**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                                                                   ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

**SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006**

**OR**

**o**                                                                      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

**SECURITIES EXCHANGE ACT OF 1934**

**For thetransition period from                 to                 **

Commission file number 1-15081

**UnionBanCal Corporation**

(Exact name of registrant asspecified in its charter)

| **Delaware**              |   | **94-1234979**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**400 California Street**

**San Francisco, California 94104-1302**

(Address and zip code ofprincipal executive offices)

Registrant’s telephonenumber:  (415) 765-2969

Securities registered pursuantto Section 12(b) of the Act:Common Stock, $1 par value per share(Title of each class)

New York Stock Exchange(Name of each exchange on which registered)

Securities registered pursuantto Section 12(g) of the Act:None

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes  þ  No  o

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes * *o  No  þ

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  þ*  *No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  þ

Indicate bycheck mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the ExchangeAct.
| Large accelerated filer   þ | Accelerated filer  o | Non-accelerated filer  o |
|---------------------------------------|--------------------------------|------------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o  No  þ

As of June 30, 2006, theaggregate market value of voting and non-voting common equity held bynon-affiliates of the registrant was $3,379,141,595. The aggregate market valuewas computed by reference to the last sales price of such stock.

As of January 31, 2007,the number of shares outstanding of the registrant’s Common Stock was139,069,133.

**DOCUMENTSINCORPORATED BY REFERENCE**
| Incorporated Document                                                                     | ** ** | ** **    | ** ** | **Location in Form 10-K** |
|-------------------------------------------------------------------------------------------|------------|---------------|------------|--------------------------------|
| Portions of the Proxy Statement for our May 24,  2007 Annual Meeting of Stockholders |       | Part III |

 

 

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**INDEX**

|                   | ** **                                                                                                           | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**        |                                                                                                                 |     |
| ITEM 1.           | BUSINESS                                                                                                             |     | 5 |
|              | General                                                                                                              |     | 5 |
|              | Banking Lines of Business                                                                                            |     | 5 |
|              | Employees                                                                                                            |     | 5 |
|              | Competition                                                                                                          |     | 6 |
|              | Monetary Policy and Economic  Conditions                                                                             |     | 7 |
|              | Supervision and Regulation                                                                                           |     | 7 |
| ITEM 1A.          | RISK FACTORS                                                                                                         |     | 12 |
| ITEM  1B.         | UNRESOLVED STAFF COMMENTS                                                                                            |     | 19 |
| ITEM 2.           | PROPERTIES                                                                                                           |     | 19 |
| ITEM 3.           | LEGAL PROCEEDINGS                                                                                                    |     | 19 |
| ITEM  4.          | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS                                                                 |     | 19 |
| ITEM  4A.         | EXECUTIVE OFFICERS OF THE  REGISTRANT                                                                                |     | 20 |
| **PART II**  |                                                                                                                 |     |
| ITEM  5.          | MARKET FOR REGISTRANT’S  COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY  SECURITIES |     | 23 |
| ITEM  6.          | SELECTED FINANCIAL DATA                                                                                              |     | 24, F-1 |
| ITEM  7.          | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     |     | 24, F-1 |
| ITEM  7A.         | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                                          |     | 24, F-32 |
| ITEM  8.          | CONSOLIDATED FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                            |     | 24, F-49 |
| ITEM  9.          | CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                |     | 24 |
| ITEM  9A.         | CONTROLS AND PROCEDURES                                                                                              |     | 24 |
| ITEM 9B.          | OTHER INFORMATION                                                                                                    |     | 25 |
| **PART III** |                                                                                                                 |     |
| ITEM  10.         | DIRECTORS AND EXECUTIVE  OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE                                         |     | 25 |
| ITEM  11.         | EXECUTIVE COMPENSATION                                                                                               |     | 26 |
| ITEM  12.    | SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                      |     | 26 |
| ITEM  13.         | CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                           |     | 26 |
| ITEM  14.         | PRINCIPAL ACCOUNTING FEES  AND SERVICES                                                                              |     | 26 |
| **PART IV**  |                                                                                                                 |     |
| ITEM  15.         | EXHIBITS AND CONSOLIDATED  FINANCIAL STATEMENT SCHEDULES                                                             |     | 27 |
| SIGNATURES        |                                                                                                                 | II-1     |

 

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**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This report includes forward-looking statements, whichinclude forecasts of our financial results and condition, expectations for ouroperations and business, and our assumptions for those forecasts andexpectations. Do not rely unduly on forward-looking statements. Actual resultsmight differ significantly from our forecasts and expectations. See Part I,Item 1A. “Risk Factors,” and the other risks described in this report forfactors to be considered when reading any forward-looking statements in thisfiling.

This document includes forward-looking statements,which are subject to the “safe harbor” created by section 27A of the SecuritiesAct of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,as amended. We may make forward-looking statements in our Securities and ExchangeCommission (SEC) filings, press releases, news articles, conference calls withanalysts and stockholders and when we are speaking on behalf of UnionBanCalCorporation. Forward-looking statements can be identified by the fact that theydo not relate strictly to historical or current facts. Often, they include thewords “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,”“potential,” “project,” or words of similar meaning, or future or conditionalverbs such as “will,” “would,” “should,” “could,” “might,” or “may.” Theseforward-looking statements are intended to provide investors with additionalinformation with which they may assess our future potential. All of theseforward-looking statements are based on assumptions about an uncertain futureand are based on information available to us at the date of these statements. Wedo not undertake to update forward-looking statements to reflect facts, circumstances,assumptions or events that occur after the date the forward-looking statementsare made.

In this document, for example, we make forward-looking statements,which discuss our expectations about:

·       Our business strategies and initiatives, the growth of our business andour competitive position

·       Our assessment of significant factors and developments that haveaffected and may affect our results

·       Pending legal and regulatory actions, and future legislative andregulatory developments, including the effects of changes to the FederalDeposit Insurance Corporation’s deposit insurance assessment policies, the SECand the Federal Reserve Board’s proposed Regulation R and the proposed Basel IIand Basel IA rule proposals

·       Regulatory controls, processes and supervisory actions regarding BankSecrecy Act and anti-money laundering matters, and their costs and impact onour business

·       The costs and effects of legal actions, investigations, regulatoryactions, or similar matters, or adverse facts and developments related thereto

·       Our ability to meet regulatory requirements

·       Credit quality and provision for credit losses, including the expectedneed to provide for credit losses due to anticipated loan growth, andindications that improvement in credit quality could be at its peak

·       Our allowances for credit losses, including the conditions we considerin determining the unallocated allowance

·       Net interest income and the effects on net interest income

·       The impact of changes in interest rates on our net interest margin

·       Loan growth rates, including growth in our residential mortgage loanportfolio

·       Deposit pricing pressures and our deposit base, including trends incustomers transferring funds from noninterest bearing deposits to interestbearing deposits or other investment alternatives

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·       Our belief that our average noninterest bearing deposits continue toprovide us with a funding advantage compared to most of our peers

·       Deposit renewals

·       Our ability and intent to hold various securities assets

·       The formation of financial subsidiaries

·       Our sensitivity to and management of market risk, including changes ininterest rates, and the economic outlook of any particular region of the U.S.including, in particular, California, Oregon and Washington

·       The composition and market sensitivity of our securities portfolios,our hedging strategies and our management of the sensitivity of our balancesheet

·       The payment of future dividends and potential dividend restrictions

·       Tax rates and taxes, including the possible effect of changes inMitsubishi UFJ Financial Group’s taxable profits on our California State taxobligations

·       Critical accounting policies and estimates and the impact of recentaccounting pronouncements

·       Our insurance coverage

·       Estimated pension and health care costs and contributions and theinvestment objectives and asset allocation strategy of our pension plan andhealth plan

·       Decisions to downsize, sell or close units, dissolve subsidiaries,expand our branch network or otherwise restructure, reorganize or change ourbusiness mix and their impact on our business

·       The relationship between our business and that of The Bank ofTokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group, Inc. and actionsthat may or may not be taken by The Bank of Tokyo-Mitsubishi UFJ and MitsubishiUFJ Financial Group, Inc.

·       Our strategies and expectations regarding capital levels and returningexcess capital to stockholders

·       The impact of strategic investments or other acquisitions on ourbusiness and benefits of marketing alliances

There are numerousrisks and uncertainties that could and will cause actual results to differmaterially from those discussed in our forward-looking statements. Many ofthese factors are beyond our ability to control or predict and could have amaterial adverse effect on our stock price, financial condition, and results ofoperations or prospects. Such risks and uncertainties include, but are notlimited to those listed in Part I, Item 1A. “Risk Factors” and Part II,Item 7 “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.”

Readers of thisdocument should not rely unduly on forward-looking information and shouldconsider all uncertainties and risks disclosed throughout this document and inour other reports to the SEC, including, but not limited to, those discussedbelow. Any factor described in this report could by itself, or together withone or more other factors, adversely affect our business, future prospects,results of operations or financial condition.

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**PART I**

**Item 1.**                 Business

All reports that we file electronically with theSecurities and Exchange Commission (SEC), including the Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, and current reports on Form 8-K,as well as any amendments to those reports, are accessible at no cost on ourinternet website at www.unionbank.com as soon as reasonably practicable afterwe electronically file such reports with, or furnish them to, the SEC. Thesefilings are also accessible on the SEC’s website at www.sec.gov.

As used in this Form 10-K,the term “UnionBanCal” and terms such as “we,” “us” and “our” refer toUnionBanCal Corporation, Union Bank of California, N.A., one or more of theirconsolidated subsidiaries, or to all of them together.

**General**

We are a California-based,commercial bank holding company whose major subsidiary, Union Bank ofCalifornia, N.A., is a commercial bank. Union Bank of California provides awide range of financial services to consumers, small businesses, middle-marketcompanies and major corporations, primarily in California, Oregon, andWashington, as well as nationally and internationally. At December 31,2006, The Bank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, which is awholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., ownedapproximately 65 percent of our outstanding common stock.

**Banking Lines ofBusiness**

Our operations are divided into two primary segments,which are described more fully in “Business Segments” of our Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) and in Note 26 to our Consolidated FinancialStatements included in this Annual Report.

*Retail Banking.**  *RetailBanking offers our customers a broad spectrum of financial products under oneconvenient umbrella. With a diverse line of checking and savings, investment,loan and fee-based banking products, individual and business clients can havetheir specific needs met. These products are offered in 321 full-servicebranches, primarily in California. In addition, Retail Banking offersinternational and settlement services, e-banking through our website, checkcashing services at our Cash & Save® locations and loan and investmentproducts tailored to our high net worth individual customers through our officesof The Private Bank. Institutional customers are offered employee benefit, 401(k) administration,corporate trust, securities lending and custody (global and domestic) services.

*Wholesale Banking.*   WholesaleBanking offers a variety of commercial financial services, including commercialloans and project financing, real estate financing, asset-based financing,trade finance and letters of credit, lease financing, customized cashmanagement services and selected capital markets products. The WholesaleBanking customers include middle-market companies, large corporations, realestate companies and other more specialized industry customers. In addition,specialized depository services are offered to title and escrow companies,retailers, domestic financial institutions, bankruptcy trustees and othercustomers with significant deposit volumes. Wholesale Banking also includes aregistered broker-dealer and a registered investment advisor, which providesecurities brokerage and investment advisory services and manage a proprietarymutual fund family. Our insurance services group offers our customers a varietyof cost-effective risk management services and insurance products.

**Employees**

At January 31, 2007, wehad 10,164 full-time equivalent employees.

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**Competition**

Banking is a highly competitive business. We competeactively for loan, deposit, and other financial services business inCalifornia, Oregon and Washington, as well as nationally and internationally.Our competitors include a large number of state and national banks, thriftinstitutions, credit unions, finance companies, mortgage banks and majorforeign-affiliated or foreign banks, as well as many financial andnonfinancial firms that offer services similar to those offered by us,including many large securities firms. Some of our competitors are community orregional banks that have strong local market positions. Other competitorsinclude large financial institutions that have substantial capital, technologyand marketing resources, which are well in excess of ours. Such large financialinstitutions may have greater access to capital at a lower cost than us, whichmay adversely affect our ability to compete effectively. We also experiencecompetition, especially for deposits, from internet-based banking institutions,which have grown rapidly in recent years.

Technology and otherchanges increasingly allow parties to complete financial transactionselectronically, and in many cases, without banks. For example, consumers canpay bills and transfer funds over the internet and by telephone without banks.Many non-bank financial service providers have lower overhead costs and aresubject to fewer regulatory constraints. If consumers do not use banks tocomplete their financial transactions, we could potentially lose fee income,deposits and income generated from those deposits.

Changes in federal law have made it easier forout-of-state banks to enter and compete in the states in which we operate. TheRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-NealAct), among other things, eliminated substantially all state law barriers tothe acquisition of banks by out-of-state bank holding companies. A bank holdingcompany may acquire banks in states other than its home state, without regardto the permissibility of such acquisitions under state law, but subject to anystate requirement that the acquired bank has been organized and operating for aminimum period of time (not to exceed five years), and the requirement that theacquiring bank holding company, prior to or following the proposed acquisition,controls no more than 10 percent of the total amount of deposits of the insureddepository institutions in the United States and no more than 30 percent ofsuch deposits in that state (or such lesser or greater amount as may beestablished by state law). The Riegle-Neal Act also permits banks to acquirebranches located in another state by purchasing or merging with a bankchartered in that state or a national banking association having its headquarterslocated in that state.

Banks, securitiesfirms, and insurance companies can now combine as a “financial holding company.”Financial holding companies can offer virtually any type of financial service,including banking, securities underwriting, insurance (both agency andunderwriting), and merchant banking. Many of our competitors have elected tobecome financial holding companies. A number of foreign banks have eitheracquired financial holding companies or obtained financial holding company statusin the U.S., further increasing competition in the U.S. market. We are not afinancial holding company. A bank holding company may elect to become afinancial holding company if all of its subsidiary depository institutions arewell-capitalized and well-managed. Under current Federal Reserve Boardinterpretations, a foreign bank holding company, which controls a subsidiaryU.S. bank holding company, such as Mitsubishi UFJ Financial Group, must makethe election. In addition, the foreign bank holding company (if it is a bankitself) must be well-capitalized and well-managed in accordance with standardscomparable to those required of U.S. banks as determined by the Federal ReserveBoard and its U.S. bank subsidiary must have a “satisfactory” or better CRArating. Mitsubishi UFJFinancial Group is not presently a financial holding company.

We believe that continuedemphasis on enhanced services and distribution systems, an expandedcustomer base, increased productivity and strong credit quality, togetherwith a substantial capital base, will position us to meet the challengesprovided by this competition.

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**Monetary Policy andEconomic Conditions**

Our earnings and businessesare affected not only by general economic conditions (both domestic andinternational), but also by the monetary policies of various governmentalregulatory authorities of the United States and foreign governments andinternational agencies. In particular, our earnings and growth may be affectedby actions of the Federal Reserve Board in connection with its implementationof national monetary policy through its open market operations in United StatesGovernment securities, control of the discount rate for borrowings by financialinstitutions and establishment of reserve requirements against both member andnon-member financial institutions’ deposits. These actions have a significanteffect on the overall growth and distribution of loans and leases, investmentsand deposits, as well as on the rates earned on securities, loans and leases orpaid on deposits. It is difficult to predict future changes in monetarypolicies and their effect on our business.

**Supervision andRegulation**

*Overview.**  *Bank holding companies and banksare extensively regulated under both federal and state law. This regulation isintended primarily for the protection of depositors, the deposit insurancefund, and other clients of the institution, and not for the benefit of theinvestors in the stock or other securities of the bank holding company. Setforth below is a summary description of the material laws and regulations thatrelate to our operation and those of our subsidiaries, including Union Bank ofCalifornia.

*BankHolding Company Act.**  *We,Mitsubishi UFJ Financial Group and The Bank of Tokyo-Mitsubishi UFJ are subjectto regulation under the Bank Holding Company Act of 1956, as amended,(BHCA) which subjects us to Federal Reserve Board reporting and examinationrequirements. Generally, the BHCA restricts our ability to invest in non-bankingentities, and we may not acquire more than 5 percent of the voting sharesof any domestic bank without the prior approval of the Federal ReserveBoard. Our activities are limited, with some exceptions, to banking, thebusiness of managing or controlling banks, and other activities, which theFederal Reserve Board deems to be so closely related to banking as to be aproper incident thereto.

Under Federal Reserve Board regulations, a bankholding company is required to serve as a source of financial and managerialstrength to its subsidiary banks and may not conduct its operations in anunsafe or unsound manner. Under this policy, the Federal Reserve Board mayrequire a holding company to contribute additional capital to anundercapitalized subsidiary bank.

*Comptrollerof the Currency.**  *UnionBank of California, as a national banking association, is subject to broadfederal regulation and oversight extending to all its operations by the Officeof the Comptroller of the Currency, its primary regulator, and also by theFederal Reserve Board and the Federal Deposit Insurance Corporation (FDIC). Aspart of this authority, Union Bank of California is required to file periodicreports with the Comptroller of the Currency and is subject to on-goingexamination by the Comptroller of the Currency.

The Comptroller of the Currency has extensiveenforcement authority over all national banks. If, as a result of anexamination of a bank, the Comptroller of the Currency determines that thefinancial condition, capital resources, asset quality, earnings prospects,management, liquidity, or other aspects of the bank’s operations areunsatisfactory or that the bank or its management is violating or has violatedany law or regulations, various remedies are available to the Comptroller ofthe Currency. These remedies include the power to enjoin “unsafe or unsound”practices, to require affirmative action to correct any conditions resultingfrom any violation or practice, to issue an administrative order that can bejudicially enforced to direct an increase in capital, to restrict the growth ofthe bank, to assess civil monetary penalties, to remove officers and directors,and ultimately to terminate the bank’s deposit insurance. The Comptroller ofthe Currency, as well as other federal agencies, have adopted regulations andguidelines establishing safety and soundness standards, including but notlimited to such matters as loan underwriting and 

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documentation, internalcontrols and audit systems, interest rate risk exposure, asset quality andearnings and compensation and other employee benefits.

*OtherRegulatory Oversight.**  *Oursubsidiaries are also subject to extensive regulation, supervision, andexamination by various other federal and state regulatory agencies. Inaddition, Union Bank of California and its subsidiaries are subject tocertain restrictions under the Federal Reserve Act and related regulations,including restrictions on affiliate transactions. As a holding company,the principal source of our cash has been dividends and interest received fromUnion Bank of California. Dividends payable by Union Bank of California to usare subject to restrictions under a formula imposed by the Office of theComptroller of the Currency unless express approval is given to exceedthese limitations. For more information regarding restrictions on loansand dividends by Union Bank of California to its affiliates and on transactionswith affiliates, see Notes 20 and 25 to our Consolidated FinancialStatements included in this Annual Report.

The Federal Deposit Insurance Corporation ImprovementAct of 1991 (FDICIA) requires federal bank regulatory authorities to take “promptcorrective action” in dealing with inadequately capitalized banks. FDICIAestablished five tiers of capital measurement ranging from “well-capitalized”to “critically undercapitalized.” It is our policy to maintain capitalratios above the minimum regulatory requirements for “well-capitalized”institutions for both Union Bank of California and us. Management believesthat, at December 31, 2006, Union Bank of California and we met therequirements for “well-capitalized” institutions.

Deposits of Union Bank of California are insured up tostatutory limits by the Federal Deposit Insurance Corporation and, accordingly,are subject to deposit insurance assessments. In February 2006, PresidentBush signed The Federal Deposit Insurance Reform Act of 2005 and The FederalDeposit Insurance Reform Conforming Amendments Act of 2005 into law. Pursuantto these Acts, the Bank Insurance Fund and the Savings Association InsuranceFund were merged into a new fund, the Deposit Insurance Fund, effective March 31,2006. These Acts, as implemented by the FDIC, also created a new assessmentsystem designed to more closely tie what banks pay for deposit insurance to therisks they pose and adopted a new base schedule of rates that the FDIC canadjust up or down, depending on the revenue needs of the insurance fund. As aresult of this legislation, commencing on January 1, 2007, we expect thatUnion Bank of California will be subject to increased annual assessments ondeposits in the range of 5 to 7 basis points. Prior to this change, Union Bankof California was not paying any insurance assessments on deposits under theFDIC’s risk-related assessment system. An FDIC credit for prior contributionsis expected to offset the assessment in 2007.

There are additional requirements and restrictions inthe laws of the United States and the states of California, Oregon, andWashington, as well as other states in which Union Bank of California andits subsidiaries may conduct operations. These include restrictions on thelevels of lending and the nature and amount of investments, as well asactivities as an underwriter of securities, the opening and closing ofbranches and the acquisition of other financial institutions. The consumerlending and finance activities of Union Bank of California are also subject toextensive regulation under various Federal and state laws. These statutesimpose requirements on the making, enforcement and collection of consumer loansand on the types of disclosures that must be made in connection with suchloans.

Union Bank of California is also subject to theCommunity Reinvestment Act (CRA). The CRA generally requires the federalbanking agencies to evaluate the record of a financial institution in meetingthe needs of local communities, including low- and moderate-incomeneighborhoods. In addition to substantial penalties and corrective measuresthat may be required for a violation of certain fair lending laws, the federalbanking agencies may take compliance with such laws and CRA into account whenregulating and supervising other activities, and in evaluating whether toapprove applications for permission to engage in new activities or foracquisitions of other banks or companies. An unsatisfactory rating may be thebasis for 

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denying the application. Basedon the most current examination report dated October 17, 2006, Union Bankof California was rated “outstanding.”

Union Bank of California has branches in Canada andthe Cayman Islands. Any international activities of Union Bank of Californiaare also subject to the laws and regulations of the jurisdiction wherebusiness is being conducted, which may change from time to time and affectUnion Bank of California’s business opportunities and competitiveness inthese jurisdictions. Furthermore, due to The Bank of Tokyo-Mitsubishi UFJ’s controllingownership of us, regulatory requirements adopted or enforced by theGovernment of Japan may have an effect on the activities and investmentsof Union Bank of California and us in the future.

The activities of Union Bank of Californiasubsidiaries, HighMark Capital Management, Inc. and UnionBanc InvestmentServices LLC are subject to the rules and regulations of the SEC, aswell as those of state securities regulators. UnionBanc Investment Services LLCis also subject to the rules and regulations of the National Associationof Securities Dealers (NASD).

UnionBanc Insurance Services, Inc. is an indirectsubsidiary of Union Bank of California and is subject to the rules andregulations of the California Department of Insurance, as well as insuranceregulators of other states.

*GLB Act.**  *The Gramm-Leach-Bliley (GLB) Actallows “financial holding companies” to offer banking, insurance, securitiesand other financial products. Among other things, the GLB Act amended section 4of the BHCA in order to provide a framework for engaging in new financialactivities by bank holding companies. A bank holding company may elect tobecome a financial holding company if all of its subsidiary depositoryinstitutions are well-capitalized and well-managed. Under current FederalReserve Board interpretations, a foreign bank holding company, which controls asubsidiary U.S. bank holding company, such as Mitsubishi UFJ Financial Group,must make the election. In addition, the foreign bank holding company (if it isa bank itself) must be well-capitalized and well-managed in accordance withstandards comparable to those required of U.S. banks as determined by theFederal Reserve Board and its U.S. bank subsidiary must have a “satisfactory”or better CRA rating. Mitsubishi UFJ Financial Group is not presently a financialholding company.

Under the GLB Act, “financialsubsidiaries” of banks may engage in some types of activities beyond thosepermitted to banks themselves, provided certain conditions are met. UnionBank of California has no plans to seek to form any “financial subsidiaries” inthe near future.

*Broker/DealerRegulation.*   Other provisions of the GLB Actamended the Securities Exchange Act of 1934 to eliminate the blanket exemptionfor banks from the definition of “broker” under that Act and replaced thisexemption with enumerated permissible bank brokerage activities. Afterimplementation of these GLB Act provisions, banks are required to register as abroker to engage in securities brokerage operations beyond the limited bankbrokerage activities permitted by the GLB Act. In December 2006, the SECand the Federal Reserve Board jointly issued proposed Regulation R which wouldimplement the securities brokerage limitations of the GLB Act. ProposedRegulation R also defines certain terms used in the GLB Act and containsadditional regulatory exemptions for limited bank brokerage activities. The SEChas delayed implementation of the GLB Act brokerage provisions until the thirdquarter of 2007. If adopted as proposed, Regulation R would further delayimplementation of these provisions for Union Bank of California until January 2009.Assuming Union Bank of California does not register as a broker, we anticipatethe GLB Act and Regulation R will require us to conduct non-exempted securitiesbrokerage activities through our registered broker-dealer, UnionBanc InvestmentServices, LLC or another registered broker-dealer subsidiary. These laws andregulations will also limit compensation we may pay our bank employees forreferrals of brokerage business and limit Union Bank of California’s ability toadvertise securities brokerage services.

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*BankSecrecy Act.**  *The banking industry is now subject tosignificantly increased regulatory controls and processes regarding the BankSecrecy Act and anti-money laundering laws. This may adversely affect theability to obtain regulatory approvals for future initiatives requiringregulatory approval, including acquisitions. Under the USA PATRIOT Act, federalbanking regulators must consider the effectiveness of a financial institution’santi-money laundering program prior to approving an application for a merger,acquisition or other activities requiring regulatory approval. For informationregarding certain regulatory matters that may adversely affect our ability toexpand through acquisitions, see “Regulatory Matters” in MD&A of thisAnnual Report.

*Sarbanes-OxleyAct.**  *OnJuly 30, 2002, in response to various high profile corporate scandals, theUnited States Congress enacted the Sarbanes-Oxley Act of 2002. TheSarbanes-Oxley Act aims to restore the credibility lost as a result of thesescandals by addressing, among other issues, corporate governance, auditing andaccounting, executive compensation, and enhanced and timely disclosure ofcorporate information. The New York Stock Exchange has adopted, and the SEC hasapproved, additional corporate governance rules. The new rules areintended to allow stockholders to more easily and effectively monitor theperformance of companies and directors.

Among other provisions, Section 302(a) ofthe Sarbanes-Oxley Act requires that our Chief Executive Officer and ChiefFinancial Officer certify that our quarterly and annual reports do not containany untrue statement or omission of a material fact. Specific requirements ofthe certifications include having these officers confirm that they areresponsible for establishing, maintaining and regularly evaluating theeffectiveness of our disclosure controls and procedures; they have made certaindisclosures to our independent public accounting firm and Audit Committee aboutour internal controls; and they have included information in our quarterly andannual reports about their evaluation and whether there have been significantchanges in our internal controls or in other factors that could significantlyaffect internal controls subsequent to their evaluation.

In addition, Section 404of the Sarbanes-Oxley Act and the SEC’s rules and regulations thereunderrequire our management to evaluate, with the participation of our principalexecutive and principal financial officers, the effectiveness, as of the end ofeach fiscal year, of our internal control over financial reporting. Ourmanagement must then provide a report on our internal control over financialreporting that contains, among other things, a statement of theirresponsibility for establishing and maintaining adequate internal control overfinancial reporting, and a statement identifying the framework we used toevaluate the effectiveness of our internal control over financial reporting.

In response to these requirements, we have establisheda Disclosure Committee to monitor compliance with these rules. Membership ofthe Disclosure Committee is comprised of senior management from throughout ourorganization whom we believe collectively provide an extensive understanding ofour operations. As part of our compliance with Section 302 of theSarbanes-Oxley Act, we evaluate our internal control process quarterly and wetest and assess our internal controls over financial reporting annually, incompliance with Section 404 of the Sarbanes-Oxley Act.

*BaselCommittee Capital Standards.**  *The Basel Committee on Banking Supervision (BIS)proposed new international capital standards for banking organizations (BaselII) in June 2004, and the proposal is currently being evaluated by banksupervisory authorities worldwide. Basel II is an effort to update the originalinternational bank capital accord (Basel I), which has been in effect since1988. Basel II is intended to improve the consistency of capital regulationsinternationally, make regulatory capital more risk sensitive, and promote enhancedrisk-management practices among large, internationally active bankingorganizations. The ultimate timing for implementation of Basel II and thespecifics of capital assessments for addressing operational risk are stilluncertain. In September 2006, the U.S. banking and thrift agenciespublished an interagency notice of proposed rulemaking for rules thatwould implement new risk-based capital requirements under Basel II in the U.S.for those U.S. bank holding companies, that meet the minimum threshold forreporting, although others may “opt in.” The new rules apply to bankholding 

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companies with consolidatedassets of $250 billion or more and consolidated on-balance sheet foreignexposures of $10 billion or more. Though we do not meet this criteria, MitsubishiUFJ Financial Group, our indirect majority owner, will be subject to therequirements of Basel II. In addition, in December 2006, the U.S. bankingand thrift agencies published an interagency notice of proposed rulemaking fora Basel IA initiative which would revise the existing U.S. risk-based capitalframework for banks not subject to Basel II. Under the proposed Basel 1A rule,compliance with the new risk-based capital framework would be optional. Thecomment period for both rule proposals will end in March 2007 and thebanking agencies have indicated that final rules could be published in thethird quarter of 2007. We are evaluating what effect these proposed rules andthe new capital requirements that may arise out of a new BIS capital accord mayhave on our minimum capital requirements.

*CustomerInformation Security.**  *TheFederal Reserve Board and other bank regulatory agencies have adopted finalguidelines for safeguarding confidential, personal customer information. Theguidelines required each financial institution, under the supervision andongoing oversight of its Board of Directors or an appropriate committeethereof, to create, implement and maintain a comprehensive written informationsecurity program designed to ensure the security and confidentiality ofcustomer information, protect against any anticipated threats or hazards to thesecurity or integrity of such information and protect against unauthorizedaccess to or use of such information that could result in substantial harm orinconvenience to any customer. Union Bank of California has adopted a customerinformation security program that has been approved by its Board of Directors.

*Privacy.**  *The GLB Act requires financialinstitutions to implement policies and procedures regarding the disclosure ofnonpublic personal information about consumers to non-affiliate third parties. Ingeneral, the statute requires explanations to consumers on policies andprocedures regarding the disclosure of such nonpublic personal information,and, except as otherwise required by law, prohibits disclosing such informationexcept as provided in the banks’ policies and procedures. Union Bank ofCalifornia implemented a privacy policy effective since the GLB Act became law,pursuant to which all of its existing and new customers are notified of theprivacy policies. State laws and regulations designed to protect the privacyand security of customer information apply also to us and our othersubsidiaries.

We and Union Bank ofCalifornia cannot be certain of the effect, if any, of the foregoinglegislative and regulatory developments on our businesses.

*Future Legislation*

Future changes in the laws,regulations, or policies that impact Union Bank of California, our othersubsidiaries and us cannot be predicted and may have a material effect on ourbusiness and earnings. Legislation relating to banking and other financialservices has been introduced from time to time in Congress and is likely to beintroduced in the future. If enacted, such legislation could significantlychange the competitive environment in which we and our subsidiaries operate. Wecannot predict whether these or any other proposals will be enacted or theultimate impact of any such legislation on our competitive situation, financialcondition or results of operations.

*Financial Information*

See our Consolidated Financial Statements starting on page F-50for financial information about UnionBanCal Corporation and its subsidiaries.

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**Item 1A.**       RiskFactors

***Industry Factors***

*Fluctuations ininterest rates on loans could adversely affect our business*

Significantincreases in market interest rates on loans, or the perception that an increasemay occur, could adversely affect both our ability to originate new loans andour ability to grow. Conversely, decreases in interest rates could result in anacceleration of loan prepayments. An increase in market interest rates couldalso adversely affect the ability of our floating-rate borrowers to meet theirhigher payment obligations. If this occurred, it could cause an increase innonperforming assets and charge offs, which could adversely affect ourbusiness.

*Fluctuations ininterest rates on deposits or other funding sources could adversely affect ourmargin spread*

Changesin market interest rates on deposits or other funding sources, includingchanges in the relationship between short-term and long-term market interestrates or between different interest rate indices, can impact our margin spread,that is, the difference between the interest rates we charge on interestearning assets, such as loans, and the interest rates we pay on interestbearing liabilities, such as deposits or other borrowings. The impact couldresult in a decrease in our interest income relative to interest expense.

*Our deposit customersmay pursue alternatives to bank deposits or seek higher yielding deposits,causing us to incur increased funding costs*

Thebanking industry and we are facing increasing deposit-pricing pressures. Checkingand savings account balances and other forms of deposits can decrease when ourdeposit customers perceive alternative investments, such as the stock market,other non-depository investments or higher yielding deposits, as providingsuperior expected returns. Technology and other changes have made it moreconvenient for bank customers to transfer funds into alternative investments orother deposit accounts, including products offered by other financialinstitutions or non-bank service providers. Additional increases in short-terminterest rates could increase such transfers of deposits to higher yieldingdeposits or other investments either with us or with external providers.Efforts and initiatives we undertake to retain and increase deposits, includingdeposit pricing, can increase our costs. When bank customers move money out ofbank deposits in favor of alternative investments or into higher yieldingdeposits, we can lose a relatively inexpensive source of funds, increasing ourfunding cost.

*Changes in the premiumspayable to the Federal Deposit Insurance Corporation will increase our costsand could adversely affect our business*

Deposits of Union Bank ofCalifornia, N.A. are insured up to statutory limits by the Federal DepositInsurance Corporation, or FDIC, and, accordingly, are subjected to depositinsurance assessments to maintain the Deposit Insurance Fund. In November 2006,the FDIC issued a final rule, effective January 1, 2007, that created anew assessment system designed to more closely tie what banks pay for depositinsurance to the risks they pose and adopted a new base schedule of rates thatthe FDIC can adjust up or down, depending on the revenue needs of the insurancefund. This new assessment system is expected to result in increased annualassessments on deposits of Union Bank of California of 5 to 7 basis points. Priorto this change, Union Bank of California was not paying any insuranceassessments on deposits under the FDIC’s risk-related assessment system. AnFDIC credit for prior contributions is expected to offset the assessment for2007. Significant increases in the insurance assessments Union Bank ofCalifornia pays will increase our costs once the credit is exceeded.

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*The continuing war onterrorism and overseas military conflicts could adversely affect U.S. andglobal economic conditions*

Actsor threats of terrorism and actions taken by the U.S. or other governments as aresult of such acts or threats and other international hostilities may resultin a disruption of U.S. and global economic and financial conditions and couldadversely affect business and economic and financial conditions in the U.S. andglobally and in our principal markets.

*Substantial competitioncould adversely affect us*

Bankingis a highly competitive business. We compete actively for loan, deposit, andother financial services business in California, Oregon and Washington, as wellas nationally and internationally. Our competitors include a large number ofstate and national banks, thrift institutions, credit unions and majorforeign-affiliated or foreign banks, as well as many financial and nonfinancialfirms that offer services similar to those offered by us, including many largesecurities firms. Some of our competitors are community or regional banks thathave strong local market positions. Other competitors include large financialinstitutions that have substantial capital, technology and marketing resourcesthat are well in excess of ours. Such large financial institutions may havegreater access to capital at a lower cost than us, which may adversely affectour ability to compete effectively. We also experience competition, especiallyfor deposits, from internet-based banking institutions, which have grownrapidly in recent years.

*The effects of, changesin or supervisory enforcement of, banking or other laws and regulations orgovernmental fiscal or monetary policies could adversely affect us*

We are subject tosignificant federal and state regulation and supervision, which is primarily forthe benefit and protection of our customers and not for the benefit ofinvestors. In the past, our business has been materially affected by theseregulations. This will likely continue in the future. Laws, regulations orpolicies, including accounting standards and interpretations, currentlyaffecting us and our subsidiaries may change at any time. Regulatoryauthorities may also change their interpretation of these statutes andregulations. Therefore, our business may be adversely affected by changes in laws,regulations, policies or interpretations or regulatory approaches to complianceand enforcement, as well as by fines and other supervisory action taken as aresult of noncompliance. International laws, regulations and policies affectingus, our subsidiaries and the business we conduct may change at any time andaffect our business opportunities and competitiveness in these jurisdictions.Due to The Bank of Tokyo-Mitsubishi UFJ controlling ownership of us, laws,regulations, policies, fines and other supervisory actions adopted or enforcedby the Government of Japan and the Federal Reserve Board may adversely affectour activities and investments and those of our subsidiaries in the future.

We maintain systems andprocedures designed to ensure that we comply with applicable laws andregulations. However, some legal/regulatory frameworks provide for theimposition of fines or penalties (which can be substantial) for noncomplianceeven though the noncompliance was inadvertent or unintentional and even thoughthere were in place at the time systems and procedures designed to ensurecompliance. There may be other negative consequences from a finding ofnoncompliance, including restrictions on certain activities and damage to ourreputation.

Additionally, ourbusiness is affected significantly by the fiscal and monetary policies of theU.S. federal government and its agencies. We are particularly affected by thepolicies of the Federal Reserve Board, which regulates the supply of money andcredit in the U.S. Under long-standing policy of the Federal Reserve Board, abank holding company is expected to act as a source of financial strength forits subsidiary banks. As a result of that policy, we may be required to commitfinancial and other resources to our subsidiary bank in circumstances where wemight not otherwise do so. Among the instruments of monetary policy availableto the Federal Reserve Board are (a) conducting open market operations inU.S. government securities, (b) changing the discount rates on borrowingsby depository institutions, and 

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(c) imposingor changing reserve requirements against certain borrowings by banks and theiraffiliates. These methods are used in varying degrees and combinations todirectly affect the availability of bank loans and deposits, as well as theinterest rates charged on loans and paid on deposits. The policies of theFederal Reserve Board may have a material effect on our business, prospects,results of operations and financial condition.

Refer to “Supervision andRegulation” above and “Regulatory Matters” in our Management’s Discussion andAnalysis (MD&A) in this Annual Report for discussion of other laws andregulations, including the Bank Secrecy Act and other anti-money launderinglaws and regulations, that may have a material effect on our business,prospects, results of operations and financial condition.

*Changes in accountingstandards could materially impact our financial statements*

Fromtime to time the Financial Accounting Standards Board and the SEC change thefinancial accounting and reporting standards that govern the preparation of ourfinancial statements. These changes can be very difficult to predict and canmaterially impact how we record and report our financial condition and resultsof operations. In some cases, we could be required to apply a new or revisedstandard retroactively, resulting in our restating prior period financialstatements.

*There are an increasingnumber of non-bank competitors providing financial services*

Technologyand other changes increasingly allow parties to complete financial transactionselectronically, and in many cases, without banks. For example, consumers canpay bills and transfer funds over the internet and by telephone without banks.Many non-bank financial service providers have lower overhead costs and aresubject to fewer regulatory constraints. If consumers do not use banks tocomplete their financial transactions, we could potentially lose fee income,deposits and income generated from those deposits.

***Company Factors***

*Adverse Californiaeconomic conditions could adversely affect our business*

Asubstantial majority of our assets, deposits and fee income are generated inCalifornia, and a substantial majority of our residential real estate loans arein California. As a result, poor economic conditions in California may cause usto incur losses associated with higher default rates and decreased collateralvalues in our loan portfolio. Economic conditions in California are subject tovarious uncertainties at this time, including the softening in the Californiareal estate market and housing industry. If economic conditions in Californiadecline, we expect that our level of problem assets could increase and ourprospects for growth could be impaired.

*Adverse economicfactors affecting certain industries we serve could adversely affect ourbusiness*

Weare subject to certain industry-specific economic factors. For example, asignificant and increasing portion of our total loan portfolio is related toresidential real estate, especially in California. Accordingly, a downturn inthe real estate and housing industries in California could have an adverseeffect on our operations and the quality of our real estate loan portfolio.Increases in residential mortgage loan interest rates could also have anadverse effect on our operations by depressing new mortgage loan originations.We provide financing to businesses in a number of other industries that may beparticularly vulnerable to industry-specific economic factors, including thecommercial real estate industry, the communications/media industry, the retailindustry, the energy industry and the technology industry. Increases in fuelprices and energy costs could adversely affect businesses in several of theseindustries. Industry-specific risks are beyond our control and could adverselyaffect our portfolio of loans, potentially resulting in an increase innonperforming loans or charge offs and a slowing of growth or reduction in ourloan portfolio.

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*Higher credit losses couldrequire us to increase our allowance for credit losses through a charge toearnings*

When we loan money orcommit to loan money we incur credit risk, or the risk of losses if ourborrowers do not repay their loans. We reserve for credit losses by establishingan allowance through a charge to earnings. The amount of this allowance isbased on our assessment of credit losses inherent in our loan portfolio and ourunfunded credit commitments. The process for determining the amount of theallowance is critical to our financial results and condition. It requiresdifficult, subjective and complex judgments about the future impact fromcurrent economic conditions that might impair the ability of our borrowers torepay their loans.

Wemight underestimate the credit losses inherent in our loan portfolio and havecredit losses in excess of the amount reserved. Or, we might increase theallowance because of changing economic conditions, which we conclude havecaused losses to be sustained in our portfolio. For example, in a risinginterest rate environment, borrowers with adjustable rate loans could see theirpayments increase. In the absence of offsetting factors such as increasedeconomic activity and higher wages, this could reduce borrowers’ ability torepay their loans, resulting in our increasing the allowance. Increased fueland energy costs could also adversely impact some borrowers’ ability to repaytheir loans. We might also increase the allowance because of unexpected events.Any increase in the allowance would result in a charge to earnings.

*We are not able tooffer all of the financial services and products of a financial holding company*

Banks,securities firms, and insurance companies can now combine as a “financialholding company.” Financial holding companies can offer virtually any type offinancial service, including banking, securities underwriting, insurance (bothagency and underwriting), and merchant banking. Many of our competitors haveelected to become financial holding companies. Recently, a number of foreignbanks have acquired financial holding companies in the U.S., further increasingcompetition in the U.S. market. Under current regulatory interpretations,Mitsubishi UFJ Financial Group, Inc. would be required to make a financialholding company election in order for us to have the benefits of this status.Mitsubishi UFJ Financial Group is not presently a financial holding company.

*Our stockholder votesare controlled by The Bank of Tokyo-Mitsubishi UFJ; our interests and those ofour minority stockholders may not be the same as those of The Bank ofTokyo-Mitsubishi UFJ*

The Bank ofTokyo-Mitsubishi UFJ, a wholly-owned subsidiary of Mitsubishi UFJ FinancialGroup, owns a majority of the outstanding shares of our common stock. As aresult, The Bank of Tokyo-Mitsubishi UFJ can elect all of our directors and cancontrol the vote on all matters, including: approval of mergers or otherbusiness combinations; a sale of all or substantially all of our assets;issuance of any additional common stock or other equity securities; incurrenceof debt other than in the ordinary course of business; the selection and tenureof our Chief Executive Officer; payment of dividends with respect to our commonstock or other equity securities; and other matters that might be favorable toThe Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group.

TheBank of Tokyo-Mitsubishi UFJ’s ability to prevent an unsolicited bid for us orany other change in control could also have an adverse effect on the marketprice for our common stock. A majority of our directors are independent of TheBank of Tokyo-Mitsubishi UFJ and are not officers or employees of UnionBanCalCorporation or any of our affiliates, including The Bank of Tokyo-MitsubishiUFJ. However, because of The Bank of Tokyo-Mitsubishi UFJ’s control over theelection of our directors, we could designate ourselves as a “controlledcompany” under the New York Stock Exchange rules and could change thecomposition of our Board of Directors so that the Board would not have amajority of independent directors. We have not done so.

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*Possible future salesof our shares by The Bank of Tokyo-Mitsubishi UFJ could adversely affect themarket for our stock*

TheBank of Tokyo-Mitsubishi UFJ may sell shares of our common stock in compliancewith the federal securities laws. By virtue of The Bank of Tokyo-Mitsubishi UFJ’scurrent control of us, The Bank of Tokyo-Mitsubishi UFJ could sell largeamounts of shares of our common stock by causing us to file a registrationstatement that would allow it to sell shares more easily. In addition, The Bankof Tokyo-Mitsubishi UFJ could sell shares of our common stock withoutregistration under certain circumstances, such as in a “private placement.”Although we can make no prediction as to the effect, if any, that such saleswould have on the market price of our common stock, sales of substantialamounts of our common stock, or the perception that such sales could occur,could adversely affect the market price of our common stock. If The Bank of Tokyo-MitsubishiUFJ sells or transfers shares of our common stock as a block, another person orentity could become our controlling stockholder.

*The Bank ofTokyo-Mitsubishi UFJ’s and Mitsubishi UFJ Financial Group’s financial orregulatory condition could adversely affect our operations*

We fund our operationsindependently of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ FinancialGroup and believe our business is not necessarily closely related to thebusiness or outlook of The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJFinancial Group. However, The Bank of Tokyo-Mitsubishi UFJ’s and Mitsubishi UFJFinancial Group’s credit ratings may affect our credit ratings.

TheBank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group are alsosubject to regulatory oversight, review and supervisory action (which caninclude fines or penalties) by Japanese and U.S. regulatory authorities. Ourbusiness operations and expansion plans could be negatively affected byregulatory concerns or supervisory action in the U.S. and in Japan against TheBank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. For additionalinformation, see “MD&A—Regulatory Matters.”

*Potential conflicts ofinterest with The Bank of Tokyo-Mitsubishi UFJ could adversely affect us*

The views of The Bankof Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group regarding possiblenew businesses, strategies, acquisitions, divestitures or other initiatives,including compliance and risk management processes, may differ from ours. Thismay delay or hinder us from pursuing individual initiatives or cause us toincur additional costs and subject us to additional oversight.

Also, as part of TheBank of Tokyo-Mitsubishi UFJ’s normal risk management processes, The Bank ofTokyo-Mitsubishi UFJ manages global credit and other types of exposures andconcentrations on an aggregate basis, including exposures and concentrations atUnionBanCal. Therefore, at certain levels or in certain circumstances, ourability to approve certain credits or other banking transactions and categoriesof customers is subject to the concurrence of The Bank of Tokyo-Mitsubishi UFJ.We may wish to extend credit or furnish other banking services to the samecustomers as The Bank of Tokyo-Mitsubishi UFJ. Our ability to do so may belimited for various reasons, including The Bank of Tokyo-Mitsubishi UFJ’saggregate exposure and marketing policies.

Certaindirectors’ and officers’ ownership interests in Mitsubishi UFJ Financial Group’scommon stock or service as a director or officer or other employee of both usand The Bank of Tokyo-Mitsubishi UFJ could create or appear to create potentialconflicts of interest, especially since both of us compete in U.S. bankingmarkets.

*Restrictions ondividends and other distributions could limit amounts payable to us*

Asa holding company, a substantial portion of our cash flow typically comes fromdividends our bank and non-bank subsidiaries pay to us. Various statutoryprovisions restrict the amount of dividends our subsidiaries can pay to uswithout regulatory approval. In addition, if any of our subsidiaries were to 

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liquidate, that subsidiary’s creditors will be entitled to receivedistributions from the assets of that subsidiary to satisfy their claimsagainst it before we, as a holder of an equity interest in the subsidiary, willbe entitled to receive any of the assets of the subsidiary.

*Our ability to makeacquisitions is subject to regulatory constraints and risks associated withpotential acquisitions or divestitures or restructurings may adversely affectus*

Our ability to obtainregulatory approval of acquisitions is subject to constraints related to theBank Secrecy Act and the CRA, as described above in “Business—Supervision andRegulation” and below in “MD&A—Regulatory Matters.” Subject to our abilityto address successfully these regulatory concerns, we may seek to acquire orinvest in financial and non-financial companies that complement our business.

We may not besuccessful in completing any such acquisition or investment as this will dependon the availability of prospective target opportunities at valuation levels wefind attractive and the competition for such opportunities from other parties.In addition, we continue to evaluate the performance of all of our businessesand business lines and may sell or restructure a business or business line. Anyacquisitions, divestitures or restructurings may result in the issuance ofpotentially dilutive equity securities, significant write-offs, including thoserelated to goodwill and other intangible assets, and/or the incurrence of debt,any of which could have a material adverse effect on our business, results ofoperations and financial condition.

Acquisitions,divestitures or restructurings could involve numerous additional risksincluding difficulties in obtaining any required regulatory approvals and inthe assimilation or separation of operations, services, products and personnel,the diversion of management’s attention from other business concerns, higherthan expected deposit attrition, divestitures required by regulatoryauthorities, the disruption of our business, the potential loss of keyemployees and unexpected contingent liabilities arising from any business wemight acquire. We may not be successful in addressing these or any othersignificant risks encountered in connection with any acquisition we might make.

*Privacy restrictionscould adversely affect our business*

Ourbusiness model relies, in part, upon cross-marketing the products and servicesoffered by us and our subsidiaries to our customers. Laws that restrict ourability to share information about customers within our corporate organizationcould adversely affect our business, results of operations and financialcondition.

*We rely on thirdparties for important products and services*

Third-partyvendors provide key components of our business infrastructure such as internetconnections, network access and mutual fund distribution and we do not controltheir actions. Any problems caused by these third parties, including as aresult of their not providing us their services for any reason or theirperforming their services poorly, could adversely affect our ability to deliverproducts and services to our customers and otherwise to conduct our business.Replacing these third-party vendors could also entail significant delay andexpense.

*Significant legalactions could subject us to substantial uninsured liabilities*

Weare from time to time subject to claims related to our operations. These claimsand legal actions, including supervisory or enforcement actions by ourregulators, could involve large monetary claims and significant defense costs.To protect ourselves from the cost of these claims, we maintain insurancecoverage in amounts and with deductibles that we believe are appropriate forour operations. However, our insurance coverage may not cover all claimsagainst us or continue to be available to us at a reasonable cost. As a result,we may be exposed to substantial uninsured liabilities, which could adversely affectour business, prospects, results of operations and financial condition.

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*Changes in our taxrates could affect our future results*

TheState of California requires us to file our franchise tax returns as a memberof a unitary group that includes Mitsubishi UFJ Financial Group and either allworldwide affiliates or only U.S. affiliates. Our future effective tax ratescould be favorably or unfavorably affected by increases or decreases inMitsubishi UFJ Financial Group’s taxable profits, which in turn are affected bychanges in the worldwide economy, especially in Japan, and decisions that theymay make about the timing of the recognition of credit losses or other matters.Our effective tax rates could also be affected by changes in the valuation ofour deferred tax assets and liabilities, changes in tax laws or theirinterpretation, or by the outcomes of examinations of our income tax returns bythe Internal Revenue Service and other tax authorities.

*Negative public opinioncould damage our reputation and adversely impact our business and revenues*

Asa financial institution, our earnings and capital are subject to risksassociated with negative public opinion. Negative public opinion could resultfrom our actual or alleged conduct in any number of activities, includinglending practices, the failure of any product or service sold by us to meet ourcustomers’ expectations or applicable regulatory requirements, corporategovernance and acquisitions, or from actions taken by regulators and communityorganizations in response to those activities. We fund our operationsindependently of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ FinancialGroup and believe our business is not necessarily closely related to thebusiness or outlook of The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJFinancial Group. However, negative public opinion could also result fromregulatory concerns regarding, or supervisory actions in the U.S. or Japanagainst, us or Union Bank of California, or The Bank of Tokyo-Mitsubishi UFJ orMitsubishi UFJ Financial Group. Negative public opinion can adversely affectour ability to keep and attract and/or retain customers and can expose us tolitigation and regulatory action. Actual or alleged conduct by one of ourbusinesses can result in negative public opinion about our other businesses.Negative public opinion could also affect our credit ratings, which areimportant to our access to unsecured wholesale borrowings; significant changesin these ratings could change the cost and availability of these sources offunding.

*Our framework formanaging risks may not be effective in mitigating risk and loss to our company*

Ourrisk management framework is made up of various processes and strategies tomanage our risk exposure. Types of risk to which we are subject includeliquidity risk, credit risk, market risk, interest rate risk, operational risk,legal risk, compliance risk, reputation risk, fiduciary risk and private equityrisk, among others. Our framework to manage risk, including the framework’sunderlying assumptions, may not be effective under all conditions andcircumstances. If our risk management framework proves ineffective, we couldsuffer unexpected losses and could be materially adversely affected.

*Our disclosure controlsand procedures may not prevent or detect all errors or acts of fraud*

Our disclosure controlsand procedures are designed to reasonably assure that information required tobe disclosed by us in reports we file or submit under the Exchange Act isaccumulated and communicated to management, and recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms. Any disclosure controls and procedures or internal controls andprocedures, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.

Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by an unauthorized override ofthe controls. Accordingly, because of the inherent limitations in our controlsystem, misstatements due to error or fraud may occur and not be detected.

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**Item 1B.**      UnresolvedStaff Comments

None.

**Item 2.**                 Properties

At December 31, 2006, we operated 317 fullservice branches in California, 4 full service branches in Oregon andWashington, and 2 international offices. We own the property occupied by 102 ofthe domestic offices and lease the remaining properties for periods of five totwenty years.

We own 2 administrative facilities in San Francisco, 2in Los Angeles, and 3 in San Diego. Other administrative offices in Arizona,California, Illinois, Nevada, New York, Oregon, Virginia, Texas and Washingtonoperate under leases expiring in one to twenty six years.

Rental expense for branchesand administrative premises is described in Note 6 to our ConsolidatedFinancial Statements included in this Annual Report.

**Item 3.**                 LegalProceedings

UnionBanCal Corporation and Union Bank of CaliforniaN.A. have been named, along with 54 other parties, as defendants in an actionfiled by DataTreasury Corporation in the United States District Court for theEastern District of Texas on February 24, 2006. Plaintiff alleges thatdefendants are “making, using, selling, offering for sale, and/or importing inor into the United States, directly, contributory and/or by inducement, withoutauthority, products and services” that are asserted to fall within the scope ofthe claims of United States Patents Nos. 5,910,988, 6,032,137, 5,265,007 and5,717,868, which are collectively addressed to various aspects of checkprocessing, including remote data capture, electronic imaging, centralprocessing and storage. Plaintiff seeks unspecified damages and injunctiverelief against infringement. We intend to continue to vigorously defend againstthe claims asserted in this legal action.

We are subject to variousother pending and threatened legal actions that arise in the normal course ofbusiness. We maintain reserves for losses from legal actions that are bothprobable and estimable. In addition, we believe the disposition of all claimscurrently pending will not have a material adverse effect on our financialcondition or results of operations.

**Item 4.**            Submission of Matters toa Vote of Security Holders

None.

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**Item 4A.**       ExecutiveOfficers of the Registrant

The following information pertains to our executiveofficers as of December 31, 2006:

| Executive Officer | ** ** | **Age** | ** ** | **Principal Occupations For The Past Five   Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------|------------|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Tetsuo Shimura    |       | 68      |       | Mr. Shimura has served  as Chairman of UnionBanCal Corporation and Union Bank of California, N.A.  since October 2003. He previously served on the Boards of Directors of  UnionBanCal and Union Bank of California from June 1997 to  July 1998. Mr. Shimura has served in the following positions at The  Bank of Tokyo-Mitsubishi UFJ: Deputy President from July 2001 to  June 2003, Chief Executive, Global Corporate Banking Business Unit from  July 2000 to July 2001 and Senior Managing Director from June 1998  to July 2001. Mr. Shimura has been a Director of UnionBanCal and  Union Bank of California since October 2003.                                                                                                                                                                           |
| Takashi Morimura  |       | 54      |       | Mr. Morimura has  served as President and Chief Executive Officer of UnionBanCal and Union Bank  of California since May 2005 and served as Vice Chairman of UnionBanCal  and Union Bank of California from July 2004 to May 2005.  Mr. Morimura served as General Manager, Global Corporate Banking IT  Planning Office of The Bank of Tokyo-Mitsubishi UFJ from July 2000 to  June 2004, and as Deputy General Manager, Overseas Planning Division of  The Bank of Tokyo-Mitsubishi UFJ from September 1999 to June 2000.  Mr. Morimura was elected an Executive Officer of The Bank of  Tokyo-Mitsubishi UFJ in June 2002 and a Managing Executive Officer of  The Bank of Tokyo-Mitsubishi UFJ in May 2005. Mr. Morimura has been  a Director of UnionBanCal and Union Bank of California since July 2004. |
| Philip B. Flynn   |       | 49      |       | Mr. Flynn has  served as Vice Chairman and Chief Operating Officer of UnionBanCal and Union  Bank of California since March 2005. He served as Vice Chairman and head  of the Commercial Financial Services Group from April 1, 2004 to  March 2005, as Executive Vice President and Chief Credit Officer from  September 2000 to April 2004, as Executive Vice President and head  of Specialized Lending from May 2000 to September 2000 and as Executive  Vice President and head of the Commercial Banking Group from June 1998  to May 2000. Mr. Flynn has been a Director of UnionBanCal and Union  Bank of California since April 2004.                                                                                                                                                                           |

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| David I. Matson |   | 62 |   | Mr. Matson has served  as Vice Chairman and Chief Financial Officer of UnionBanCal and Union Bank of  California since March 2005 and served as Executive Vice President and  Chief Financial Officer from July 1998 to March 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|--------|----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Masashi Oka     |   | 51 |   | Mr. Oka has  served as Vice Chairman, Administration and Support of UnionBanCal and Union  Bank of California since July 2005. Beginning in 1998, Mr. Oka held  the following positions with The Bank of Tokyo-Mitsubishi UFJ: Chief Manager,  Corporate Banking Division No. 2 until April 2001; General Manager,  Syndications Office, Structured Finance Division until October 2002,  General Manager, Global Syndications Office, Debt Finance Division until  June 2004, and General Manager & Global Head, Syndicated  Finance Division until May 2005. From April 2005 until  June 2005, Mr. Oka was Chairman of the Japan Syndication and  Loan-Trading Association. Mr. Oka has been an Executive Officer of The  Bank of Tokyo-Mitsubishi UFJ since June 2005. Mr. Oka has been a  Director of UnionBanCal and Union Bank of California since October 2005. |
| Linda F. Betzer |   | 60 |   | Ms. Betzer has  served as Executive Vice President and head of the Operations and Customer  Services Group of UnionBanCal and Union Bank of California since  January 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| JoAnn M. Bourne |   | 51 |   | Ms. Bourne has  served as Executive Vice President since April 2000 and as head of the  Commercial Deposits and Treasury Management Group of UnionBanCal and Union  Bank of California since April 2003. She served as head of the  Commercial Banking Group from January 2002 to April 2003 and  managed the Commercial Deposit Services Division from June 1997 to  January 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Bruce H. Cabral |   | 51 |   | Mr. Cabral has  served as Executive Vice President since March 2000 and as Chief Credit  Officer of UnionBanCal and Union Bank of California since April 2004. He  served as Deputy Chief Credit Officer from November 2002 until  April 2004. Prior to this position, Mr. Cabral was a Senior Credit  Officer responsible for Real Estate Lending and National Banking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

21

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| John C. Erickson           |   | 45 |   | Mr. Erickson has  served as Executive Vice President and head of the Commercial Banking and  Wealth Management Group of UnionBanCal and Union Bank of California since  May 2006. He served as head of the Commercial Banking Group from  April 2003 to April 2006, as head of the National Banking and  Communications, Media and Entertainment Divisions from April 2001 to  April 2003 and as Senior Vice President, Corporate Capital Markets, from  April 1996 to April 2001. |
|----------------------------|--------|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Paul E. Fearer             |   | 63 |   | Mr. Fearer has served as Executive Vice  President and Director of Human Resources of UnionBanCal and Union Bank of  California since April 1996.                                                                                                                                                                                                                                                                                                                                                                |
| Steven L. Glaser           |   | 58 |   | Mr. Glaser has served as Executive Vice  President and head of the Retail Banking Group of UnionBanCal and Union Bank  of California since May 2006. He served as head of the Consumer Asset  Management Division from April 1997 to September 2006.                                                                                                                                                                                                                                                   |
| John H. McGuckin, Jr. |   | 60 |   | Mr. McGuckin has served as Executive Vice  President, General Counsel and Secretary of UnionBanCal and Union Bank of  California since September 2000. He served as Executive Vice President  and General Counsel of UnionBanCal from January 1998 to  September 2000 and served as Executive Vice President and General  Counsel of Union Bank of California from April 1996 until  September 2000.                                                                                         |
| James Yee                  |   | 53 |   | Mr. Yee has served as Executive Vice President  and Chief Information Officer for UnionBanCal and Union Bank of California  since May 2005. Prior to joining UnionBanCal, he served as Senior Vice  President, Information Technology, for Charles Schwab & Company from  April 2004 to April 2005 and Senior Vice President and Chief  Information Officer of Pacific Exchange, Inc. from April 2000 to  March 2003.                                                          |

 

The term of office of anexecutive officer extends until the officer resigns, is removed, retires, or isotherwise disqualified for service. There are no family relationships among theexecutive officers.

22

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**PART II**

**Item 5.**                 Marketfor Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchasesof Equity Securities

Our common stock is traded on the New York Stock Exchange under thesymbol UB. As of January 31, 2007, our common stock was held by 3,068stockholders of record. At December 31, 2006, The Bank of Tokyo-MitsubishiUFJ, Ltd. held approximately 65 percent of our common stock. During 2005 and2006, the average daily trading volume of our common stock was 308,178 sharesand 365,725 shares, respectively. At December 31, 2004, 2005 and 2006, ourcommon stock closed at $64.48 per share, $68.72 per share and $61.25 per share,respectively. The following table presents stock quotations for each quarterlyperiod for the two years ended December 31, 2005 and 2006.

| ** **     | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $        | 63.99      |     | $          | 59.70 |   | $ | 70.37 |   | $ | 65.65 |   |
| Second quarter |       | 68.00    |       | 58.00    |       | 71.75 |   | 62.63 |   |
| Third quarter  |       | 71.97    |       | 66.38    |       | 65.64 |   | 58.46 |   |
| Fourth quarter |       | 70.45    |       | 65.68    |       | 62.99 |   | 56.26 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The following table presents quarterly per share cashdividends declared for 2005 and 2006.

| ** **     | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First quarter  |       | $0.36    |       | $0.41    |       |
| Second quarter |       | 0.41     |       | 0.47     |       |
| Third quarter  |       | 0.41     |       | 0.47     |       |
| Fourth quarter |       | 0.41     |       | 0.47     |       |

 

On January 24, 2007, our Board of Directorsapproved a quarterly common stock dividend of $0.47 per share for the firstquarter of 2007. Future dividends will depend upon our earnings, financialcondition, capital requirements and other factors as our Board of Directors maydeem relevant.

We offer a dividend reinvestment and stock purchaseplan that allows stockholders to reinvest dividends in our common stock atmarket price. The Bank of Tokyo-Mitsubishi UFJ did not participate in the planduring 2005 and 2006. For further information about this plan, see Note 15 toour Consolidated Financial Statements included in this Annual Report.

Our ability to declare and pay dividends is affectedby certain regulatory restrictions. See Note 20 to our Consolidated FinancialStatements included in this Annual Report.

23

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The following table presents repurchases by us of our equity securitiesduring the fourth quarter 2006.

| ** **                  | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                             | ** ** | **Approximate Dollar**             | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | ** **                         | ** ** | ** **                       | ** ** | **Total Number**                  | ** ** | **Value of Shares that** | ** ** |
| ** **                  | ** ** | ** **                         | ** ** | ** **                       | ** ** | **of Shares Purchased**      | ** ** | **May Yet Be**                | ** ** |
| ** **                  | ** ** | **Total Numbe of ** | ** ** | **Average Price Paid** | ** ** | **as Part of Publicly** | ** ** | **Purchased**                           | ** ** |
| **Period**                  | ** ** | **Shares Purchased **(1) | ** ** | **per Share**               | ** ** | **Announced Programs**            | ** ** | **Under the Programs**        | ** ** |
| **October 2006**       | ** ** |                               | ** ** | ** **                       |       |                                   | ** ** | ** **                              |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| (October 2-31,  2006)  |       |                               | 84,553     | ** **                       |       |                                   | $          | 57.44                                   | ** ** |   |   | 80,000 | ** ** |   |   | $ | 252,818,594 |   |   |
| **November 2006**      | ** ** |                               | ** ** | ** **                       |       |                                   | ** ** | ** **                              |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| (November 1-30,  2006) |       |                               | 745,275    | ** **                       |       |                                   | $          | 57.63                                   | ** ** |   |   | 729,500 | ** ** |   |   | $ | 209,867,339 |   |   |
| **December 2006**      | ** ** |                               | ** ** | ** **                       |       |                                   | ** ** | ** **                              |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| (December 1-29,  2006) |       |                               | 994,956    | ** **                       |       |                                   | $          | 60.56                                   | ** ** |   |   | 993,200 | ** ** |   |   | $ | 149,613,549 | (2) |   |
| **Total**                   |       |                               | 1,824,784  | ** **                       |       |                                   | $          | 59.22                                   | ** ** |   |   | 1,802,700 | ** ** |   |   |   |   |   |

----

(1)                   Includes 4,553shares, 15,775 shares and 1,756 shares of common stock repurchased duringOctober, November and December 2006, respectively, from employees forrequired personal income tax withholdings on the vesting of restricted stockissued under the Year 2000 UnionBanCal Corporation Management Stock Plan.

(2)                   In the fourthquarter of 2006, UnionBanCal Corporation used $108.1 million from the $500million repurchase program announced on April 26, 2006.

**Item 6.**                 SelectedFinancial Data

See page F-1 ofthis Annual Report.

**Item 7.**                 Management’sDiscussion and Analysis of Financial Condition and Results of Operations

See pages F-1through F-48 of this Annual Report.

**Item 7A.**       Quantitativeand Qualitative Disclosures About Market Risk

See pages F-32through F-36 of this Annual Report.

**Item 8.**                 ConsolidatedFinancial Statements and Supplementary Data

See pages F-49 throughF-116 of this Annual Report.

**Item 9.**                 Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**       Controlsand Procedures

*DisclosureControls.**  *OurChief Executive Officer (principal executive officer) and Chief FinancialOfficer (principal financial officer) have concluded that the design andoperation of our disclosure controls and procedures are effective as of December 31,2006. This conclusion is based on an evaluation conducted under the supervisionand with the participation of management. Disclosure controls and proceduresare those controls and procedures which ensure that information required to bedisclosed in this filing is accumulated and communicated to management and isrecorded, processed, summarized and reported in a timely manner and inaccordance with Securities and Exchange Commission rules and regulations.

24

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*InternalControls Over Financial Reporting.**  *Management’s Report on InternalControl Over Financial Reporting regarding the effectiveness of internalcontrols over financial reporting is presented on page F-118. TheReport of Independent Registered Public Accounting Firm is presented on page F-119.During the quarter ended December 31, 2006, there were no changes in ourinternal controls over financial reporting that materially affected, or arereasonably likely to affect, our internal controls over financial reporting.

**Item 9B.**      OtherInformation

None.

**PART III**

**Item 10.**       Directorsand Executive Officers of the Registrant & Corporate Governance

Reference is made to theinformation contained in the section entitled “Election of Directors—Nominees”of our Proxy Statement for our May 24, 2007 Annual Meeting of Stockholdersfor incorporation by reference of information concerning directors and personsnominated to become directors of UnionBanCal Corporation. See “ExecutiveOfficers of the Registrant” on pages 20 - 22 of this Annual Report forinformation regarding executive officers.

Information concerning Section 16(a) beneficialownership reporting compliance is incorporated by reference from the text underthe caption “Section 16(a) Beneficial Ownership Reporting Compliance”in the Proxy Statement for our May 24, 2007 Annual Meeting ofStockholders.

***Corporate Governance***

UnionBanCal has a separatelydesignated standing Audit Committee established in accordance with Section 3(a)(58)(A) ofthe Securities Exchange Act of 1934. The members of the Audit Committee are L.Dale Crandall (Chair), David R. Andrews, Murray H. Dashe, Michael J.Gillfillan, and Mary S. Metz, all of whom are independent under the New YorkStock Exchange Corporate Governance Rules. Of these Audit Committee members, Mr. Crandallis an audit committee financial expert as determined by the Board within theapplicable definition of the Securities and Exchange Commission.

We haveadopted the following:

·       ACode of Ethics applicable to senior financial officers, including our ChiefExecutive Officer, Chief Financial Officer and Controller;

·       BusinessStandards for Ethical Conduct, which is a code of ethics and conduct applicableto all officers and employees;

·       ACode of Ethics applicable to directors of UnionBanCal and Union Bank of California,N.A.;

·       CorporateGovernance Guidelines to promote the effective functioning of the activities ofthe UnionBanCal Board of Directors and to promote a common set of expectationsas to how the Board, its Committees, individual directors and management shouldperform their functions; and

·       Chartersfor the Committees of the Board, including the Audit Committee, CorporateGovernance Committee and Executive Compensation & Benefits Committee.

A copy of each of these committee charters, Codes ofEthics, Business Standards for Ethical Conduct and Corporate GovernanceGuidelines is posted on our website, or is available, without charge, upon thewritten request of any stockholder directed to the Secretary of UnionBanCalCorporation, 400 California Street, San Francisco, California 94104-1302.We intend to disclose promptly any amendment to, or waiver from any provisionof, the Code of Ethics applicable to senior financial officers, and any waiverfrom any provision of the Code of Ethics applicable to directors or theBusiness Standards for Ethical Conduct applicable to executive officers, on ourwebsite. Our website address is www.unionbank.com.

25

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**Item 11.**       Executive Compensation

Information concerningexecutive compensation is incorporated by reference from the text under thecaptions “Executive Compensation” (provided that the section entitled, “ExecutiveCompensation & Benefits Committee Report” shall be furnished by thisreference and shall not be deemed filed or incorporated by reference into anyfiling under the Securities Act of 1933 or the Securities Exchange Act of 1934)and “Director Compensation” in the Proxy Statement for our May 24, 2007 AnnualMeeting of Stockholders. Additional information regarding our directors isincorporated by reference from the text under the caption “CompensationCommittee Interlocks and Insider Participation” in the Proxy Statement for our May 24,2007 Annual Meeting of Stockholders.

**Item 12.**       SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning ownership of the equity stockof UnionBanCal by certain beneficial owners and management is incorporated byreference from the text under the captions “Principal Stockholders” and “SecurityOwnership by Management” in the Proxy Statement for our May 24, 2007Annual Meeting of Stockholders.

The following table provides information relating toour equity compensation plans as of December 31, 2006.

| ** **                                             | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants, and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants, and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column a)** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **(a)**                                                                                                                                           | ** ** | **(b)**                                                                                                      | ** ** | **(c)**                                                                                                                                                                                                        | ** ** |
| Equity compensation  approved by stockholders          |       |                                                                                                                                              | 8,326,241  |                                                                                                         |       |                                                                                                                                                                                                           | $          | 49.24 |   |   |   | 3,825,635 |   |   |
| Equity compensation  not approved by stockholders |       |                                                                                                                                              | —     |                                                                                                         |       |                                                                                                                                                                                                           | —     |   |   |   | — |   |   |
|                                                   |       |                                                                                                                                              | 8,326,241  |                                                                                                         |       |                                                                                                                                                                                                           | $          | 49.24 |   |   |   | 3,825,635 |   |   |

 

All equity compensation planshave been approved by our stockholders. At December 31, 2006, there were3,825,635 shares of common stock available for future issuance under the StockPlans as stock options, restricted stock or shares of common stock issued uponvesting of performance shares and restricted stock units settled in commonstock. For additional information concerning our equity compensation plans, seeNote 16 to our Consolidated Financial Statements included in this AnnualReport.

**Item 13.**       CertainRelationships and Related Transactions, and Director Independence

Information concerning certainrelationships and related transactions with officers, directors, and The Bankof Tokyo-Mitsubishi UFJ is incorporated by reference from the text under thecaption “Transactions with Related Persons” of the Proxy Statement for our May 24,2007 Annual Meeting of Stockholders. Information concerning independence ofdirectors is incorporated by reference from the text under the caption, “Electionof Directors—Director Independence” of the Proxy Statement for our May 24,2007 Annual Meeting of Stockholders.

**Item 14.**       PrincipalAccounting Fees and Services

Reference is made to theinformation contained in the section entitled, “Ratification of Selection ofIndependent Registered Public Accounting Firm—Audit Fees” and “—Pre-approval ofServices by 

26

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Deloitte &Touche LLP” of the Proxy Statement for our May 24, 2007 Annual Meeting ofStockholders for incorporation by reference of information concerning principalaccounting fees and services.

**PART IV**

**Item 15.**       Exhibitsand Consolidated Financial Statement Schedules

**(a)(1)**                 FinancialStatements

Our Consolidated FinancialStatements, Management’s Report on Internal Control Over Financial Reporting,and the Report of Independent Registered Public Accounting Firm are set forthon pages F-50 through F-120. (See index on page F-49).

**(a)(2)**                 FinancialStatement Schedules

All schedules to ourConsolidated Financial Statements are omitted because of the absence of theconditions under which they are required or because the required information isincluded in our Consolidated Financial Statements or accompanying notes.

**(a)(3)**                 Exhibits

| No.   | ** ** | **Description**                                                                                                                                                 |
|-------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |       | Restated  Certificate of Incorporation of the Registrant(1)                                                                                                     |
| 3.2   |       | Bylaws of the Registrant(1)                                                                                                                                     |
| 4.1   |       | Trust Indenture between UnionBanCal Corporation and  J.P. Morgan Trust Company, National Association, as Trustee, dated  December 8, 2003(2)               |
| 4.2   |       | The Registrant agrees to furnish upon request to the  Commission a copy of each instrument defining the rights of holders of  long-term debt of the Registrant. |
| 10.1  |       | UnionBanCal Corporation Management Stock Plan*(3)                                                                                                               |
| 10.2  |       | Union Bank of California, N.A. Deferred Compensation  Plan*(4)                                                                                                  |
| 10.3  |       | Union Bank of California, N.A. Senior Executive  Bonus Plan*(5)                                                                                                 |
| 10.4  |       | Union Bank of California, N.A Senior Management  Bonus Plan*(6)                                                                                                 |
| 10.5  |       | Union Bank of California, N.A. Supplemental  Executive Retirement Plan*(7)                                                                                      |
| 10.6  |       | Amendment No. 1 to the Union Bank of  California, N.A. Supplemental Executive Retirement Plan*(8)                                                          |
| 10.7  |       | Union Bank Financial Services Reimbursement Program*(9)                                                                                                         |
| 10.8  |       | UnionBanCal Corporation Performance Share Plan*(10)                                                                                                             |
| 10.9  |       | Amended and Restated 1997 UnionBanCal Corporation  Performance Share Plan*(11)                                                                                  |
| 10.10 |       | Forms of Performance Share Agreement under the 1997  UnionBanCal Corporation Performance Share Plan*(12)                                                        |
| 10.11 |       | Form of Terms and Conditions of Performance  Share Plan Stock Unit Deferral Elections*(36)                                                                 |
| 10.12 |       | Service Agreement Between Union Bank of California,  N.A. and The Bank of Tokyo-Mitsubishi, Ltd. dated October 1, 1997*(13)                                |
| 10.13 |       | Year 2000 UnionBanCal Corporation Management Stock  Plan*(14)                                                                                                   |
| 10.14 |       | Form of 2006 Nonqualified Stock Option  Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan*(15)                                   |
| 10.15 |       | Form of 2005 Nonqualified Stock Option  Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan*(16)                                   |

27

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| 10.16 |   | Form of 2004  Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(17)                                                                                                  |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17 |   | Form of 2006 Restricted  Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock  Plan*(18)                                                                                                           |
| 10.18 |   | Form of Restricted  Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock  Plan*(19)                                                                                                                |
| 10.19 |   | Forms of Restricted Stock  Unit Agreement for Non-Employee Directors under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(20)                                                                                    |
| 10.20 |   | Form of 2004  Nonqualified Stock Option Agreement for Non-Employee Directors under the Year  2000 UnionBanCal Corporation Management Stock Plan*(21)                                                                       |
| 10.21 |   | Terms and Conditions  Applicable to Non-Employee Director Stock Unit Awards under the Year 2000  UnionBanCal Corporation Management Stock Plan*(22)                                                                             |
| 10.22 |   | Forms of Restricted Stock  Agreement for Non-Employee Directors under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(23)                                                                                         |
| 10.23 |   | Union Bank of California,  N.A. Supplemental Retirement Plan for Policy Making Officers*(24)                                                                                                                                    |
| 10.24 |   | Amendment No. 1 to the Union  Bank of California, N.A. Supplemental Retirement Plan for Policy Making  Officers*(25)                                                                                                       |
| 10.25 |   | Form of  Change-of-Control Agreement, dated as of May 1, 2003, between  UnionBanCal Corporation and each of the policy-making officers of UnionBanCal  Corporation*(26)                                               |
| 10.26 |   | Union Bank of California,  N.A. Separation Pay Plan*(27)                                                                                                                                                                        |
| 10.27 |   | Philip B. Flynn Employment  Agreement (effective April 1, 2004)*(28)                                                                                                                                                       |
| 10.28 |   | Philip B. Flynn Amendment of  Employment Agreement (effective May 1, 2005)*(29)                                                                                                                                            |
| 10.29 |   | David I. Matson Employment  Agreement (effective January 1, 1998)*(30)                                                                                                                                                     |
| 10.30 |   | David I. Matson Amendment of  Employment Agreement (effective May 1, 2005)*(31)                                                                                                                                            |
| 10.31 |   | Written Descriptions of  Compensation Arrangements for UnionBanCal Non-Employee Directors*(32)                                                                                                                                  |
| 10.32 |   | Written Description of  Compensation Arrangements for Union Bank of California, N.A. Non-Employee  Directors*(33)                                                                                                               |
| 10.33 |   | Repurchase Agreement between  UnionBanCal Corporation and The Bank of Tokyo-Mitsubishi, Ltd., dated as of  February 23, 2005(34)                                                                                           |
| 10.34 |   | Purchase and Assumption  Agreement by and among Union Bank of California, N.A., Union Bank of  California International, and Union Bank of California Servicos LTDA. and  Wachovia Bank, N.A. dated September 21, 2005(35) |
| 12.1  |   | Computation of Ratio of  Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements(36)                                                                                                                       |
| 21.1  |   | Subsidiaries of the  Registrant(36)                                                                                                                                                                                             |
| 23.1  |   | Consent of  Deloitte & Touche LLP(36)                                                                                                                                                                                  |
| 24.1  |   | Power of Attorney(36)                                                                                                                                                                                                           |
| 24.2  |   | Resolution of Board of  Directors(36)                                                                                                                                                                                           |
| 31.1  |   | Certification of the Chief  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002(36)                               |

28

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| 31.2 |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002(36) |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(36)                             |
| 32.2 |   | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(36)                             |

----

             (1)  Incorporated by reference to the exhibit of the same number to theUnionBanCal Corporation Quarterly Report on Form 10-Q for thequarter ended September 30, 2003 (SEC File No. 001-15081).

             (2)  Incorporated by reference to Exhibit 99.1 to the UnionBanCalCorporation Current Report on Form 8-K dated December 8, 2003(SEC File No. 001-15081).

             (3)  Incorporated by reference to the exhibit of the same number to theUnionBanCal Corporation Annual Report on Form 10-K for the yearended December 31, 1997 (SEC File No. 000-28118).

             (4)  Incorporated by reference to the exhibit of the same number to theUnionBanCal Corporation Annual Report on Form 10-K for the yearended December 31, 1996 (SEC File No. 000-28118).

             (5)  Incorporated by reference to Appendix B to the UnionBanCalCorporation Definitive Proxy Statement on Schedule 14A filed on March 23,2006 (SEC File No. 001-15081).

             (6)  Incorporated by reference to Exhibit C to the UnionBanCalCorporation Definitive Proxy Statement on Schedule 14A filed on March 27,2001 (SEC File No. 001-15081).

             (7)  Incorporated by reference to Exhibit 10.6 to the UnionBanCalCorporation Annual Report on Form 10-K for the year ended December 31,1997 (SEC File No. 000-28118).

             (8)  Incorporated by reference to Exhibit 10.1 to the UnionBanCalCorporation Quarterly Report on Form 10-Q for the quarter ended June 30,2006 (SEC File No. 001-15081).

             (9)  Incorporated by reference to Exhibit 10.14 to the UnionBanCalCorporation Current Report on Form 8-K dated April 1, 1996 (SECFile No. 000-28118).

        (10)  Incorporated by reference to Appendix B to the UnionBanCalCorporation Definitive Proxy Statement on Schedule 14A filed on March 26,2004 (SEC File No. 001-15081).

    (11)  Incorporatedby reference to Appendix A to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

    (12)  Incorporatedby reference to (i) Exhibit 10.2 to the UnionBanCal CorporationCurrent Report on Form 8-K dated March 22, 2005 and (ii) Exhibit 10.1to the UnionBanCal Corporation Current Report on Form 8-K dated March 24,2006 (SEC File No. 001-15081).

    (13)  Incorporatedby reference to Exhibit 10.10 to the UnionBanCal Corporation Annual Reporton Form 10-K for the year ended December 31, 1997 (SEC File No. 000-28118).

    (14)  Incorporatedby reference to Appendix A to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 25, 2005 (SEC File No. 001-15081).

    (15)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended March 31, 2006 (SECFile No. 001-15081).

    (16)  Incorporatedby reference to Exhibit 10.4 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 22, 2005 (SEC File No. 001-15081).

29

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    (17)  Incorporatedby reference to Exhibit 10.3 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 22, 2005 (SEC File No. 001-15081).

    (18)  Incorporatedby reference to Exhibit 10.3 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2006 (SECFile No. 001-15081).

    (19)  Incorporatedby reference to Exhibit 10.3 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended March 31, 2006 (SECFile No. 001-15081).

    (20)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation Current Reporton Form 8-K dated July 1, 2006 (SEC File No. 001-15081).

    (21)  Incorporatedby reference to Exhibit 10.5 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 22, 2005 (SEC File No. 001-15081).

    (22)  Incorporatedby reference to Exhibit 10.6 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 22, 2005 (SEC File No. 001-15081).

    (23)  Incorporatedby reference to Exhibit 10.14 to the UnionBanCal Corporation Annual Reporton Form 10-K for the year ended December 31, 2005 (SEC File No. 001-15081).

    (24)  Incorporatedby reference to Exhibit 10.10 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2000 (SECFile No. 001-15081).

    (25)  Incorporatedby reference to Exhibit 10.2 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2006 (SECFile No. 001-15081).

    (26)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2003 (SECFile No. 001-15081).

    (27)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 22, 2005 (SEC File No. 001-15081).

    (28)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended March 31, 2004 (SECFile No. 001-15081).

    (29)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2005 (SECFile No. 001-15081).

    (30)  Incorporatedby reference to Exhibit 10.13 to the UnionBanCal Corporation Annual Reporton Form 10-K for the year ended December 31, 2002 (SEC File No. 001-15081).

    (31)  Incorporatedby reference to Exhibit 10.2 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended June 30, 2005 (SECFile No. 001-15081).

    (32)  Incorporatedby reference to (i) Exhibit 10.1 to the UnionBanCal CorporationCurrent Report on Form 8-K dated July 27, 2005 (SEC File No. 001-15081)and (ii) Item 1 of the UnionBanCal Corporation Current Report on Form 8-Kdated October 26, 2005 (SEC File No. 001-15081).

    (33)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation Current Reporton Form 8-K dated December 7, 2005 (SEC File No. 001-15081).

    (34)  Incorporatedby reference to Exhibit 10.25 to the UnionBanCal Corporation Annual Reporton Form 10-K for the year ended December 31, 2005 (SEC File No. 001-15081).

    (35)  Incorporatedby reference to Exhibit 10.1 to the UnionBanCal Corporation QuarterlyReport on Form 10-Q for the quarter ended September 30, 2005(SEC File No. 001-15081).

    (36)  Providedherewith.

                 *  Management contract or compensatory plan,contract or arrangement.

30

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**UnionBanCal Corporationand SubsidiariesManagement’s Discussion and Analysis of Financial Condition**

**and Results of Operations**

**Selected Financial Data**

| ** **                                                                                                 | ** ** | **As of and for the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands, except per share data)**                            | ** ** | **2002**                                                                               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results of operations:**                                                                                 | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income(1)                                                                                     |       | $                                                                                      | 1,544,284  |   | $ | 1,550,057 |   | $ | 1,627,761 |   | $ | 1,843,466 |   | $ | 1,844,556 |   |
| (Reversal of) provision for loan losses                                                                    |       | 175,000                                                                                |       | 72,799 |   | (45,757 | ) | (50,683 | ) | (5,000 | ) |
| Noninterest income                                                                                         |       | 621,516                                                                                |       | 712,956 |   | 912,823 |   | 804,787 |   | 878,499 |   |
| Noninterest expense                                                                                        |       | 1,252,356                                                                              |       | 1,363,934 |   | 1,473,589 |   | 1,607,246 |   | 1,686,288 |   |
| Income before income taxes(1)                                                                              |       | 738,444                                                                                |       | 826,280 |   | 1,112,752 |   | 1,091,690 |   | 1,041,767 |   |
| Taxable-equivalent adjustment                                                                              |       | 2,587                                                                                  |       | 2,553 |   | 3,745 |   | 4,352 |   | 6,401 |   |
| Income tax expense                                                                                         |       | 231,190                                                                                |       | 271,193 |   | 398,933 |   | 356,698 |   | 271,623 |   |
| Income from continuing operations                                                                          |       | 504,667                                                                                |       | 552,534 |   | 710,074 |   | 730,640 |   | 763,743 |   |
| Income (loss) from discontinued operations, net of taxes                                                   |       | 23,236                                                                                 |       | 34,605 |   | 22,460 |   | 132,293 |   | (10,747 | ) |
| Net income                                                                                                 |       | $                                                                                      | 527,903    |   | $ | 587,139 |   | $ | 732,534 |   | $ | 862,933 |   | $ | 752,996 |   |
| **Per common share:**                                                                                      | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings:                                                                                            |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| From continuing operations                                                                                 |       | $                                                                                      | 3.26       |   | $ | 3.71 |   | $ | 4.81 |   | $ | 5.04 |   | $ | 5.39 |   |
| Net income                                                                                                 |       | 3.41                                                                                   |       | 3.94 |   | 4.96 |   | 5.95 |   | 5.32 |   |
| Diluted earnings:                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| From continuing operations                                                                                 |       | 3.23                                                                                   |       | 3.67 |   | 4.72 |   | 4.94 |   | 5.31 |   |
| Net income                                                                                                 |       | 3.38                                                                                   |       | 3.90 |   | 4.87 |   | 5.84 |   | 5.24 |   |
| Dividends(2)                                                                                               |       | 1.09                                                                                   |       | 1.21 |   | 1.39 |   | 1.59 |   | 1.82 |   |
| Book value (end of period)                                                                                 |       | 24.94                                                                                  |       | 25.66 |   | 28.93 |   | 31.62 |   | 32.86 |   |
| Common shares outstanding (end of period)(3)                                                               |       | 150,702,363                                                                            |       | 145,758,156 |   | 148,359,918 |   | 144,207,072 |   | 139,107,254 |   |
| Weighted average common shares outstanding (basic)(3) (4)                                             |       | 154,757,817                                                                            |       | 148,917,249 |   | 147,767,238 |   | 145,109,058 |   | 141,620,081 |   |
| Weighted average common shares outstanding (diluted)(3) (4)                                           |       | 156,414,940                                                                            |       | 150,645,193 |   | 150,302,831 |   | 147,791,565 |   | 143,754,865 |   |
| **Balance sheet (end of period):**                                                                         | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets(5)                                                                                            |       | $                                                                                      | 40,169,773 |   | $ | 42,498,467 |   | $ | 48,098,021 |   | $ | 49,416,002 |   | $ | 52,619,576 |   |
| Total loans                                                                                                |       | 25,255,413                                                                             |       | 24,375,156 |   | 29,109,415 |   | 33,095,595 |   | 36,671,723 |   |
| Nonperforming assets                                                                                       |       | 337,404                                                                                |       | 286,050 |   | 149,855 |   | 61,645 |   | 42,365 |   |
| Total deposits                                                                                             |       | 31,110,985                                                                             |       | 33,947,806 |   | 38,719,506 |   | 40,082,239 |   | 41,969,368 |   |
| Stockholders’ equity                                                                                  |       | 3,758,189                                                                              |       | 3,740,436 |   | 4,292,244 |   | 4,559,700 |   | 4,571,401 |   |
| **Balance sheet (period average):**                                                                        | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                                               |       | $                                                                                      | 34,615,481 |   | $ | 38,572,615 |   | $ | 43,158,714 |   | $ | 47,610,818 |   | $ | 49,992,481 |   |
| Total loans                                                                                                |       | 24,643,533                                                                             |       | 24,927,797 |   | 26,047,852 |   | 31,452,606 |   | 35,704,129 |   |
| Earning assets                                                                                             |       | 31,676,523                                                                             |       | 34,925,332 |   | 39,033,107 |   | 42,796,688 |   | 45,080,843 |   |
| Total deposits                                                                                             |       | 27,321,455                                                                             |       | 32,016,157 |   | 36,006,833 |   | 39,543,986 |   | 40,121,139 |   |
| Stockholders’ equity                                                                                  |       | 3,739,530                                                                              |       | 3,831,032 |   | 4,050,202 |   | 4,280,085 |   | 4,574,185 |   |
| **Financial ratios****(6)****:**                                                                           | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on average assets:                                                                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| From continuing operations                                                                                 |       | 1.46                                                                                   | %          | 1.43 | % | 1.65 | % | 1.53 | % | 1.53 | % |
| Net income                                                                                                 |       | 1.53                                                                                   |       | 1.52 |   | 1.70 |   | 1.81 |   | 1.51 |   |
| Return on average stockholders’ equity:                                                               |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| From continuing operations                                                                                 |       | 13.50                                                                                  |       | 14.42 |   | 17.53 |   | 17.07 |   | 16.70 |   |
| Net income                                                                                                 |       | 14.12                                                                                  |       | 15.33 |   | 18.09 |   | 20.16 |   | 16.46 |   |
| Efficiency ratio(7)                                                                                        |       | 57.82                                                                                  |       | 60.27 |   | 57.95 |   | 60.75 |   | 62.67 |   |
| Net interest margin(1)                                                                                     |       | 4.88                                                                                   |       | 4.44 |   | 4.17 |   | 4.31 |   | 4.09 |   |
| Dividend payout ratio                                                                                      |       | 33.44                                                                                  |       | 32.61 |   | 28.90 |   | 31.55 |   | 33.77 |   |
| Tangible common equity ratio                                                                               |       | 8.93                                                                                   |       | 8.20 |   | 7.94 |   | 8.31 |   | 7.84 |   |
| Tier 1 risk-based capital ratio(5)                                                                         |       | 11.18                                                                                  |       | 11.31 |   | 9.71 |   | 9.17 |   | 8.68 |   |
| Total risk-based capital ratio(5)                                                                          |       | 12.93                                                                                  |       | 14.14 |   | 12.17 |   | 11.10 |   | 11.71 |   |
| Leverage ratio(5)                                                                                          |       | 9.75                                                                                   |       | 9.03 |   | 8.09 |   | 8.39 |   | 8.44 |   |
| Allowances for credit losses to total loans(8)                                                             |       | 2.41                                                                                   |       | 2.19 |   | 1.65 |   | 1.32 |   | 1.12 |   |
| Allowances for credit losses to nonaccrual loans(8)                                                        |       | 180.94                                                                                 |       | 190.08 |   | 337.74 |   | 743.58 |   | 987.06 |   |
| Net loans charged off (recovered) to average total  loans                                                  |       | 0.84                                                                                   |       | 0.64 |   | 0.09 |   | (0.01 | ) | 0.04 |   |
| Nonperforming assets to total loans, distressed loans held for  sale, and foreclosed assets |       | 1.34                                                                                   |       | 1.17 |   | 0.51 |   | 0.19 |   | 0.12 |   |
| Nonperforming assets  to total assets(5)                                                                   |       | 0.84                                                                                   |       | 0.67 |   | 0.31 |   | 0.12 |   | 0.08 |   |

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(1)                    Amounts are on a taxable-equivalent basisusing the federal statutory tax rate of 35 percent.

(2)                    Dividends per share reflect dividendsdeclared on UnionBanCal Corporation’s common stock outstanding as of thedeclaration date.

(3)                    Common shares outstanding reflect commonshares issued less treasury shares.

(4)                    At December 31, 2006, weighted averagecommon shares outstanding (basic) excludes nonvested restricted shares butincludes the Impact of those shares in the calculation of diluted shares. Theimpact of this change on previous periods was not material.

(5)                    End of period total assets and assets usedto calculate all regulatory capital ratios include those of discontinuedoperations.

(6)                    Average balances used to calculate ourfinancial ratios are based on continuing operations data only, unless otherwiseindicated.

(7)                    The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the (reversal) ofprovision for losses on off-balance sheet commitments, as a percentage of netinterest income (taxable-equivalent basis) and noninterest income and is calculated for continuingoperations only.

(8)                    The allowances for credit losses ratiosinclude the allowances for loan losses and losses on off-balance sheetcommitments. These ratios relate to continuing operations only.

F-1

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***This report includes forward-looking statements, whichinclude forecasts of our financial results and condition, expectations for ouroperations and business, and our assumptions for those forecasts andexpectations. Do not rely unduly on forward-looking statements. Actual resultsmight differ significantly from our forecasts and expectations. Please refer toPart I, Item 1A “Risk Factors” for a discussion of some factors that maycause results to differ.***

You should read the following discussion and analysisof our consolidated financial position and results of our operations for theyears ended December 31, 2004, 2005 and 2006 together with ourConsolidated Financial Statements and the Notes to Consolidated FinancialStatements included in this Annual Report. Averages, as presented in thefollowing tables, are substantially all based upon daily average balances.

As used in this Form 10-K,the term “UnionBanCal” and terms such as “we,” “us” and “our” refer toUnionBanCal Corporation, Union Bank of California, N.A., one or more of theirconsolidated subsidiaries, or to all of them together.

**Introduction**

We are a California-based,commercial bank holding company whose major subsidiary, Union Bank ofCalifornia, N.A. (the Bank), is a commercial bank. We had consolidated assetsof $53 billion at December 31, 2006. At December 31, 2006, The Bankof Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately 65percent of our outstanding common stock.

**Executive Overview**

We are providing you with an overview of what webelieve are the most significant factors and developments that impacted our2006 results and that could impact our future results. We ask that youcarefully read this entire document and any other reports that we refer to inthis Annual Report, for more detailed information that will complete yourunderstanding of trends, events and uncertainties that impact us.

Our average loans grew by 14 percent in 2006 comparedto 2005. This growth was concentrated in our commercial and residentialmortgage lending areas, although we expect that the growth rate in residentialmortgage loans will slow if interest rates continue to rise.

Although our loan portfolio grew significantly in thepast year, our overall credit quality remained strong during 2006. Our nonperformingassets totaled $42 million at December 31, 2006 compared to $62 million atDecember 31, 2005. While such low levels of nonperforming assets are notsustainable, we believe that our consistently responsible lending andmonitoring practices will position us to maintain high credit quality in ourloan portfolio.

During 2006, we reversed $10 million of our allowancefor credit losses compared with a reversal of approximately $47 million in 2005.After several years of reversals of our allowance for credit losses anddiminishing levels of nonperforming assets, we believe that our allowance forcredit losses is now at a level that will require that we provide for creditlosses inherent in our loan portfolio growth. We will also need to provide forany adverse changes in the financial situation of our borrowers or from ourcurrent economic environment.

Although our deposit basecontinues to be relatively attractive compared to most of our peers, ouraverage noninterest bearing deposits declined by approximately $2 billion in2006 compared to 2005 as deposit pricing pressures, caused by rising short-terminterest rates, resulted in customer transfers of funds from noninterestbearing to interest bearing deposits or other investments. We believe thatdespite the deposit shift we experienced in 2006, our high percentage ofaverage noninterest bearing deposits to average total deposits continues toprovide us with a funding advantage compared to most of our peers.

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In 2006, our net interest income was $1.8 billion,flat compared to 2005, as our strong loan growth was offset by higher fundingcosts.

Noninterest income grew 9 percent in 2006 comparedwith 2005, primarily from higher trust and investment management fees relatedto growth in trust assets and lower securities losses, partially offset by adecline in insurance commissions and service charges on deposit accounts, whichstemmed from lower account analysis fees and lower demand deposit balances.

In 2006, our noninterest expense grew to $1.7 billioncompared to $1.6 billion in 2005. Most of this increase was related to salariesand employee benefits, of which $28.1 million was related to both our adoptionof the new share-based compensation accounting rules and higher costs forrestricted stock awards.

Our 2006 noninterest expense also included expenses ofapproximately $39 million related to our Bank Secrecy Act/anti-money laundering(BSA/AML) initiatives. In 2007, we expect to spend half of what we spent in2006 for these initiatives. However, a significant portion of the 2007 expenseswill be spent for permanent BSA/AML staffing that will extend beyond 2007.

Our effective tax rate decreased to 26 percent in 2006from 33 percent during 2005. The lower rate in 2006 was due primarily toreductions in California tax expense from a refund of California franchisetaxes of $72.8 million, net of federal tax, that we received in December 2006.We expect our 2007 effective tax rate to be approximately 34 percent.

During 2006, we returned asignificant amount of capital to our stockholders in the form of dividends andcommon stock repurchases. We declared $258 million in dividends and werepurchased $452 million of our common stock in 2006 and, as of December 31,2006, we had $150 million remaining under our current board authorization forthe repurchase of our common stock.

**Discontinued Operations**

During the third quarter 2005,we committed to a plan to exit our international correspondent banking businessand entered into a definitive agreement to sell this business to Wachovia Bank,N.A. This business consisted of international payment and trade processingalong with the related lending activities. The principal legal closing of thetransaction occurred on October 6, 2005 and we received $245 million. During2006, we received an additional $4 million as a contingent purchase pricepayment.

This transaction has beenaccounted for as a discontinued operation and all prior periods, except wherespecifically mentioned, have been restated to reflect this accounting treatment.All of the assets and liabilities of the discontinued operations have beenseparately identified on our consolidated balance sheet and the assets areshown at the lower of cost or fair value less costs to dispose. The average netassets or liabilities of our discontinued operations are reflected in ouranalysis of net interest margin. All of our offices designated for disposalwere closed as of June 30, 2006. The remaining assets include depositswith banks awaiting approval of repatriation of capital and unremitted profitsand loans that are maturing by 2008. The remaining liabilities consistprimarily of accrued expenses, which will be settled when due. For the detailedcomponents of our assets and liabilities from discontinued operations, see Note2 “Discontinued Operations” to the Consolidated Financial Statements of thisAnnual Report.

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Includedin our net income are the net results of our discontinued operations. For theyears ended December 31, 2004, 2005 and 2006, income from discontinuedoperations included the following:

| ** **                                                      | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(Dollars in thousands)**                            | ** ** | **2004**                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net interest income                                             |       | $                                                             | 21,207     |   | $ | 20,252 |   | $ | 871 |   |
| Provision for loan  losses                                      |       | 10,757                                                        |       | 6,683 |   | — |   |
| Noninterest income                                              |       | 76,482                                                        |       | 298,725 |   | 13,110 |   |
| Noninterest expense                                             |       | 50,593                                                        |       | 106,712 |   | 31,038 |   |
| Income (loss) from  discontinued operations before income taxes |       | 36,339                                                        |       | 205,582 |   | (17,057 | ) |
| Income tax expense  (benefit)                                   |       | 13,879                                                        |       | 73,289 |   | (6,310 | ) |
| Income (loss) from  discontinued operations                     |       | $                                                             | 22,460     |   | $ | 132,293 |   | $ | (10,747 | ) |

 

Net interest income for theyears ended 2004, 2005 and 2006 included the allocation of interest expensefrom continuing operations of approximately $0.8 million, $15.5 million and$1.8 million, respectively. Interest expense allocated to discontinuedoperations is calculated based on its average net assets and the correspondingcost of funds rate equivalent to the average federal funds purchased rate forthe period.

Noninterest income includedthe recognition of the $228.8 million on the sale of this business in 2005 andan additional $4 million payment from Wachovia Bank in 2006 reflecting thefinal settlement upon the conversion of our international correspondent bankingcustomer base. Noninterest expense for the year ended December 31, 2004included $2.1 million of compliance related expenses. Noninterest expense for the year ended December 31, 2005 included$32.8 million of compliance related expenses, $22.0 million of severanceexpense and $3.0 million of impairment of software in development. Noninterestexpense for the year ended December 31, 2006 included $8.7 million ofcompliance related expenses and $2.4 million of expenses related to thetermination of lease contracts relating to this business.

The remaining discussion ofour financial results is based on results from continuing operations, unlessotherwise stated.

**Critical Accounting Policies**

*General*

UnionBanCal’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America (US GAAP) and the generalpractices of the banking industry. The financial information contained withinour statements is, to a significant extent, financial information that is basedon approximate measures of the financial effects of transactions and eventsthat have already occurred. A variety of factors could affect the ultimatevalue that is obtained either when earning income, recognizing an expense,recovering an asset or relieving a liability. In many instances, we use adiscount factor to determine the present value of assets and liabilities. Achange in the discount factor could increase or decrease the values of thoseassets and liabilities and such a change would result in either a beneficial oradverse impact to our financial results. We use historical loss factors,adjusted for current conditions, to determine the inherent loss that may bepresent in our loan and lease portfolio. Actual losses could differsignificantly from the loss factors that we use. Other significant estimatesthat we use are employee turnover, discount rates and expected rates of returnon plan assets to determine our pension costs, residual values in our leasingportfolio, fair value of our derivatives and securities, expected useful livesof our depreciable assets and assumptions regarding our effective income taxrates. We enter into derivative contracts to accommodate our customers and forour own risk management purposes. The derivative contracts are generallyenergy, foreign exchange, interest rate swap and interest rate optioncontracts, although we could enter into other types of derivative contracts. Werecord these contracts at fair value, using either readily available, marketquoted prices or from information 

F-4

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that can beextrapolated to approximate a market price. We are subject to US GAAP that maychange from one previously acceptable method to another method. Although theeconomics of our transactions would be the same, the timing of an accountingevent impacting our transactions could change.

Our most significant estimatesare approved by our Chief Executive Officer (CEO) Forum, which is comprised ofour most senior officers. For each financial reporting period, a review ofthese estimates is presented to and discussed with the Audit Committee of ourBoard of Directors.

All of our significantaccounting policies are identified in Note 1 to our Consolidated FinancialStatements included in this Annual Report. The following describes ourmost critical accounting policies and our basis for estimating the allowancesfor credit losses, pension obligations and asset impairment.

*Allowances for Credit Losses*

The allowances for creditlosses, which consist of the allowances for loan and off-balance sheetcommitment losses are estimates of the losses that may be sustained in our loanand lease portfolio as well as for certain off-balance sheet commitments suchas unfunded commitments, commercial letters of credit, and financial guarantees.The allowances are based on two principles of accounting: (1) Statement ofFinancial Accounting Standards (SFAS) No. 5, “Accounting forContingencies,” which requires that losses be accrued when they are probable ofoccurring and estimable; and (2) SFAS No. 114, “Accounting byCreditors for Impairment of a Loan” and SFAS No. 118, “Accounting byCreditors for Impairment of a Loan - Income Recognition and Disclosures,” whichrequire that losses be accrued based on the differences between the value ofcollateral, present value of future cash flows or values that are observable inthe secondary market and the loan balance.

Our allowances for creditlosses have four components: the formula allowance, the specific allowance, theunallocated allowance and the allowance for off-balance sheet commitments,which is included in other liabilities. Each of these components is determinedbased upon estimates that can and do change when the actual events occur. Theformula allowance uses a model based, in part, on historical losses as anindicator of future losses and, as a result, could differ from the lossesincurred in the future. This history is updated quarterly to include data thatmakes the historical data more relevant. Moreover, management adjusts thehistorical loss estimates for conditions that more accurately capture probablelosses inherent in the portfolio. The specific allowance uses varioustechniques to arrive at an estimate of loss. Historical loss information,discounted cash flows, fair market value of collateral and secondary marketinformation are all used to estimate those losses. The use of these values isinherently subjective and our actual losses could be greater or less than theestimates. The unallocated allowance captures losses that are attributable tovarious economic events, as well as to industry or geographic sectors whoseimpact on the portfolio have occurred but have yet to be recognized in eitherthe formula or specific allowances. Our allowance for off-balance sheetcommitments is measured in approximately the same manner as the allowance forour loans but includes an estimate of likely utilization based upon historicaldata. At December 31, 2006, our allowance for loan losses was $331 millionand our allowance for off-balance sheet commitments was $81 million, basedupon our assessment of the probability of loss. For further informationregarding our allowance for loan losses, see “Allowances for Credit Losses” inthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A.)

*Pension Obligations*

Our pension obligations andrelated assets of our defined retirement benefit plan are presented in Note 9to our Consolidated Financial Statements included in this Annual Report. Planassets, which consist primarily of marketable equity and debt instruments, arevalued using market quotations. Plan obligations and the annual benefit expenseare determined by independent actuaries and through key assumptions. Keyassumptions in measuring the plan obligations and determining the pensionbenefit expense are the discount rate, the rate of compensation increases, andthe estimated future return on plan assets. Our discount rate is calculatedusing a yield curve based on Aa3 or better rated bonds. This yield curve is 

F-5

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matched tothe anticipated timing of the actuarially determined estimated pension benefitpayments to determine the weighted average discount rate. Compensation increaseassumptions are based upon historical experience and anticipated futuremanagement actions. Asset returns are based upon the anticipated average rateof earnings expected on the invested funds of the plan.

At December 31, 2006, weadopted the disclosure requirements of SFAS No. 158, “Employers’Accounting for Defined Pension and Other Postretirement Plans, an amendment ofSFAS No. 87, 88, 106 and 132(R).”This Statement required us to recognize the overfunded or underfunded status ofour defined benefit plan as an asset or liability in our statement of financialposition and to recognize previously unrecognized prior service costs and netactuarial losses in other comprehensive income. At adoption on December 31,2006, we recognized a prepaid pension asset for the overfunded status of ourpension plan of $398 million. We also recognized $203 million ($126 million,net of tax) for the previously unrecognized prior service costs and netactuarial losses of our pension plan in other comprehensive income.

Our net actuarial losses(pretax) declined $180.5 million between December 31, 2005 and 2006. Theimprovement in our net actuarial losses resulted primarily from an increase inthe assumed discount rate from 5.5 percent to 6.0 percent and a higher thanexpected rate of return on our plan assets of 13.9 percent versus 8.25percent. Of the $180.5 million decline, $66.4 million resulted primarily fromthe change in the discount rate, while $81.8 million resulted from the betterthan expected return on plan assets. The combined reduction of $148.2 millionin our actuarial loss will reduce our 2007 net periodic pension cost by $8.9million. Of the total $203 million of net actuarial loss at December 31,2006, approximately $133 million will be subject to amortization over 9.5years. The remaining $70 million is not currently subject to amortization. Thecumulative net actuarial loss resulted primarily from differences between expectedand actual assumptions of rate of return on plan assets and the discount rate. Includedin our 2007 net periodic pension cost will be $14 million of amortizationrelated to net actuarial losses. We estimate that our total 2007 net periodicpension cost will be approximately $6.8 million, assuming a 2007 contributionof $50 million. The primary reason for the decrease in net periodic pensioncost for 2007 compared to $39.1 million in 2006 is the increase in the assumeddiscount rate, the increase from the expected return on plan assets and areduction in net actuarial loss amortization. The 2007 estimate for netperiodic pension cost was actuarially determined using a discount rate of 6.0percent, an expected return on plan assets of 8.25 percent and an expectedcompensation increase assumption of 4.7 percent.

A 50 basis point increase ineither the discount rate, expected return on plan assets, or the rate ofincrease in future compensation levels would increase (decrease) 2007 periodicpension cost by ($13.3) million, ($7.7) million, and $4.1 million,respectively. A 50 basis point decrease in either the discount rate, expectedreturn on plan assets, or the rate of increase in future compensation levelswould increase (decrease) 2007 periodic benefit cost by $13.8 million, $7.7million, and ($3.9) million, respectively.

*Asset Impairment*

We make estimates andassumptions when preparing our consolidated financial statements for whichactual results will not be known for some time. This includes the recoverabilityof long-lived assets employed in our business, including those of acquiredbusinesses, and other-than-temporary impairment in our securities portfolio. Wetest goodwill from our acquisitions for impairment at least annually or morefrequently if events or circumstances indicate that there may be cause forconducting an interim test. In testing for a potential impairment of goodwill,we estimated the fair value of each of our reporting units (generally definedas the level in which segment performance is analyzed) and compared this valueto the carrying value of each reporting unit. The estimated fair value ofgoodwill was established using a market approach method for our banking andinsurance units and a discounted cash flow model for our trust units. Wedetermined that the estimated fair value of each reporting unit was greaterthan its carrying value, therefore no impairment existed for the year ended2006. Quarterly, we test our private capital investments for impairment byreviewing the investee’s business model, current and projected financialperformance, 

F-6

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liquidityand overall economic and market conditions. During 2006, we recognized another-than-temporary impairment of $0.7 million for our private capitalinvestment portfolio. In addition, we test our debt securities below Aainvestment grade for impairment quarterly and during 2006 we did not recognizean other-than-temporary impairment in the collateralized loan obligation (CLO)portfolio. Impairment testing of the CLO securities requires the use of anumber of assumptions related to cash flows, recovery rates, default rates,market valuations and reinvestment of cash flows during the reinvestment period.This portfolio of securities is highly diversified, which we believe shouldmitigate the risk that downturns in any one industry segment will significantlyimpair the portfolio. Our higher grade debt securities are not tested forother-than-temporary impairment since we have the ability and intent to holdthem until our cost has been recovered.

**Financial Performance**

**Summary of FinancialPerformance**

| ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase (Decrease)**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 versus 2004** | ** ** | ** ** | ** ** | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**                                    | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | ** ** | ** ** | **Amount**                     | ** ** | **Percent** | ** ** | ** ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of Operations**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |       | ** **                     | ** ** |   | ** ** | ** ** |   |   |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income(1)                                                  |       | $          | 1,624,016  |       | $          | 1,839,114  |       | $          | 1,838,155  |                           |       |   | $ | 215,098 |   |   | 13.2 | % |   |   |   | $ | (959 | ) |   | (0.1 | )% |   |
| Noninterest income                                                      |       |       |       |       |       |       |       |       |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                     |       | 335,207    |       | 323,865    |       | 319,647    |       |       |       | (11,342                        | )          |   | (3.4 | ) |   |   |   | (4,218 | ) |   | (1.3 | ) |   |
| Trust and investment management fees                                    |       | 153,083    |       | 173,518    |       | 195,086    |       |       |       | 20,435                         |       |   | 13.3 |   |   |   |   | 21,568 |   |   | 12.4 |   |   |
| Insurance commissions                                                   |       | 77,874     |       | 78,915     |       | 72,547     |       |       |       | 1,041                          |       |   | 1.3 |   |   |   |   | (6,368 | ) |   | (8.1 | ) |   |
| Securities gains (losses), net                                          |       | (12,085    | )          | (50,039    | )          | 2,242      |       |       |       | (37,954                        | )          |   | nm |   |   |   |   | 52,281 |   |   | nm |   |   |
| Gain on sale of merchant  card portfolio                                |       | 93,000     |       | —     |       | —     |       |       |       | (93,000                        | )          |   | (100.0 | ) |   |   |   | — |   |   | — |   |   |
| Gain on private capital investments, net                                |       | 26,278     |       | 27,187     |       | 23,112     |       |       |       | 909                            |       |   | 3.5 |   |   |   |   | (4,075 | ) |   | (15.0 | ) |   |
| Other noninterest income                                                |       | 239,466    |       | 251,341    |       | 265,865    |       |       |       | 11,875                         |       |   | 5.0 |   |   |   |   | 14,524 |   |   | 5.8 |   |   |
| Total noninterest income                                                |       | 912,823    |       | 804,787    |       | 878,499    |       |       |       | (108,036                       | )          |   | (11.8 | ) |   |   |   | 73,712 |   |   | 9.2 |   |   |
| Total revenue                                                           |       | 2,536,839  |       | 2,643,901  |       | 2,716,654  |       |       |       | 107,062                        |       |   | 4.2 |   |   |   |   | 72,753 |   |   | 2.8 |   |   |
| Reversal of allowance for loan losses(2)                                |       | (45,757    | )          | (50,683    | )          | (5,000     | )          |       |       | 4,926                          |       |   | 10.8 |   |   |   |   | (45,683 | ) |   | (90.1 | ) |   |
| Noninterest expense                                                     |       |       |       |       |       |       |       |       |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                          |       | 848,717    |       | 934,354    |       | 996,536    |       |       |       | 85,637                         |       |   | 10.1 |   |   |   |   | 62,182 |   |   | 6.7 |   |   |
| Net occupancy                                                           |       | 127,720    |       | 141,299    |       | 141,771    |       |       |       | 13,579                         |       |   | 10.6 |   |   |   |   | 472 |   |   | 0.3 |   |   |
| Outside services                                                        |       | 74,978     |       | 117,190    |       | 117,387    |       |       |       | 42,212                         |       |   | 56.3 |   |   |   |   | 197 |   |   | 0.2 |   |   |
| Professional services                                                   |       | 48,371     |       | 45,500     |       | 63,616     |       |       |       | (2,871                         | )          |   | (5.9 | ) |   |   |   | 18,116 |   |   | 39.8 |   |   |
| Foreclosed asset expense (income)                                       |       | 1,211      |       | (5,635     | )          | (15,322    | )          |       |       | (6,846                         | )          |   | nm |   |   |   |   | (9,687 | ) |   | nm |   |   |
| (Reversal of) provision for losses on off-balance  sheet commitments(2) |       | —     |       | 4,000      |       | (5,000     | )          |       |       | 4,000                          |       |   | nm |   |   |   |   | (9,000 | ) |   | nm |   |   |
| Other noninterest expense                                               |       | 372,592    |       | 370,538    |       | 387,300    |       |       |       | (2,054                         | )          |   | (0.6 | ) |   |   |   | 16,762 |   |   | 4.5 |   |   |
| Total noninterest expense                                               |       | 1,473,589  |       | 1,607,246  |       | 1,686,288  |       |       |       | 133,657                        |       |   | 9.1 |   |   |   |   | 79,042 |   |   | 4.9 |   |   |
| Income from continuing operations before income taxes                   |       | 1,109,007  |       | 1,087,338  |       | 1,035,366  |       |       |       | (21,669                        | )          |   | (2.0 | ) |   |   |   | (51,972 | ) |   | (4.8 | ) |   |
| Income tax expense                                                      |       | 398,933    |       | 356,698    |       | 271,623    |       |       |       | (42,235                        | )          |   | (10.6 | ) |   |   |   | (85,075 | ) |   | (23.9 | ) |   |
| Income from continuing  operations                                      |       | $          | 710,074    |       | $          | 730,640    |       | $          | 763,743    |                           |       |   | $ | 20,566 |   |   | 2.9 | % |   |   |   | $ | 33,103 |   |   | 4.5 | % |   |

----

(1)                   Netinterest income does not include any adjustments for fully taxable equivalence.

(2)                   Beginningin 2005, the net change in the allowance for losses on off-balance sheetcommitments was recognized separately from the change in the allowance for loanlosses. Prior periods have not been restated for this change.

nm = notmeaningful

F-7

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*The primary contributors to our continuing operationsfinancial performance for 2006 compared to 2005 are presented below.*

·       Ournet interest income was unfavorably influenced by lower average demand depositbalances, which resulted in a shift to more costly interest bearing liabilities.In addition, higher rates on interest bearing liabilities and lower hedgeincome (see our discussion under “Net Interest Income”) also negativelyimpacted our net interest margin. Offsetting these negative influences to ournet interest margin were higher earning asset volumes in most of our major loancategories and higher average yields on our earning assets.

·       Althoughcredit quality remained healthy, we reversed less of our allowance for loanlosses in 2006 primarily due to the growth in our commercial loan portfolio. Webelieve that the improvement in credit quality could be at its peak, given theincreasing uncertainty in the economic outlook. (See our discussion under “Allowancesfor Credit Losses.”)

·       Ournoninterest income was impacted by several factors:

—              Servicecharges on deposits decreased due to lower account analysis fees stemming froman increase in the earnings credit rates on deposit balances, as well as fromlower demand deposit balances;

—              Trustand investment management fees were higher primarily due to higher sales,growth in trust assets, a one-time $3.8 million increase in trust feesresulting from a refinement in our accrual accounting methodology and a changein the administration structure of our HighMark funds, which were offset byhigher outside service expenses (see noninterest expense discussion below).Managed assets increased by approximately 5 percent, while non-managed assetsincreased by approximately 11 percent from December 31, 2005 to December 31,2006. Total assets under administration increased by approximately 10 percent,to $230.1 billion, for the same period;

—              Insurancecommissions decreased mainly due to lower revenues from construction-relatedprojects, which slowed in 2006, and lower contingent revenues;

—              Lowersecurities losses of $52.3 million primarily due to a loss of $50.1 million onthe sale of $1.5 billion of government agency securities in our available forsale portfolio during 2005. The sales occurred as a result of our decision torebalance our portfolio by diversifying our agency concentration risk, with asubsequent reinvestment in AAA-rated non-agency mortgage-backed securities andto fund our expected loan growth;

—              Netgains on private capital investments were lower compared to the prior year dueto lower sales and capital distributions; and

—              Higherother noninterest income included lower trading provision adjustments to ourreserve for losses on customer derivative contracts, which declined by $7.6million and a $3.0 million settlement associated with an eminent domainaction taken by a municipality to take possession of land used by one of ourbranches.

·       Contributingto our higher noninterest expense were several factors:

—              Salariesand employee benefits increased primarily as a result of:

·       annualmerit increases and higher staff levels;

·       additionalcontract labor staff for compliance related activities;

·       higherseverance expense;

F-8

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·       higherincentive expenses related to stock options and higher levels of restrictedstock grants in 2006, partly offset by lower bonuses and otherperformance-related incentives; and

·       higheremployee benefits expense mainly due to increased group health insurancepremiums and pension and other postretirement benefits expense due to actuarialassumptions, partly offset by a decrease in workers’ compensation expense;

—              Professionalservices expense increased mainly due to compliance-related expenses;

—              Foreclosedasset income reflected higher gains on the sale of foreclosed properties in2006;

—              Provisionfor losses on off-balance sheet commitments declined by $9.0 million comparedto 2005 as a result of improvements in the credit quality of our borrowerscompared to the prior year; and

—              Higherother noninterest expense, which included higher software costs, marketingexpenses and charitable contributions and low income housing investmentamortization expenses partly offset by declining amortization of identifiableintangibles.

*The primary contributors to our continuing operationsfinancial performance for 2005 compared to 2004 are presented below.*

·       Ournet interest income was favorably influenced by higher earning asset volumes ineach of our major loan categories, higher average yields on our earning assetsand strong deposit growth. Offsetting these positive influences to our netinterest margin were higher rates on interest bearing liabilities and lowerhedge income (See our discussion under “Net Interest Income.”)

·       Thereversal of our allowance for loan losses in 2005 was primarily due toimproving credit quality, which was highly influenced by improvements in ourcommercial loan portfolio. (See our discussion under “Allowances for CreditLosses.”)

·       Ournoninterest income was impacted by several factors:

—              InMay 2004, we sold our merchant card portfolio to NOVA Information Systems.The sale of our merchant card portfolio reflected our ongoing effort to sharpenour strategic focus. Additionally, the long-term marketing alliance we formedwith NOVA will provide us with marketing fees in the future;

—              Aloss of $50.1 million on the sale of $1.5 billion of government agencysecurities in our available for sale portfolio during 2005. The sales occurredas a result of our decision to rebalance our portfolio by diversifying ouragency concentration risk, by reinvesting in AAA-rated non-agencymortgage-backed securities and to fund our loan growth;

—              Servicecharges on deposit accounts decreased primarilydue to lower account analysis fees, stemming from an increase in theearnings credit rate on commercial deposit balances;

—              Trust and investmentmanagement fees increased from 2004 due to the impact of our acquisition of CNATrust’s (renamed TruSource) assets in August 2004 and the purchase of atrust asset portfolio of an affiliate in December 2004, as well as higherservicing fees related to increased assets under administration. Managed assetsincreased by 6 percent and non-managed assets increased by 2 percent from 2004to 2005. Total assets under administration increased by 2 percent, to $209billion, by December 31, 2005; and

—              Othernoninterest income increased, including company-owned life insurance (COLI)income of $7.4 million, which was previouslyreported as an offset to noninterest expense in 2004; higher merchantbanking fees of $4.3 million (mostly related to higher syndication fees); and 

F-9

----

$3.5 million inmiscellaneous income including a $1.2 million bonus from NOVA due to strongresults from our marketing alliance; partly offset by lower card processingfees of $9.0 million due to the sale of our merchant card portfolio in May 2004.

·       Contributingto our higher noninterest expense were several factors:

—              Salariesand employee benefits increased mostly from:

·       acquisitionsand new branch openings, which accounted for approximately 18 percent of theincrease in our salaries and other compensation;

·       higherperformance-related incentive expense from goal achievements and the increasedamortization from larger issuances of restricted stock;

·       annualmerit increases; and

·       higheremployee benefits expense mainly due to the impact of the lower discount ratewe used to calculate our future pension and other postretirement liabilities(reduced from 6.25 percent for 2004 to 5.75 percent for 2005) and the change inthe classification of COLI income to other noninterest income, which was $6.3million in 2004 (previously reported as employee benefits expense in the prioryear);

—              Netoccupancy costs increased primarily due to charges associated with theconsolidation of offices in San Francisco;

—              Outsideservices expense increased primarily as a result of higher costs of servicesrelated to title and escrow balances stemming from a higher earnings creditrate and higher balances in 2005;

—              Provisionfor losses on off-balance sheet commitments increased $4.0 million primarily asa result of growth in the level of commitments; and

—              Othernoninterest expense decreased mainly due to a decrease in expenses related tolitigation and professional consulting expenses compared to 2004 and net incomeof $5.6 million as a result of the sale of OREO, partly offset by highersoftware expenses related to the purchase and development of software tosupport key technology initiatives and higher expenses related to ouracquisitions.

F-10

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**Net Interest Income**

The table below shows the major components of netinterest income and net interest margin for the periods presented.

| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                                                    | ** ** | **Average**                                 | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| **(Dollars in thousands)**                                          | ** ** | **Balance**                                 | ** ** | **Expense**(1) | ** ** | **Rate**(1) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1) | ** ** |
| **Assets**                                                                    |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:(2)                                                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                          |       | $                                           | 9,394,086  |   | $ | 533,415 |   |   | 5.68 | % |   | $ | 11,105,948 |   | $ | 677,590 |   |   | 6.10 | % |   | $ | 13,220,633 |   | $ | 869,884 |   |   | 6.58 | % |   |
| Construction                                                                  |       | 1,093,230                                   |       | 49,259 |   |   | 4.51 |   |   | 1,268,448 |   | 77,844 |   |   | 6.14 |   |   | 1,857,404 |   | 142,031 |   |   | 7.65 |   |   |
| Residential mortgage                                                          |       | 8,235,204                                   |       | 387,123 |   |   | 4.70 |   |   | 10,513,671 |   | 515,485 |   |   | 4.90 |   |   | 11,846,908 |   | 607,977 |   |   | 5.13 |   |   |
| Commercial mortgage                                                           |       | 4,527,977                                   |       | 250,112 |   |   | 5.52 |   |   | 5,529,222 |   | 348,788 |   |   | 6.31 |   |   | 5,702,858 |   | 404,749 |   |   | 7.10 |   |   |
| Consumer                                                                      |       | 2,177,372                                   |       | 120,125 |   |   | 5.52 |   |   | 2,444,011 |   | 159,493 |   |   | 6.53 |   |   | 2,505,770 |   | 192,156 |   |   | 7.67 |   |   |
| Lease financing                                                               |       | 619,983                                     |       | 28,404 |   |   | 4.58 |   |   | 591,306 |   | 23,653 |   |   | 4.00 |   |   | 570,556 |   | 15,232 |   |   | 2.67 |   |   |
| Total Loans                                                                   |       | 26,047,852                                  |       | 1,368,438 |   |   | 5.25 |   |   | 31,452,606 |   | 1,802,853 |   |   | 5.73 |   |   | 35,704,129 |   | 2,232,029 |   |   | 6.25 |   |   |
| Securities - taxable                                                          |       | 11,701,866                                  |       | 422,047 |   |   | 3.61 |   |   | 10,262,274 |   | 392,452 |   |   | 3.82 |   |   | 8,417,950 |   | 415,902 |   |   | 4.94 |   |   |
| Securities - tax-exempt                                                       |       | 68,399                                      |       | 5,551 |   |   | 8.12 |   |   | 66,178 |   | 5,323 |   |   | 8.04 |   |   | 61,729 |   | 4,982 |   |   | 8.07 |   |   |
| Interest bearing deposits in banks                                            |       | 201,716                                     |       | 3,417 |   |   | 1.69 |   |   | 112,247 |   | 2,676 |   |   | 2.38 |   |   | 51,534 |   | 2,617 |   |   | 5.08 |   |   |
| Federal funds sold and securities purchased under  resale agreements     |       | 719,714                                     |       | 9,189 |   |   | 1.28 |   |   | 610,735 |   | 20,535 |   |   | 3.36 |   |   | 497,318 |   | 25,518 |   |   | 5.13 |   |   |
| Trading account assets                                                        |       | 293,560                                     |       | 3,778 |   |   | 1.29 |   |   | 292,648 |   | 4,494 |   |   | 1.54 |   |   | 348,183 |   | 6,838 |   |   | 1.96 |   |   |
| Total earning assets                                                          |       | 39,033,107                                  |       | 1,812,420 |   |   | 4.64 |   |   | 42,796,688 |   | 2,228,333 |   |   | 5.21 |   |   | 45,080,843 |   | 2,687,886 |   |   | 5.96 |   |   |
| Allowance for loan losses(3)                                                  |       | (513,165                                    | )          |   |   |   |   |   |   | (389,398 | ) |   |   |   |   |   |   | (334,720 | ) |   |   |   |   |   |   |
| Cash and due from banks                                                       |       | 2,171,838                                   |       |   |   |   |   |   |   | 2,247,905 |   |   |   |   |   |   |   | 2,063,342 |   |   |   |   |   |   |   |
| Premises and equipment, net                                                   |       | 507,503                                     |       |   |   |   |   |   |   | 520,084 |   |   |   |   |   |   |   | 508,889 |   |   |   |   |   |   |   |
| Other assets                                                                  |       | 1,959,431                                   |       |   |   |   |   |   |   | 2,435,539 |   |   |   |   |   |   |   | 2,674,127 |   |   |   |   |   |   |   |
| Total assets                                                                  |       | $                                           | 43,158,714 |   |   |   |   |   |   |   | $ | 47,610,818 |   |   |   |   |   |   |   | $ | 49,992,481 |   |   |   |   |   |   |   |
| **Liabilities**                                                               |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Domestic deposits:                                                            |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                                          |       | $                                           | 11,712,648 |   | 74,006 |   |   | 0.63 |   |   | $ | 12,843,905 |   | 159,221 |   |   | 1.24 |   |   | $ | 12,938,620 |   | 292,899 |   |   | 2.26 |   |   |
| Savings and consumer time                                                     |       | 4,405,572                                   |       | 38,374 |   |   | 0.87 |   |   | 4,667,868 |   | 60,248 |   |   | 1.29 |   |   | 4,483,729 |   | 93,582 |   |   | 2.09 |   |   |
| Large time                                                                    |       | 2,406,408                                   |       | 34,307 |   |   | 1.43 |   |   | 3,121,055 |   | 83,882 |   |   | 2.69 |   |   | 5,656,370 |   | 263,226 |   |   | 4.65 |   |   |
| Total interest bearing deposits                                               |       | 18,524,628                                  |       | 146,687 |   |   | 0.79 |   |   | 20,632,828 |   | 303,351 |   |   | 1.47 |   |   | 23,078,719 |   | 649,707 |   |   | 2.82 |   |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 596,997                                     |       | 7,470 |   |   | 1.25 |   |   | 898,107 |   | 25,854 |   |   | 2.88 |   |   | 701,614 |   | 33,711 |   |   | 4.80 |   |   |
| Net funding allocated from (to) discontinued operations(4)          |       | (108,425                                    | )          | (816 | ) |   | 0.75 |   |   | (507,397 | ) | (15,482 | ) |   | 3.05 |   |   | (37,770 | ) | (1,847 | ) |   | 4.89 |   |   |
| Commercial paper                                                              |       | 620,053                                     |       | 6,899 |   |   | 1.11 |   |   | 1,086,088 |   | 31,672 |   |   | 2.92 |   |   | 1,582,226 |   | 75,015 |   |   | 4.74 |   |   |
| Other borrowed funds                                                          |       | 162,424                                     |       | 4,866 |   |   | 3.00 |   |   | 168,220 |   | 6,313 |   |   | 3.75 |   |   | 294,977 |   | 15,352 |   |   | 5.20 |   |   |
| Medium and long-term debt                                                     |       | 807,070                                     |       | 16,773 |   |   | 2.08 |   |   | 807,592 |   | 32,206 |   |   | 3.99 |   |   | 1,230,846 |   | 70,439 |   |   | 5.72 |   |   |
| Trust notes                                                                   |       | 62,480                                      |       | 2,780 |   |   | 4.45 |   |   | 15,562 |   | 953 |   |   | 6.12 |   |   | 15,109 |   | 953 |   |   | 6.31 |   |   |
| Total borrowed funds                                                          |       | 2,140,599                                   |       | 37,972 |   |   | 1.77 |   |   | 2,468,172 |   | 81,516 |   |   | 3.30 |   |   | 3,787,002 |   | 193,623 |   |   | 5.11 |   |   |
| Total interest bearing liabilities                                            |       | 20,665,227                                  |       | 184,659 |   |   | 0.89 |   |   | 23,101,000 |   | 384,867 |   |   | 1.67 |   |   | 26,865,721 |   | 843,330 |   |   | 3.14 |   |   |
| Noninterest bearing deposits                                                  |       | 17,482,205                                  |       |   |   |   |   |   |   | 18,911,158 |   |   |   |   |   |   |   | 17,042,420 |   |   |   |   |   |   |   |
| Other liabilities(3)                                                          |       | 961,080                                     |       |   |   |   |   |   |   | 1,318,575 |   |   |   |   |   |   |   | 1,510,155 |   |   |   |   |   |   |   |
| Total liabilities                                                             |       | 39,108,512                                  |       |   |   |   |   |   |   | 43,330,733 |   |   |   |   |   |   |   | 45,418,296 |   |   |   |   |   |   |   |
| **Stockholders' Equity**                                                      |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                                 |       | 4,050,202                                   |       |   |   |   |   |   |   | 4,280,085 |   |   |   |   |   |   |   | 4,574,185 |   |   |   |   |   |   |   |
| Total stockholders' equity                                                    |       | 4,050,202                                   |       |   |   |   |   |   |   | 4,280,085 |   |   |   |   |   |   |   | 4,574,185 |   |   |   |   |   |   |   |
| Total liabilities and stockholders'   equity                                  |       | $                                           | 43,158,714 |   |   |   |   |   |   |   | $ | 47,610,818 |   |   |   |   |   |   |   | $ | 49,992,481 |   |   |   |   |   |   |   |
| **Reported Net Interest Income/Margin**                                       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent basis)                         |       |                                        |       | 1,627,761 |   |   | 4.17 | % |   |   |   | 1,843,466 |   |   | 4.31 | % |   |   |   | 1,844,556 |   |   | 4.09 | % |   |
| Less: taxable-equivalent adjustment                                           |       |                                        |       | 3,745 |   |   |   |   |   |   |   | 4,352 |   |   |   |   |   |   |   | 6,401 |   |   |   |   |   |
| Net interest income                                                           |       |                                        |       | $ | 1,624,016 |   |   |   |   |   |   |   | $ | 1,839,114 |   |   |   |   |   |   |   | $ | 1,838,155 |   |   |   |   |   |

 

| **Average Assets and  Liabilities of  Discontinued Operations for the Year  Ended:** | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Assets                                                                               |       |                            | $          | 2,067,591                       |       |                            |       | $ | 1,897,622 |   |   |   | $ | 189,376 |   |   |
| Liabilities                                                                          |       |                            | $          | 1,959,166                       |       |                            |       | $ | 1,390,225 |   |   |   | $ | 151,606 |   |   |
| Net assets                                                                           |       |                            | $          | 108,425                         |       |                            |       | $ | 507,397 |   |   |   | $ | 37,770 |   |   |

----

(1)                    Yields and interest income are presented on ataxable-equivalent basis using the federal statutory tax rate of 35 percent.

(2)                    Average balances on loans outstanding include allnonperforming loans and loans held for sale. The amortized portion of net loanorigination fees (costs) is included in interest income on loans, representingan adjustment to the yield.

(3)                    The average allowance related to losses on off-balancesheet commitments was included in other liabilities starting in 2005. Priorperiods have not been restated.

(4)                    Net funding allocated from (to) discontinued operationsrepresents the shortage (excess) of assets over liabilities of discontinuedoperations. The expense (earning) on funds allocated from (to) discontinuedoperations is calculated by taking the net balance and applying an earningsrate or a cost of funds equivalent to the corresponding period’s Federal fundspurchased rate. The year-to-date expense (earning) amount is the sum of thequarterly amounts.

F-11

----

Netinterest income in 2006, on a taxable-equivalent basis, decreased lessthan 1 percent, and our net interest margin decreased by 22 basis points, from2005. These results were primarily due to the following:

·       Averageearning assets increased $2.3 billion, or 5 percent, primarily due to anincrease in average loans, partly offset by a decline in average securities.The increase in average loans was largely due to a $2.1 billion increase inaverage commercial loans and a $1.3 billion increase in average residentialmortgages, while average securities declined by $1.8 billion;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 75basis points, despite being negatively impacted by lower hedge income, whichdecreased by $53.0 million, and an increase in lower yielding loans related totitle and escrow customers;

·       Averagenoninterest bearing deposits decreased $1.9 billion, or 10 percent, including adecrease of $716.1 million, or 23 percent, in average title and escrow depositsdue to the decline in residential real estate activity. Average business demanddeposits, excluding title and escrow deposits, declined $896 million, or 7percent, primarily due to changes in customer behavior in response to risingshort-term interest rates. Consumer demand deposits decreased $184 million, or6 percent. Average noninterest bearing deposits represented 42 percent ofaverage total deposits in 2006 compared to 48 percent of average total depositsin 2005; and

·       In2006, the annualized average all-in cost of funds, which included lower hedgeincome of $11.9 million, was 1.92 percent, reflecting our averagedeposit-to-loan ratio of 112 percent and a relatively high proportion ofnoninterest bearing deposits to total deposits. In 2005, the annualizedall-in-cost of funds was 0.92 percent and the average deposit-to-loan ratio was126 percent.

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term certificatesof deposit (CDs), and to convert our long-term, fixed-rate borrowings tofloating rate. Throughout 2006, these derivative positions provided less netinterest income than in 2005, as positions matured and as interest rates rose. However,as we expected, the declines in hedge income were offset by increased yields onthe underlying variable rate loans. For our loans, we had hedge income of $5.1million and hedge expense of $47.9 million for 2005 and 2006, respectively. Fordeposits and long-term fixed rate borrowings, hedge income was $12.6 millionand $0.7 million for 2005 and 2006, respectively.

Netinterest income in 2005, on a taxable-equivalent basis, increased 13percent and our net interest margin increased by 14 basis points from 2004. Theincrease was attributable to the following factors:

·       Favorablechanges in the composition of our earning assets with strong growth in loanbalances including $2.3 billion in average residential mortgages, $1.7 billionin average commercial loans and $1.0 billion in average commercial mortgages,offset by a $1.4 billion decline in average securities balance;

·       Depositgrowth contributed favorably to our net interest margin in 2005. Averagenoninterest bearing deposits were higher in 2005, compared to 2004, mainly dueto higher average business demand deposits, including demand deposits from ourtitle and escrow clients and stable consumer demand deposit growth. The ratioof noninterest bearing deposits to total deposits was 48 percent in 2005;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment, resulting in a higher average yield of 57 basis points on averageearning assets, despite being negatively impacted by lower hedge income, whichdecreased by $66.9 million; and

·       In2005, our all-in cost of funds on interest bearing liabilities was negativelyimpacted by the increasing rate environment, resulting in a higher average costof interest-bearing liabilities of 78 basis points, including lower hedgeincome, which decreased by $7.6 million.

F-12

----

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term CDs, and toconvert our long-term, fixed-rate borrowings to floating rate. Throughout 2005,these derivative positions provided less net interest income than in 2004, aspositions matured and as interest rates rose. However, as we expected, thedeclines in hedge income were offset by increased yields on the underlyingvariable rate loans. For the years ended December 31, 2004 and 2005, wehad hedge income of $92.2 million and $17.7 million, respectively.

**Analysis of Changes inNet Interest Income**

Thefollowing table shows the changes in the components of net interest income on ataxable-equivalent basis for 2004, 2005 and 2006. The changes in netinterest income between periods have been reflected as attributable either tovolume or to rate changes. For purposes of this table, changes that are notsolely due to volume or rate changes are allocated to rate. Loan fees of $68million, $79 million and $71 million for the years ended 2004, 2005 and 2006,respectively, are included in this table. Adjustments have not been made forinterest received from a prior period.

| ** **                                                                    | ** ** | **Years Ended December 31,**                       | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005 versus 2004**                                    | ** ** | **2006 versus 2005** | ** ** |
| ** **                                                                    | ** ** | **Increase (decrease) due to change in** | ** ** | **Increase (decrease) due to change in** | ** ** |
| ** **                                                                    | ** ** | **Average**                                                       | ** ** | **Average** | ** ** | **Net** | ** ** | **Average** | ** ** | **Average** | ** ** | **Net** | ** ** |
| **(Dollars in thousands)**                                          | ** ** | **Volume**                                                        | ** ** | **Rate** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| **Changes in Interest Income****(1)**                                         | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans:                                                                        |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                          |       | $                                                                 | 100,189    |   | $ | 43,986 |   | $ | 144,175 |   | $ | 128,996 |   | $ | 63,298 |   | $ | 192,294 |   |
| Construction                                                                  |       | 7,902                                                             |       | 20,683 |   | 28,585 |   | 36,162 |   | 28,025 |   | 64,187 |   |
| Residential mortgage                                                          |       | 107,088                                                           |       | 21,274 |   | 128,362 |   | 65,329 |   | 27,163 |   | 92,492 |   |
| Commercial mortgage                                                           |       | 55,269                                                            |       | 43,407 |   | 98,676 |   | 10,956 |   | 45,005 |   | 55,961 |   |
| Consumer                                                                      |       | 14,718                                                            |       | 24,650 |   | 39,368 |   | 4,033 |   | 28,630 |   | 32,663 |   |
| Lease financing                                                               |       | (1,313                                                            | )          | (3,438 | ) | (4,751 | ) | (830 | ) | (7,591 | ) | (8,421 | ) |
| Total Loans                                                                   |       | 283,853                                                           |       | 150,562 |   | 434,415 |   | 244,646 |   | 184,530 |   | 429,176 |   |
| Securities - taxable                                                          |       | (51,969                                                           | )          | 22,374 |   | (29,595 | ) | (70,453 | ) | 93,903 |   | 23,450 |   |
| Securities - tax-exempt                                                       |       | (180                                                              | )          | (48 | ) | (228 | ) | (358 | ) | 17 |   | (341 | ) |
| Interest bearing deposits in banks                                            |       | (1,512                                                            | )          | 771 |   | (741 | ) | (1,445 | ) | 1,386 |   | (59 | ) |
| Federal funds sold and securities purchased under  resale agreements     |       | (1,395                                                            | )          | 12,741 |   | 11,346 |   | (3,811 | ) | 8,794 |   | 4,983 |   |
| Trading account assets                                                        |       | (12                                                               | )          | 728 |   | 716 |   | 855 |   | 1,489 |   | 2,344 |   |
| Total earning assets                                                          |       | 228,785                                                           |       | 187,128 |   | 415,913 |   | 169,434 |   | 290,119 |   | 459,553 |   |
| **Changes in Interest Expense**                                               | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                                                     |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                                          |       | 7,127                                                             |       | 78,088 |   | 85,215 |   | 1,174 |   | 132,504 |   | 133,678 |   |
| Savings and consumer time                                                     |       | 2,282                                                             |       | 19,592 |   | 21,874 |   | (2,375 | ) | 35,709 |   | 33,334 |   |
| Large time                                                                    |       | 8,800                                                             |       | 40,775 |   | 49,575 |   | 68,200 |   | 111,144 |   | 179,344 |   |
| Total interest bearing deposits                                               |       | 18,209                                                            |       | 138,455 |   | 156,664 |   | 66,999 |   | 279,357 |   | 346,356 |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 3,764                                                             |       | 14,620 |   | 18,384 |   | (5,659 | ) | 13,516 |   | 7,857 |   |
| Net funding allocated from (to) discontinued operations                  |       | (2,992                                                            | )          | (11,674 | ) | (14,666 | ) | 14,324 |   | (689 | ) | 13,635 |   |
| Commercial paper                                                              |       | 5,173                                                             |       | 19,600 |   | 24,773 |   | 14,487 |   | 28,856 |   | 43,343 |   |
| Other borrowed funds                                                          |       | 174                                                               |       | 1,273 |   | 1,447 |   | 4,753 |   | 4,286 |   | 9,039 |   |
| Medium and long-term debt                                                     |       | 11                                                                |       | 15,422 |   | 15,433 |   | 16,888 |   | 21,345 |   | 38,233 |   |
| Trust notes                                                                   |       | (2,088                                                            | )          | 261 |   | (1,827 | ) | (28 | ) | 28 |   | — |   |
| Total borrowed funds                                                          |       | 4,042                                                             |       | 39,502 |   | 43,544 |   | 44,765 |   | 67,342 |   | 112,107 |   |
| Total interest bearing liabilities                                            |       | 22,251                                                            |       | 177,957 |   | 200,208 |   | 111,764 |   | 346,699 |   | 458,463 |   |
| Changes in net  interest income                                               |       | $                                                                 | 206,534    |   | $ | 9,171 |   | $ | 215,705 |   | $ | 57,670 |   | $ | (56,580 | ) | $ | 1,090 |   |

----

(1)                   Interest income is presented on ataxable-equivalent basis using the federal statutory tax rate of 35 percent.

F-13

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The following tables detailour noninterest income and noninterest expense that exceeded 1% of our totalrevenues for the years ended December 31, 2004, 2005 and 2006.

**Noninterest Income**

| ** **                                 | ** ** | ** **                                  | ** ** | ** **                     | ** ** | ** **                     | ** ** | **Increase (Decrease)**                | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                  | ** ** | ** **                     | ** ** | ** **                     | ** ** | **Years Ended December 31,** | ** ** |
| ** **                                 | ** ** | **Years Ended December 31,** | ** ** | **2005 versus 2004** | ** ** | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**       | ** ** | ** **                                  | ** ** | **2004**                       | ** ** | **2005**                       | ** ** | **2006**                                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Service charges on  deposit accounts       |       | $                                           | 335,207    |                           | $          | 323,865                        |       | $                                           | 319,647    |   | $ | (11,342 | ) |   | (3 | )% |   | $ | (4,218 | ) |   | (1 | )% |   |
| Trust and investment  management  fees     |       | 153,083                                     |       | 173,518                        |       | 195,086                        |       | 20,435                                      |       |   | 13 |   |   | 21,568 |   |   | 12 |   |   |
| Insurance commissions                      |       | 77,874                                      |       | 78,915                         |       | 72,547                         |       | 1,041                                       |       |   | 1 |   |   | (6,368 | ) |   | (8 | ) |   |
| Merchant banking fees                      |       | 39,646                                      |       | 43,898                         |       | 42,185                         |       | 4,252                                       |       |   | 11 |   |   | (1,713 | ) |   | (4 | ) |   |
| Brokerage commissions  and fees            |       | 33,063                                      |       | 30,038                         |       | 35,811                         |       | (3,025                                      | )          |   | (9 | ) |   | 5,773 |   |   | 19 |   |   |
| Foreign exchange  gains, net               |       | 32,004                                      |       | 33,902                         |       | 32,220                         |       | 1,898                                       |       |   | 6 |   |   | (1,682 | ) |   | (5 | ) |   |
| Card processing fees,  net                 |       | 34,147                                      |       | 25,105                         |       | 28,400                         |       | (9,042                                      | )          |   | (26 | ) |   | 3,295 |   |   | 13 |   |   |
| Securities gains  (losses), net            |       | (12,085                                     | )          | (50,039                        | )          | 2,242                          |       | (37,954                                     | )          |   | nm |   |   | 52,281 |   |   | nm |   |   |
| Gain on sale of  merchant card  portfolio  |       | 93,000                                      |       | —                         |       | —                         |       | (93,000                                     | )          |   | (100 | ) |   | — |   |   | — |   |   |
| Gain on private  capital investments,  net |       | 26,278                                      |       | 27,187                         |       | 23,112                         |       | 909                                         |       |   | 3 |   |   | (4,075 | ) |   | (15 | ) |   |
| Other                                      |       | 100,606                                     |       | 118,398                        |       | 127,249                        |       | 17,792                                      |       |   | 18 |   |   | 8,851 |   |   | 7 |   |   |
| Total noninterest income                   |       | $                                           | 912,823    |                           | $          | 804,787                        |       | $                                           | 878,499    |   | $ | (108,036 | ) |   | (12 | )% |   | $ | 73,712 |   |   | 9 | % |   |
|                                            |            |                                             |            |                                |            |                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

nm = not meaningful

**Noninterest Expense**

| ** **                                                                   | ** ** | ** **                                  | ** ** | ** **                     | ** ** | ** **                     | ** ** | **Increase (Decrease)**                | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                  | ** ** | ** **                     | ** ** | ** **                     | ** ** | **Years Ended December 31,** | ** ** |
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** | **2005 versus 2004** | ** ** | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**                                         | ** ** | ** **                                  | ** ** | **2004**                       | ** ** | **2005**                       | ** ** | **2006**                                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries and other  compensation                                             |       | $                                           | 685,753    |                           | $          | 748,046                        |       | $                                           | 799,050    |   | $ | 62,293 |   |   | 9 | % |   | $ | 51,004 |   |   | 7 | % |   |
| Employee benefits                                                            |       | 162,964                                     |       | 186,308                        |       | 197,486                        |       | 23,344                                      |       |   | 14 |   |   | 11,178 |   |   | 6 |   |   |
| Salaries and employee  benefits                                              |       | 848,717                                     |       | 934,354                        |       | 996,536                        |       | 85,637                                      |       |   | 10 |   |   | 62,182 |   |   | 7 |   |   |
| Net occupancy                                                                |       | 127,720                                     |       | 141,299                        |       | 141,771                        |       | 13,579                                      |       |   | 11 |   |   | 472 |   |   | — |   |   |
| Outside services                                                             |       | 74,978                                      |       | 117,190                        |       | 117,387                        |       | 42,212                                      |       |   | 56 |   |   | 197 |   |   | — |   |   |
| Equipment                                                                    |       | 67,839                                      |       | 68,206                         |       | 69,833                         |       | 367                                         |       |   | 1 |   |   | 1,627 |   |   | 2 |   |   |
| Software                                                                     |       | 51,877                                      |       | 58,511                         |       | 63,979                         |       | 6,634                                       |       |   | 13 |   |   | 5,468 |   |   | 9 |   |   |
| Professional services                                                        |       | 48,371                                      |       | 45,500                         |       | 63,616                         |       | (2,871                                      | )          |   | (6 | ) |   | 18,116 |   |   | 40 |   |   |
| Advertising and public  relations                                            |       | 37,965                                      |       | 36,803                         |       | 44,007                         |       | (1,162                                      | )          |   | (3 | ) |   | 7,204 |   |   | 20 |   |   |
| Communications                                                               |       | 42,011                                      |       | 41,909                         |       | 40,431                         |       | (102                                        | )          |   | — |   |   | (1,478 | ) |   | (4 | ) |   |
| Data processing                                                              |       | 32,528                                      |       | 32,687                         |       | 31,844                         |       | 159                                         |       |   | — |   |   | (843 | ) |   | (3 | ) |   |
| Intangible asset  amortization                                               |       | 19,471                                      |       | 19,921                         |       | 13,686                         |       | 450                                         |       |   | 2 |   |   | (6,235 | ) |   | (31 | ) |   |
| Foreclosed asset expense (income)                                            |       | 1,211                                       |       | (5,635                         | )          | (15,322                        | )          | (6,846                                      | )          |   | nm |   |   | (9,687 | ) |   | nm |   |   |
| (Reversal of) provision for losses on  off-balance sheet commitments(1) |       | —                                      |       | 4,000                          |       | (5,000                         | )          | 4,000                                       |       |   | nm |   |   | (9,000 | ) |   | nm |   |   |
| Other                                                                        |       | 120,901                                     |       | 112,501                        |       | 123,520                        |       | (8,400                                      | )          |   | (7 | ) |   | 11,019 |   |   | 10 |   |   |
| Total noninterest expense                                                    |       | $                                           | 1,473,589  |                           | $          | 1,607,246                      |       | $                                           | 1,686,288  |   | $ | 133,657 |   |   | 9 | % |   | $ | 79,042 |   |   | 5 | % |   |
|                                                                              |            |                                             |            |                                |            |                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

**nm = not meaningful**

(1)            Beginning in 2005, thenet change in the allowance for losses on off-balance sheet commitments wasrecognized separately from the change in the allowance for loan losses. Priorperiods have not been restated.

F-14

----

**Income Tax Expense**

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | ** **                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Income before income  taxes          |       | $                                           | 1,109,007  |   | $ | 1,087,338 |   | $ | 1,035,366 |   |
| Income tax expense                   |       | 398,933                                     |       | 356,698 |   | 271,623 |   |
| Effective tax rate                   |       | 36                                          | %          | 33 | % | 26 | % |
|                                      |            |                                             |            |  |  |  |  |  |  |  |  |  |

 

The decrease in the effective tax rate in 2006 was dueto a credit to state income tax expense of $72.8 million for a refund receivedin 2006 in a settlement between us and the State of California in an action webrought to recover taxes paid for the calendar years 1989 through 1995. Thesettlement was made in response to claims for refund filed by us in 2001 withrespect to the proper tax treatment of losses from loans and securities during1989 through 1995. The losses were incurred by the group of affiliatedcorporations included in our California tax filing. After an initial denial ofthe claims by the FTB Audit Division, we filed a suit for refund in SanFrancisco Superior Court. The settlement agreement settled all claims for theyears at issue and the lawsuit was dismissed.

The decrease in the effective tax rate in 2005 was dueto lower California state taxes in 2005 as compared to 2004, and a reduction to2005 federal tax expense of $10.0 million for estimated amounts owed to theInternal Revenue Service (IRS) with respect to certain leveraged leasingtransactions.

In the normal course of business, the tax returns ofUnionBanCal Corporation and its subsidiaries are subject to review andexamination by various tax authorities. In the course of its examination of ourfederal tax returns for the years 1998 through 2002, the IRS has disallowed thetax deductions claimed with respect to certain leveraged leasing transactions,referred to as “lease-in/lease-outs” (LILOs). We believe our tax treatment ofthese LILOs was consistent with applicable tax law, regulations and case law,and we intend to defend our position vigorously.

In 2003 we made partial payments of the tax andinterest assessed and filed a protest with the IRS Administrative AppealsDivision (Appeals). During 2005, we concluded our discussions with Appealswithout resolution. In the fourth quarter of 2005, we paid the balance of thetax and interest, for a total payment of $95.1 million. In August 2006, wefiled a refund suit in the Court of Federal Claims. A trial date has not yetbeen set.

The tax payments did not affect our income tax expensebecause deferred taxes were previously provided on the leveraged leases asrequired by SFAS No. 13, “Accounting For Leases.” We also maintain a taxreserve for interest deficiencies, against which the interest payments wereapplied. The amount of the reserve is based on management’s best estimate ofthe most likely outcome of the matter.

The State of California requires us to file ourfranchise tax returns as a member of a unitary group that includes MitsubishiUFJ Financial Group, Inc. and either all worldwide affiliates or only U.S.affiliates. Since 1996, we have elected to file our California franchise taxreturns on a worldwide unitary basis. The inclusion of Mitsubishi UFJ FinancialGroup’s financial results, which in some years were net losses, has partiallyoffset our net profits subject to California income tax. The inclusion ofMitsubishi UFJ Financial Group’s worldwide property, payroll and sales in thecalculation of the California apportionment factor has also reduced thepercentage of our income subject to California income tax. As a result, oureffective tax rate for California had been significantly lower than thestatutory rate, net of federal benefit, of 7.05 percent.

Changes in Mitsubishi UFJ Financial Group’s taxableprofits will impact our effective tax rate. Mitsubishi UFJ Financial Group’staxable profits are impacted most significantly by changes in the worldwideeconomy, especially in Japan, and decisions that they may make about the timingof the recognition of credit losses or other matters. When Mitsubishi UFJFinancial Group’s worldwide taxable profits rise, our effective tax rate inCalifornia will rise, and when they decrease, our rate will decrease. We 

F-15

----

review Mitsubishi UFJFinancial Group’s financial information on a quarterly basis in order todetermine the rate at which to recognize our California income taxes. However,all of the information relevant to determining the effective California taxrate may not be available until after the end of the period to which the taxrelates in part from the differences between our fiscal year-end and MitsubishiUFJ Financial Group’s. The determination of the California effective tax rateinvolves management judgment and estimates, and can change during the calendaryear or between calendar years as additional information becomes available.

For additional informationregarding income tax expense, including a reconciliation between the effectivetax rate and the statutory tax rate, see Note 11 to our Consolidated FinancialStatements included in this Annual Report.

**Credit Risk Management**

Our principal business activityis the extension of credit in the form of loans and credit substitutes toindividuals and businesses. Our policies and applicable laws and regulationsgoverning the extension of credit require risk analysis including an extensiveevaluation of the purpose of the request and the borrower’s ability andwillingness to repay us as scheduled. Our evaluation also includes ongoingportfolio and credit management through portfolio diversification, lendinglimit constraints, credit review and approval policies, and extensive internalmonitoring.

We manage and control credit risk throughdiversification of the portfolio by type of loan, industry concentration,dollar limits on multiple loans to the same borrower, geographic distributionand type of borrower. Geographic diversification of loans originated throughour branch network is generally within California, Oregon and Washington, whichwe consider to be our principal markets. In addition, we originate andparticipate in lending activities outside these states, as well asinternationally.

In analyzing our loan portfolios, we apply specificmonitoring policies and procedures that vary according to the relative riskprofile and other characteristics of the loans within the various portfolios.Our residential, consumer and certain small commercial loans and leases arerelatively homogeneous and no single loan is individually significant in termsof its size or potential risk of loss. Therefore, we review these portfolios byanalyzing their performance as a pool of loans. In contrast, our monitoringprocess for the larger commercial, financial and industrial, construction,commercial mortgage, leases, and foreign loan portfolios includes a periodicreview of individual loans. Loans that are performing but have shown some signsof weakness are subjected to more stringent reporting and oversight. We reviewthese loans to assess the ability of the borrowing entity to continue toservice all of its interest and principal obligations and as a result mayadjust the risk grade of the loan accordingly. In the event that we believethat full collection of principal and interest is not reasonably assured, theloan is appropriately downgraded and, if warranted, placed on nonaccrualstatus, even though the loan may be current as to principal and interestpayments.

We have a Credit Review andManagement Committee chaired by the Chief Credit Officer and composed of theChief Executive Officer, the Chief Operating Officer and other executiveofficers that establishes our overall risk appetite, portfolio concentrationlimits, and credit risk rating methodology. This committee is supported by theCredit Policy Forum, composed of Group Senior Credit Officers that haveresponsibility for establishing credit policy, credit underwriting criteria,and other risk management controls. Credit Administration, under the directionof the Chief Credit Officer and his designated Group Senior Credit Officers, isresponsible for administering the credit approval process and related policies.Policies require an evaluation of credit requests and ongoing reviews ofexisting credits in order to ensure that the purpose of the credit isacceptable, and that the borrower is able and willing to repay as agreed. Furthermore,policies require prompt identification and quantification of asset qualitydeterioration or potential loss.

Another part of the controlprocess is the internal credit examination function, which reports to the Boardof Directors and provides both the Board of Directors and executive managementwith an 

F-16

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independentassessment of the level of credit risk and the effectiveness of the creditmanagement process. The Independent Risk Monitoring Group for Credit(IRMG-Credit) routinely reviews the accuracy and timeliness of risk gradesassigned to individual borrowers to ensure that the business unit credit riskidentification process is functioning properly. This group also assessescompliance with credit policies and underwriting standards at the business unitlevel. Additionally, IRMG-Credit reviews and provides commentary on proposedchanges to credit policies, practices and underwriting guidelines. IRMG-Creditsummarizes its significant findings on a regular basis and providesrecommendations for corrective action when credit management or controldeficiencies are identified.

**Loans**

Thefollowing table shows loans outstanding by loan type and as a percentage oftotal loans for 2002 through 2006. Information about our loan portfolio is alsoincluded in “Business Segments.”

| ** **                           | ** ** | ** **       | ** ** | **Increase  (Decrease)**     | ** ** |
|--------------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **       | ** ** | **December 31,  2006 From:** | ** ** |
| ** **                           | ** ** | **December 31,** | ** ** | **December 31,  2005**       | ** ** |
| **(Dollars in millions)**            | ** ** | **2002**         | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial |       | $                | 10,612     |                         | 42         | % | $ | 8,898 |   | 36 | % | $ | 9,955 |   | 35 | % | $ | 11,451 |   | 35 | % | $ | 12,945 |   | 35 | % |   | $ | 1,494 |   |   |   | 13.0 | % |   |
| Construction                         |       | 1,285            |       | 5                            |       | 1,101 |   | 5 |   | 1,130 |   | 4 |   | 1,447 |   | 4 |   | 2,176 |   | 6 |   |   | 729 |   |   |   | 50.4 |   |   |
| Mortgage:                            |       |             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                          |       | 6,365            |       | 26                           |       | 7,464 |   | 31 |   | 9,538 |   | 33 |   | 11,380 |   | 34 |   | 12,344 |   | 34 |   |   | 964 |   |   |   | 8.5 |   |   |
| Commercial                           |       | 4,150            |       | 16                           |       | 4,195 |   | 17 |   | 5,409 |   | 19 |   | 5,683 |   | 17 |   | 6,028 |   | 16 |   |   | 345 |   |   |   | 6.1 |   |   |
| Total mortgage                       |       | 10,515           |       | 42                           |       | 11,659 |   | 48 |   | 14,947 |   | 52 |   | 17,063 |   | 51 |   | 18,372 |   | 50 |   |   | 1,309 |   |   |   | 7.7 |   |   |
| Consumer:                            |       |             |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Installment                          |       | 910              |       | 4                            |       | 819 |   | 3 |   | 768 |   | 2 |   | 891 |   | 3 |   | 1,137 |   | 3 |   |   | 246 |   |   |   | 27.6 |   |   |
| Revolving lines of credit            |       | 1,103            |       | 4                            |       | 1,222 |   | 5 |   | 1,582 |   | 5 |   | 1,611 |   | 5 |   | 1,401 |   | 4 |   |   | (210 | ) |   |   | (13.0 | ) |   |
| Total consumer                       |       | 2,013            |       | 8                            |       | 2,041 |   | 8 |   | 2,350 |   | 7 |   | 2,502 |   | 8 |   | 2,538 |   | 7 |   |   | 36 |   |   |   | 1.4 |   |   |
| Lease financing                      |       | 813              |       | 3                            |       | 664 |   | 3 |   | 609 |   | 2 |   | 580 |   | 2 |   | 581 |   | 2 |   |   | 1 |   |   |   | 0.2 |   |   |
| Total loans held for investment      |       | 25,238           |       | 100                          |       | 24,363 |   | 100 |   | 28,991 |   | 100 |   | 33,043 |   | 100 |   | 36,612 |   | 100 |   |   | 3,569 |   |   |   | 10.8 |   |   |
| Total loans held for sale            |       | 17               |       | —                       |       | 12 |   | — |   | 118 |   | — |   | 53 |   | — |   | 60 |   | — |   |   | 7 |   |   |   | 13.2 |   |   |
| Total loans                          |       | $                | 25,255     |                         | 100        | % | $ | 24,375 |   | 100 | % | $ | 29,109 |   | 100 | % | $ | 33,096 |   | 100 | % | $ | 36,672 |   | 100 | % |   | $ | 3,576 |   |   |   | 10.8 | % |   |

 

**Commercial, Financialand Industrial Loans**

Commercial, financial and industrial loans representone of the largest categories in the loan portfolio. These loans are extendedprincipally to corporations, middle-market businesses, and small businesses,with no industry concentration exceeding 10 percent of total loans. Althoughmany of our customers are located in California, the portfolio has a highdegree of geographic diversification based upon our customers’ revenue bases,which we believe lowers our vulnerability to changes in the economic outlook ofany particular region of the U.S.

Our commercial market lending originates primarilythrough our commercial banking offices. These offices, which rely extensivelyon relationship-oriented banking, provide a variety of services including cashmanagement services, lines of credit, accounts receivable and inventoryfinancing. Separately, we originate or participate in a wide variety offinancial services to major corporations. These services include traditionalcommercial banking and specialized financing tailored to the needs of eachcustomer’s specific industry. Presently, we are active in, among other sectors,the oil and gas, communications, entertainment, retailing, power and utilitiesand financial services industries.

The commercial, financial and industrial loanportfolio increased from December 31, 2005 mainly due to increased loandemand primarily in the oil and gas and national corporate segments, as well asthe California middle market.

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**Construction andCommercial Mortgage Loans**

We engage in non-residential real estate lending thatincludes commercial mortgage loans and construction loans secured by deeds oftrust. Construction loans are made primarily to commercial property developersand to residential builders.

The construction loan portfolio increase from December 31,2005 was due to increased funding for residential construction projects withapartment financing representing the largest component.

The commercial mortgage loanportfolio consists of loans on commercial income properties primarily inCalifornia. The increase in commercial mortgages from December 31, 2005 was mainly due to increased demand in theCalifornia middle market for real estate related financing.

**Residential MortgageLoans**

We originate residential mortgage loans, secured byone-to-four family residential properties, through our multiple channel network(including branches, mortgage brokers, and loan-by-phone) throughoutCalifornia, Oregon and Washington, and we periodically purchase loans in ourmarket area. At December 31, 2006, 64 percent of our residential mortgageloans were interest only, of which none are negative amortizing. Atorigination, these interest only loans had relatively high credit scores andhad weighted average loan-to-value (LTV) ratios of approximately 65 percent. Theremainder of the portfolio consists of balloon or regular amortizing loans.

We hold most of the loans weoriginate, selling only our 30-year, fixed rate loans, except forCommunity Reinvestment Act (CRA) qualifying loans.

**Consumer Loans**

We originate consumer loans,such as auto loans and home equity loans and lines, through our branch network.The primary source of the increase in consumer loans was our “Flex EquityLine/Loan” product. The “Flex Equity Line/Loan” allows our customers theflexibility to manage a line of credit with as many as four fixed rate loansunder a single product. When customers convert their “Flex Equity Lines/Loans”to fixed rate loans these new loans are classified as installment loans. Weoffer a “Flex Equity High LTV” product, which allows our customers to draw upto 100 percent of the value of their real estate or $150 thousand, whichever isless. At December 31,2006, the amount outstanding from this product was $5 million.

**Lease Financing**

We offer two types of leasesto our customers:  direct financingleases, where the assets leased are acquired without additional financing fromother sources; and leveraged leases, where a substantial portion of the financingis provided by debt with no recourse to us. Included in our lease portfolio areleveraged leases of $556 million, which are net of non-recourse debt ofapproximately $1.1 billion. We utilize a number of special purpose entities forour leveraged leases. These entities serve legal and tax purposes and do notfunction as vehicles to shift liabilities to other parties or to deconsolidateaffiliates for financial reporting purposes. As allowed by US GAAP and by law,the gross lease receivable is offset by the qualifying non-recourse debt. Inleveraged lease transactions, the third-party lender may only look to thecollateral value of the leased assets for repayment.

**Cross-BorderOutstandings**

Our cross-borderoutstandings, including those that are part of our discontinued operations,reflect certain additional economic and political risks that are not reflectedin domestic outstandings. These risks include those arising from exchange ratefluctuations and restrictions on the transfer of funds. The following tablesets forth our cross-border outstandings as of December 31, 2004 forSouth Korea, the only country 

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where such outstandings exceeded 1 percent of totalassets. For the periods ended December 31, 2005 and December 31, 2006there were no countries where such cross-border outstandings exceeded 1 percentof total assets. The cross-border outstandings were compiled based uponcategory and domicile of ultimate risk and are comprised of balances withbanks, trading account assets, securities available for sale, securitiespurchased under resale agreements, loans, accrued interest receivable,acceptances outstanding and investments in foreign entities. For any countryshown in the table below, any significant local currency outstandings areeither hedged or funded by local currency borrowings.

|                                     | ** ** | ** **       | ** ** | **Public**   | ** ** | **Corporations**   | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|--------------|------------|--------------------|------------|------------------|------------|
| ** **                          | ** ** | **Financial**    | ** ** | **Sector**   | ** ** | **and Other** | ** ** | **Total**        | ** ** |
| **(Dollars in millions)** | ** ** | **Institutions** | ** ** | **Entities** | ** ** | **Borrowers**      | ** ** | **Outstandings** | ** ** |
| December 31, 2004              |       |             |       |         |       |               |       |             |       |   |   |   |   |   |   |   |   |
| South Korea                         |       |             | $          | 615          |       |               |       | $                | —     |   |   |   | $ | 3 |   |   |   | $ | 618 |   |   |
|                                     |            |                  |            |              |            |                    |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Provision for LoanLosses**

We had a reversal of allowancefor loan losses of $5 million in 2006, compared with a reversal of allowancefor loan losses of $51 million in 2005. Provisions for loan losses are chargedto income to bring our allowance for loan losses to a level deemed appropriateby management based on the factors discussed under “Allowances for CreditLosses” below. Starting in 2005, we began to recognize in noninterest expense thechanges in our allowance for losses on off-balance sheet commitments separatelyfrom our allowance for loan losses. We recorded a reversal of provision forlosses on off-balance sheet commitments of $5 million in 2006 and a provisionfor losses on off-balance sheet commitments of $4 million in 2005.

**Allowances for CreditLosses**

*Policy and Methodology*

We maintain allowances for credit losses (defined asboth the allowance for loan and off- balance sheet commitment losses) to absorblosses inherent in the loan portfolio as well as for leases and off-balancesheet commitments. The allowances are based on our regular, quarterlyassessments of the probable estimated losses inherent in the loan portfolio andunused commitments to provide financing. Our methodology for measuring theappropriate level of the allowances relies on several key elements, whichinclude the formula allowance, specific allowances for identified problemcredit exposures, and the unallocated allowance.

The formula allowanceis calculated by applying loss factors to outstanding loans and certain unusedcommitments, in each case based on the internal risk grade of such loans,leases and commitments. Changes in risk grades affect the amount of the formulaallowance. Loss factors are based on our historical loss experience and may beadjusted for significant factors that, in management’s judgment, affect thecollectibility of the portfolio as of the evaluation date. Loss factors aredeveloped in the following ways:

·       lossfactors for individually graded credits are derived from a migration model thattracks historical losses over a period, such as an economic cycle, which webelieve captures the inherent losses in our loan portfolio; and

·       pooledloan loss factors (not individually graded loans) are based on expected netcharge offs. Pooled loans are loans that are homogeneous in nature, such asconsumer installment, home equity, residential mortgage loans and certain smallcommercial loans.

We believe that an economic cycle is a period in whichboth upturns and downturns in the economy have been reflected. We calculateloss factors over a time interval that spans what we believe constitutes acomplete and representative economic cycle.

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Loan loss factors, which are used in determining ourformula allowance, are adjusted quarterly primarily based upon the level ofhistorical net charge offs and losses expected by management in the near term. Weestimate our expected losses based on a loss confirmation period. The lossconfirmation period is the estimated average period of time between a materialadverse event affecting the credit-worthiness of a borrower and the subsequentrecognition of a loss.  Based upon ourevaluation process, we believe that, for our non-criticized, risk-graded loans,on average, losses are sustained approximately 10 quarters after an adverseevent in the creditor’s financial condition has taken place. For our criticizedrisk-graded loans, we measure the losses based upon the remaining life of theloan. See definition of criticized credits under “*Changes in the Formula and Specific Allowances*” in thissection of MD&A. Similarly, for pool-managed credits, the loss confirmationperiod varies by product, but ranges between one and two years.

Furthermore, based on management’s judgment, ourmethodology permits adjustments to any loss factor used in the computation ofthe formula allowance for significant factors, which affect the collectibilityof the portfolio as of the evaluation date, but are not reflected in the lossfactors. By assessing the probable estimated losses inherent in the loanportfolio on a quarterly basis, we are able to adjust specific and inherentloss estimates based upon the most recent information that has become available.This includes changing the number of periods that are included in thecalculation of the loss factors and adjusting qualitative factors to berepresentative of the economic cycle that we expect will impact the portfolio.Updates of the loss confirmation period are done when significant events causeus to reexamine our data.

Specific allowances are established in cases wheremanagement has identified significant conditions or circumstances related to acredit or a portfolio segment that management believes indicate the probabilitythat a loss has been incurred. This amount may be determined either by a methodprescribed by SFAS No. 114, or methods that include a range of probableoutcomes based upon certain qualitative factors.

The unallocatedallowance is based on management’s evaluation of conditions that are notdirectly reflected in the determination of the formula and specific allowances.The evaluation of the inherent loss with respect to the conditions listed belowis subject to a higher degree of uncertainty because they may not be identifiedwith specific problem credits or portfolio segments. The conditions evaluatedin connection with the unallocated allowance may include the following, whichcould exist at the balance sheet date:

·       generaleconomic and business conditions affecting our key lending areas;

·       creditquality trends (including trends in nonperforming loans expected to result fromexisting conditions);

·       collateralvalues;

·       loanvolumes and concentrations;

·       specificindustry conditions within portfolio segments;

·       recentloss experience in particular segments of the portfolio;

·       durationof the current economic cycle;

·       bankregulatory examination results; and

·       findingsof our internal credit examiners.

Executive management reviews these conditionsquarterly in discussion with our senior credit officers. To the extent that anyof these conditions is evidenced by a specifically identifiable problem creditor portfolio segment as of the evaluation date, management’s estimate of theeffect of such conditions may be reflected as a specific allowance, applicableto such credit or portfolio segment. Where any of these conditions is notevidenced by a specifically identifiable problem credit or portfolio segment asof the 

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evaluation date, management’sevaluation of the probable loss related to such condition is reflected in theunallocated allowance.

The allowances for credit losses are based uponestimates of probable losses inherent in the loan portfolio and certainoff-balance sheet commitments. The actual losses can vary from the estimatedamounts. Our methodology includes several features that are intended to reducethe differences between estimated and actual losses. The loss migration modelthat is used to establish the loan loss factors for individually graded loansis designed to be self-correcting by taking into account our loss experienceover prescribed periods. In addition, by basing the loan loss factors over aperiod reflective of an economic cycle, recent loss data that may not bereflective of prospective losses going forward will not have an undue influenceon the calculated loss factors.

Thefollowing table reflects the allowance for loan losses allocated to eachrespective loan category at period end and as a percentage of the total periodend balance of that loan category, as set forth in the “Loans” table on page F-17.For periods prior to 2004, the allowance for loan losses included the allowancefor losses on off-balance sheet commitments. As a result, the percentageallocated to each loan by type for 2004, 2005 and 2006 would have been higherabsent any other changes affecting the loss factors and risk grades.

| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**  | ** ** | **2002**              | ** ** | **2003** | ** ** | **2004** | ** ** |
| Commercial, financial, and industrial |       | $                     | 316,273    |   | 2.98 | % | $ | 278,506 |   | 3.13 | % | $ | 182,877 |   | 1.84 | % |
| Construction                          |       | 24,900                |       | 1.94 |   | 16,400 |   | 1.49 |   | 14,843 |   | 1.31 |   |
| Mortgage:                             |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Residential                           |       | 1,900                 |       | 0.03 |   | 2,200 |   | 0.03 |   | 2,900 |   | 0.03 |   |
| Commercial                            |       | 28,519                |       | 0.69 |   | 24,756 |   | 0.59 |   | 83,414 |   | 1.54 |   |
| Total mortgage                        |       | 30,419                |       | 0.29 |   | 26,956 |   | 0.23 |   | 86,314 |   | 0.58 |   |
| Consumer:                             |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Installment                           |       | 6,400                 |       | 0.70 |   | 3,000 |   | 0.37 |   | 2,400 |   | 0.31 |   |
| Revolving lines of credit             |       | 6,100                 |       | 0.55 |   | 5,300 |   | 0.43 |   | 2,400 |   | 0.15 |   |
| Total consumer                        |       | 12,500                |       | 0.62 |   | 8,300 |   | 0.41 |   | 4,800 |   | 0.20 |   |
| Lease financing                       |       | 30,690                |       | 3.77 |   | 29,800 |   | 4.49 |   | 27,634 |   | 4.54 |   |
| Total allocated allowance             |       | 414,782               |       | 1.64 |   | 359,962 |   | 1.48 |   | 316,468 |   | 1.09 |   |
| Unallocated                           |       | 194,408               |       |   |   | 172,948 |   |   |   | 82,688 |   |   |   |
| Total allowance for  loan losses      |       | $                     | 609,190    |   | 2.41 | % | $ | 532,910 |   | 2.19 | % | $ | 399,156 |   | 1.37 | % |

 

F-21

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| ** **                            | ** ** | ** **            | ** ** | ** **                     | ** ** | ** **                                                             | ** ** | ** **                                                              | ** ** | **Increase (Decrease)**                | ** ** |
|---------------------------------------|------------|-----------------------|------------|--------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | ** **            | ** ** | ** **                     | ** ** | ** **                                                             | ** ** | ** **                                                              | ** ** | **Years Ended December 31,** | ** ** |
| ** **                            | ** ** | **December 31,** | ** ** | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**  | ** ** | **2005**              | ** ** | **2006**                       | ** ** | **     Amount     ** | ** ** | **     Percent     ** | ** ** |
| Commercial, financial, and industrial |       | $                     | 169,700    |                           | 1.48       | %                                                                      | $          | 150,600                                                                 |       | 1.16                                        | %          |   | $ | (19,100 | ) |   |   | (11 | )% |   |
| Construction                          |       | 19,800                |       | 1.37                           |       | 34,600                                                                 |       | 1.59                                                                    |       |                                        | 14,800     |   |   |   | 75 |   |   |
| Mortgage:                             |       |                  |       |                           |       |                                                                   |       |                                                                    |       |                                        |       |   |   |   |   |   |   |
| Residential                           |       | 3,400                 |       | 0.03                           |       | 3,700                                                                  |       | 0.03                                                                    |       |                                        | 300        |   |   |   | 9 |   |   |
| Commercial                            |       | 72,500                |       | 1.28                           |       | 73,600                                                                 |       | 1.22                                                                    |       |                                        | 1,100      |   |   |   | 2 |   |   |
| Total mortgage                        |       | 75,900                |       | 0.44                           |       | 77,300                                                                 |       | 0.42                                                                    |       |                                        | 1,400      |   |   |   | 2 |   |   |
| Consumer:                             |       |                  |       |                           |       |                                                                   |       |                                                                    |       |                                        |       |   |   |   |   |   |   |
| Installment                           |       | 1,900                 |       | 0.21                           |       | 1,200                                                                  |       | 0.11                                                                    |       |                                        | (700       | ) |   |   | (37 | ) |   |
| Revolving lines of credit             |       | 2,000                 |       | 0.12                           |       | 1,800                                                                  |       | 0.13                                                                    |       |                                        | (200       | ) |   |   | (10 | ) |   |
| Total consumer                        |       | 3,900                 |       | 0.16                           |       | 3,000                                                                  |       | 0.12                                                                    |       |                                        | (900       | ) |   |   | (23 | ) |   |
| Lease financing                       |       | 17,200                |       | 2.97                           |       | 6,500                                                                  |       | 1.12                                                                    |       |                                        | (10,700    | ) |   |   | (62 | ) |   |
| Total allocated  allowance            |       | 286,500               |       | 0.87                           |       | 272,000                                                                |       | 0.74                                                                    |       |                                        | (14,500    | ) |   |   | (5 | ) |   |
| Unallocated                           |       | 65,032                |       |                           |       | 59,077                                                                 |       |                                                                    |       |                                        | (5,955     | ) |   |   | (9 | ) |   |
| Total allowance for  loan losses |       | $                     | 351,532    |                           | 1.06       | %                                                                      | $          | 331,077                                                                 |       | 0.90                                        | %          |   | $ | (20,455 | ) |   |   | (6 | )% |   |

 

*Comparison of the TotalAllowances and Related Provisions for Credit Losses*

At December 31, 2004, 2005, and 2006, our totalallowances for credit losses were 338 percent, 744 percent, and 987 percent oftotal nonaccrual loans, respectively. In addition, the allowances incorporatethe results of measuring impaired loans as provided in SFAS No. 114 andSFAS No. 118. These accounting standards prescribe the measurementmethods, income recognition and disclosures related to impaired loans. At December 31,2006, total impaired loans were $27 million and the associated impairmentallowance was $3 million, compared with total impaired loans of $59 million andan associated impairment allowance of $13 million at December 31, 2005,and total impaired loans of $88 million and an associated impairment allowanceof $24 million at December 31, 2004.

At December 31, 2006, the allowance for losses onoff-balance sheet commitments was $81 million, resulting in a $5 millionreversal of allowance from the prior year. At December 31, 2005, the allowancefor losses on off-balance sheet commitments was $86 million resulting in anincrease of $4 million from 2004. Prior to December 31, 2004, theallowance for loan losses included the allowance for losses on off-balancesheet commitments. Funded loans and off-balance sheet commitments areconsidered together when determining the adequacy of the allowances for creditlosses as a whole.

During 2004, 2005, and2006 there were no material changes in estimation methods or assumptions thataffected our methodology for assessing the appropriateness of the formula andspecific or unallocated allowances for credit losses, except for the followingrefinements:

·       In2004, we refined our loss factors for commercial real estate and constructionlending in order to more accurately capture probable loss inherent in theportfolio and we adjusted the period used to calculate the cumulative lossrates on criticized loans from 12 to 24 quarters to better estimate losses overthe life of the loans. We revised our method of estimating our expected lossesbased on a loss confirmation period. The loss confirmation period is theestimated average period of time between a material adverse event affecting thecredit-worthiness of a borrower and the subsequent recognition of a loss. Basedupon our evaluation process, we believe that, for our non-criticized,risk-graded loans, on average, losses are sustained approximately 10 quartersafter an adverse event 

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in the creditor’s financialcondition has taken place. Similarly, for pool-managed credits, the lossconfirmation period varies by product, but ranges between one and two years.

·       During 2004, 2005, and2006, changes in estimates and assumptions regarding the effects of economicand business conditions on borrowers and other factors also affected theassessment of the unallocated allowance.

As a result of management’s assessment of factors,including the credit quality of our loan portfolio, modest growth in the U.S.economy, growth and changes in the composition of the loan portfolio and thepotential impact of decreasing fuel costs across the whole economy, offset bythe adverse impact of a significant slowdown in the housing market, we recordeda reversal of allowance for loan losses of $5 million in 2006 compared to $51million in 2005. The refinements we made in the manner in which we segment ourallowances for credit losses, as previously described, had no impact on theoverall level of the allowances.

Thefollowing table sets forth the components of the allowances for credit losses.

| ** **                          | ** ** | ** **            | ** ** | ** **                      | ** ** | ** ** | ** ** | **Increase (Decrease)**                               | ** ** |
|-------------------------------------|------------|-----------------------|------------|---------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **            | ** ** | ** **                      | ** ** | ** ** | ** ** | **December 31, 2006 From:**                 | ** ** |
| ** **                          | ** ** | **December 31,** | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in millions)** | ** ** | **2004**              | ** ** | **2005**                        | ** ** | **2006**   | ** ** | **    Amount    ** | ** ** | **    Percent    ** | ** ** |
| Allocated allowance:                |       |                  |       |                            |       |       |       |                                                       |       |   |   |   |   |   |   |
| Formula                             |       | $                     | 361        |                            | $          | 356        |       | $                                                          | 347        |   |   | $ | (9 | ) |   |   | (3 | )% |   |
| Specific                            |       | 38                    |       | 17                              |       | 6          |       |                                                       | (11        | ) |   |   | (65 | ) |   |
| Total allocated allowance           |       | 399                   |       | 373                             |       | 353        |       |                                                       | (20        | ) |   |   | (5 | ) |   |
| Unallocated allowance               |       | 83                    |       | 65                              |       | 59         |       |                                                       | (6         | ) |   |   | (9 | ) |   |
| Total allowances for credit  losses |       | $                     | 482        |                            | $          | 438        |       | $                                                          | 412        |   |   | $ | (26 | ) |   |   | (6 | )% |   |

 

*Changes in the Formulaand Specific Allowances*

The decrease in the formula allowance between December 31,2005, and December 31, 2006, was due primarily to the impact of a decreasein our loss factors, as well as criticized credits (as defined below), partlyoffset by the overall growth in the commercial loan portfolio.

The specific allowance decrease from December 31,2005 to December 31, 2006 was primarily reflective of decreases innonaccrual loans, as well as lower loss content within nonaccrual loans. At December 31,2005, the specific allowance decreased from December 31, 2004 primarilydue to decreases in nonaccrual loans and the charge offs of certain aircraftleases.

The total allocated allowance includes the allowancefor losses related to off-balance sheet exposures such as unfunded commitmentsand letters of credit.

At December 31, 2006, theallocated portion of the allowances for credit losses included $58 millionrelated to special mention and classified credits (criticized credits),compared to $82 million at December 31, 2005, and $118 million at December 31,2004. The yearly declines resulted primarily from improving credit quality.  Special mention and classified credits arethose that are internally risk graded as “special mention,” “substandard” or “doubtful.” Special mention credits are potentiallyweak, as the borrower has begun to exhibit deteriorating trends, which, if notcorrected, could jeopardize repayment of the loan and result in furtherdowngrade. Substandard credits have well-defined weaknesses, which, if notcorrected, could jeopardize the full satisfaction of the debt. A creditclassified as “doubtful” has critical weaknesses that make full collectionimprobable.

F-23

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*Changes in theUnallocated Allowance*

Thefollowing table identifies the components of the unallocated allowance and therange of inherent loss.

| **(Dollars in millions)** | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Concentration**                   | ** ** | **Commitments**(1)              | ** ** | **Low**                         | ** ** | **High**                        | ** ** | **Commitments**(1) | ** ** | **Low** | ** ** | **High** | ** ** | **Commitments**(1) | ** ** | **Low** | ** ** | **High** | ** ** |
| Real Estate                         |       |                            | $          | 7,663                           |       |                            | $          | 10 |   | $ | 22 |   |   | $ | 8,728 |   |   | $ | 8 |   |   | $ | 18 |   |   |   | $ | 10,183 |   |   | $ | 8 |   |   | $ | 20 |   |   |
| Fuel Prices                         |       |                            | 38,472     |                            |       | 10                              |       | 34 |   |   | 43,557 |   |   | 8 |   |   | 34 |   |   |   | 48,264 |   |   | 3 |   |   | 14 |   |   |
| Concentrated Sales                  |       |                            | —     |                            |       | —                          |       | — |   |   | 2,175 |   |   | 4 |   |   | 7 |   |   |   | 2,301 |   |   | 7 |   |   | 12 |   |   |
| Contractors                         |       |                            | —     |                            |       | —                          |       | — |   |   | 987 |   |   | 3 |   |   | 5 |   |   |   | 844 |   |   | 5 |   |   | 7 |   |   |
| Leasing                             |       |                            | 615        |                            |       | 15                              |       | 26 |   |   | 586 |   |   | 3 |   |   | 6 |   |   |   | 591 |   |   | 3 |   |   | 6 |   |   |
| Advertising Dependents              |       |                            | —     |                            |       | —                          |       | — |   |   | — |   |   | — |   |   | — |   |   |   | 1,059 |   |   | 2 |   |   | 4 |   |   |
| Retail                              |       |                            | 1,807      |                            |       | 1                               |       | 3 |   |   | 2,118 |   |   | 1 |   |   | 3 |   |   |   | 2,416 |   |   | 1 |   |   | 2 |   |   |
| Foreign                             |       |                            | 181        |                            |       | 5                               |       | 10 |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |
| Power Companies/Utilities           |       |                            | 3,611      |                            |       | 3                               |       | 6 |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |
| Other                               |       |                            | 1,793      |                            |       | 3                               |       | 5 |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |
| Total Attributed                    |       |                            |       |                            |       | $                               | 47         |   | $ | 106 |   |   |   |   |   | $ | 27 |   |   | $ | 73 |   |   |   |   |   |   | $ | 29 |   |   | $ | 65 |   |   |

----

(1)                   Includes loansoutstanding and unused commitments.

At December 31, 2006, the unallocated allowancedeclined from December 31, 2005. The reasons for the decrease, and forwhich an unallocated allowance was warranted, follow.

In our assessment as of December 31, 2006,management focused, in particular, on the factors and conditions set out below.There can be no assurance that the adverse impact of any of these conditions onus will not be in excess of the ranges set forth. 

Although in certain instances the downgrading of aloan resulting from the effects of the conditions described below has beenreflected in the formula allowance, management believes that the impact ofthese events on the collectibility of the applicable loans may not have beenreflected in the level of nonperforming loans or in the internal risk gradingprocess with respect to such loans. In addition, our formula allowance does nottake into consideration sector-specific changes in the severity of losses thatare expected to arise from current economic conditions compared with ourhistorical losses. Accordingly, our evaluation of the probable losses relatedto the impact of these factors was reflected in the unallocated allowance. Theevaluations of the inherent losses with respect to these factors are subject tohigher degrees of uncertainty because they are not identified with specificproblem credits. 

In certain cases, webelieve that credit migration is likely to be somewhat more severe than thelong-run average, but a greater share of the inherent probable loss associatedwith this credit migration is now captured in the allocated allowance as aresult of the previously mentioned refinement in methodology that wasinstituted during 2004. The following describes the specific conditions weconsidered.

·       With respect to residentialreal estate construction, we considered the impact of significant weakness inthe residential real estate market.

·       With respect to fuelprices, we considered the decline in the prices of oil and petroleum productsexperienced during the latter portion of 2006, and the impact across allsectors of the economy.

·       With respect toconcentrated sales, we considered the increasing pricing pressures andcompetition among suppliers to the large ‘big box’ retailers. 

F-24

----

·       Withrespect to contractors, we considered the continued slowdown in the residentialconstruction markets.

·       Withrespect to leasing, we considered the improving outlook for airlines, which arebenefiting from improving fuel pricing and capacity utilization, as well assome weakness in the utilities sector.

·       Withrespect to advertising dependents, we considered the impact of decliningnewspaper, radio and television advertising sales revenues and decliningnewspaper circulation totals. 

·       Withrespect to retailers, we considered mixed sales results especially during therecent holiday period, with retailers reporting modest gains in same storesales, and specific concerns among certain retail segments.

At December 31,2005, the unallocated allowance declined from December 31, 2004. Thereasons for the decrease, and for which an unallocated allowance was warranted,follow.

·       Withrespect to fuel prices, we considered higher prices of oil and petroleumproducts that were experienced during the year, and the impact across virtuallyall sectors of the economy.

·       Withrespect to residential real estate construction, we considered the impact ofincreasing commodity prices on builders and weakness in the residential realestate market.

·       Withrespect to concentrated sales, we considered the risks associated with customerconcentration among our retailing customers. 

·       Withrespect to leasing, we considered the improving outlook for power plants andthe uncertain situation with airlines.

·       Withrespect to contractors, we considered the negative impact rising commodityprices have on profit margins for contractors under fixed rate contracts andthe slowdown or flattening of certain residential construction markets.

·       Withrespect to retailers, we considered mixed sales results especially during therecent holiday period, with retailers reporting both modest to poor sales, andspecific concerns among certain retail segments.

·       With respect tocross-border exposures in certain foreign countries, the attribution associatedwith these credits was eliminated as a result of the sale of our internationalcorrespondent banking business.

F-25

----

*Change in the TotalAllowances for Credit Losses*

Thefollowing table sets forth a reconciliation of changes in our allowances forcredit losses.

| ** **                                                                      | ** ** | ** **                                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase (Decrease)  December 31, 2006 From:** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                                            | ** ** | **2002**                                    | ** ** | **2003**                        | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **   Amount   **                       | ** ** | **   Percent   ** | ** ** |
| Balance, beginning of period                                                    |       | $                                           | 634,509    |                            | $          | 609,190    |       | $          | 532,910    |       | $          | 399,156                                                              |       | $ | 351,532 |   |   | $ | (47,624 | ) |   |   | (12 | )% |   |
| Loans charged off:                                                              |       |                                        |       |                            |       |       |       |       |       |       |       |                                                                 |       |   |   |   |   |   |   |
| Commercial, financial and industrial                                            |       | 212,675                                     |       | 159,611                         |       | 70,107     |       | 19,962     |       | 36,520     |       |                                                                 | 16,558     |   |   |   | 83 |   |   |
| Construction                                                                    |       | —                                      |       | —                          |       | 765        |       | 118        |       | —     |       |                                                                 | (118       | ) |   |   | (100 | ) |   |
| Mortgage                                                                        |       | 1,591                                       |       | 7,286                           |       | 43         |       | 2,071      |       | 336        |       |                                                                 | (1,735     | ) |   |   | (84 | ) |   |
| Consumer                                                                        |       | 11,220                                      |       | 9,657                           |       | 6,397      |       | 4,532      |       | 3,777      |       |                                                                 | (755       | ) |   |   | (17 | ) |   |
| Lease financing                                                                 |       | 19,856                                      |       | 33,032                          |       | 2,361      |       | 19,862     |       | 22         |       |                                                                 | (19,840    | ) |   |   | (100 | ) |   |
| Total loans charged off                                                         |       | 245,342                                     |       | 209,586                         |       | 79,673     |       | 46,545     |       | 40,655     |       |                                                                 | (5,890     | ) |   |   | (13 | ) |   |
| **Recoveries of loans previously  charged off:**                                |       |                                        |       |                            |       |       |       |       |       |       |       |                                                                 |       |   |   |   |   |   |   |
| Commercial, financial and industrial                                            |       | 34,075                                      |       | 45,822                          |       | 50,432     |       | 47,526     |       | 19,135     |       |                                                                 | (28,391    | ) |   |   | (60 | ) |   |
| Construction                                                                    |       | 40                                          |       | —                          |       | 118        |       | 34         |       | —     |       |                                                                 | (34        | ) |   |   | (100 | ) |   |
| Mortgage                                                                        |       | 405                                         |       | 150                             |       | 1,702      |       | 73         |       | 73         |       |                                                                 | —     |   |   |   | — |   |   |
| Consumer                                                                        |       | 4,436                                       |       | 3,673                           |       | 1,971      |       | 1,716      |       | 1,513      |       |                                                                 | (203       | ) |   |   | (12 | ) |   |
| Lease financing                                                                 |       | 590                                         |       | 446                             |       | 1,374      |       | 206        |       | 4,486      |       |                                                                 | 4,280      |   |   |   | nm |   |   |
| Total recoveries of loans previously charged off                                |       | 39,546                                      |       | 50,091                          |       | 55,597     |       | 49,555     |       | 25,207     |       |                                                                 | (24,348    | ) |   |   | (49 | ) |   |
| Net loans charged off (recovered)                                               |       | 205,796                                     |       | 159,495                         |       | 24,076     |       | (3,010     | )          | 15,448     |       |                                                                 | 18,458     |   |   |   | nm |   |   |
| (Reversal of) provision for loan losses                                         |       | 175,000                                     |       | 72,799                          |       | (45,757    | )          | (50,683    | )          | (5,000     | )          |                                                                 | (45,683    | ) |   |   | (90 | ) |   |
| Foreign translation adjustment and other net additions  (deductions)(1)(2) |       | 5,477                                       |       | 10,416                          |       | (63,921    | )          | 49         |       | (7         | )          |                                                                 | (56        | ) |   |   | nm |   |   |
| Ending balance of allowance for loan losses(2)                                  |       | $                                           | 609,190    |                            | $          | 532,910    |       | $          | 399,156    |       | $          | 351,532                                                              |       | $ | 331,077 |   |   | $ | (20,455 | ) |   |   | (6 | ) |   |
| Allowance for losses on off-balance sheet commitments(2)                        |       | —                                      |       | —                          |       | 82,375     |       | 86,375     |       | 81,374     |       |                                                                 | (5,001     | ) |   |   | (6 | ) |   |
| Allowances for credit losses                                                    |       | $                                           | 609,190    |                            | $          | 532,910    |       | $          | 481,531    |       | $          | 437,907                                                              |       | $ | 412,451 |   |   | $ | (25,456 | ) |   |   | (6 | ) |   |
| Allowances for credit losses to total loans                                |       | 2.41                                        | %          | 2.19                            | %          | 1.65       | %          | 1.32       | %          | 1.12       | %          |                                                                 |       |   |   |   |   |   |   |
| (Reversal of) provision for credit losses to net loans  charged off (recovered) |       | 85.04                                       |       | 45.64                           |       | (190.05    | )          | nm         |       | (32.37     | )          |                                                                 |       |   |   |   |   |   |   |
| Net loans charged off  (recovered) to average total loans                       |       | 0.84                                        |       | 0.64                            |       | 0.09       |       | (0.01      | )          | 0.04       |       |                                                                 |       |   |   |   |   |   |   |

----

(1)                   Includes$5.7 million related to the Business Bancorp acquisition and $12.6 millionrelated to the Jackson Federal Bank acquisition, both acquired in 2004. Alsoincludes $10.3 million related to the Monterey Bay Bank acquisition in 2003,$2.8 million for the Valencia Bank & Trust acquisition and $2.4million for the First Western Bank acquisition, both acquired in 2002.

(2)                   OnDecember 31, 2004, UnionBanCal Corporation transferred the allowancerelated to off-balance sheet commitments of $82.4 million from allowance forloan losses to other liabilities. Prior periods have not been restated.

nm - not meaningful

Total loans charged off in2004, 2005 and 2006, decreased from each prior year, primarily fromimprovements in loan quality. Lease charge offs in 2004 and 2005 relatedprimarily to several commercial aircraft leases. Charge offs reflect therealization of losses in the portfolio that were recognized previously throughprovisions for credit losses. 

F-26

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Loan recoveries in 2006decreased from 2005, which included a single large commercial loan recovery in2005 totaling over $9 million. Loan recoveries in 2004 and 2005 were relativelyconstant. Fluctuations in loan recoveries from year-to-year are due tovariability in timing of recoveries and tend to trail the periods in whichcharge offs are recorded.

**Nonperforming Assets**

Nonperforming assets mayconsist of nonaccrual loans, distressed loans held for sale, and foreclosedassets. Nonaccrual loans are those for which management has discontinuedaccrual of interest because there exists significant uncertainty as to the fulland timely collection of either principal or interest or such loans have becomecontractually past due 90 days with respect to principal or interest. For amore detailed discussion of the accounting for nonaccrual loans, see Note 1 toour Consolidated Financial Statements included in this Annual Report.

Distressed loans held for saleare loans, which would otherwise be included in nonaccrual loans, which havebeen identified for accelerated disposition. Disposition of these assets iscontemplated within a short period of time, not to exceed one year.

Foreclosed assets includeproperty where we acquired title through foreclosure or “deed in lieu” offoreclosure.

Thefollowing table sets forth an analysis of nonperforming assets.

| ** **                                                                                             | ** ** | ** **            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase (Decrease)  December 31, 2006 From:** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **December 31,** | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                                                                   | ** ** | **2002**              | ** ** | **2003**                        | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **    Amount    **           | ** ** | **    Percent    ** | ** ** |
| Commercial, financial  and industrial                                                                  |       | $                     | 276,415    |                            | $          | 190,404    |       | $          | 58,538     |       | $          | 50,073                                                               |       | $ | 7,552 |   |   | $ | (42,521 | ) |   |   | (84.9 | )% |   |
| Construction                                                                                           |       | —                |       | —                          |       | 2,622      |       | —     |       | —     |       |                                                                 | —     |   |   |   | — |   |   |
| Mortgage—Commercial                                                                               |       | 23,980                |       | 38,354                          |       | 26,519     |       | 8,819      |       | 19,187     |       |                                                                 | 10,368     |   |   |   | nm |   |   |
| Lease financing                                                                                        |       | 36,294                |       | 51,603                          |       | 54,894     |       | —     |       | 15,047     |       |                                                                 | 15,047     |   |   |   | nm |   |   |
| Total nonaccrual loans                                                                                 |       | 336,689               |       | 280,361                         |       | 142,573    |       | 58,892     |       | 41,786     |       |                                                                 | (17,106    | ) |   |   | (29.0 | ) |   |
| Foreclosed assets                                                                                      |       | 715                   |       | 5,689                           |       | 7,282      |       | 2,753      |       | 579        |       |                                                                 | (2,174     | ) |   |   | (79.0 | ) |   |
| Total nonperforming  assets                                                                            |       | $                     | 337,404    |                            | $          | 286,050    |       | $          | 149,855    |       | $          | 61,645                                                               |       | $ | 42,365 |   |   | $ | (19,280 | ) |   |   | (31.3 | ) |   |
| Allowances for credit  losses(1)                                                                       |       | $                     | 609,190    |                            | $          | 532,910    |       | $          | 481,531    |       | $          | 437,907                                                              |       | $ | 412,451 |   |   | $ | (25,456 | ) |   |   | (5.8 | )% |   |
| Nonaccrual loans to  total  loans                                                                      |       | 1.33                  | %          | 1.15                            | %          | 0.49       | %          | 0.18       | %          | 0.11       | %          |                                                                 |       |   |   |   |   |   |   |
| Allowances for credit  losses to nonaccrual loans                                                 |       | 180.94                |       | 190.08                          |       | 337.74     |       | 743.58     |       | 987.06     |       |                                                                 |       |   |   |   |   |   |   |
| Nonperforming assets  to total loans, distressed loans held for sale, and foreclosed  assets |       | 1.34                  |       | 1.17                            |       | 0.51       |       | 0.19       |       | 0.12       |       |                                                                 |       |   |   |   |   |   |   |
| Nonperforming assets  to total assets                                                                  |       | 0.84                  |       | 0.67                            |       | 0.31       |       | 0.12       |       | 0.08       |       |                                                                 |       |   |   |   |   |   |   |

----

(1)                   Includesallowance for losses related to off-balance sheet commitments.

nm - notmeaningful

The decrease in nonaccrual loans from December 2005to December 2006 was primarily due to pay-downs, charge offs, resumptionto accrual status and loan sales. During 2006, we sold approximately $26 millionof nonperforming loans compared to approximately $45 million in 2005, whichreduced our credit exposures. Losses from these sales were reflected in ourcharge offs. 

F-27

----

Thefollowing table sets forth an analysis of loans contractually past due 90 daysor more as to interest or principal and still accruing, but not included innonaccrual loans above.

| ** **                                               | ** ** | ** **            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase (Decrease)  December 31, 2006 From:** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|---------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **December 31,** | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                     | ** ** | **2002**              | ** ** | **2003**                        | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **    Amount    **           | ** ** | **    Percent    ** | ** ** |
| Commercial, financial  and industrial               |       | $                     | 1,705      |                            | $          | 893        |       | $          | 1,315      |       | $          | 187                                                                  |       | $ | 3,085 |   |   | $ | 2,898 |   |   |   | nm |   |   |
| Construction                                             |       | 679                   |       | —                          |       | —     |       | 677        |       | —     |       |                                                                 | (677       | ) |   |   | (100.0 | )% |   |
| Mortgage:                                                |       |                  |       |                            |       |       |       |       |       |       |       |                                                                 |       |   |   |   |   |   |   |
| Residential                                              |       | 3,211                 |       | 1,878                           |       | 1,385      |       | 2,784      |       | 2,359      |       |                                                                 | (425       | ) |   |   | (15.3 | ) |   |
| Commercial                                               |       | 506                   |       | —                          |       | —     |       | 499        |       | 2,155      |       |                                                                 | 1,656      |   |   |   | nm |   |   |
| Total mortgage                                           |       | 3,717                 |       | 1,878                           |       | 1,385      |       | 3,283      |       | 4,514      |       |                                                                 | 1,231      |   |   |   | 37.5 |   |   |
| Consumer and other                                       |       | 2,072                 |       | 1,123                           |       | 1,157      |       | 819        |       | 1,706      |       |                                                                 | 887        |   |   |   | nm |   |   |
| Total loans 90 days  or more past due and still accruing |       | $                     | 8,173      |                            | $          | 3,894      |       | $          | 3,857      |       | $          | 4,966                                                                |       | $ | 9,305 |   |   | $ | 4,339 |   |   |   | 87.4 | % |   |

----

nm -not meaningful

**Interest Foregone**

If interest that was due on the book balances of allnonaccrual and restructured loans (including loans that were, but are no longeron nonaccrual) had been accrued under their original terms, we would haverecognized $5.7 million of interest income in 2006.

After designation as anonaccrual loan, we recognized interest income on a cash basis of $16.4 millionand $3.6 million for loans that were on nonaccrual status at December 31,2005 and 2006, respectively.

**Securities**

Management of the securitiesportfolio involves the maximization of return while maintaining prudent levelsof quality, market risk, and liquidity. At December 31, 2006,approximately 99 percent of our securities were investment grade. The amortizedcost, gross unrealized gains, gross unrealized losses, and fair values ofsecurities are detailed in Note 3 to our Consolidated Financial Statements includedin this Annual Report.

**Analysis of SecuritiesAvailable for Sale**

The following table shows the remaining contractualmaturities and expected yields of the securities available for sale based uponamortized cost at December 31, 2006. The fair value of our securitiesavailable for sale portfolio at December 31, 2005 was $8.2 billioncompared to $8.8 billion at December 31, 2006.

Included in our securities available for saleportfolios at December 31, 2005 and 2006 were securities used for Asset andLiability Management (ALM) purposes of $6.4 billion and $6.6 billion,respectively. These securities had an expected weighted average maturity of 3.0years and 2.8 years, respectively.

F-28

----

**Securities Available For Sale**

| ** **                           | ** ** | **Maturity**      | ** ** | ** **                  | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | ** **        | ** ** | **Over One Year** | ** ** | **Over Five Years** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **One Year** | ** ** | **Through**                 | ** ** | **Through** | ** ** | **Over** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **or Less**  | ** ** | **Five Years**         | ** ** | **Ten Years** | ** ** | **Ten Years** | ** ** | **Amortized Cost** | ** ** |
| **(Dollars in thousands)** | ** ** | **Amount**        | ** ** | **Yield**                   | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| U.S. Treasury                        |       | $                 | 60,060     |                        | 4.15       | % | $ | — |   | — | % | $ | — |   | — | % | $ | — |   | — | % | $ | 60,060 |   | 4.15 | % |
| Other U.S. government                |       | 450,887           |       | 3.57                        |       | 300,749 |   | 4.36 |   | — |   | — |   | — |   | — |   | 751,636 |   | 3.89 |   |
| Mortgage-backedsecurities(1)(2)      |       | 528               |       | 6.69                        |       | 6,426 |   | 6.05 |   | 1,593,820 |   | 4.22 |   | 4,143,314 |   | 4.75 |   | 5,744,088 |   | 4.60 |   |
| State and municipal                  |       | 4,855             |       | 4.37                        |       | 9,011 |   | 7.39 |   | 16,948 |   | 4.87 |   | 28,041 |   | 4.54 |   | 58,855 |   | 5.06 |   |
| Asset-backed and debt  securities    |       | —            |       | —                      |       | 124,689 |   | 3.83 |   | 819,422 |   | 6.41 |   | 1,266,872 |   | 5.91 |   | 2,210,983 |   | 5.98 |   |
| Equity securities(3)                 |       | —            |       | —                      |       | — |   | — |   | — |   | — |   | — |   | — |   | 23,007 |   | — |   |
| Foreign securities                   |       | 86                |       | 3.65                        |       | 1,235 |   | 4.64 |   | — |   | — |   | — |   | — |   | 1,321 |   | 4.58 |   |
| Total securities available  for sale |       | $                 | 516,416    |                        | 3.65       | % | $ | 442,110 |   | 4.30 | % | $ | 2,430,190 |   | 4.96 | % | $ | 5,438,227 |   | 5.02 | % | $ | 8,849,950 |   | 4.87 | % |

----

(1)                   The remaining contractual maturities of mortgage-backedsecurities were allocated assuming no prepayments. The contractual maturity ofthese securities is not a reliable indicator of their expected life becauseborrowers have the right to repay their obligations at any time.

(2)                   See discussion of expected duration in “Quantitativeand Qualitative Disclosures About Market Risk.”

(3)                   Equity securities do not have a statedmaturity and are included in the total column only.

**Loan Maturities**

Thefollowing table presents our loans by contractual maturity except for loansheld for sale, which are presented based on the period when the sale isexpected to take place.

| ** **                                    | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | ** **                      | ** ** | **Over** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **                      | ** ** | **One Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **One Year**               | ** ** | **Through** | ** ** | **Over** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**          | ** ** | **or Less**                | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total** | ** ** |
| Commercial, financial and industrial          |       | $                               | 3,321,299  |   | $ | 7,772,637 |   | $ | 1,850,835 |   | $ | 12,944,771 |   |
| Construction                                  |       | 977,544                         |       | 1,159,877 |   | 38,124 |   | 2,175,545 |   |
| Mortgage:                                     |       |                            |       |   |   |   |   |   |   |
| Residential                                   |       | 456,976                         |       | 14,034 |   | 11,872,782 |   | 12,343,792 |   |
| Commercial                                    |       | 332,640                         |       | 1,575,360 |   | 4,120,242 |   | 6,028,242 |   |
| Total mortgage                                |       | 789,616                         |       | 1,589,394 |   | 15,993,024 |   | 18,372,034 |   |
| Consumer:                                     |       |                            |       |   |   |   |   |   |   |
| Installment                                   |       | 8,431                           |       | 82,155 |   | 1,046,815 |   | 1,137,401 |   |
| Revolving lines of credit                     |       | 1,244,472                       |       | 153,599 |   | 3,102 |   | 1,401,173 |   |
| Total consumer                                |       | 1,252,903                       |       | 235,754 |   | 1,049,917 |   | 2,538,574 |   |
| Lease financing                               |       | 1,113                           |       | 40,729 |   | 539,361 |   | 581,203 |   |
| Total loans held to maturity                  |       | 6,342,475                       |       | 10,798,391 |   | 19,471,261 |   | 36,612,127 |   |
| Total loans held for sale                     |       | 59,596                          |       | — |   | — |   | 59,596 |   |
| Total loans                                   |       | $                               | 6,402,071  |   | $ | 10,798,391 |   | $ | 19,471,261 |   | $ | 36,671,723 |   |
| Allowance for loan losses                     |       |                            |       |   |   |   |   | 331,077 |   |
| Loans, net                                    |       |                            |       |   |   |   |   | $ | 36,340,646 |   |
| Total fixed rate  loans due after one year    |       |                            |       |   |   |   |   | $ | 7,128,091 |   |
| Total variable rate  loans due after one year |       |                            |       |   |   |   |   | 23,141,561 |   |
| Total loans due after  one year               |       |                            |       |   |   |   |   | $ | 30,269,652 |   |

 

F-29

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**Time Deposits of$100,000 and Over**

The following table presents domestic time deposits of$100,000 and over by maturity.

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**              | ** ** | **2006**              | ** ** |
| Three months or less                              |       | $                     | 5,366,136  |   |
| Over three months  through six months             |       | 562,609               |       |
| Over six months  through twelve months            |       | 302,526               |       |
| Over twelve months                                |       | 116,502               |       |
| Total domestic time deposits of $100,000 and over |       | $                     | 6,347,773  |   |

 

We offer certificates ofdeposit and other time deposits of $100,000 and over at market rates ofinterest. A large portion of these deposits are offered to customers, bothpublic and private, who have done business with us for an extended period.Based on our historical experience, we expect that as these deposits mature,the majority will continue to be renewed at market rates of interest.

**Borrowed Funds**

Thefollowing table presents information on our borrowed funds.

| ** **                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                                                                | ** ** | **2004**              | ** ** | **2005** | ** ** | **2006** | ** ** |
| Federal funds  purchased and securities sold under repurchase agreements with weighted  average interest rates of 1.90%, 3.97% and 5.18% at December 31, 2004,  2005 and 2006, respectively(1) |       | $                     | 587,249    |   | $ | 651,529 |   | $ | 1,083,927 |   |
| Commercial paper,  with weighted average interest rates of 1.69%, 3.60%, and 4.99% at  December 31, 2004, 2005 and 2006, respectively                                                          |       | 824,887               |       | 680,027 |   | 1,661,163 |   |
| Other borrowed funds,  with weighted average interest rates of 4.25%, 4.05% and 5.12% at  December 31, 2004, 2005 and 2006, respectively                                                       |       | 172,549               |       | 134,485 |   | 432,401 |   |
| Total borrowed funds                                                                                                                                                                                |       | $                     | 1,584,685  |   | $ | 1,466,041 |   | $ | 3,177,491 |   |
| Federal funds purchased and  securities sold under repurchase agreements:                                                                                                                           |       |                  |       |   |   |   |   |
| Maximum outstanding at any month end                                                                                                                                                                |       | $                     | 739,386    |   | $ | 2,285,569 |   | $ | 1,083,927 |   |
| Average balance during the year                                                                                                                                                                     |       | 596,997               |       | 898,107 |   | 701,614 |   |
| Weighted average interest rate during the year(1)                                                                                                                                                   |       | 1.25                  | %          | 2.88 | % | 4.80 | % |
| Commercial paper:                                                                                                                                                                                   |       |                  |       |   |   |   |   |
| Maximum outstanding at any month end                                                                                                                                                                |       | $                     | 855,334    |   | $ | 1,390,504 |   | $ | 1,859,747 |   |
| Average balance during the year                                                                                                                                                                     |       | 620,053               |       | 1,086,088 |   | 1,582,226 |   |
| Weighted average interest rate during the year                                                                                                                                                      |       | 1.11                  | %          | 2.92 | % | 4.74 | % |
| Other borrowed funds:                                                                                                                                                                               |       |                  |       |   |   |   |   |
| Maximum outstanding at any month end                                                                                                                                                                |       | $                     | 212,371    |   | $ | 286,342 |   | $ | 794,701 |   |
| Average balance during the year                                                                                                                                                                     |       | 162,424               |       | 168,220 |   | 294,977 |   |
| Weighted average  interest rate during the year                                                                                                                                                     |       | 3.00                  | %          | 3.75 | % | 5.20 | % |

----

(1)                   Weightedaverage interest rates provided relate to external funding and do not reflectearnings on net funding to discontinued operations. For further information,see Note 2 to our Consolidated Financial Statements included in this AnnualReport.

F-30

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**Capital Adequacy,Dividends and Share Repurchases**

*Capital Adequacy andCapital Management*

We strive to maintain strong capital levels, to usecapital effectively, and to return excess capital to our stockholders.

We have historically maintained capital levels inexcess of those levels required by bank regulators and above industry averages.Strong capital improves our ability to absorb unanticipated losses andcontributes to higher ratings by bank regulatory agencies and credit ratingagencies.

We strive to use our capital effectively, with ourfirst priority to support our long-term growth and strategic positioning. Capitalis used to fund loan growth and other balance sheet growth, to reinvest in ourcore businesses, and to fund strategic acquisitions. Capital is also employedto pay a competitive dividend to our stockholders and to periodically increasethe dividend. When we possess capital in excess of core business and dividendrequirements, we often employ some of that excess capital to repurchase commonstock.

Our primary source of capital is net income. Inaddition, we have generated capital from common stock issued in connection withacquisitions, from common stock issued in connection with employee stock optionexercises, to the extent that amounts were not recognized in net income, andfrom the net proceeds of asset sales and business divestitures.

We are subject to minimum capital requirements at boththe bank and holding company levels, as defined by our bank regulators. We havehistorically maintained capital levels well above the minimum thresholds and,where applicable, in excess of the thresholds established by the bankingregulators to identify “well-capitalized” institutions.

In addition, we monitor avariety of US GAAP capital measures and hybrid capital measures to maintaincapital levels consistent with our goals. These measures include the tangiblecommon equity ratio and various capital metrics favored by the major creditrating agencies. We analyze these ratios relative to our current financialposition, our projected financial position, and peer banks. Our currentstrategic target for the tangible common equity ratio is 7 percent to 8percent.

*Dividends*

We strive to pay ourstockholders a competitive dividend, while maintaining a conservative payoutratio. We review our dividend rate quarterly in conjunction with a quarterlyreview of capital. We have elected to increase the dividend rate several timesin recent years, reflecting our strong capital levels and expectations of solidcapital generation going forward.

*Share repurchases*

In recent years, we have elected to return asignificant amount of excess capital to our stockholders in the form of sharerepurchases. Our share repurchase activity has reflected our confidence in ourability to maintain healthy rates of new capital generation, as well as asurplus of capital beyond our core business and dividend requirements. Inrecent years, share repurchases have been executed at prices that haveconsiderably enhanced our earnings per share and return on equity. In addition,the repurchase of shares has resulted in lower dividend expenditures due tofewer shares outstanding.

As compared to dividends, share repurchases are highlyflexible, allowing management to return excess capital in times of surplus, orto eliminate repurchases altogether if superior strategic opportunities todeploy excess capital exist.

F-31

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Thefollowing table summarizes our risk-based capital, risk-weightedassets, and risk-based capital ratios. The table includes assets ofdiscontinued operations.

| ** **                           | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Minimum**     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|-----------------|------------|
| ** **                           | ** ** | **December 31,** | ** ** | **Regulatory** | ** ** |
| **(Dollars in thousands)** | ** ** | **2002**              | ** ** | **2003**       | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Requirement** | ** ** |
| **Capital  Components**              | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |            | ** ** | ** ** |   |
| Tier 1 capital                       |       | $                     | 3,667,237  |           | $          | 3,747,884  |       | $          | 3,817,698  |       | $          | 4,178,160       |       | $ | 4,333,865 |   |   |   |   |   |
| Tier 2 capital                       |       | 573,858               |       | 936,189        |       | 968,294    |       | 876,713    |       | 1,509,338  |       |            |       |   |   |
| Total risk-based  capital            |       | $                     | 4,241,095  |           | $          | 4,684,073  |       | $          | 4,785,992  |       | $          | 5,054,873       |       | $ | 5,843,203 |   |   |   |   |   |
| Risk-weighted assets                 |       | $                     | 32,811,441 |           | $          | 33,133,407 |       | $          | 39,324,859 |       | $          | 45,540,448      |       | $ | 49,904,203 |   |   |   |   |   |
| Quarterly average  assets            |       | $                     | 37,595,002 |           | $          | 41,506,828 |       | $          | 47,168,683 |       | $          | 49,789,877      |       | $ | 51,353,681 |   |   |   |   |   |
| **Capital  Ratios**                  | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |            | ** ** | ** ** |   |
| Total risk-based  capital            |       | 12.93                 | %          | 14.14          | %          | 12.17      | %          | 11.10      | %          | 11.71      | %          |            | 8.0        | % |   |
| Tier 1 risk-based  capital           |       | 11.18                 |       | 11.31          |       | 9.71       |       | 9.17       |       | 8.68       |       |            | 4.0        |   |   |
| Leverage ratio(1)                    |       | 9.75                  |       | 9.03           |       | 8.09       |       | 8.39       |       | 8.44       |       |            | 4.0        |   |   |

----

(1)                   Tier 1 capitaldivided by quarterly average assets (excluding certain intangible assets).

We and the Bank are subject to various regulations ofthe federal banking agencies, including minimum capital requirements. We bothare required to maintain minimum ratios of Total and Tier 1 capital to risk-weightedassets and of Tier 1 capital to quarterly average assets (the leverage ratio).

The increase in the Total capital ratio from December 31,2005 was due to an increase in our total risk-based capital, which resultedfrom our net income and the Bank’s issuance of $700 million of subordinatednotes in May 2006, less dividends and stock repurchases, partially offsetby an increase in risk-weighted assets stemming from growth in our loanportfolio and unfunded commitments. The decrease in the Tier 1 capital ratio isprimarily due to the $4.4 billion growth in risk-weighted assets at December 31,2006. There was no impact on capital ratios as a result of the adoption of SFASNo. 158.

As of December 31, 2006,the most recent notification from the Office of the Comptroller of the Currency(OCC) categorized the Bank as “well-capitalized.” This means that the Bank metall regulatory requirements of “well-capitalized” institutions, which are10 percent for the Total risk-based capital ratio, 6 percent for the Tier1 risk-based capital ratio and 5 percent for the leverage ratio.

**Quantitative andQualitative Disclosures About Market Risk**

Our exposure to market risk exists primarily ininterest rate risk in our non-trading balance sheet and, to a much lesserdegree, in price risk in our trading portfolio for our customer-focused tradingand sales activities. The objective of market risk management is to mitigateany undue adverse impact on earnings and capital arising from changes ininterest rates and other market variables and to ensure the Bank has adequatesources of liquidity. This risk management objective supports our broadobjective of enhancing shareholder value, which encompasses stable earningsgrowth over time and capital stability. During 2006, the Bank’s structure forgoverning market risk was enhanced by expanding the involvement of ExecutiveManagement in the process.

The Board of Directors, through its Finance andCapital Committee, approves our Asset and Liability Management, Investment andDerivatives Policy (ALM Policy), which governs the management of market riskand guides our investment and derivatives activities. The ALM Policyestablishes the Bank’s risk tolerance guidelines by outlining standards formeasuring market risk, creates Board-level limits for specific market risks,establishes guidelines for reporting market risk, and requires independentreview and oversight of market risk activities.

In an effort to ensure that the Bank has an effectiveprocess to identify, measure, monitor and manage market risk, the ALM Policyrequires the Bank to establish an Asset Liability Management Committee (ALCO),which is comprised of the members of the CEO Forum and the Treasurer. ALCOprovides the 

F-32

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broad and strategic guidanceof market risk management by formulating high-level strategies for market riskmanagement and defining the risk/return stance for the Bank and by approvingthe investment, derivatives, and trading policies that govern the Bank’sactivities. ALCO is also responsible for ongoing management of market risk andapproves specific risk management programs, including those related to interestrate hedging, investment securities, and wholesale funding.

The Treasurer is primarily responsible for theimplementation of risk management strategies approved by ALCO and for operatingmanagement of market risk through the funding, investment, and derivativeshedging activities of Corporate Treasury. The manager of the Global MarketsDivision is responsible for operating management of price risk through the tradingactivities conducted in that division. The Market Risk Monitoring unit isresponsible for the monitoring of market risk and functions independently ofall operating and management units.

We have separate and distinctmethods for managing the market risk associated with our asset and liabilitymanagement activities and our trading activities, as described below.

*Interest Rate RiskManagement (Other Than Trading)*

ALCO monitors interest rate risk monthly through avariety of modeling techniques that are used to quantify the sensitivity of NetInterest Income (NII) and of Economic Value of Equity (EVE) to changes ininterest rates. As directed by ALCO, and in consideration of the importance ofour demand deposit accounts as a funding source, NII is adjusted in the policyrisk measure to incorporate the effect of certain non-interest income andexpense items related to these deposits that are nevertheless sensitive tochanges in interest rates. NII, so adjusted, is termed Economic NII. Inmanaging interest rate risk, ALCO monitors NII sensitivity on both an adjusted(“Economic”) and an unadjusted (“Accounting”) basis over various time horizonsand in response to a variety of interest rate changes.

Our NII policy measure involves a simulation of “Earnings-at-Risk”(EaR) in which we estimate the impact that gradual, ramped-on parallel shiftsin the yield curve would have on earnings over a 12-month horizon, givenour projected balance sheet profile. We measure and monitor our interest raterisk profile using two calculations of EaR: Accounting NII-at-Risk and EconomicNII-at-Risk, the latter adjusted for the non-interest items described above. Underthe policy limits, the negative change in simulated Economic NII in either theup or down 200 basis point shock scenarios may not, except on a temporarybasis, exceed 4 percent of Economic NII as measured in the no interest ratechange base case scenario.

Our EaR simulations use a 12-month projectedbalance sheet in order to model the impact of interest rate changes. Assumptionsare made to model the future behavior of deposit rates and loan spreads basedon statistical analysis, management’s outlook, and historical experience. Theprepayment risks related to residential loans and mortgage-backed securitiesare measured using industry estimates of prepayment speeds.

During 2006, ourinterest rate risk shifted from asset sensitive to a neutral to slightlyliability sensitive profile primarily as a result of trends in our unhedged,core balance sheet including wholesale funding replacing declining depositbalances and continued deposit pricing pressure. During 2006, we added $2.2billion of new floor hedges, net of maturities, to reduce our downsideasset-sensitivity (see our discussion of “ALM Derivatives” below). We also added$700 million notional amount of interest rate swaps to convert the Bank’s $700million fixed rate debt issuance in 2006 to a floating rate. Additionally,refinements to our deposit price sensitivity model continued to reduce ourasset sensitivity.

At December 31, 2006,Economic Net Interest Income (NII) sensitivity was neutral to slightlyliability sensitive to parallel rate shifts. A +200 basis point parallel shiftwould reduce 12-month Economic NII by 0.37 percent, while a similardownward shift would increase it by 1.09 percent. This compares with anestimated 0.93 percent increase and 1.97 percent decrease, respectively, at December 31,2005. We caution that ongoing enhancements to our interest rate risk modelingmay make prior-year comparisons of 

F-33

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Economic NIIless meaningful. Economic NII adjusts our reported NII for the effect ofcertain noninterest bearing deposit related fee and expense items. Thoseadjustment items are innately liability sensitive, meaning that reported NII ismore asset sensitive than is Economic NII.

**Economic NII**

| ** **                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(Dollars in millions)** | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| +200 basis points                   |       |                  | $          | 18.9                  |       |   |   | $ | (7.0 | ) |   |
| as a percentage of  base case NII   |       |                  | 0.93       | %                     |       |   | (0.37 | )% |   |
| -200  basis points                  |       |                  | $          | (40.2                 | )          |   |   | $ | 20.5 |   |   |
| as a percentage of base case  NII   |       |                  | (1.97      | )%                    |       |   | 1.09 | % |   |

 

The figures in the above table are reported on acontinuing operations basis, with all assets and liabilities associated withthe disposal of the international correspondent banking business eliminated. Webelieve that this approach provides the best representation of our riskprofiles.

In the case of non-parallel yield curve changes, ourEconomic NII is liability sensitive to changes in short-term rates (withlong-term rates held constant) and asset sensitive to changes in long-termrates (with short-term rates held constant). In other words, our Economic NIIwill benefit from curve steepening with short rates dropping and will contractfrom the curve further inverting with long rates dropping.

In addition to EaR, we measure the sensitivity of EVEto interest rate shocks. EVE-at-Risk is reviewed and monitored for itscompliance with ALCO guidelines. Our EVE-at-Risk at December 31, 2006,reflects a lower risk exposure to falling rates than 2005. Additionally, ourEVE-at-Risk shows a smaller risk exposure to rising rates than the riskexposure to falling rates.

We believe that, together, ourNII and EVE simulations provide management with a reasonably comprehensive viewof the sensitivity of our operating results and value profile to changes ininterest rates, at least over the measurement horizon. However, as with anyfinancial model, the underlying assumptions are inherently uncertain andsubject to refinement as modeling techniques and theory improve and historicaldata becomes more readily accessible. Consequently, our simulation modelscannot predict with certainty how rising or falling interest rates might impactnet interest income. Actual and simulated results will differ to the extentthere are variances between actual and assumed interest rate changes, balancesheet volumes, and management strategies, among other factors. Key underlyingassumptions include prepayment speeds on mortgage-related assets, changes inmarket conditions, loan volume and pricing, deposit sensitivity, customerpreferences and cash flows and maturities of derivative financial instruments.

*ALM Activities*

During 2006, our unhedged,core balance sheet became significantly less asset sensitive compared to 2005. However,at December 31, 2006, the core balance sheet continues to be slightlyasset sensitive meaning that the current mix of assets reprices slightly fasterthan our current mix of liabilities. The change in the risk profile of the corebalance sheet resulted primarily from an increased deposit pricing sensitivityduring the year, a decline in core deposit balances and an increased assetgrowth funded by proportionally more short-term wholesale liabilities. Inmanaging the interest rate sensitivity of our balance sheet, we use the ALMinvestment securities portfolio and derivatives positions as the primary toolsto adjust our interest rate risk profile, if necessary. During 2006, wereinvested proceeds from maturing ALM securities into securities with liketerms and asset allocation. New derivative hedges were also added during theyear as described below.

F-34

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*ALM Securities*

At December 31, 2005 and 2006, our available forsale securities portfolio included $6.4 billion and $6.6 billion, respectively,of securities for ALM purposes. At December 31, 2006, approximately $2.7billion of the portfolio was pledged to secure trust and public deposits andfor other purposes as required or permitted by law. During 2006, we purchasedapproximately $2.0 billion of securities, which included the impact of ourportfolio rebalancing strategy completed in the first quarter of 2006. Approximately$1.7 billion of ALM securities matured or were called during 2006. Thecomposition of the portfolio is expected to remain relatively stable in 2007. Basedon current prepayment projections, the estimated ALM portfolio effectiveduration was 2.1 at December 31, 2006, compared to 2.2 at December 31,2005.

Effective duration is ameasure of price sensitivity of a bond portfolio to immediate parallel shiftsin interest rates. An effective duration of 2.1 suggests an expected pricechange of approximately minus 2.1 percent for an immediate 1.0 percent increasein interest rates*.*

*ALM Derivatives*

During 2006, the ALM derivatives portfolio increasedby a net $700 million notional amount, as $4.1 billion of notional amountcontracts were purchased, offset partially by maturities of $3.4 billionnotional. The derivatives purchased in 2006 are comprised of $3.4 billion notionalamount of LIBOR floor contracts and $700 million notional amount of receivefixed interest rate swaps in order to moderate the downside asset-sensitivityof our overall risk position. The $700 million in new receive fixed interestrate swaps were purchased to convert to a floating rate the $700 millionprincipal amount of ten-year, fixed-rate subordinated notes issued under theBank Note program described under “Liquidity Risk” below.

The fair value of the ALM derivative contractsincreased with the purchase of new derivative contracts during the year andwith the maturity or decline in the remaining maturity of several “out-of-the-money”interest rate swap contracts. For additional discussion of derivativeinstruments and our hedging strategies, see Note 19 to our ConsolidatedFinancial Statements included in this Annual Report.

Thefollowing table provides the notional value and the fair value of our ALMderivatives portfolio as of December 31, 2004, 2005 and 2006 and thechange in fair value between December 31, 2005 and 2006.

| ** **                                                                      | ** ** | ** **            | ** ** | ** **                                | ** ** | ** ** | ** ** | **Increase / (Decrease)**     | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **December 31,** | ** ** | **From December 31, 2005** | ** ** |
| **(Dollars in thousands)**                                            | ** ** | **2004**              | ** ** | **2005**                                  | ** ** | **2006**   | ** ** | **to December 31, 2006** | ** ** |
| Total gross notional  amount of positions held for purposes other than trading: |       | $                     | 9,880,000  |                                      | $          | 7,550,000  |       | $                                       | 8,250,000  |   |   | $ | 700,000 |   |   |
| Of which, interest rate swaps pay fixed rates of interest:                      |       | —                |       | —                                    |       | —     |       |                                    | —     |   |   |
| Fair value of positions held for purposes other than trading:                   |       |                  |       |                                      |       |       |       |                                    |       |   |   |
| Gross positive fair value                                                       |       | 45,435                |       | 5,721                                     |       | 44,720     |       |                                    | 38,999     |   |   |
| Gross negative fair value                                                       |       | 15,462                |       | 55,943                                    |       | 37,682     |       |                                    | (18,261    | ) |   |
| Positive (Negative)  Fair value of positions, net                               |       | $                     | 29,973     |                                      | $          | (50,222    | )          | $                                       | 7,038      |   |   | $ | 57,260 |   |   |

 

F-35

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*Trading Activities*

We enter into trading account activities primarily asa financial intermediary for customers and, to a minor extent, for our ownaccount. By acting as a financial intermediary, we are able to provide ourcustomers with access to a range of products from the securities, foreignexchange, and derivatives markets. In acting for our own account, we may takepositions in certain securities and foreign exchange instruments, subject tovarious limits in amount, tenor and other respects, with the objective ofgenerating trading profits.

We believe that the risks associated with thesepositions are conservatively managed. We utilize a combination of positionlimits and stop-loss limits, applied at an aggregated level and to varioussub-components within those limits. Our Market Risk Monitoring group preparesdaily reports for broad distribution on positions, profit and loss, andmark-to-market valuations. Summary versions of these reports go to seniormanagement on a daily or weekly basis and to ALCO on a monthly basis. Positionsare controlled and reported both in notional and Value-at-Risk (VaR) terms. Ourcalculation of VaR estimates how high the loss in fair value might be, at a 99percent confidence level, due to an adverse shift in market prices over aperiod of ten business days. VaR at the trading activity level is managedwithin limits well below the maximum limit established by Board policy fortotal trading positions at 0.5 percent of stockholders’ equity. The VaR modelincorporates assumptions on key parameters, including holding period andhistorical volatility.

Thefollowing table sets forth the average, high and low VaR for our tradingactivities for the years ended December 31, 2005 and 2006. The increase inthe FX VaR is due to the impact of the tax accounting treatment for overseasbranch allocations of the gain from the sale of the International Banking Groupand the holdings of the Yen, Won and Taiwanese Dollar.

| ** **                           | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Average**                     | ** ** | **High**                        | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** |
| **(Dollars in thousands)** | ** ** | **VaR**                         | ** ** | **VaR**                         | ** ** | **VaR** | ** ** | **VaR** | ** ** | **VaR** | ** ** | **VaR** | ** ** |
| Foreign exchange                     |       |                            | $          | 177                             |       |   | $ | 533 |   | $ | 53 |   |   | $ | 3,590 |   |   | $ | 6,774 |   | $ | 93 |   |
| Securities                           |       |                            | 384        |                            |       | 720 |   | 215 |   |   | 528 |   |   | 986 |   | 209 |   |
|                                      |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Consistent with our business strategy of focusing onthe sale of capital markets products to customers, we manage our trading riskexposures at relatively low levels. Our foreign exchange business continues toderive the majority of its revenue from customer-related transactions. We takeinter-bank trading positions only on a limited basis and we do not take anylarge or long-term strategic positions in the market for our own portfolio.  Similarly, we continue to generate most of oursecurities trading income from customer-related transactions.

Our interest rate derivative contracts included, as ofDecember 31, 2006, approximately $5.1 billion notional amount ofderivative contracts entered into as an accommodation for customers. We act asan intermediary and match these contracts, at a credit spread, to contractswith major dealers, thus neutralizing the related market risk on all customertransactions.

We market energy derivativescontracts to existing energy industry customers, primarily oil and gasproducers, in order to meet their hedging needs. Volume increased from $1.5 billionin notional amount of contracts outstanding at December 31, 2005 to $3.3billion notional amount at December 31, 2006. Consistent with our customerinterest rate derivatives business, all transactions are fully matched toremove our exposure to market risk, with income earned on the credit spread. Foradditional discussion of derivative instruments, see Note 19 to ourConsolidated Financial Statements included in this Annual Report.

F-36

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**Liquidity Risk**

Liquidity risk is the undue risk to the Bank’s earningsand capital, which would result from the Bank’s inability to meet itsobligations as they come due without incurring unacceptable costs. Themanagement of liquidity risk is governed by the ALM Policy under the oversightof ALCO. Liquidity is managed using a total balance sheet perspective thatanalyzes both funding capacity available through increased liabilities andliquidation of assets relative to projected demands for liquidity. The primarysources of liquidity are core deposits, asset liquidation, including securitiessold under repurchase agreements, and wholesale funding, which includes fundsraised from interbank and other sources, both domestic and offshore. TheTreasurer is responsible for operating management of liquidity through thefunding and investment functions of Corporate Treasury. ALCO also maintains aLiquidity Contingency Plan, the objective of which is to identify actions to betaken to ensure adequate liquidity if an event should occur that disrupts oradversely affects the Bank’s normal funding activities.

Core deposits provide us with a sizable source ofrelatively stable and low-cost funds. Our $34.5 billion in average coredeposits, which includes demand deposits, money market demand accounts, savingsand consumer time deposits, combined with average common stockholders’ equity,funded over 78 percent of average total assets of approximately $50 billion in2006. Most of the remaining funding was provided by short-term borrowings inthe form of certificates of deposit, large time deposits, federal fundspurchased, securities sold under repurchase agreements, commercial paper, andother borrowings.

Our securities portfolio provides additionalenhancement to our liquidity position, which may be created through eithersecurities sales or repurchase agreements. At December 31, 2006, we couldhave sold or transferred under repurchase agreements approximately $4.5 billionof our available for sale securities. Liquidity may also be provided by thesale or maturity of other assets such as interest-bearing deposits in banks,federal funds sold and trading account securities. The aggregate balance ofthese assets averaged $0.9 billion in 2006. Additional liquidity may beprovided through loan maturities and sales.

In 2006,Union Bank of California initiated a $4 billion Bank Note program and issued$700 million principal amount of ten-year, fixed rate subordinated notesleaving $3.3 billion of funding available for issuance of debt securities. Inaddition to the funding provided by our bank subsidiary, we raise funds at theholding company level. UnionBanCal Corporation has in place a shelfregistration with the Securities and Exchange Commission (SEC) permitting readyaccess to the public debt markets. As of December 31, 2006, $600 millionof debt or other securities were available for issuance under this shelfregistration. These sources, in addition to our core deposit and equitycapital, provide a stable funding base, although we do not have firmcommitments in place to sell securities under the note program or the shelfregistration. Management does not rely on any one source of liquidity andmanages availability in response to changing balance sheet needs. The costs andability to raise funds are directly impacted by our credit ratings. The followingtable provides our credit ratings as of December 31, 2006.

|                                 | ** ** | ** ** | ** ** | **Union Bank of**    | ** ** | **UnionBanCal** | ** ** |
|---------------------------------|------------|------------|------------|----------------------|------------|-----------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **California, N.A.** | ** ** | **Corporation** | ** ** |
| Standard & Poor’s |       | Long-term  |       |                 | A+         |            |       |   | A |   |   |
|                                 |       | Short-term |       |                 | A-1        |            |       |   | A-1 |   |   |
| Moody’s                    |       | Long-term  |       |                 | A1         |            |       |   | A2 |   |   |
|                            |       | Short-term |       |                 | P-1        |            |       |   | P-1 |   |   |
| Fitch                           |       | Long-term  |       |                 | A+         |            |       |   | A+ |   |   |
|                                 |       | Short-term |       |                 | F1         |            |       |   | F1 |   |   |

 

**Off-Balance SheetArrangements and Aggregate Contractual Obligations and Commitments**

Off-balance sheet arrangements are any contractualarrangement to which an unconsolidated entity is a party, under which wehave:  (1) any obligation under aguarantee contract; (2) a retained or contingent 

F-37

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interest in assets transferredto an unconsolidated entity or similar arrangement that serves as credit,liquidity or market risk support to that entity for such assets; (3) anyobligation under certain derivative instruments; or (4) any obligationunder a material variable interest held by us in an unconsolidated entity thatprovides financing, liquidity, market risk or credit risk support to us, orengages in leasing, hedging or research and development services with us.

Our most significant off-balance sheet arrangementsare limited to obligations under guarantee contracts such as financial andperformance standby letters of credit for our credit customers, commercialletters of credit, unfunded commitments to lend, commitments to sell mortgageloans and commitments to fund investments in various CRA related investmentsand venture capital investments. To a lesser extent, we enter into contractualguarantees of agented sales of low income housing tax credit investments thatrequire us to perform under those guarantees if there are breaches of performanceof the underlying income-producing properties. As part of our leasingactivities, we may be lessor to special purpose entities to which we providefinancing for large equipment leasing projects.

It is our belief that none of these arrangementsexpose us to any greater risk of loss than is already reflected on our balancesheet. We do not have any off-balance sheet arrangements in which we have anyretained or contingent interest (as we do not transfer or sell our assets toentities in which we have a continuing involvement), any exposure to derivativeinstruments that are indexed to our stock, nor any variable interests in anyunconsolidated entity to which we may be a party, except for those leasingarrangements described previously.

Thefollowing table presents, as of December 31, 2006, our significant anddeterminable contractual obligations by payment date, except for obligationsunder our pension and postretirement plans, which are included in Note 9 to ourConsolidated Financial Statements included in this Annual Report, and accruedinterest payable, which is not significant. The payment amounts represent thoseamounts contractually due to the recipient and do not include any unamortizedpremiums or discounts, hedge basis adjustment or other similar carrying valueadjustments.

| ** **                                                    | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | ** **                      | ** ** | **Over** | ** ** | **Over** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | ** **                      | ** ** | **One Year** | ** ** | **Three Years** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **One Year**               | ** ** | **through** | ** ** | **through** | ** ** | **Over Five** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                          | ** ** | **or less**                | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Years** | ** ** | **Total** | ** ** |
| Time deposits                                                 |       | $                               | 9,189,533  |   | $ | 304,842 |   | $ | 81,857 |   | $ | 3,636 |   | $ | 9,579,868 |   |
| Long-term debt                                                |       | 200,000                         |       | — |   | — |   | 1,100,000 |   | 1,300,000 |   |
| Junior subordinated  debt payable to subsidiary grantor trust |       | —                          |       | — |   | — |   | 13,000 |   | 13,000 |   |
| Other long-term  liabilities                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Operating leases (premises)                                   |       | 54,270                          |       | 102,922 |   | 79,890 |   | 88,120 |   | 325,202 |   |
| Purchase obligations                                          |       | 34,602                          |       | 27,531 |   | — |   | — |   | 62,133 |   |
| Total debt and  operating leases                              |       | $                               | 9,478,405  |   | $ | 435,295 |   | $ | 161,747 |   | $ | 1,204,756 |   | $ | 11,280,203 |   |

 

Purchase obligations include any legally bindingcontractual obligations that require us to spend more than $1,000,000 annuallyunder the contract. Payments are shown through the date of contract termination.Purchase obligations in the table above include purchases of hardware, softwarelicenses and printing. For information regarding our sources of liquidity tomeet these obligations, see “Liquidity Risk” in the preceding section.

F-38

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**Thefollowing table presents our significant commitments to fund as of December 31,2006.**

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**       | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Commitments to extend  credit              |       | $                     | 20,287,320 |   | $ | 22,738,185 |   |
| Standby letters of  credit                 |       | 3,549,389             |       | 3,574,934 |   |
| Commercial letters of  credit              |       | 98,375                |       | 59,254 |   |
| Commitments to fund  principal investments |       | 110,150               |       | 87,413 |   |
|                                            |            |                       |            |  |  |  |  |

 

Commitments to extend credit are legally bindingagreements to lend to a customer provided there are no violations of anycondition established in the contract. Commitments have fixed expiration datesor other termination clauses and may require maintenance of compensatorybalances. Since many of the commitments to extend credit may expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash-flow requirements.

Standby and commercial letters of credit areconditional commitments issued to guarantee the performance of a customer to athird party. Standby letters of credit generally are contingent upon thefailure of the customer to perform according to the terms of the underlyingcontract with the third party, while commercial letters of credit are issuedspecifically to facilitate foreign or domestic trade transactions. The majorityof these types of commitments have terms of one year or less. At December 31,2006, the carrying value of our standby and commercial letters of credittotaled $6.7 million. Exposure to loss related to these commitments is coveredby the allowance for losses on off-balance sheet commitments. The carryingvalue of the standby and commercial letters of credit and the allowance forlosses on off-balance sheet commitments are included in other liabilities onour consolidated balance sheet. In addition, at December 31, 2006, ourmaximum exposure to loss for standby and commercial letters of credit relatedto discontinued operations had declined to $0.1 million, with no correspondingcarrying value of these standby and commercial letters of credit.

The credit risk involved in issuing loan commitmentsand standby and commercial letters of credit is essentially the same as thatinvolved in extending loans to customers and is represented by the contractualamount of these instruments. Collateral may be obtained based on management’scredit assessment of the customer.

Principal investments include direct investments inprivate and public companies and indirect investments in private equity funds. Weissue commitments to provide equity and mezzanine capital financing to privateand public companies through either direct investments in specific companies orthrough investment funds and partnerships. The timing of future cash requirementsto fund such commitments is generally dependent on the investment cycle. Thiscycle, the period over which privately-held companies are funded by privateequity investors and ultimately sold, merged, or taken public through aninitial offering, can vary based on overall market conditions as well as thenature and type of industry in which the companies operate.

We are fund manager for limited liability companiesissuing low-income housing credit (LIHC) investments. LIHC investments providetax benefits to investors in the form of tax deductions from operating lossesand tax credits. To facilitate the sale of these LIHC investments, we guaranteethe timely completion of projects and delivery of tax benefits throughout theinvestment term. Guarantees may include a minimum rate of return, theavailability of tax credits, and operating deficit thresholds over aneleven-year weighted average period. Additionally, we receive projectcompletion and tax credit guarantees from the limited liability companiesissuing the LIHC investments that reduce our ultimate exposure to loss. As of December 31,2006, our maximum exposure to loss under these guarantees is limited to areturn of investor capital and minimum investment yield, or $146.7 million. Wemaintain a reserve of $6.0 million for these guarantees.

F-39

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We have guarantees thatobligate us to perform if our affiliates are unable to discharge theirobligations. These obligations include guarantees of commercial paperobligations and leveraged lease transactions. The guarantee issued by UnionBank of California, N.A. for an affiliate’s commercial paper program is done inorder to facilitate the sale of the commercial paper. As of December 31,2006, we had a maximum exposure to loss under the commercial paper programguarantee of $1.7 billion. Our guarantee has an average term of less than ninemonths and is fully collateralized by a pledged deposit. We guarantee oursubsidiaries’ leveraged lease transactions with terms ranging from fifteen tothirty years. Following the original funding of these leveraged leasetransactions, we have no material obligation to be satisfied. As ofDecember 31, 2006, we had no exposure to loss for these agreements.

We conduct securities lendingtransactions for institutional customers as a fully disclosed agent. At times,securities lending indemnifications are issued to guarantee that a securitylending customer will be made whole in the event the borrower does not returnthe security subject to the lending agreement and collateral held isinsufficient to cover the market value of the security. All lendingtransactions are collateralized, primarily by cash. The amount of securitieslent with indemnifications was $2.0 billion and $2.2 billion atDecember 31, 2005 and 2006, respectively. The market value of theassociated collateral was $2.0 billion and $2.3 billion at December 31,2005 and 2006, respectively.

We occasionally enter intofinancial guarantee contracts where a premium is received from anotherfinancial institution counterparty to guarantee a portion of the credit risk oninterest rate swap contracts entered into between the financial institution andits customer. We become liable to pay the financial institution only if thefinancial institution is unable to collect amounts owed to them by theircustomer. As of December 31, 2006, the maximum exposure to loss underthese contracts totaled $10.0 million. At December 31, 2006, we maintaineda reserve of $0.1 million for losses related to these guarantees.

**Business Segments**

During 2006, we formallyreorganized our operating segments by disaggregating the businesses that wereformerly managed and reported under the Community Banking and InvestmentServices Group or the Commercial Financial Services Group. We believe that thisnew organizational structure will enhance our focus on target markets andenterprise wide sales and service. The various operating segments reportingunder our Chief Operating Officer and the Group Head of Pacific Rim CorporateGroup have been aggregated into two reportable business segments entitled “RetailBanking” and “Wholesale Banking” based upon the aggregation criteria prescribedin SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”

The risk-adjusted return oncapital (RAROC) methodology used seeks to attribute economic capital tobusiness units consistent with the level of risk they assume. These risks areprimarily credit, market and operational. Credit risk is the potential loss ineconomic value due to the likelihood that the obligor will not perform asagreed. Market risk is the potential loss in fair value due to changes ininterest rates, currency rates and equity prices. Operational risk is thepotential loss due to all other factors, such as failures in internal control,system failures, or external events. RAROC is one of several measures that isused to measure business unit compensation. 

The tables that follow reflectthe condensed income statements, selected average balance sheet items, andselected financial ratios, including changes from the prior year, for each ofour reportable business segments. The information presented does notnecessarily represent the businesses’ financial condition and results ofoperations as if they were independent entities. In 2006, we changed ourreporting to reflect a “market view” perspective in measuring our operatingsegments. The market view is a measurement of our customer markets aggregatedto show all revenues generated and expenses incurred from all products andservices sold to those customers regardless of where product areasorganizationally report. Therefore, revenues and expenses are included in boththe operating segment that provides the service and the operating segment thatmanages the customer relationship. The duplicative results from this internalmanagement accounting view are reflected in “Reconciling Items.” The marketview approach fosters 

F-40

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cross-sellingwith a total profitability view of the products and services being managed. Forexample, the Securities Trading and Sales unit within the Global Markets Divisionis a business unit that manages the fixed income securities activities for allretail and corporate customers throughout the Bank. This unit retains and alsoallocates revenues and expenses to divisions responsible for such retail andcommercial customer relationships.

Unlike financial accounting,there is no authoritative body of guidance for management accounting equivalentto US GAAP. Consequently, reported results are not necessarily comparable withthose presented by other companies.

The RAROC measurementmethodology recognizes credit expense for expected losses arising from creditrisk and attributes economic capital related to unexpected losses arising fromcredit, market and operational risks. As a result of the methodology used bythe RAROC model to calculate expected losses, differences between the provisionfor credit losses and credit expense in any one period could be significant.

However, over an economiccycle, the cumulative provision for credit losses and credit expense forexpected losses should be substantially the same. Business unit results arebased on an internal management reporting system used by management to measurethe performance of the units and UnionBanCal Corporation as a whole. Ourmanagement reporting system identifies balance sheet and income statement itemsfor each business unit based on internal management accounting policies. Netinterest income is determined using our internal funds transfer pricing system,which assigns a cost of funds to assets or a credit for funds to liabilitiesand capital, based on their type, maturity or repricing characteristics. Noninterestincome and expense directly or indirectly attributable to a business unit areassigned to that business. The business units are assigned the costs of productsand services directly attributable to their business activity through standardunit cost accounting based on volume of usage. All other corporate expenses(overhead) are allocated to the business units based on a predeterminedpercentage of usage. 

The reportable businesssegment results for the prior periods have been adjusted to reflect changes inthe transfer pricing methodology, the organizational changes that haveoccurred, our discontinued operations and the market view contribution.

F-41

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| ** **                                                                                      | ** ** | **Retail Banking**                             | ** ** | ** **                  | ** ** | ** **                                          | ** ** | **Wholesale Banking**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                      | ** ** | **As of and for the Year** | ** ** | **2006 vs. 2005** | ** ** | **As of and for the Year** | ** ** | **2006 vs. 2005** | ** ** |
| ** **                                                                                      | ** ** | **Ended December 31,**                    | ** ** | **Increase/(decrease)**     | ** ** | **Ended December 31,**                    | ** ** | **Increase/(decrease)**     | ** ** |
| ** **                                                                                      | ** ** | **2004**                                            | ** ** | **2005**                    | ** ** | **2006**                                            | ** ** | **Amount**                  | ** ** | **Percent** | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results  of operations after performance center earnings (dollars in  thousands):** | ** ** | ** **                                          | ** ** | ** **                  | ** ** | ** **                                          | ** ** | ** **                  | ** ** |        | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                                                  |       | $                                                   | 718,019    |                        | $          | 890,400                                             |       | $                           | 948,356    |        | $          | 57,956     |       |   | 7 | % |   | $ | 812,866 |   | $ | 997,414 |   | $ | 1,039,706 |   | $ | 42,292 |   |   | 4 | % |   |
| Noninterest income  (expense)                                                                   |       | 465,139                                             |       | 487,725                     |       | 520,736                                             |       | 33,011                      |       |        | 7          |       |       | 417,794 |   | 432,304 |   | 417,757 |   | (14,547 | ) |   | (3 | ) |   |
| Total revenue                                                                                   |       | 1,183,158                                           |       | 1,378,125                   |       | 1,469,092                                           |       | 90,967                      |       |        | 7          |       |       | 1,230,660 |   | 1,429,718 |   | 1,457,463 |   | 27,745 |   |   | 2 |   |   |
| Noninterest expense  (income)                                                                   |       | 851,537                                             |       | 911,218                     |       | 976,091                                             |       | 64,873                      |       |        | 7          |       |       | 570,657 |   | 638,240 |   | 679,437 |   | 41,197 |   |   | 6 |   |   |
| Credit expense  (income)                                                                        |       | 24,017                                              |       | 25,649                      |       | 25,416                                              |       | (233                        | )          |        | (1         | )          |       | 118,351 |   | 106,480 |   | 95,229 |   | (11,251 | ) |   | (11 | ) |   |
| Income from continuing  operations before income  taxes                                    |       | 307,604                                             |       | 441,258                     |       | 467,585                                             |       | 26,327                      |       |        | 6          |       |       | 541,652 |   | 684,998 |   | 682,797 |   | (2,201 | ) |   | 0 |   |   |
| Income tax expense  (income)                                                                    |       | 117,658                                             |       | 168,781                     |       | 178,851                                             |       | 10,070                      |       |        | 6          |       |       | 179,900 |   | 233,184 |   | 224,225 |   | (8,959 | ) |   | (4 | ) |   |
| Income from continuing  operations                                                              |       | 189,946                                             |       | 272,477                     |       | 288,734                                             |       | 16,257                      |       |        | 6          |       |       | 361,752 |   | 451,814 |   | 458,572 |   | 6,758 |   |   | 1 |   |   |
| Income (loss) from  discontinued operations, net of income  taxes                               |       | —                                              |       | —                      |       | —                                              |       | —                      |       |        | na         |       |       | — |   | — |   | — |   | — |   |   | na |   |   |
| Net income (loss)                                                                               |       | $                                                   | 189,946    |                        | $          | 272,477                                             |       | $                           | 288,734    |        | $          | 16,257     |       |   | 6 |   |   | $ | 361,752 |   | $ | 451,814 |   | $ | 458,572 |   | $ | 6,758 |   |   | 1 |   |   |
| **Average  balances (dollars in  millions):**                                                   |       |                                                |       |                        |       |                                                |       |                        |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans(1)                                                                                  |       | $                                                   | 11,808     |                        | $          | 14,234                                              |       | $                           | 15,683     |        | $          | 1,449      |       |   | 10 |   |   | $ | 13,997 |   | $ | 17,153 |   | $ | 19,993 |   | $ | 2,840 |   |   | 17 |   |   |
| Total assets                                                                                    |       | 12,706                                              |       | 15,131                      |       | 16,538                                              |       | 1,407                       |       |        | 9          |       |       | 17,014 |   | 21,260 |   | 24,688 |   | 3,428 |   |   | 16 |   |   |
| Total deposits(1)                                                                               |       | 18,972                                              |       | 19,833                      |       | 18,993                                              |       | (840                        | )          |        | (4         | )          |       | 16,469 |   | 18,392 |   | 18,450 |   | 58 |   |   | 0 |   |   |
| **Financial  ratios:**                                                                          |       |                                                |       |                        |       |                                                |       |                        |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk adjusted return  on capital                                                                |       | 34                                                  | %          | 45                          | %          | 44                                                  | %          |                        |       |        |       |       |       | 21 | % | 23 | % | 22 | % |   |   |   |   |   |   |
| Return on average  assets                                                                       |       | 1.49                                                |       | 1.80                        |       | 1.75                                                |       |                        |       |        |       |       |       | 2.13 |   | 2.13 |   | 1.86 |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                                             |       | 71.97                                               |       | 66.12                       |       | 66.44                                               |       |                        |       |        |       |       |       | 46.28 |   | 45.04 |   | 47.67 |   |   |   |   |   |   |   |

 

| ** **                                                                                | ** ** | **Other**                                           | ** ** | ** **                  | ** ** | ** **                                          | ** ** | **Reconciling Items** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                | ** ** | **As of and for the Year** | ** ** | **2006 vs. 2005** | ** ** | **As of and for the Year** | ** ** |
| ** **                                                                                | ** ** | **Ended December 31,**                    | ** ** | **Increase/(decrease)**     | ** ** | **Ended December 31,**                    | ** ** |
| ** **                                                                                | ** ** | **2004**                                            | ** ** | **2005**                    | ** ** | **2006**                                            | ** ** | **Amount**                 | ** ** | **Percent** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results  of operations after performance center earnings (dollars in thousands):** | ** ** | ** **                                          | ** ** | ** **                  | ** ** | ** **                                          | ** ** | ** **                 | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income  (expense)                                                            |       | $                                                   | 94,640     |                        | $          | (45,480                                             | )          | $                          | (140,247   | ) | $ | (94,767 | ) |   | 208 | % |   | $ | (1,509 | ) | $ | (3,220 | ) | $ | (9,660 | ) |
| Noninterest income  (expense)                                                             |       | 87,773                                              |       | (48,419                     | )          | 13,409                                              |       | 61,828                     |       |   | 128 |   |   | (57,883 | ) | (66,823 | ) | (73,403 | ) |
| Total revenue                                                                             |       | 182,413                                             |       | (93,899                     | )          | (126,838                                            | )          | (32,939                    | )          |   | (35 | ) |   | (59,392 | ) | (70,043 | ) | (83,063 | ) |
| Noninterest expense  (income)                                                             |       | 83,361                                              |       | 95,208                      |       | 74,724                                              |       | (20,484                    | )          |   | (22 | ) |   | (31,966 | ) | (37,420 | ) | (43,964 | ) |
| Credit expense  (income)                                                                  |       | (188,020                                            | )          | (182,580                    | )          | (125,550                                            | )          | 57,030                     |       |   | 31 |   |   | (105 | ) | (232 | ) | (95 | ) |
| Income from continuing  operations before income taxes                                    |       | 287,072                                             |       | (6,527                      | )          | (76,012                                             | )          | (69,485                    | )          |   | (1,065 | ) |   | (27,321 | ) | (32,391 | ) | (39,004 | ) |
| Income tax expense  (income)                                                              |       | 111,825                                             |       | (32,877                     | )          | (116,534                                            | )          | (83,657                    | )          |   | (254 | ) |   | (10,450 | ) | (12,390 | ) | (14,919 | ) |
| Income from continuing  operations                                                        |       | 175,247                                             |       | 26,350                      |       | 40,522                                              |       | 14,172                     |       |   | 54 |   |   | (16,871 | ) | (20,001 | ) | (24,085 | ) |
| Income (loss) from  discontinued operations, net of income taxes                     |       | 22,460                                              |       | 132,293                     |       | (10,747                                             | )          | (143,040                   | )          |   | (108 | ) |   | — |   | — |   | — |   |
| Net income (loss)                                                                         |       | $                                                   | 197,707    |                        | $          | 158,643                                             |       | $                          | 29,775     |   | $ | (128,868 | ) |   | (81 | ) |   | $ | (16,871 | ) | $ | (20,001 | ) | $ | (24,085 | ) |
| **Average  balances (dollars in millions):**                                              |       |                                                |       |                        |       |                                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total loans(1)                                                                            |       | $                                                   | 258        |                        | $          | 85                                                  |       | $                          | 49         |   | $ | (36 | ) |   | (42 | ) |   | (15 | ) | (20 | ) | (21 | ) |
| Total assets                                                                              |       | 13,459                                              |       | 11,246                      |       | 8,791                                               |       | (2,455                     | )          |   | (22 | ) |   | (20 | ) | (26 | ) | (25 | ) |
| Total deposits(1)                                                                         |       | 594                                                 |       | 1,446                       |       | 3,255                                               |       | 1,809                      |       |   | 125 |   |   | (28 | ) | (127 | ) | (577 | ) |
| **Financial  ratios:**                                                                    |       |                                                |       |                        |       |                                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Risk adjusted return  on capital                                                          |       | na                                                  |       | na                          |       | na                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Return on average  assets                                                                 |       | na                                                  |       | na                          |       | na                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                                       |       | na                                                  |       | na                          |       | na                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |

 

| ** **                                                                           | ** ** | **UnionBanCal**                                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                                           | ** ** | **Corporation**                                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                                                           | ** ** | **As of and for the Year** | ** ** | **2006 vs. 2005** | ** ** |
| ** **                                                                           | ** ** | **Ended December 31,**                    | ** ** | **Increase/(decrease)**     | ** ** |
| ** **                                                                           | ** ** | **2004**                                            | ** ** | **2005**                    | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results  of operations after performance center earnings (dollars in thousands):** | ** ** | ** **                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                                       |       | $                                                   | 1,624,016  |                        | $          | 1,839,114  |       | $ | 1,838,155 |   | $ | (959 | ) |   | 0 | % |   |
| Noninterest income  (expense)                                                        |       | 912,823                                             |       | 804,787                     |       | 878,499    |       | 73,712 |   |   | 9 |   |   |
| Total revenue                                                                        |       | 2,536,839                                           |       | 2,643,901                   |       | 2,716,654  |       | 72,753 |   |   | 3 |   |   |
| Noninterest expense  (income)                                                        |       | 1,473,589                                           |       | 1,607,246                   |       | 1,686,288  |       | 79,042 |   |   | 5 |   |   |
| Credit expense  (income)                                                             |       | (45,757                                             | )          | (50,683                     | )          | (5,000     | )          | 45,683 |   |   | 90 |   |   |
| Income from continuing  operations before income taxes                               |       | 1,109,007                                           |       | 1,087,338                   |       | 1,035,366  |       | (51,972 | ) |   | (5 | ) |   |
| Income tax expense  (income)                                                         |       | 398,933                                             |       | 356,698                     |       | 271,623    |       | (85,075 | ) |   | (24 | ) |   |
| Income from continuing  operations                                                   |       | 710,074                                             |       | 730,640                     |       | 763,743    |       | 33,103 |   |   | 5 |   |   |
| Income (loss) from  discontinued operations, net of income taxes                     |       | 22,460                                              |       | 132,293                     |       | (10,747    | )          | (143,040 | ) |   | (108 | ) |   |
| Net income (loss)                                                                    |       | $                                                   | 732,534    |                        | $          | 862,933    |       | $ | 752,996 |   | $ | (109,937 | ) |   | (13 | ) |   |
| **Average  balances (dollars in millions):**                                         |       |                                                |       |                        |       |       |       |   |   |   |   |   |   |
| Total loans(1)                                                                       |       | $                                                   | 26,048     |                        | $          | 31,452     |       | $ | 35,704 |   | $ | 4,252 |   |   | 14 |   |   |
| Total assets                                                                         |       | 43,159                                              |       | 47,611                      |       | 49,992     |       | 2,381 |   |   | 5 |   |   |
| Total deposits(1)                                                                    |       | 36,007                                              |       | 39,544                      |       | 40,121     |       | 577 |   |   | 1 |   |   |
| **Financial  ratios:**                                                               |       |                                                |       |                        |       |       |       |   |   |   |   |   |   |
| Risk adjusted return  on capital                                                     |       | na                                                  |       | na                          |       | na         |       |   |   |   |   |   |   |
| Return on average  assets                                                            |       | 1.65                                                | %          | 1.53                        | %          | 1.53       | %          |   |   |   |   |   |   |
| Efficiency ratio(2)                                                                  |       | 57.95                                               |       | 60.75                       |       | 62.67      |       |   |   |   |   |   |   |

----

(1)                    Represents loans and deposits for each business segmentafter allocation between the segments of loans and deposits originated in onesegment but managed by another segment.

(2)                    The efficiency ratio is noninterest expense, excludingforeclosed asset expense (income) and the provision for losses on off-balancesheet commitments, as a percentage of net interest income and noninterestincome.

na = not applicable

F-42

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*Retail Banking*

Retail Banking provides financial products includingcredit, deposit, trust, investment management and risk management deliveredthrough our branches, relationship managers, private bankers and trustadministrators, to individuals, small businesses and institutional clients. Retailbanking is focused on executing a segment based strategy that will identifytargeted opportunities within the consumer and small business markets, anddevelop product, marketing and sales strategies to attract new customers inthese identified target markets. While the primary focus of Retail Banking’ssegment based strategy is deposit growth, an additional focus continues to beconsumer and small business loan generation.

During 2006, net income of Retail Banking increased by6 percent, compared to 2005, reflecting this segment’s continued focus onattracting consumer and small business deposits and growing the consumer assetportfolio. Net interest income increased by 7 percent during 2006, compared to2005, primarily due to higher transfer pricing credits received on deposits.

Asset growth for 2006 primarily reflects an increasedemphasis on real estate-secured loans and a network of residential real estatebrokers. Additionally, the focus on home equity loans and more effectivecross-selling efforts have led to an overall growth in consumer loans.

Average total deposits declined 4 percent in 2006,compared to 2005 primarily from increased competition for interest bearingdeposits. Despite the 2006 decline in average deposits, Retail Banking’scustomer segmentation strategy continues to focus on attracting consumer andsmall business deposits through marketing activities, increasing customercross-sell, relationship management, increasing and improving sales resources,establishing new locations and new products. We expect that a larger branchnetwork, created from new and acquired branches, will improve growth prospectswhen combined with more robust efforts in the telephone and internet channels.

Of the 7 percent increase in noninterest income for2006, compared to 2005, trust fees contributed 4 percent of the growth,primarily due to growth in trust assets and a refinement in accrual methodology.In addition, deposit and interchange fees contributed 1 percent to theincrease.

The 7 percent increase in noninterest expenses during2006, compared to 2005, was mainly due to higher staff expenses, as well ashigher compliance related activities.

*Retail Banking  *is comprised of thefollowing major divisions: Retail Banking Branches, Consumer Asset Management,Wealth Management and Institutional Services and Asset Management.

·       *Retail Banking Branches* serves its customers through 317full-service branches in California, 4 full-service branches in Oregon andWashington and 2 international offices. We own property occupied by 102 of thedomestic offices and lease the remaining properties for periods of five totwenty years. Customers also access our services 24 hours a day by telephone orthrough our website at www.unionbank.com. In addition, the branches offerautomated teller and point-of-sale merchant services.

Retail Banking Branches is organized geographically. Weserve our customers in the following ways:

—              throughconveniently located banking branches, which serve consumers and businesseswith checking and deposit services, as well as various types of consumerfinancing and investment services;

—              throughour internet banking services, which augment our physical delivery channels byproviding an array of customer transaction, bill payment and loan paymentservices;

—              throughbusiness banking centers, which serve small businesses; and

—              throughin-store branches.

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·       *Consumer Asset Management* provides the centralized origination, underwriting, processing,servicing, collection and administration for consumer assets includingresidential mortgages.

Through alliances with other financial institutions,Consumer Asset Management offers additional products and services, such ascredit cards and merchant bank cards.

Our Retail Banking Branches and Consumer AssetManagement divisions compete with larger banks by attempting to provide servicequality superior to that of our major competitors. The primary means ofcompeting with community banks include our branch network and our technology todeliver banking services. We also offer convenient banking hours to consumersthrough our drive-through banking locations and selected branches that are openseven days a week.

These divisions competewith a number of commercial banks, internet banks, savings associations andcredit unions, as well as more specialized financial service providers such asinvestment brokerage companies, consumer finance companies, and residentialreal estate lenders.

·       *Wealth Management* provides comprehensive private banking services to our affluentclientele. The Private Bank focuses primarily on delivering financial servicesto high net worth individuals with sophisticated financial needs as well as toprofessional service firms. Specific products and services include trust andestate services, investment account management services, and deposit and creditproducts. A key strategy of The Private Bank is to expand its business byleveraging existing Bank client relationships. Through 15 existing locations,The Private Bank relationship managers offer all of our available products andservices.

·       *Institutional Services and Asset Management* provides investmentmanagement and administration services for a broad range of individuals andinstitutions.

—              HighMarkCapital Management, Inc., a registered investment advisor, providesinvestment management and advisory services to institutional clients as well asinvestment advisory, administration and support services to our proprietarymutual funds, the affiliated HighMark Funds. It also provides investmentmanagement services to Union Bank of California, N.A. with respect to most ofits trust and agency clients, including corporations, pension funds andindividuals. HighMark Capital Management, Inc.’s strategy is to broadenits client base and to increase the assets of the HighMark Funds.

—              InstitutionalServices provides custody, corporate trust, and retirement plan services. CustodyServices provides both domestic and international safekeeping/settlementservices in addition to securities lending. Corporate Trust acts as trustee forcorporate and municipal debt issues, provides escrow services and trusteeservices for project finance. Retirement Services provides a full range ofdefined benefit and defined contribution administrative services, includingtrustee services, administration, investment management, and 401(k) valuationservices. The client base of Institutional Services includes financialinstitutions, corporations, government agencies, unions, insurance companies,mutual funds, investment managers and non-profit organizations. InstitutionalServices’ strategy is to continue to leverage and expand its position in ourtarget markets.

*Wholesale Banking*

Wholesale Banking offers financing, depository, cashmanagement and insurance services to middle market and large corporatebusinesses primarily headquartered in the western United States. WholesaleBanking continues to focus on specific geographic markets and industry segmentssuch as energy, entertainment, and real estate. Relationship managers providecredit services, including commercial loans, accounts receivable and inventoryfinancing, project financing, lease financing, trade financing and real estatefinancing. In addition to credit services, Wholesale Banking offers cashmanagement services 

F-44

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delivered through depositmanagers with significant industry expertise and experience in cash managementsolutions for businesses, U.S. correspondent banks and government entities, aswell as investment and risk management products.

During 2006, net income of Wholesale Banking increasedby 1 percent, compared to 2005, due to higher net interest income partiallyoffset by lower noninterest income and higher noninterest expense. Net interestincome increased by 4 percent during 2006, compared to the same period in 2005,primarily due to higher transfer pricing credits received on deposits andcontinued strong growth in loans.

During 2006, average loans increased by 17 percent, comparedto 2005. This was primarily due to increased commercial loan demand in the oiland gas and national corporate segments, as well as the California middlemarket. The construction loan portfolio also increased due to increased demandfor residential construction projects with apartment financing representing thelargest component.

Noninterest income decreased by 3 percent in 2006,compared to 2005, primarily due to lower deposit fees resulting from higherearnings credit rates on deposit balances. The increase in noninterest expensein 2006, compared to 2005, was mainly due to higher salaries andperformance-related incentive expense, including the impact of stock optionsand restricted stock expenses, which prior to 2006 were not included in resultsof the business units.

Wholesale Banking initiatives continue to includeexpanding deposit activities and loan strategies that include originating,underwriting and syndicating loans in core competency markets, such as theCalifornia middle-market, corporate banking, commercial real estate, energy,equipment leasing and commercial finance. Commercial Deposit and TreasuryManagement Division provides processing services, including services such asAutomated Clearing House (ACH), check processing, and cash vault services.

*WholesaleBanking  *is comprised of the following main divisions:

·       the*Commercial Banking Division*,which serves California middle-market and large corporate companies withcommercial lending, trade financing, and asset-based loans;

·       the*Real Estate Industries Division*,which provides real estate lending products such as construction loans,commercial mortgages and bridge financing;

·       the*Energy Capital Services Division*,which provides corporate financing and project financing to oil and gascompanies, as well as power and utility companies, nationwide;

·       the*Equipment Leasing Division*, whichprovides lease financing services to corporate customers nationwide;

·       the*National Banking**Division*, which provides financing,deposits and traditional banking services to corporate clients primarilyheadquartered outside California;

·       the*Commercial Deposit and Treasury ManagementDivision*, which provides deposit and cash management expertise tomiddle-market and large corporate clients, government agencies and specializedindustries. This division also manages Union Bank of California’s webstrategies for retail, small business, wealth management and commercialclients, as well as commercial product development;

·       the*Capital Markets**Division*, which provides financing tomiddle-market and large corporate clients in their defined industries andgeographic markets, together with limited merchant and investment bankingrelated products and services;

·       *Global Markets* serves our customers withtheir insurance, foreign exchange and interest rate risk management andinvestment needs. The Global Markets Division offers energy derivativecontracts, on a limited basis, to serve our energy sector client base. Thedivision takes market risk when buying and selling securities and foreignexchange contracts for its own account, but takes no 

F-45

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market risk when providinginsurance or derivative contracts, since the market risk for these products isoffset with third parties. The division also includes UnionBanc InvestmentServices LLC, which is a subsidiary of Union Bank of California;

·       *Insurance Services* products are soldthrough UnionBanc Insurance Services, Inc., the insurance agencysubsidiary of UBOC Insurance, Inc. UBOC Insurance, Inc. is asubsidiary of Union Bank of California; and

·       *Pacific Rim Corporate Group* offers a rangeof credit, deposit, and investment management products and services tocompanies in the U.S., which are affiliated with companies headquartered inJapan.

The main strategy of ourWholesale Banking business units is to target industries and companies forwhich we can reasonably expect to be one of a customer’s primary banks. Consistentwith this strategy, Wholesale Banking business units attempt to serve a largepart of the targeted customers’ credit and depository needs. The WholesaleBanking business units compete with other banks primarily on the basis of thequality of our relationship managers, the level of industry expertise, thedelivery of quality customer service, and our reputation as a “business bank.”We also compete with a variety of other financial services companies as well asnon-bank companies. Competitors include other major California banks, as wellas regional, national and international banks. In addition, we compete withinvestment banks, commercial finance companies, leasing companies and insurancecompanies.

*Other*

Net income decreased by $128.9 million in 2006 overthe same period in 2005 due to lower net interest income primarily related tothe net impact of funds transfer pricing and lower income from the ALMderivatives portfolio, the lower credit to loan loss provision in 2006 comparedto 2005 and the $147.4 million after-tax gain on sale of our correspondentbanking business in 2005. The decrease was partially offset by highernoninterest income resulting from a $50 million loss on the sale of governmentagency securities in 2005.

“Other” includes thefollowing items:

·       thefunds transfer pricing results for the entire company, which allocates to theother business segments their cost of funds on all asset categories and creditfor funds on all liability categories;

·       CorporateTreasury, which is responsible for our ALM, wholesale funding, and the ALMInvestment and derivatives hedging portfolios. These treasury managementactivities are carried out to counter-balance the residual risk positionsof our balance sheet and to manage those risks within the guidelinesestablished by ALCO. (For additional discussion regarding these risk managementactivities, see “Quantitative and Qualitative Disclosures About Market Risk”);

·       theadjustment between the credit expense under RAROC and the provision for creditlosses under US GAAP and earnings associated with unallocated equity capital;

·       theresidual costs of support groups;

·       corporateactivities that are not directly attributable to one of the two businesssegments. Included in this category are certainother items such as the results of operations of certain non-banksubsidiaries of UnionBanCal and the elimination of the fully taxable-equivalentbasis amount;

·       thediscontinued operations resulting from the sale of our internationalcorrespondent banking business; and

·       theadjustment between the tax expense calculated under RAROC using a tax rate of38.25 percent and our effective tax rates.

F-46

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The 2006 financial resultswere impacted by the following factors:

·       netinterest income is the result of differences between the net interest incomeearned by UnionBanCal and transfer pricing results, which include the creditfor equity for the reportable segments under RAROC. Net interest income(expense) declined $94.8 million to ($140.2) million compared to 2005 primarilydue to the net impact of changes in transfer pricing rates and lower income(higher expenses) from the ALM derivatives portfolios as market rates increased;

·       creditexpense (income) of ($125.6) million was due to the difference between the $5.0million reversal of allowance for loan losses calculated under our US GAAPmethodology and the $120.6 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       noninterestincome of $13.4 million;

·       noninterestexpense of $74.7 million related to residual costs of support groups andcorporate activities not directly related to either of the two businesssegments;

·       incometax expense (income) of ($116.5) million was due to the difference between the$271.6 million or a 26.23 percent effective tax rate for our consolidatedresults and the actual tax expense calculated for reportable segments of $388.1million using the RAROC effective rate;

·       lossfrom discontinued operations of $10.7 million.

The 2005 financialresults were impacted by the following factors:

·       netinterest income declined $140.1 million primarily as a result of the net impactof changes in transfer pricing rates over the prior year as market ratesincreased;

·       creditexpense (income) of ($182.6) million was due to the difference between the$50.7 million reversal of provision for loan losses calculated under our US GAAPmethodology and the $131.9 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       noninterestincome (expense) of ($48.4) million includes a $50.1 million loss on the saleof government agency securities resulting from restructuring our securitiesportfolio in 2005;

·       noninterest expense of$95.2 million related to residual costs of support groups and corporateactivities not directly related to either of the two business segments; and

·       income from discontinuedoperations, net of taxes of $132.3 million, included the after-tax gain on thesale of our international correspondent banking business of $147.4 million.

**Regulatory Matters**

In October 2004,Union Bank of California International entered into a written agreement withthe Federal Reserve Bank of New York relating to Union Bank of CaliforniaInternational’s Bank Secrecy Act and anti-money laundering controls andprocesses. Union Bank of California International, a wholly owned subsidiary ofUnion Bank of California, N.A., and an Edge Act subsidiary, is limited toengaging in international banking activities, most of which were sold in October 2005.We expect to dissolve this subsidiary in the first quarter of 2007. Althoughthe principal business activities of this subsidiary have been sold, we remainlegally responsible for resolving the issues raised by the Federal Reserve Bankof New York.

In March 2005, Union Bank of California enteredinto a memorandum of understanding with the Office of the Comptroller of theCurrency, which requires Union Bank of California to strengthen its BankSecrecy Act and anti-money laundering controls and processes. During 2006, we continued the process of

F-47

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strengtheningthose controls and processes. The memorandum of understanding remains in effectat the time of this Annual Report on Form 10-K.

Management is committed to resolving the issues raisedby the regulators and continues to take actions it believes to be appropriateto achieve this objective. However, our actions are subject to ongoing review andevaluation, the results of which may include further regulatory action. Wecannot assure that the actions we have taken will be sufficient to preventfurther regulatory action relating to this subject.

In December 2006, Mitsubishi UFJ Financial Group, Inc.,The Bank of Tokyo-Mitsubishi UFJ, Ltd., and its wholly owned subsidiary, Bankof Tokyo-Mitsubishi UFJ Trust Company, entered into a series of agreements withthe FDIC, the Federal Reserve Bank of San Francisco, the Federal Reserve Bankof New York and the New York State Banking Department, which require astrengthening of their Bank Secrecy Act and anti-money laundering controls andprocesses.

Until resolved, these pending regulatory matters, orany future regulatory actions concerning the Bank Secrecy Act or anti-moneylaundering controls and processes, may adversely affect UnionBanCal Corporation’sand Union Bank of California’s ability to obtain regulatory approvals forfuture initiatives, including acquisitions. Also, any future regulatory actionsrelating to noncompliance or repeat violations could result in the impositionof fines or penalties, which could be substantial.

The SEC is conducting an inquiry regarding certainpractices related to our mutual fund activities. The inquiry concerns the useof a portion of the fees received under an agreement from the HighMark Funds byan unaffiliated administrator to pay expenses related to the marketing anddistribution of fund shares. The HighMark Funds is a family of mutual fundsmanaged by HighMark Capital Management, Inc., the investment managementsubsidiary of Union Bank of California. We are cooperating with this inquiry.

F-48

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**UnionBanCalCorporation and Subsidiaries**

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                              | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Consolidated  Statements of Income for the Years Ended December 31, 2004, 2005, and  2006                               |       | F-50     |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2006                                                           |       | F-51     |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended  December 31, 2004, 2005, and 2006 |       | F-52     |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2004, 2005,  and 2006                           |       | F-53     |   |
| Notes  to Consolidated Financial Statements                                                                                  |       | F-54     |   |
| Report  of Independent Registered Public Accounting Firm                                                                     |       | F-117    |   |

 

F-49

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**UnionBanCalCorporation and SubsidiariesConsolidated Statements of Income**

| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Interest Income**                                                             |       |                                        |       |   |   |   |   |
| Loans                                                                           |       | $                                           | 1,366,970  |   | $ | 1,800,725 |   | $ | 2,228,023 |   |
| Securities                                                                      |       | 425,607                                     |       | 395,819 |   | 419,050 |   |
| Interest bearing  deposits in banks                                             |       | 3,417                                       |       | 2,676 |   | 2,617 |   |
| Federal funds sold and  securities purchased under resale agreements            |       | 9,189                                       |       | 20,535 |   | 25,518 |   |
| Trading account assets                                                          |       | 3,492                                       |       | 4,226 |   | 6,277 |   |
| Total interest income                                                           |       | 1,808,675                                   |       | 2,223,981 |   | 2,681,485 |   |
| **Interest Expense**                                                            |       |                                        |       |   |   |   |   |
| Deposits                                                                        |       | 146,687                                     |       | 303,351 |   | 649,707 |   |
| Federal funds  purchased and securities sold under repurchase agreements        |       | 6,654                                       |       | 10,372 |   | 31,864 |   |
| Commercial paper                                                                |       | 6,899                                       |       | 31,672 |   | 75,015 |   |
| Medium and long-term debt                                                       |       | 16,773                                      |       | 32,206 |   | 70,439 |   |
| Trust notes                                                                     |       | 2,780                                       |       | 953 |   | 953 |   |
| Other borrowed funds                                                            |       | 4,866                                       |       | 6,313 |   | 15,352 |   |
| Total interest expense                                                          |       | 184,659                                     |       | 384,867 |   | 843,330 |   |
| **Net Interest Income**                                                         |       | 1,624,016                                   |       | 1,839,114 |   | 1,838,155 |   |
| Reversal of allowance  for loan losses(1)                                       |       | (45,757                                     | )          | (50,683 | ) | (5,000 | ) |
| Net interest income  after reversal of allowance for loan losses                |       | 1,669,773                                   |       | 1,889,797 |   | 1,843,155 |   |
| **Noninterest Income**                                                          |       |                                        |       |   |   |   |   |
| Service charges on  deposit accounts                                            |       | 335,207                                     |       | 323,865 |   | 319,647 |   |
| Trust and investment  management fees                                           |       | 153,083                                     |       | 173,518 |   | 195,086 |   |
| Insurance commissions                                                           |       | 77,874                                      |       | 78,915 |   | 72,547 |   |
| Merchant banking fees                                                           |       | 39,646                                      |       | 43,898 |   | 42,185 |   |
| Brokerage commissions  and fees                                                 |       | 33,063                                      |       | 30,038 |   | 35,811 |   |
| Foreign exchange  gains, net                                                    |       | 32,004                                      |       | 33,902 |   | 32,220 |   |
| Card processing fees,  net                                                      |       | 34,147                                      |       | 25,105 |   | 28,400 |   |
| Securities gains  (losses), net                                                 |       | (12,085                                     | )          | (50,039 | ) | 2,242 |   |
| Other                                                                           |       | 219,884                                     |       | 145,585 |   | 150,361 |   |
| Total noninterest  income                                                       |       | 912,823                                     |       | 804,787 |   | 878,499 |   |
| **Noninterest Expense**                                                         |       |                                        |       |   |   |   |   |
| Salaries and employee  benefits                                                 |       | 848,717                                     |       | 934,354 |   | 996,536 |   |
| Net occupancy                                                                   |       | 127,720                                     |       | 141,299 |   | 141,771 |   |
| Outside services                                                                |       | 74,978                                      |       | 117,190 |   | 117,387 |   |
| Equipment                                                                       |       | 67,839                                      |       | 68,206 |   | 69,833 |   |
| Software                                                                        |       | 51,877                                      |       | 58,511 |   | 63,979 |   |
| Professional services                                                           |       | 48,371                                      |       | 45,500 |   | 63,616 |   |
| Communications                                                                  |       | 42,011                                      |       | 41,909 |   | 40,431 |   |
| Foreclosed asset  expense (income)                                              |       | 1,211                                       |       | (5,635 | ) | (15,322 | ) |
| (Reversal of)  provision for losses on off-balance sheet commitments(1)         |       | —                                      |       | 4,000 |   | (5,000 | ) |
| Other                                                                           |       | 210,865                                     |       | 201,912 |   | 213,057 |   |
| Total noninterest  expense                                                      |       | 1,473,589                                   |       | 1,607,246 |   | 1,686,288 |   |
| Income from continuing  operations before income taxes                          |       | 1,109,007                                   |       | 1,087,338 |   | 1,035,366 |   |
| Income tax expense                                                              |       | 398,933                                     |       | 356,698 |   | 271,623 |   |
| **Income from Continuing  Operations**                                          |       | 710,074                                     |       | 730,640 |   | 763,743 |   |
| Income (loss) from  discontinued operations before income taxes                 |       | 36,339                                      |       | 205,582 |   | (17,057 | ) |
| Income tax expense  (benefit)                                                   |       | 13,879                                      |       | 73,289 |   | (6,310 | ) |
| **Income (Loss) from Discontinued  Operations**                                 |       | 22,460                                      |       | 132,293 |   | (10,747 | ) |
| **Net Income**                                                                  |       | $                                           | 732,534    |   | $ | 862,933 |   | $ | 752,996 |   |
| **Income from continuing  operations per common share—basic**              |       | $                                           | 4.81       |   | $ | 5.04 |   | $ | 5.39 |   |
| **Net income per common share—basic**                                      |       | $                                           | 4.96       |   | $ | 5.95 |   | $ | 5.32 |   |
| **Income from continuing  operations per common share—diluted**            |       | $                                           | 4.72       |   | $ | 4.94 |   | $ | 5.31 |   |
| **Net income per common share—diluted**                                    |       | $                                           | 4.87       |   | $ | 5.84 |   | $ | 5.24 |   |
| **Weighted average common shares  outstanding—basic**                      |       | 147,767                                     |       | 145,109 |   | 141,620 |   |
| **Weighted average common shares outstanding—diluted**                     |       | 150,303                                     |       | 147,792 |   | 143,755 |   |

----

(1)                   Beginning in2005, the net change in the allowance for losses on off-balance sheetcommitments was recognized separately from the change in the allowance for loanlosses. Prior periods have not been restated.

See accompanying notes to consolidated financialstatements.

F-50

----

**UnionBanCalCorporation and SubsidiariesConsolidated Balance Sheets**

| ** **                                                                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                  | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **Assets**                                                                                            |       |                  |       |   |   |
| Cash and due from banks                                                                               |       | $                     | 2,402,212  |   | $ | 2,213,782 |   |
| Interest bearing deposits in banks                                                                    |       | 771,164               |       | 824,456 |   |
| Federal funds sold and securities purchased under  resale agreements                                  |       | 796,500               |       | 943,200 |   |
| Total cash and cash equivalents                                                                       |       | 3,969,876             |       | 3,981,438 |   |
| Trading account assets                                                                                |       | 312,655               |       | 376,321 |   |
| Securities available for  sale:                                                                       |       |                  |       |   |   |
| Securities pledged as collateral                                                                      |       | 96,994                |       | 89,184 |   |
| Held in portfolio                                                                                     |       | 8,072,286             |       | 8,667,038 |   |
| Loans (net of allowance for loan losses: 2005,  $351,532; 2006,  $331,077)                            |       | 32,744,063            |       | 36,340,646 |   |
| Due from customers on acceptances                                                                     |       | 19,252                |       | 17,834 |   |
| Premises and equipment, net                                                                           |       | 536,074               |       | 495,302 |   |
| Intangible assets                                                                                     |       | 42,616                |       | 28,930 |   |
| Goodwill                                                                                              |       | 454,015               |       | 453,489 |   |
| Other assets                                                                                          |       | 2,113,577             |       | 2,148,954 |   |
| Assets of discontinued operations to be disposed or  sold                                             |       | 1,054,594             |       | 20,440 |   |
| Total assets                                                                                          |       | $                     | 49,416,002 |   | $ | 52,619,576 |   |
| **Liabilities**                                                                                       |       |                  |       |   |   |
| Noninterest bearing                                                                                   |       | $                     | 19,489,377 |   | $ | 17,113,890 |   |
| Interest bearing                                                                                      |       | 20,592,862            |       | 24,855,478 |   |
| Total deposits                                                                                        |       | 40,082,239            |       | 41,969,368 |   |
| Federal funds purchased and securities sold under  repurchase agreements                              |       | 651,529               |       | 1,083,927 |   |
| Commercial paper                                                                                      |       | 680,027               |       | 1,661,163 |   |
| Other borrowed funds                                                                                  |       | 134,485               |       | 432,401 |   |
| Acceptances outstanding                                                                               |       | 19,252                |       | 17,834 |   |
| Other liabilities                                                                                     |       | 1,466,478             |       | 1,545,165 |   |
| Medium and long-term debt                                                                             |       | 801,095               |       | 1,318,847 |   |
| Junior subordinated debt payable to subsidiary  grantor trust                                         |       | 15,338                |       | 14,885 |   |
| Liabilities of discontinued operations to be  extinguished or assumed                                 |       | 1,005,859             |       | 4,585 |   |
| Total liabilities                                                                                     |       | 44,856,302            |       | 48,048,175 |   |
| Commitments, contingencies,  and guarantees—See Note 24                                          |       |                  |       |   |   |
| **Stockholders’ Equity**                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Preferred stock:                                                                                      |       |                  |       |   |   |
| Authorized 5,000,000 shares, no shares issued or  outstanding at December 31, 2005 or 2006       |       | —                |       | — |   |
| Common stock, par value $1  per share:                                                                |       |                  |       |   |   |
| Authorized 300,000,000 shares, issued 154,469,215  shares in 2005 and 156,460,057 shares in 2006 |       | 154,469               |       | 156,460 |   |
| Additional paid-in capital                                                                            |       | 994,956               |       | 1,083,649 |   |
| Treasury stock—10,262,143 shares in 2005 and  17,352,803 shares in 2006                     |       | (612,732              | )          | (1,064,606 | ) |
| Retained earnings                                                                                     |       | 4,141,400             |       | 4,655,272 |   |
| Accumulated other comprehensive loss                                                                  |       | (118,393              | )          | (259,374 | ) |
| Total stockholders’ equity                                                                       |       | 4,559,700             |       | 4,571,401 |   |
| Total liabilities and  stockholders’ equity                                                      |       | $                     | 49,416,002 |   | $ | 52,619,576 |   |

 

See accompanying notes to consolidated financial statements.

F-51

----

**UnionBanCal Corporation and SubsidiariesConsolidated Statements of Changes in Stockholders’ Equity**

| **(In thousands, except shares)**                             | ** ** | **Number  of shares** | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Treasury  stock** | ** ** | **Retained  earnings** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total  stock-  holders’  equity** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|----------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------|------------|
| **BALANCE DECEMBER 31, 2003**                                                |       | 146,000,156                |       | $                 | 146,000    |                             | $          | 555,156             |       | $                      | (12,846    | )                                                         | $          | 2,999,884                                |       |   | $ | 52,242 |   |   | $ | 3,740,436 |   |
| Comprehensive income                                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net income-2004                                                              |       |                       |       |              |       |                             |       |                |       | 732,534                |       |                                                      |       |                                     |       | 732,534 |   |
| Other  comprehensive income (loss), net of tax:                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net change in unrealized losses on cash flow hedges                          |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (42,357    | )                                        |       | (42,357 | ) |
| Net change in unrealized losses on securities available  for sale            |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (54,231    | )                                        |       | (54,231 | ) |
| Foreign currency translation adjustment                                      |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 2,423      |                                     |       | 2,423 |   |
| Minimum pension liability adjustment                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (2,904     | )                                        |       | (2,904 | ) |
| Total comprehensive income                                                   |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       | 635,465 |   |
| Dividend reinvestment plan                                                   |       | 308                        |       | 1                 |       | 16                               |       |                |       |                   |       |                                                      |       |                                     |       | 17 |   |
| Deferred compensation - restricted stock awards                              |       | 16,000                     |       | 16                |       | 968                              |       |                |       | (583                   | )          |                                                      |       |                                     |       | 401 |   |
| Stock options exercised                                                      |       | 1,918,011                  |       | 1,918             |       | 62,700                           |       |                |       |                   |       |                                                      |       |                                     |       | 64,618 |   |
| Excess tax benefit - stock options                                           |       |                       |       |              |       | 15,691                           |       |                |       |                   |       |                                                      |       |                                     |       | 15,691 |   |
| Stock issued in acquisitions                                                 |       | 4,257,343                  |       | 4,257             |       | 247,571                          |       |                |       |                   |       |                                                      |       |                                     |       | 251,828 |   |
| Common stock repurchased (1)                                                 |       |                       |       |              |       | (174                             | )          | (210,515            | )          |                   |       |                                                      |       |                                     |       | (210,689 | ) |
| Dividends declared on common stock, $1.39 per share (2)                      |       |                       |       |              |       |                             |       |                |       | (205,523               | )          |                                                      |       |                                     |       | (205,523 | ) |
| Net change                                                                   |       |                       |       | 6,192             |       | 326,772                          |       | (210,515            | )          | 526,428                |       |                                                      | (97,069    | )                                        |       | 551,808 |   |
| **BALANCE DECEMBER 31, 2004**                                                |       | 152,191,818                |       | $                 | 152,192    |                             | $          | 881,928             |       | $                      | (223,361   | )                                                         | $          | 3,526,312                                |       |   | $ | (44,827 | ) |   | $ | 4,292,244 |   |
| Comprehensive income                                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net income-2005                                                              |       |                       |       |              |       |                             |       |                |       | 862,933                |       |                                                      |       |                                     |       | 862,933 |   |
| Other  comprehensive income (loss), net of tax:                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net change in unrealized losses on cash flow hedges                          |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (35,737    | )                                        |       | (35,737 | ) |
| Net change in unrealized losses on securities available  for sale            |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (42,403    | )                                        |       | (42,403 | ) |
| Foreign currency translation adjustment                                      |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 8,134      |                                     |       | 8,134 |   |
| Minimum pension liability adjustment                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (3,560     | )                                        |       | (3,560 | ) |
| Total comprehensive income                                                   |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       | 789,367 |   |
| Deferred compensation - restricted stock awards                              |       | 399,489                    |       | 399               |       | 25,242                           |       |                |       | (18,072                | )          |                                                      |       |                                     |       | 7,569 |   |
| Stock options exercised                                                      |       | 1,877,908                  |       | 1,878             |       | 69,932                           |       |                |       |                   |       |                                                      |       |                                     |       | 71,810 |   |
| Excess tax benefit - stock options                                           |       |                       |       |              |       | 17,854                           |       |                |       |                   |       |                                                      |       |                                     |       | 17,854 |   |
| Common stock repurchased (1)                                                 |       |                       |       |              |       |                             |       | (389,371            | )          |                   |       |                                                      |       |                                     |       | (389,371 | ) |
| Dividends declared on common stock, $1.59 per share (2)                      |       |                       |       |              |       |                             |       |                |       | (229,773               | )          |                                                      |       |                                     |       | (229,773 | ) |
| Net change                                                                   |       |                       |       | 2,277             |       | 113,028                          |       | (389,371            | )          | 615,088                |       |                                                      | (73,566    | )                                        |       | 267,456 |   |
| **BALANCE DECEMBER 31, 2005**                                                |       | 154,469,215                |       | $                 | 154,469    |                             | $          | 994,956             |       | $                      | (612,732   | )                                                         | $          | 4,141,400                                |       |   | $ | (118,393 | ) |   | $ | 4,559,700 |   |
| Comprehensive income                                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net income-2006                                                              |       |                       |       |              |       |                             |       |                |       | 752,996                |       |                                                      |       |                                     |       | 752,996 |   |
| Other  comprehensive income (loss), net of tax:                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net change in unrealized losses on cash flow hedges                          |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 6,903      |                                     |       | 6,903 |   |
| Net change in unrealized losses on securities available  for sale            |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 16,221     |                                     |       | 16,221 |   |
| Foreign currency translation adjustment                                      |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (41        | )                                        |       | (41 | ) |
| Minimum pension liability adjustment                                         |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (2,877     | )                                        |       | (2,877 | ) |
| Total comprehensive income                                                   |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       | 773,202 |   |
| SFAS No. 158 adjustment (3)                                             |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (161,187   | )                                        |       | (161,187 | ) |
| Reclassification due to adoption of SFAS  No. 123(R) implementation (4) |       |                       |       |              |       | (19,035                          | )          |                |       | 19,035                 |       |                                                      |       |                                     |       | — |   |
| Stock options exercised                                                      |       | 1,409,727                  |       | 1,410             |       | 55,322                           |       |                |       |                   |       |                                                      |       |                                     |       | 56,732 |   |
| Restricted stock granted, net of forfeitures                                 |       | 578,865                    |       | 579               |       | (579                             | )          |                |       |                   |       |                                                      |       |                                     |       | — |   |
| Perfomance share units vested                                                |       | 2,250                      |       | 2                 |       | (2                               | )          |                |       |                   |       |                                                      |       |                                     |       | — |   |
| Excess tax benefit - stock based compensation                                |       |                       |       |              |       | 13,054                           |       |                |       |                   |       |                                                      |       |                                     |       | 13,054 |   |
| Compensation expense - stock options and other share-based awards       |       |                       |       |              |       | 22,704                           |       |                |       |                   |       |                                                      |       |                                     |       | 22,704 |   |
| Compensation expense - restricted stock                                      |       |                       |       |              |       | 14,420                           |       |                |       |                   |       |                                                      |       |                                     |       | 14,420 |   |
| Compensation expense - performance share units                               |       |                       |       |              |       | 2,809                            |       |                |       |                   |       |                                                      |       |                                     |       | 2,809 |   |
| Common stock repurchased (1)                                                 |       |                       |       |              |       |                             |       | (451,874            | )          |                   |       |                                                      |       |                                     |       | (451,874 | ) |
| Dividends declared on common stock, $1.82 per share (2)                      |       |                       |       |              |       |                             |       |                |       | (258,159               | )          |                                                      |       |                                     |       | (258,159 | ) |
| Net change                                                                   |       |                       |       | 1,991             |       | 88,693                           |       | (451,874            | )          | 513,872                |       |                                                      | (140,981   | )                                        |       | 11,701 |   |
| **BALANCE  DECEMBER 31, 2006**                                               |       | 156,460,057                |       | $                 | 156,460    |                             | $          | 1,083,649           |       | $                      | (1,064,606 | )                                                         | $          | 4,655,272                                |       |   | $ | (259,374 | ) |   | $ | 4,571,401 |   |

----

(1)                    Common stock repurchased includes commission costs.

(2)                    Dividends are based on UnionBanCal Corporation’s sharesoutstanding as of the declaration date.

(3)                    See Note 9 of these consolidated financial statementsfor description of the adoption of Statement of Financial Accounting StandardsNo. 158 “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and132(R)” (SFAS No. 158).

(4)                    Reclassification reflects a reduction in additionalpaid-in capital and a corresponding credit to retained earnings forunrecognized compensation expense on nonvested restricted stock as ofJanuary 1, 2006 upon adoption of SFAS No. 123(R) “Share-BasedPayment.”

See accompanying notes to consolidated financialstatements.

F-52

----

**UnionBanCalCorporation and SubsidiariesConsolidated Statements of Cash Flows**

| ** **                                                                               | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                     | ** ** | **2004**                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                               |       |                                                          |       |   |   |   |   |
| Net income                                                                               |       | $                                                             | 732,534    |   | $ | 862,933 |   | $ | 752,996 |   |
| Income (loss) from discontinued operations, net of  taxes                                |       | 22,460                                                        |       | 132,293 |   | (10,747 | ) |
| Income from continuing operations, net of taxes                                          |       | 710,074                                                       |       | 730,640 |   | 763,743 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |       |                                                          |       |   |   |   |   |
| Reversal of allowance for loan losses                                                    |       | (45,757                                                       | )          | (50,683 | ) | (5,000 | ) |
| (Reversal of) provision for losses on off-balance  sheet commitments                     |       | —                                                        |       | 4,000 |   | (5,000 | ) |
| Depreciation, amortization and accretion                                                 |       | 155,890                                                       |       | 157,616 |   | 139,042 |   |
| Stock-based compensation—stock options and other  share-based compensation          |       | 401                                                           |       | 7,569 |   | 39,933 |   |
| Provision for deferred income taxes                                                      |       | 76,708                                                        |       | 65,230 |   | 42,631 |   |
| (Gains) losses on sales of securities available for  sale, net                           |       | 12,085                                                        |       | 50,039 |   | (2,242 | ) |
| Net (increase) decrease in prepaid expenses                                              |       | (89,434                                                       | )          | (150,286 | ) | 177,363 |   |
| Net (increase) decrease in fees and other charges  receivable                            |       | (15,721                                                       | )          | 113,223 |   | (52,276 | ) |
| Net increase (decrease) in accrued expenses                                              |       | 2,832                                                         |       | 30,384 |   | (68,768 | ) |
| Net (increase) decrease in trading account assets                                        |       | 16,181                                                        |       | (76,816 | ) | (63,666 | ) |
| Net increase in trading account liabilities                                              |       | 18,162                                                        |       | 102,903 |   | 45,876 |   |
| Net increase in other liabilities                                                        |       | 22,707                                                        |       | 154,096 |   | 67,102 |   |
| Net increase in other assets, net of acquisitions                                        |       | (136,120                                                      | )          | (389,785 | ) | (144,468 | ) |
| Loans originated for resale                                                              |       | (1,046,833                                                    | )          | (145,671 | ) | (558,833 | ) |
| Net proceeds from sale of loans originated for resale                                    |       | 931,324                                                       |       | 218,068 |   | 486,739 |   |
| Excess tax benefit—stock-based compensation                                         |       | (15,691                                                       | )          | (17,854 | ) | (13,054 | ) |
| Other, net                                                                               |       | 139,285                                                       |       | 14,512 |   | (176,361 | ) |
| Discontinued operations, net                                                             |       | (320                                                          | )          | 243,509 |   | 202,440 |   |
| Total adjustments                                                                        |       | 25,699                                                        |       | 330,054 |   | 111,458 |   |
| Net cash provided by operating activities                                                |       | 735,773                                                       |       | 1,060,694 |   | 875,201 |   |
| **Cash  Flows from Investing Activities:**                                               |       |                                                          |       |   |   |   |   |
| Proceeds from sales of securities available for sale                                     |       | 1,046,055                                                     |       | 1,580,353 |   | 144,026 |   |
| Proceeds from matured and called securities available  for sale                          |       | 3,741,945                                                     |       | 2,965,067 |   | 1,749,200 |   |
| Purchases of securities available for sale, net of  acquisitions                         |       | (4,879,266                                                    | )          | (1,715,882 | ) | (2,424,176 | ) |
| Net purchases of premises and equipment                                                  |       | (109,418                                                      | )          | (98,353 | ) | (71,388 | ) |
| Net increase in loans, net of acquisitions                                               |       | (2,984,288                                                    | )          | (4,076,331 | ) | (3,509,531 | ) |
| Net cash used in acquisitions                                                            |       | (101,359                                                      | )          | — |   | — |   |
| Other, net                                                                               |       | 900                                                           |       | 25 |   | (34,187 | ) |
| Discontinued operations, net                                                             |       | (40,245                                                       | )          | 873,020 |   | 728,363 |   |
| Net cash used in investing activities                                                    |       | (3,325,676                                                    | )          | (472,101 | ) | (3,417,693 | ) |
| **Cash  Flows from Financing Activities:**                                               |       |                                                          |       |   |   |   |   |
| Net increase in deposits, net of acquisitions                                            |       | 2,937,950                                                     |       | 1,362,734 |   | 1,887,129 |   |
| Net increase in federal funds purchased and  securities sold under repurchase agreements |       | 220,681                                                       |       | 64,280 |   | 432,398 |   |
| Net increase (decrease) in commercial paper and other  borrowed funds                    |       | 243,078                                                       |       | (182,924 | ) | 1,279,052 |   |
| Redemption of junior subordinated debt                                                   |       | (360,825                                                      | )          | — |   | — |   |
| Common stock repurchased                                                                 |       | (210,689                                                      | )          | (389,371 | ) | (451,874 | ) |
| Proceeds from issuance of long-term debt                                                 |       | —                                                        |       | — |   | 693,742 |   |
| Repayment of medium-term debt                                                            |       | —                                                        |       | — |   | (200,000 | ) |
| Payments of cash dividends                                                               |       | (197,198                                                      | )          | (224,218 | ) | (251,403 | ) |
| Stock-based compensation exercised                                                       |       | 80,309                                                        |       | 89,664 |   | 69,786 |   |
| Other, net                                                                               |       | 2,440                                                         |       | 8,134 |   | 3,459 |   |
| Discontinued operations, net                                                             |       | (128,147                                                      | )          | (547,660 | ) | (908,670 | ) |
| Net cash provided by financing activities                                                |       | 2,587,599                                                     |       | 180,639 |   | 2,553,619 |   |
| Net increase (decrease) in cash and cash equivalents                                     |       | (2,304                                                        | )          | 769,232 |   | 11,127 |   |
| Cash and cash equivalents at beginning of year                                           |       | 3,201,875                                                     |       | 3,199,854 |   | 3,969,876 |   |
| Effect of exchange rate changes on cash and cash  equivalents                            |       | 283                                                           |       | 790 |   | 435 |   |
| Cash and cash equivalents at end of year                                                 |       | $                                                             | 3,199,854  |   | $ | 3,969,876 |   | $ | 3,981,438 |   |
| **Cash  Paid During the Year For:**                                                      |       |                                                          |       |   |   |   |   |
| Interest                                                                                 |       | $                                                             | 175,146    |   | $ | 364,715 |   | $ | 769,265 |   |
| Income taxes                                                                             |       | 310,789                                                       |       | 319,885 |   | 225,977 |   |
| **Supplemental  Schedule of Noncash Investing and Financing Activities:**                |       |                                                          |       |   |   |   |   |
| Acquisitions:                                                                            |       |                                                          |       |   |   |   |   |
| Fair value of assets acquired                                                            |       | $                                                             | 2,577,765  |   | $ | — |   | $ | — |   |
| Purchase price:                                                                          |       |                                                          |       |   |   |   |   |
| Cash                                                                                     |       | (201,522                                                      | )          | — |   | — |   |
| Stock issued                                                                             |       | (251,828                                                      | )          | — |   | — |   |
| Fair value of liabilities assumed                                                        |       | $                                                             | 2,124,415  |   | $ | — |   | $ | — |   |
| Loans transferred to foreclosed assets (OREO)                                            |       | $                                                             | 5,506      |   | $ | 1,310 |   | $ | 1,903 |   |

 

See accompanying notes to consolidated financialstatements.

F-53

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006**

**Note 1—Summary of Significant AccountingPolicies and Nature of Operations**

*Introduction*

UnionBanCal Corporation is a commercial bank holdingcompany whose major subsidiary, Union Bank of California, N.A. (the Bank), is acommercial bank. UnionBanCal Corporation and its subsidiaries (the Company)provide a wide range of financial services to consumers, small businesses,middle-market companies and major corporations, primarily in California,Oregon, and Washington, as well as nationally and internationally.

The Bank of Tokyo-MitsubishiUFJ, Ltd. (BTMU), which is a wholly-owned subsidiary of Mitsubishi UFJFinancial Group, Inc. (MUFG), owned approximately 65 percent of theCompany’s outstanding common stock at December 31, 2006.

*Basis of FinancialStatement Presentation*

The accounting and reporting policies of the Companyconform to accounting principles generally accepted in the United States ofAmerica (US GAAP) and general practice within the banking industry. Thosepolicies that materially affect the determination of financial position,results of operations, and cash flows are summarized below.

The Consolidated FinancialStatements include the accounts of the Company. All intercompany transactionsand balances have been eliminated. The preparation of financial statements inconformity with US GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates. Certain amounts for priorperiods may have been reclassified to conform with current financial statementpresentation.

*Cash and Cash Equivalents*

For purposes of reporting cashflows, cash and cash equivalents include cash and due from banks, interestbearing deposits in banks, and federal funds sold and securities purchasedunder resale agreements, which have original maturities less than 90 days.

*Resale and RepurchaseAgreements*

Transactions involvingpurchases of securities under agreements to resell (reverse repurchaseagreements or reverse repos) or sales of securities under agreements torepurchase (repurchase agreements or repos) are accounted for as collateralizedfinancings except where the Company does not have an agreement to sell (orpurchase) the same or substantially the same securities before maturity at afixed or determinable price. The Company’s policy is to obtain possession ofcollateral with a market value equal to or in excess of the principal amountloaned under resale agreements. Collateral is valued daily, and the Company mayrequire counterparties to deposit additional collateral or return collateralpledged, when appropriate.

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

*Trading Account Assets*

Trading account assets consist of securities and loansthat management acquires with the intent to hold for short periods of time inorder to take advantage of anticipated changes in market values. Substantiallyall of the securities have a high degree of liquidity and readily determinablemarket value. Interest earned, paid, or accrued on trading account assets isincluded in interest income using a method that produces a level yield.Realized gains and losses from the sale or close-out of trading accountpositions and unrealized market value adjustments are recognized in noninterestincome.

Also included in trading account assets are the unrealizedgains related to a variety of interest rate derivative contracts, primarilyswaps and options, energy derivative contracts and foreign exchange contracts,entered into either for trading purposes, based on management’s intent atinception, or as an accommodation to customers.

Derivatives held or issued fortrading or customer accommodation are carried at fair value, with realized andunrealized changes in fair values on contracts included in noninterest incomein the period in which the changes occur. Unrealized gains and losses arereported gross and included in trading account assets and other liabilities,respectively. Cash flows are reported net as operating activities. The reservefor credit exposures and administrative costs related to derivative and foreignexchange contracts is presented as an offset to trading account assets. Changesin the reserves for those contracts offset trading gains and losses innoninterest income.

*Securities Availablefor Sale*

The Company’s securities portfolio consists of debtand equity securities that are classified as securities available for sale.

Debt securities and equity securities with readilydeterminable market values that are not classified as trading account assetsare classified as securities available for sale and carried at fair value, withthe unrealized gains or losses reported net of taxes as a component ofaccumulated other comprehensive income (loss) in stockholders’ equity untilrealized.

Interest income on debt securities includes theamortization of premiums and the accretion of discounts using a method thatproduces a level yield and is included in interest income on securities.

The Company recognizes other-than-temporary impairment on itssecurities available for sale portfolio when it is likely that it will notrecover its cost. A debt security is subject to quarterly impairment testingwhen its fair value is lower than its carrying value. The Company excludes fromquarterly impairment testing debt securities that are backed by the full faithand credit of the U.S. government or where the likelihood of default is remoteand purchased at a premium below 10 percent of par. Typical debt securities inthe portfolio that are subject to testing for other-than-temporary impairmentare collateralized loan obligations (CLOs), commercial mortgage conduits andequity securities. In calculating the level of other-than-temporary impairment,the Company considers expected cash flows utilizing a number of assumptionssuch as recovery rates, default rates and reinvestment rates, business models,current and projected financial performance, and overall economic marketconditions. Marketable equity securities are subject to testing forother-than-temporary impairment when there is a sustained decline in market price

F-55

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

below the amount recorded forthat investment. The Company considers the issuer’s financial condition,capital strength, and near-term prospects in calculating an other-than-temporaryimpairment.

Realized gains and losses on the sale of andother-than-temporary impairment charges on available for sale securities areincluded in noninterest income as securities gains (losses), net. The specificidentification method is used to calculate realized gains or losses.

Securities available for sale that are pledged underan agreement to repurchase and which may be sold or repledged under thatagreement have been separately identified as pledged as collateral.

*Loans Held for Investment,Loans Held for Sale, and Certain Loans Acquired at a Discount*

Loans are reported at the principal amountsoutstanding, net of unamortized nonrefundable loan fees and related direct loanorigination costs. Deferred net fees and costs related to loans held forinvestment are recognized in interest income generally over the contracted loanterm using a method that generally produces a level yield on the unpaid loanbalance. Nonrefundable fees and direct loan origination costs related to loansheld for sale are deferred and recognized as a component of the gain or loss onsale. Interest income is accrued principally on a simple interest basis. Loansheld for sale are carried at the lower of cost or market on an individual basisfor commercial loans and on an aggregate basis for residential mortgage loans. Changesin value are recognized in other noninterest income. Loans acquired at adiscount related to credit deterioration since their origination are recordedat fair value with no allowance for loan losses. Interest income is recognizedbased on the excess of future expected cash flows over the purchase priceversus contractual cash flows. Such loans are considered impaired when it isprobable that the Company will be unable to collect the total expected futurecash flows. At that time, the Company will establish an allowance for loanlosses up to the amount expected at acquisition.

Nonaccrual loans are those for which management hasdiscontinued accrual of interest because there exists significant uncertaintyas to the full and timely collection of either principal or interest or suchloans have become contractually past due 90 days with respect to principal orinterest.

Interest accruals are continued for certain smallbusiness loans that are processed centrally, consumer loans, and one-to-fourfamily residential mortgage loans. These loans are charged off or written downto their net realizable value based on delinquency time frames that range from120 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 andin the process of collection. For this purpose, loans are consideredwell-secured if they are collateralized by property having a net realizablevalue in excess of the amount of principal and accrued interest outstanding orare guaranteed by a financially responsible and willing party. Loans areconsidered “in the process of collection” if collection is proceeding in duecourse either through legal action or other actions that are reasonablyexpected to result in the prompt repayment of the debt or in its restoration tocurrent status.

When a loan is placed on nonaccrual, all previously accrued butuncollected interest is reversed against current period operating results. Allsubsequent payments received are first applied to unpaid principal and then touncollected interest. Interest income is accrued at such time as the loan isbrought fully current as to both principal and interest, and, in management’sjudgment, such a loan is considered to be fully collectible. However, Companypolicy also allows management to continue the recognition of interest income oncertain loans designated as nonaccrual. This portion of the nonaccrualportfolio is 

F-56

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

referred to as “Cash BasisNonaccrual” loans. This policy only applies to loans that are well-secured andin management’s judgment are considered to be fully collectible. Although theaccrual of interest is suspended, any payments received may be applied to theloan according to its contractual terms and interest income recognized whencash is received.

Loans are considered impaired when, based on currentinformation, it is probable that the Company will be unable to collect allamounts due according to the contractual terms of the loan agreement, includinginterest payments. Impaired loans are carried at the lower of the recordedinvestment in the loan, the estimated present value of total expected futurecash flows, discounted at the loan’s effective rate, or the fair value of thecollateral, if the loan is collateral dependent. Additionally, some impairedloans with commitments of less than $2.5 million are aggregated for the purposeof measuring impairment using historical loss factors as a means ofmeasurement. Excluded from the impairment analysis are large groups of smallerbalance homogeneous loans such as consumer and residential mortgage loans.

The Company offers primarilytwo types of leases to customers: 1) direct financing leases where the assetsleased are acquired without additional financing from other sources, and 2)leveraged leases where a substantial portion of the financing is provided bydebt with no recourse to the Company. Direct financing leases are carried netof unearned income, unamortized nonrefundable fees and related direct costsassociated with the origination or purchase of leases. Leveraged leases arecarried net of nonrecourse debt.

*Allowance for LoanLosses*

The Company maintains an allowance for loan losses toabsorb losses inherent in the loan portfolio. The allowance is based onongoing, quarterly assessments of the probable estimated losses inherent in theloan portfolio. The allowance is increased by the provision for loan losses,which is charged against current period operating results and decreased by theamount of charge offs, net of recoveries. The Company’s methodology forassessing the appropriateness of the allowance consists of several keyelements, which include the formula allowance, the specific allowance and theunallocated allowance.

The formula allowance is calculated by applying lossfactors to outstanding loans. Loss factors are based on the Company’shistorical loss experience and may be adjusted for significant factors that, inmanagement’s judgment, affect the collectibility of the portfolio as of theevaluation date. The Company derives the loss factors for most commercial loansfrom a loss migration model and, for pooled loans, by using expected net chargeoffs. Pooled loans are homogeneous in nature and include consumer andresidential mortgage loans, and certain small commercial loans. Estimatedlosses are based on a loss confirmation period, which is the estimated averageperiod of time between a material adverse event affecting the credit worthinessof a borrower for non-criticized, risk-graded credits or through the remaininglife of the loan for criticized, risk-graded credits, and the subsequentrecognition of a loss.

Specific allowances are established in cases wheremanagement has identified significant conditions or circumstances related to acredit that management believes indicate the probability that a loss has beenincurred in excess of the amount determined by the application of the formulaallowance.

The unallocated allowance is composed of attribution factors, which arebased upon management’s evaluation of various conditions that are not directlymeasured in the determination of the formula and specific allowances. The conditionsevaluated in connection with the unallocated allowance may include 

F-57

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

existing general economic andbusiness conditions affecting the key lending areas of the Company, creditquality trends, collateral values, loan volumes and concentrations, specificindustry conditions within portfolio segments, recent loss experience inparticular segments of the portfolio, duration of the current business cycle,bank regulatory examination results and findings of the Company’s internalcredit examiners.

The allowance also incorporates the results ofmeasuring impaired loans as provided in Statement of Financial AccountingStandards (SFAS) No. 114, “Accounting by Creditors for Impairment of aLoan” and SFAS No. 118, “Accounting by Creditors for Impairment of aLoan—Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, incomerecognition and disclosures related to impaired loans. A loan is consideredimpaired when management determines that it is probable that the Company willbe unable to collect all amounts due according to the original contractualterms of the loan agreement. Impairment is measured by the difference betweenthe recorded investment in the loan (including accrued interest, net deferredloan fees or costs and unamortized premium or discount) and the estimatedpresent value of total expected future cash flows, discounted at the loan’seffective rate, or the fair value of the collateral, if the loan is collateraldependent. Additionally, some impaired loans with commitments of less than $2.5million are aggregated for the purpose of measuring impairment using historicalloss factors as a means of measurement. In addition, the impairment allowancemay include amounts related to certain qualitative factors that have yet tomanifest themselves in the other measurements. Impairment is recognized as acomponent of the existing allowance for loan losses.

*Premises and Equipment*

Premises and equipment are carried at cost, lessaccumulated depreciation and amortization. Depreciation and amortization arecalculated using the straight-line method over the estimated useful life ofeach asset. Lives of premises range from ten to forty years; lives offurniture, fixtures and equipment range from three to eight years. Leaseholdimprovements are amortized over the term of the respective lease or ten years,whichever is shorter.

Long-livedassets that are held or that are to be disposed of are evaluated periodicallyfor impairment when events or changes in circumstances indicate that thecarrying amount may not be recoverable. The impairment is calculated as thedifference between the expected undiscounted future cash flows of a long-livedasset, if lower, and its carrying value. In the event of an impairment, theCompany recognizes a loss for the difference between the carrying amount andthe estimated value of the asset as measured using a quoted market price or, inthe absence of a quoted market price, a discounted cash flow analysis. Theimpairment loss is reflected in noninterest expense.

*Intangible Assets*

Intangible assets representpurchased assets that lack physical substance but can be separatelydistinguished from goodwill because of contractual or other legal rights orbecause the asset is capable of being sold or exchanged. Intangible assets arerecorded at fair value at the date of acquisition.

Intangible assets that have infinite lives, such asgoodwill, are tested for impairment at least annually.

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

Intangible assets that havefinite lives, which include core deposit intangibles and rights-to-expiration,are amortized either using the straight-line method or a method that patternsthe manner in which the economic benefit is consumed. Intangible assets aretypically amortized over their estimated period of benefit ranging from six tofifteen years, although some intangible assets may have useful lives whichextend to thirty years. The Company periodically evaluates the recoverabilityof intangible assets and takes into account events or circumstances thatwarrant revised estimates of useful lives or that indicate that impairmentexists.

*Other Real Estate Owned*

Other real estate owned (OREO)represents the collateral acquired through foreclosure in full or partialsatisfaction of the related loan. OREO is recorded at the lower of the loan’sunpaid principal balance or its fair value as established by a currentappraisal, adjusted for disposition costs. Any write-down at the date oftransfer is charged to the allowance for loan losses. OREO values, recorded inother assets, are reviewed on an ongoing basis and any decline in value isrecognized as foreclosed asset expense in the current period. The net operatingresults from these assets are included in the current period in noninterestexpense as foreclosed asset expense (income).

*Private CapitalInvestments*

Private capital investmentsinclude direct investments in private companies and indirect investments inprivate equity funds. These investments are initially valued at cost and testedfor other-than-temporary impairment on a quarterly basis if the carrying valueexceeds fair value. Fair value is estimated based on a company’s businessmodel, current and projected financial performance, liquidity and overalleconomic and market conditions. Any other-than-temporary impairment isrecognized in other noninterest income.

*Derivative InstrumentsHeld for Purposes Other Than Trading*

The Company enters into avariety of derivative contracts as a means of reducing the Company’s interestrate and foreign exchange exposures. At inception, these contracts, i.e.,hedging instruments, are evaluated in order to determine if the hedginginstrument will be highly effective in achieving offsetting changes in thehedge instrument and hedged item attributable to the risk being hedged. Anyineffectiveness, which arises during the hedging relationship, is recognized innoninterest expense in the period in which it arises. All qualifying hedgeinstruments are valued at fair value and included in other assets or otherliabilities. For fair value hedges of interest bearing assets or liabilities,the change in the fair value of the hedged item and the hedging instrument, tothe extent effective, is recognized in net interest income. For all other fairvalue hedges, the changes in the fair value of the hedged item and changes infair value of the derivative are recognized in noninterest income. For cashflow hedges, the unrealized changes in fair value to the extent effective arerecognized in other comprehensive income. Amounts realized on cash flow hedgesrelated to variable rate loans and deposit liabilities are recognized in netinterest income in the period in which the cash flow from the hedged item isrealized. The fair value of cash flow hedges related to forecasted transactionsis recognized in noninterest expense in the period when the forecasted transactionoccurs.

F-59

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

*Operating Leases*

The Company enters into a variety of lease contractsgenerally for premises and equipment. Lease contracts that do not transfersubstantially all of the benefits and risks of ownership and meet the criteriaunder SFAS No. 13 “Accounting for Leases” are treated as operatingleases. The Company accounts for the payments of rent on these contracts on astraight-line basis over the lease term. At inception of the lease term, anyperiods for which no rents are paid and/or escalation clauses are stipulated inthe lease contract are included in the determination of the rent expense andrecognized ratably over the lease term.

The Company records liabilitiesfor legal obligations associated with the future retirement of buildings andleasehold improvements at fair value when incurred. As required under FinancialAccounting Standards Board (FASB) Interpretation No. 47 (FIN No. 47),“Accounting for Asset Retirement Obligations,” the assets are increased by therelated liability and depreciated over the estimated useful life of that asset.

*Foreign CurrencyTranslation*

Assets, liabilities andresults of operations for foreign branches are recorded based on the functionalcurrency of each branch. Since the functional currency of the branches is thelocal currency, the net assets are remeasured into U.S. dollars using acombination of current and historical exchange rates. The resulting gains orlosses are included in stockholders’ equity, as a component of accumulatedother comprehensive income (loss), on a net of tax basis. Effective December 31,2005, the foreign exchange translation related to the internationalcorrespondent banking business was recognized as part of the gain from the saleand is included in discontinued operations.

*Income Taxes*

The Company files consolidatedfederal and combined state income tax returns. Amounts provided for income taxexpense are based on income reported for financial statement purposes, ratherthan amounts reported on the Company’s income tax return. Interest income,interest expense and penalties pertaining to the settlement, or expectedsettlement, of prior years’ tax issues are recognized in income tax expense. Deferredtaxes, which arise principally from temporary differences between the period inwhich certain income and expenses are recognized for financial accountingpurposes and the period in which they affect taxable income, are included inthe amounts provided for income taxes. Under this method, the computation ofthe net deferred tax liability or asset gives current recognition to changes inthe tax laws.

*Net Income Per CommonShare*

Basic earnings per share (EPS)is computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted EPS incorporates the dilutiveeffect of common stock equivalents outstanding on an average basis during theperiod. Stock options, nonvested restricted stock, restricted stock units andperformance share units are common stock equivalents. See discussion under “Stock-BasedCompensation,” which follows below and Note 16 to these consolidated financialstatements.

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

*Allowance for Losses onOff-Balance Sheet Commitments*

The Company maintains anallowance for losses on off-balance sheet commitments to absorb losses inherentin those commitments upon funding. The commitments include unfunded loans,standby letters of credit and commercial lines of credit that are not for sale.The Company’s methodology for assessing the appropriateness of this allowanceis the same as that used for the allowance for loan losses and incorporates anassumption based upon historical information of likely utilization. Seeaccounting policy “*Allowance for Loan Losses*.”  The allowance for losses on off-balance sheetcommitments is classified as other liabilities and the change in this allowanceis recognized in noninterest expense.

*Stock-BasedCompensation*

On January 1, 2006, the Company adopted SFAS No. 123(R),“Share-Based Payment,” a revision of SFAS No. 123, “Accounting forStock-Based Compensation,” and elected to use the modified prospectiveapplication method to transition to the new accounting standard. SFAS No. 123(R) requiresthat compensation costs related to share-based payment transactions berecognized in the financial statements. Measurement of the cost of employeeservice is based on the grant-date fair value of the equity or liabilityinstrument issued. SFAS 123(R) also prescribes that estimated forfeituresof shares are to be included in the calculation of compensation expense.

Under the modified prospective transition method,compensation cost is recognized for the portion of outstanding awards for whichthe requisite service has not yet been rendered. The cost is being recognizedover the period during which the employees are required to provide service. Theafter-tax impact of this change on income from continuing operations was areduction of $13.5 million for the year ended December 31, 2006, whichincludes the impact of estimated forfeitures for restricted stock and therecognition of compensation costs related to nonvested stock options. Thecorresponding impact to basic and diluted earnings per share was a reduction of$0.10 and $0.09 per share, respectively, for the year ended December 31,2006.

For the years ended December 31, 2004 and 2005,as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation,”the Company recognized compensation expense using the intrinsic value-basedmethod of valuing stock options prescribed in Accounting Principles BoardOpinion (APB) No. 25, “Accounting for Stock Issued to Employees” andrelated Interpretations. Under the intrinsic value-based method, compensationcost was measured as the amount by which the quoted market price of the Company’sstock at the date of grant exceeded the stock option exercise price. For theyears ended December 31, 2004 and 2005, options granted under the planshad an exercise price equal to the market value of the underlying common stockon the date of the grant and, therefore, were not included in compensationexpense.

At December 31, 2006, the Company had twostock-based employee compensation plans. For further discussion concerning theCompany’s stock-based employee compensation plans, see Note 16 to theseconsolidated financial statements. Options granted under the plans had anexercise price equal to the market value of the underlying common stock on thedate of grant. The value of the restricted stock awards issued under the plansand the value of that portion of outstanding option awards for which therequisite service has not yet been rendered is being recognized ratably overthe remaining service period as compensation expense.

F-61

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

The following tableillustrates the effect on net income, which includes discontinued operationsand corresponding earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation during 2004 and 2005. For the purpose of this disclosure, theCompany has recognized compensation costs for graded vesting on a straight-linebasis and did not include an estimate for forfeitures.

| ** **                                                                                            | ** ** | **For the Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Dollars in thousands)**                                                                  | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| As reported net  income                                                                               |       | $                                     | 732,534    |   | $ | 862,933 |   |
| Add: stock-based  employee compensation expense included in reported net income, net of income  taxes |       | 248                                   |       | 4,674 |   |
| Deduct: total  stock-based employee compensation expense, net of income taxes                         |       | 25,377                                |       | 24,491 |   |
| Pro forma net income,  after stock-based employee compensation expense                                |       | $                                     | 707,405    |   | $ | 843,116 |   |
| Net income per common share—basic                                                                |       |                                  |       |   |   |
| As reported                                                                                           |       | $                                     | 4.96       |   | $ | 5.95 |   |
| Pro forma                                                                                             |       | $                                     | 4.79       |   | $ | 5.81 |   |
| Net income per common share—diluted                                                              |       |                                  |       |   |   |
| As reported                                                                                           |       | $                                     | 4.87       |   | $ | 5.84 |   |
| Pro forma                                                                                             |       | $                                     | 4.71       |   | $ | 5.73 |   |

 

*Employee Pension andOther Postretirement Benefits*

The Company provides a varietyof pension and other postretirement benefit plans for eligible employees andretirees. Provisions for the costs of these employee pension and other postretirementbenefit plans are accrued and charged to expense when the benefit is earned.

*Segment Reporting*

Business unit results are based on an internalmanagement reporting system used by management to measure the performance ofthe units and the Company as a whole. The management reporting systemidentifies balance sheet and income statement items to each business unit basedon internal management accounting policies. Net interest income is determinedusing the Company’s internal funds transfer pricing system, which assigns acost of funds to assets or a credit for funds to liabilities and capital basedon their type, maturity or repricing characteristics. Noninterest income andexpense directly or indirectly attributable to a business unit are assigned tothat business. Economic capital is attributed to each business unit using aRisk Adjusted Return on Capital (RAROC) methodology, which seeks to allocatecapital to each business unit consistent with the level of risk it assumes.These risks are primarily credit risk, market risk and operational risk. Creditrisk is the potential loss in economic value due to the likelihood that theobligor will not perform as agreed. Market risk is the potential loss in fairvalue due to changes in interest rates, currency rates and volatilities.Operational risk is the potential loss due to all other factors, such asfailures in internal controls, system failures, or external events.

The Company’s operatingbusiness segments have been aggregated into two major components: WholesaleBanking and Retail Banking. This aggregation groups the components by majorclasses of customers and the products and services that are provided.

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 1—Summary of SignificantAccounting Policies and Nature of Operations (Continued)**

*Junior SubordinatedDebt Payable to Subsidiary Grantor Trust (Trust Notes)*

Trust notes are accounted for as liabilities on thebalance sheet. Interest on trust notes is treated as interest expense on anaccrual basis.

Additional information on thetrust notes can be found in Note 14 to these consolidated financial statements.

*Treasury Stock*

Common stock repurchased isshown separately in the statement of changes in stockholders’ equity at costand shares repurchased are deducted from shares outstanding until retired. Gainsand losses resulting from shares reissued are based on the average cost ofshares repurchased. Gains and losses, up to the amount of gains previously recognized,are included in additional paid in capital. Losses in excess of the gainspreviously recognized reduce retained earnings.

*Recently IssuedAccounting Pronouncements*

*Accounting forShare-Based Payments*

In December 2004,the FASB, issued SFAS No. 123 (revised 2004), “Share-Based Payment.”This Statement requires that compensation costs related to share-based paymenttransactions be recognized in the financial statements. Measurement of the costof employee service is based on the grant-date fair value of the equity orliability instruments issued. That cost is recognized over the period duringwhich an employee is required to provide service in exchange for the award. Additionally,liability awards are remeasured each reporting period. Statement 123(R) replacedSFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes APBOpinion No. 25, “Accounting for Stock Issued to Employees.” This Statementis effective for annual periods beginning after June 15, 2005 and requiredadoption using a modified prospective application or a modified retrospectiveapplication. On April 14, 2005, the SEC issued rule 2005-57,which allowed companies to delay implementation of the Statement to thebeginning of the next fiscal year. The Company adopted Statement 123(R) onJanuary 1, 2006 under the modified prospective method, which resulted inan increase in noninterest expense of $21.6 million for the year ended December 31,2006. See Note 16 to these consolidated financial statements.

*Accounting for CertainHybrid Financial Instruments*

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140.” TheStatement allows financial instruments that have embedded derivatives to beaccounted for as a whole, (eliminating the need to bifurcate the derivativefrom its host) if the holder elects to irrevocably account for the wholeinstrument on a fair value basis. The Statement is effective for all financialinstruments acquired or issued after December 31, 2006. Managementbelieves that adopting this Statement will not have a material impact on theCompany’s financial position or results of operations.

F-63

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations (Continued)**

*Accounting forServicing of Financial Assets*

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140.” The Statement requires that allseparately recognized servicing assets and servicing liabilities be initiallymeasured at fair value, if practicable. It allows an entity to choose one oftwo subsequent measurement methods for each class of separately recognizedservicing assets and servicing liabilities: the amortization method or the fairvalue measurement method. Under the amortization method, servicing assets andliabilities are amortized in proportion to and over the period of estimated netservicing income or servicing loss. Under the fair value method, servicingassets and liabilities are recorded at fair value each reporting period withany changes reported in current period earnings. The Statement is effective forall servicing assets on January 1, 2007. Management believes that adoptingthis Statement will not have a material impact on the Company’s financialposition or results of operations.

*Accounting for Changesin the Timing of Cash Flows Relating to Income Taxes in Leveraged Leases*

In July 2006, the FASB issued Staff Position(FSP) FAS 13-2, “Accounting for a Change or Projected Change in theTiming of Cash Flows Relating to Income Taxes Generated by a Leveraged LeaseTransaction.” The FSP requires that if, during the lease term, the projectedtiming of the income tax cash flows generated by a leveraged lease isrevised, the rate of return and the allocation of income must be recalculatedfrom the inception of the lease. At adoption, the change in the net investmentbalance resulting from the calculation would be recognized as an adjustment tothe beginning balance of retained earnings. Following adoption, a change in thenet investment balance resulting from a recalculation would be recognized as again or a loss in the period in which the assumption is changed. The FSP iseffective for all leveraged leases on January 1, 2007. The Company investsin Lease in-Lease-Out (LILO) transactions that have been challenged by theInternal Revenue Service (IRS). The Company has paid the IRS the income taxassociated with the LILO transactions. However, the Company is defending the initialfiling position as to the timing of the tax benefits associated with thesetransactions. The Company will be required to recalculate these leases toreflect a potential change in the timing of income tax cash flows in accordancewith this FSP. The Company will adopt the FSP on January 1, 2007 andestimates that the cumulative effect of change in accounting upon adoption willrequire a reduction of the beginning balance of retained earnings ofapproximately $21 million, after tax. Any adjustment to retained earnings atadoption will be recognized in interest income during the remaining term of theaffected leases.

*Accounting forUncertainty in Income Taxes*

In July 2006, the FASB issued FIN No. 48, “Accountingfor Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109”,which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes.”  TheInterpretation establishes a “more-likely-than-not” recognition threshold thatmust be met before a tax benefit can be recognized in the financial statements.For tax positions that meet the more-likely-than-not threshold, an enterpriseshould recognize the largest amount of tax benefit that is greater than 50percent likely of being realized upon ultimate settlement with the taxingauthority. The Interpretation is effective January 1, 2007. The cumulativeeffect of applying the provisions of the Interpretation would be recognized as anadjustment to the beginning balance of retained 

F-64

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note1—Summary of Significant Accounting Policies and Nature of Operations(Continued)**

earnings. Uponadoption, the Company estimates that the impact of this Interpretation could bea reduction of beginning retained earnings of approximately $49 million.

*Accounting for FairValue Measurements*

In September 2006, theFASB issued SFAS No.157, “Fair Value Measurements.” The Statement defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosures about fairvalue measurements. Fair value is defined as the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. A three-level hierarchyranks the quality and reliability of information used to determine fair valueswith the highest priority given to quoted prices in active markets and modelvalues that include inputs based on unobservable data as the lowest level. TheStatement applies whenever other accounting standards require or permit assetsor liabilities to be measured at fair value. The Statement is effective January 1,2008. Management is currently evaluating the impact of this Statement on theCompany’s financial position and results of operations.

*Accounting for DefinedBenefit Pension and Other Postretirement Plans*

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106, and 132(R).”  The Statementrequires a company that sponsors a defined benefit pension plan or otherpostretirement benefit plan to recognize the funded status of the benefit planas an asset or liability, measured as the difference between the fair value ofplan assets and the benefit obligation. It requires immediate recognition ofpreviously unrecognized prior service costs and credits, unrecognized netactuarial gains or losses, and any unrecognized transition obligation or assetas components of other comprehensive income. The Statement was effective forthe year ended December 31, 2006. At adoption, the Company’s stockholders’equity was reduced by $161 million, net of tax. Disclosures required under thisstatement are contained in Note 9 to these consolidated financial statements.

*Effects of Prior YearMisstatements on Current Year Financial Statements*

In September 2006, theSEC staff issued Staff Accounting Bulletin (SAB) No.108, “Considering theEffects of Prior Year Misstatements When Quantifying Misstatements in CurrentYear Financial Statements.”  SAB 108provides guidance on quantifying and evaluating the materiality of unrecordedmisstatements. It requires the use of both the “iron curtain” and “rollover”approaches in quantifying and evaluating the materiality of a misstatement. Underthe iron curtain approach the error is quantified as the cumulative amount bywhich the current year balance sheet is misstated. The rollover approachquantifies the error as the amount by which the current year income statementis misstated. If either approach results in a material misstatement, financialstatement adjustments are required. SAB 108 was effective for the year ended December 31,2006. At adoption, there was no impact on the Company’s financial position orresults of operations.

**Note 2—Discontinued Operations**

During the third quarter 2005, the Bank signed a definitive agreementto sell its international correspondent banking operations (previously reportedas the International Banking Group for segment 

F-65

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note2—Discontinued Operations (Continued)**

reporting) to Wachovia Bank,N.A. effective October 6, 2005. This business consisted of internationalpayment and trade processing along with the related lending activities. Theprincipal legal closing of the transaction took place on October 6, 2005,with the Bank receiving $245 million in cash from Wachovia Bank, N.A. At theprincipal closing, no loans or other assets were acquired by Wachovia Bank N.A.and no liabilities were assumed. The Bank continued to operate theinternational business over a transition period of several months. All of theoffices designated for disposal were closed as of June 30, 2006. During2006, the Bank received an additional $4 million as a contingent purchase pricepayment.

The Company has accounted for this transaction as adiscontinued operation and restated its prior period financial statements. Theassets of the discontinued operations were reclassified as “held for sale” andaccounted for at the lower of cost or fair value less the costs to sell. Theremaining assets consist primarily of deposits with banks awaiting approval ofrepatriation of capital and unremitted profits and loans that are maturing in2008. The remaining liabilities consist primarily of accrued expenses, whichwill be settled when due.

Interest expense was attributed to discontinuedoperations based on average net assets. The amount of interest expenseallocated to discontinued operations during the years ended December 31,2004, 2005 and 2006 was $0.8 million, $15.5 million and $1.8 million,respectively.

The severance reserve balances at December 31,2005 and 2006 were $21.7 million and $2.0 million respectively. The decrease of$19.7 million from December 31, 2005 primarily is related to cash paymentsto employees.

At December 31,2005 and 2006, all assets related to the discontinued operations are recordedat the lower of cost or fair value, less costs of disposal. The assets andliabilities identified as discontinued operations were comprised of thefollowing:

| ** **                                                            | ** ** | **For the Years Ended**         | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
| **Assets**                                                            |       |                            |       |   |   |   |   |
| Cash and due from  banks                                              |       |                            | $          | 119,158 |   |   | $ | 18,422 |   |
| Interest bearing  deposits in banks                                   |       |                            | 138,762    |   |   | — |   |
| Loans                                                                 |       |                            | 724,084    |   |   | 1,337 |   |
| Due from customers on  acceptances                                    |       |                            | 42,612     |   |   | 377 |   |
| Premises and  equipment                                               |       |                            | 1,409      |   |   | — |   |
| Other assets                                                          |       |                            | 28,569     |   |   | 304 |   |
| Assets of  discontinued operations to be disposed or sold             |       |                            | $          | 1,054,594 |   |   | $ | 20,440 |   |
| **Liabilities**                                                       | ** ** |                            |       |   |   |   |   |
| Noninterest bearing  deposits                                         |       |                            | $          | 446,953 |   |   | $ | — |   |
| Interest bearing  deposits                                            |       |                            | 461,717    |   |   | — |   |
| Other liabilities                                                     |       |                            | 97,189     |   |   | 4,585 |   |
| Liabilities of discontinued  operations to be extinguished or assumed |       |                            | $          | 1,005,859 |   |   | $ | 4,585 |   |

 

F-66

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 2—DiscontinuedOperations (Continued)**

The components of income fromdiscontinued operations for the years ended December 31, 2004, 2005 and2006 are:

| ** **                                                      | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(Dollars in thousands)**                            | ** ** | **2004**                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net interest income                                             |       | $                                                             | 21,207     |   | $ | 20,252 |   | $ | 871 |   |
| Provision for loan  losses                                      |       | 10,757                                                        |       | 6,683 |   | — |   |
| Noninterest income                                              |       | 76,482                                                        |       | 298,725 |   | 13,110 |   |
| Noninterest expense                                             |       | 50,593                                                        |       | 106,712 |   | 31,038 |   |
| Income (loss) from  discontinued operations before income taxes |       | 36,339                                                        |       | 205,582 |   | (17,057 | ) |
| Income tax expense  (benefit)                                   |       | 13,879                                                        |       | 73,289 |   | (6,310 | ) |
| Income (loss) from  discontinued operations                     |       | $                                                             | 22,460     |   | $ | 132,293 |   | $ | (10,747 | ) |

 

Noninterest income for the years ended December 31, 2005 and 2006,included $228.8 million and $4 million, respectively as gain on sale of thebusiness. Noninterest expense for the year ended December 31, 2005included approximately $22.0 million of severance expense. In addition,compliance related expenses were $32.8 million and $8.7 million for the yearsended December 31, 2005 and 2006, respectively.

**Note 3—Securities**

The amortized cost, grossunrealized gains, gross unrealized losses, and fair values of securities arepresented below.

**Securities Available For Sale**

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2004**              | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Fair**              | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(Dollars in thousands)** | ** ** | **Value**             | ** ** | **Cost** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| U.S. Treasury                        |       | $                     | 53,375     |   | $ | 50,246 |   | $              — |   |   | $ | 287 |   |   | $ | 49,959 |   | $ | 60,060 |   |   | $ | 3 |   |   | $           189 |   | $ | 59,874 |   |
| Other U.S. government                |       | 3,875,679             |       | 902,802 |   | 161 |   |   | 14,571 |   |   | 888,392 |   | 751,636 |   |   | 109 |   |   | 7,548 |   | 744,197 |   |
| Mortgage-backed securities           |       | 6,003,426             |       | 5,351,677 |   | 7,798 |   |   | 123,941 |   |   | 5,235,534 |   | 5,744,088 |   |   | 11,015 |   |   | 110,092 |   | 5,645,011 |   |
| State and municipal                  |       | 74,127                |       | 65,620 |   | 4,152 |   |   | 378 |   |   | 69,394 |   | 58,855 |   |   | 3,419 |   |   | 308 |   | 61,966 |   |
| Asset-backed and debt securities     |       | 1,121,884             |       | 1,906,583 |   |  

14,214 |   |   | 7,172 |   |   | 1,913,625 |   | 2,210,983 |   |   | 12,139 |   |   |  

3,441  |   | 2,219,681 |   |
| Equity securities                    |       | 9,523                 |       | 10,980 |   | 929 |   |   | 799 |   |   | 11,110 |   | 23,007 |   |   | 1,165 |   |   | — |   | 24,172 |   |
| Foreign securities                   |       | 1,207                 |       | 1,266 |   | — |   |   | — |   |   | 1,266 |   | 1,321 |   |   | — |   |   | — |   | 1,321 |   |
| Total securities  available for sale |       | $                     | 11,139,221 |   | $ | 8,289,174 |   | $ | 27,254  |   |   | $ | 147,148 |   |   | $ | 8,169,280 |   | $ | 8,849,950 |   |   | $ | 27,850 |   |   | $   121,578  |   | $ | 8,756,222 |   |
|                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the years ended December 31, 2004, 2005 and2006, interest income included $3.6 million, $3.4 million and $3.1 million,respectively, from non-taxable securities and dividend income of $3.9 million,$4.4 million and $4.1 million, respectively, from equity securities.

The amortized cost and fairvalue of securities, by contractual maturity, are shown below. Expectedmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations, with or without call or prepaymentpenalties.

F-67

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 3—Securities (Continued)**

**Maturity Schedule of Securities**

| ** **                              | ** ** | **Securities**                            | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **Available for Sale **(1) | ** ** |
| ** **                              | ** ** | **December 31, 2006**           | ** ** |
| ** **                              | ** ** | **Amortized**                             | ** ** | **Fair** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Cost**                                  | ** ** | **Value** | ** ** |
| Due in one year or  less                |       | $                                         | 516,416    |   | $ | 512,254 |   |
| Due after one year  through five years  |       | 442,110                                   |       | 437,261 |   |
| Due after five years  through ten years |       | 2,430,190                                 |       | 2,394,760 |   |
| Due after ten years                     |       | 5,438,227                                 |       | 5,387,775 |   |
| Equity securities(2)                    |       | 23,007                                    |       | 24,172 |   |
| Total securities                        |       | $                                         | 8,849,950  |   | $ | 8,756,222 |   |

----

(1)                   The remainingcontractual maturities of mortgage-backed securities are classified withoutregard to prepayments. The contractual maturity of these securities is not areliable indicator of their expected life since borrowers have the right torepay their obligations at any time.

(2)                   Equitysecurities do not have a stated maturity.

In 2004, proceeds from salesof securities available for sale were $1.0 billion with gross realized gains of$2.0 million and gross realized losses of $14.1 million. In 2005, proceeds fromsales of securities available for sale were $1.6 billion with gross realizedgains of $0.7 million and gross realized losses of $50.7 million. In 2006,proceeds from sales of securities available for sale were $144 million withgross realized gains of $2.9 million and gross realized losses of $0.7 million.The loss of $0.7 million in 2006 resulted from the recognition of another-than-temporary impairment.

**Analysis of UnrealizedLosses on Securities Available for Sale**

At December 31,2006, the Company’s securities available for sale shown below were in acontinuous unrealized loss position for the periods less than 12 months and 12months or more.

| ** **                           | ** ** | **Less than 12 months** | ** ** | **12 months or more**  | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|-----------|------------|
| **(Dollars in thousands)** | ** ** | **Fair  Value**         | ** ** | **Unrealized  Losses** | ** ** | **Count** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Count** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Count** | ** ** |
| U.S. Treasury                        |       | $                       | —     |                   |       | $         | —     |   |   |   | — |   |   | $ | 49,875 |   |   | $ | 189 |   |   |   | 1 |   |   | $ | 49,875 |   |   | $ | 189 |   |   |   | 1 |   |   |
| Other U.S. government                |       | 146,098                 |       |                   | 651        |      |       |   | 3 |   |   | 547,990 |   |   | 6,897 |   |   |   | 18 |   |   | 694,088 |   |   | 7,548 |   |   |   | 21 |   |   |
| Mortgage-backed securities           |       | 707,334                 |       |                   | 2,186      |      |       |   | 31 |   |   | 3,660,514 |   |   | 107,906 |   |   |   | 265 |   |   | 4,367,848 |   |   | 110,092 |   |   |   | 296 |   |   |
| State and municipal                  |       | 1,194                   |       |                   | 2          |      |       |   | 2 |   |   | 25,674 |   |   | 306 |   |   |   | 86 |   |   | 26,868 |   |   | 308 |   |   |   | 88 |   |   |
| Asset-backed and debt securities     |       | 99,497                  |       |                   | 466        |      |       |   | 11 |   |   | 239,936 |   |   | 2,975 |   |   |   | 22 |   |   | 339,433 |   |   | 3,441 |   |   |   | 33 |   |   |
| Total securities  available for sale |       | $                       | 954,123    |                   |       | $         | 3,305      |   |   |   | 47 |   |   | $ | 4,523,989 |   |   | $ | 118,273 |   |   |   | 392 |   |   | $ | 5,478,112 |   |   | $ | 121,578 |   |   |   | 439 |   |   |

 

The Company’s securities areprimarily investments in debt securities, which the Company has the ability andintent to hold until recovery of the carrying value. The following describesthe nature of the investments, the causes of impairment, the severity andduration of the impairment, if applicable, and a discussion regarding how theCompany has determined that the unrealized loss is not other-than-temporary.

F-68

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note3—Securities (Continued)**

*U.S. TreasurySecurities*

U.S. Treasury securities aresecurities backed by the full faith and credit of the United States governmentand therefore have no risk of default. These securities are issued at a statedinterest rate and mature within one year. All of the unrealized losses on U.S.Treasury securities resulted from rising interest rates subsequent to purchase.Unrealized losses will decline as interest rates fall to the purchased yieldand as the securities approach maturity. Since the Company has the ability andintent to hold the U.S. Treasury securities until recovery of the carryingvalue, which could be maturity, the unrealized loss is considered temporary.

*Other U.S. GovernmentSecurities*

Other U.S. Governmentsecurities are securities issued by one of the several Government-SponsoredEnterprises (GSEs) such as Fannie Mae, Freddie Mac, Federal Home Loan Banks orFederal Farm Credit Banks. They are not backed by the full faith and credit ofthe United States government. These securities were issued with a statedinterest rate and mature in less than five years. All of the unrealized losseson other U.S. Government securities resulted from rising interest ratessubsequent to purchase. Unrealized losses will decline as interest rates fallto the purchased yield and as the securities approach maturity. Since theCompany has the ability and intent to hold the other U.S. Government securitiesuntil recovery of the carrying value, which could be maturity, the unrealizedloss is considered temporary.

*Mortgage-BackedSecurities*

Mortgage-backed securities areprimarily securities guaranteed by a GSE such as Fannie Mae or Freddie Mac. Thesesecurities are collateralized by residential mortgage loans and may be prepaidat par prior to maturity. All of the unrealized losses on the mortgage-backedsecurities resulted from rising interest rates subsequent to purchase. Becausethe likelihood of credit loss is remote, the securities are excluded from theperiodic evaluation of other-than-temporary impairment. The securities aresubject to the provisions of SFAS No. 91, “Accounting for Non-refundableFees and Costs Associated with Originating or Acquiring Loans and InitialDirect Costs of Leases” and any purchased premiums in excess of the par amountare evaluated for recoverability on a quarterly basis and the result of thatevaluation is recorded in interest income. Unrealized losses, beyond thepurchased premium, will decline as interest rates fall to the purchased yieldand as the securities approach contractual or expected maturity. Since theCompany has the ability and intent to hold the mortgage-backed securities untilrecovery of the par amount, which could be maturity, the unrealized loss isconsidered temporary.

*State and MunicipalSecurities*

State and municipal securitiesare primarily securities issued by state and local governments to financeoperating expenses and various projects. These securities are issued at astated interest rate and have varying expected maturities ranging up to 31years. The majority of the unrealized losses on the state and municipalsecurities resulted from rising interest rates subsequent to purchase, whichoccurred with the acquisition of Business Bank of California on January 16,2004. Unrealized losses will decline as interest rates fall to the purchasedyield and as the securities approach maturity. Since the Company has theability and intent to hold the state and municipal securities until recovery ofthe carrying value, which could be maturity, the unrealized loss is consideredtemporary.

F-69

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note3—Securities (Continued)**

*Asset-Backed and DebtSecurities*

Asset-backed and debtsecurities consist of credit card receivable securities and collateralized loanobligations (CLOs). Certain of these CLOs are highly illiquid and for whichfair values are difficult to obtain. Unrealized losses arise from risinginterest rates, widening credit spreads, credit quality of the underlyingcollateral, and the market’s opinion of the performance of the fund managers. Cashflow analysis of the underlying collateral provides an estimate ofother-than-temporary impairment, which is performed quarterly on thosesecurities below Aa investment grade. Any security with a change in creditrating is also subject to cash flow analysis to determine whether or not another-than-temporary impairment exists. Since the Company has the ability andintent to hold the asset-backed and debt securities until recovery of the carryingvalue, which could be maturity, the unrealized loss is considered temporary.

***Collateral***

The Company reports securities pledged as collateralin secured borrowings and other arrangements when the secured party can sell orrepledge the securities. These securities have been separately identified. Ifthe secured party cannot resell or repledge the securities of the Company,those securities are not separately identified. As of December 31, 2005and 2006, the Company had collateral pledged for borrowings and to securepublic and trust department deposits of $2.9 billion and $2.7 billion,respectively. These secured parties are not permitted to resell or repledgethose securities.

As of December 31, 2006,the Company had accepted securities with a value of $10.3 million as collateralthat it is permitted by contract to sell or repledge compared to none as of December 31,2005.

F-70

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 4—Loans and Allowance forLoan Losses**

A summaryof loans, net of unearned interest and fees of $13 million and $1 million, at December 31,2005 and 2006, respectively, is as follows:

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**     | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Commercial, financial  and industrial(1) |       | $                     | 11,450,955 |   | $ | 12,944,771 |   |
| Construction                             |       | 1,447,292             |       | 2,175,545 |   |
| Mortgage:                                |       |                  |       |   |   |
| Residential                              |       | 11,380,728            |       | 12,343,792 |   |
| Commercial                               |       | 5,682,624             |       | 6,028,242 |   |
| Total mortgage                           |       | 17,063,352            |       | 18,372,034 |   |
| Consumer:                                |       |                  |       |   |   |
| Installment                              |       | 891,062               |       | 1,137,401 |   |
| Revolving lines of credit                |       | 1,610,680             |       | 1,401,173 |   |
| Total consumer                           |       | 2,501,742             |       | 2,538,574 |   |
| Lease financing                          |       | 579,593               |       | 581,203 |   |
| Total loans held for investment          |       | 33,042,934            |       | 36,612,127 |   |
| Total loans held for sale                |       | 52,661                |       | 59,596 |   |
| Total loans                              |       | 33,095,595            |       | 36,671,723 |   |
| Allowance for loan losses                |       | 351,532               |       | 331,077 |   |
| Loans, net                               |       | $                     | 32,744,063 |   | $ | 36,340,646 |   |

----

(1)                   Included incommercial, financial and industrial loans at December 31, 2005 and 2006were overdrafts from various deposit accounts of $52.0 million and $100.3million, respectively.

Changes inthe allowance for loan losses were as follows:

| ** **                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**                                              | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Balance, beginning of  year                                                       |       | $                                           | 532,910    |   | $ | 399,156 |   | $ | 351,532 |   |
| Loans charged off                                                                 |       | (79,673                                     | )          | (46,545 | ) | (40,655 | ) |
| Recoveries of loans  previously charged off                                       |       | 55,597                                      |       | 49,555 |   | 25,207 |   |
| Total net loans charged off (recovered)                                           |       | (24,076                                     | )          | 3,010 |   | (15,448 | ) |
| Reversal of allowance  for loan losses                                            |       | (45,757                                     | )          | (50,683 | ) | (5,000 | ) |
| Foreign translation  adjustment and other net additions  (deductions)(1) (2) |       | (63,921                                     | )          | 49 |   | (7 | ) |
| Ending balance of  allowance for loan losses                                      |       | $                                           | 399,156    |   | $ | 351,532 |   | $ | 331,077 |   |
| Allowance for  off-balance sheet commitment losses(2)                             |       | 82,375                                      |       | 86,375 |   | 81,374 |   |
| Allowances for credit losses  balance, end of year                                |       | $                                           | 481,531    |   | $ | 437,907 |   | $ | 412,451 |   |

----

(1)                   Includes $5.7million related to the Business Bank of California acquisition and $12.6million related to the Jackson Federal Bank acquisition, both acquired in 2004.

(2)                   OnDecember 31, 2004, UnionBanCal Corporation transferred the allowance forlosses on off-balance sheet commitments of $82.4 million from the allowance forloan losses to other liabilities.

F-71

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 4—Loansand Allowance for Loan Losses (Continued)**

Nonaccrual loans totaled $59million and $42 million at December 31, 2005 and 2006, respectively. Therewere no renegotiated loans at December 31, 2005 and 2006. Loans 90 dayspast due and still accruing totaled $5.0 million and $9.3 million at December 31,2005 and 2006, respectively.

*Loan Impairment*

Impaired loans of the Company include commercial,financial and industrial, construction and commercial mortgage loans designatedas nonaccrual. When the value of an impaired loan is less than the recordedinvestment in the loan, a portion of the Company’s allowance for loan losses isallocated as an impairment allowance.

The Company’s policy for recognition of interestincome, charge offs of loans, and application of payments on impaired loans isthe same as the policy applied to nonaccrual loans.

Thefollowing table sets forth information about the Company’s impaired loans.

| ** **                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                   | ** ** | **2004**              | ** ** | **2005** | ** ** | **2006** | ** ** |
| Impaired loans with  an allowance                                                      |       | $                     | 81,015     |   | $ | 58,892 |   | $ | 26,739 |   |
| Impaired loans  without an allowance(1)                                                |       | 6,664                 |       | — |   | — |   |
| Total impaired loans(2)                                                                |       | $                     | 87,679     |   | $ | 58,892 |   | $ | 26,739 |   |
| Allowance for  impaired loans                                                          |       | $                     | 24,282     |   | $ | 13,293 |   | $ | 2,975 |   |
| Average balance of  impaired loans during the year                                     |       | $                     | 139,221    |   | $ | 45,769 |   | $ | 26,833 |   |
| Interest income recognized  during the year on nonaccrual loans at December 31(3) |       | $                     | 25,750     |   | $ | 16,426 |   | $ | 3,636 |   |

----

(1)                   These loans donot require an allowance for credit losses under SFAS No. 114 since thefair values of the impaired loans equal or exceed the recorded investments inthe loans.

(2)                   This amount wasevaluated for impairment using three measurement methods as follows: $41million, $45 million and $6 million was evaluated using the present valueof the expected future cash flows at December 31, 2004, 2005 and 2006,respectively; $9 million, $3 million and $11 million was evaluated using thefair value of the collateral at December 31, 2004, 2005 and 2006,respectively; and $38 million, $11 million and $10 million was evaluated using historicalloss factors at December 31, 2004, 2005 and 2006, respectively.

(3)                   Reflectsboth interest income recognized on an accrual-basis and on a cash-basis.

*Related Party Loans*

In some cases, the Company makesloans to related parties including its directors, executive officers, and theiraffiliated companies. At December 31, 2005, related party loansoutstanding to individuals who served as directors or executive officers andtheir affiliated companies at anytime during the year totaled $27 millioncompared to $20 million at December 31, 2006. In the opinion ofmanagement, these related party loans were made on substantially the sameterms, including interest rates and collateral requirements, as those termsprevailing in the market at the date these loans were made. During 2005 and2006, there were no loans to related parties that were charged off. Additionally,at December 31, 2005 and 2006, there were no loans to related parties thatwere nonperforming.

F-72

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 4—Loans and Allowance forLoan Losses (Continued)**

During2005 and 2006, the Company extended credit to BTMU, its majority stockholder,in the form of overdrafts in BTMU’s accounts with the Company in the ordinarycourse of business. There were no overdraft balances outstanding as ofDecember 31, 2005 and 2006.

**Note 5—Goodwill and OtherIntangible Assets**

The tablebelow reflects the Company’s identifiable intangible assets and accumulatedamortization at December 31, 2005 and 2006.

| ** **                         | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Dollars in thousands** | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization**   | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Core Deposit  Intangibles          |       | $                               | 67,237     |                            | $          | (44,973 | ) | $ | 22,264 |   | $ | 67,237 |   | $ | (54,545 | ) | $ | 12,692 |   |
| Rights-to-Expiration               |       | 36,608                          |       | (17,595                         | )          | 19,013 |   | 36,608 |   | (21,320 | ) | 15,288 |   |
| Other                              |       | 2,100                           |       | (761                            | )          | 1,339 |   | 2,100 |   | (1,150 | ) | 950 |   |
| Total                              |       | $                               | 105,945    |                            | $          | (63,329 | ) | $ | 42,616 |   | $ | 105,945 |   | $ | (77,015 | ) | $ | 28,930 |   |

 

Totalamortization expense for 2004, 2005 and 2006 was $19.5 million, $19.9 millionand $13.7 million, respectively.

| ** **                                               | ** ** | **Core Deposit  Intangibles** | ** ** | **Rights-to-  Expiration** | ** ** | **Other** | ** ** | **Total Identifiable  Intangible Assets** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|-----------|------------|-----------------------------------------------------|------------|
| Estimated amortization  expense for the years ending:    |       |                               |       |                       |       |      |       |                                                |       |   |   |
| 2007                                                     |       |                               | $          | 5,471                      |       | $         | 3,166      |                                                | $          | 299 |   |   | $ | 8,936 |   |
| 2008                                                     |       |                               | 3,245      |                       | 2,675      |      | 230        |                                                |       | 6,150 |   |
| 2009                                                     |       |                               | 1,764      |                       | 2,242      |      | 177        |                                                |       | 4,183 |   |
| 2010                                                     |       |                               | 807        |                       | 1,859      |      | 137        |                                                |       | 2,803 |   |
| 2011                                                     |       |                               | 443        |                       | 1,519      |      | 107        |                                                |       | 2,069 |   |
| thereafter                                               |       |                               | 962        |                       | 3,827      |      | —     |                                                |       | 4,789 |   |
| Total amortization expense  after December 31, 2006 |       |                               | $          | 12,692                     |       | $         | 15,288     |                                                | $          | 950 |   |   | $ | 28,930 |   |

 

Thechanges in the carrying amount of goodwill during 2004, 2005 and 2006 are shownbelow. Corrections of errors in the recognition of deferred taxes related tocertain bank acquisitions are included in the table. These errors had no impacton net income. Additionally, the Company’s annual impairment testing for 2004,2005 and 2006 resulted in no impairment of goodwill.

| **(Dollars in thousands)**               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance,  January 1,                          |       | $        | 226,556    |     | $          | 450,961  |       | $ | 454,015 |   |
| Acquired during the  years ended December 31, |       | 246,671  |       | —   |       | —   |       |
| Contingent period  adjustments                     |       | —   |       | (1,466   | )          | —   |       |
| Adjustment for  contingent consideration           |       | 1,710    |       | 1,993    |       | (526     | )          |
| Correction of an  error                            |       | (23,976  | )          | 2,527    |       | —   |       |
| Balance, December 31,                         |       | $        | 450,961    |     | $          | 454,015  |       | $ | 453,489 |   |

 

F-73

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note5—Goodwill and Other Intangible Assets (Continued)**

On January 16, 2004, the Company completed itsacquisition of Business Bank of California, and initially recordedapproximately $86 million of goodwill and $16 million of core depositintangible. The core deposit intangible is being amortized on an acceleratedbasis over an estimated life of 6 years.

On August 1, 2004, the Company completed itsacquisition of the business portfolio of CNA Trust Company (CNAT), and initiallyrecorded approximately $3 million of goodwill, $7 million of core depositintangible and $2 million in other intangible assets. The identifiableintangibles are being amortized on an accelerated basis over their estimatedlife of 7 years.

On October 28, 2004, theCompany completed its acquisition of Jackson Federal Bank, and initiallyrecorded approximately $139 million of goodwill and $6 million of core depositintangible. The core deposit intangible is being amortized on an acceleratedbasis over an estimated life of 7 years.

**Note 6—Premises and Equipment**

Premisesand equipment are carried at cost, less accumulated depreciation andamortization. In December 31, 2005, equipment cost included software indevelopment of approximately $24 million. Software in development is nowincluded in other assets. As of December 31, 2005 and 2006, the amountswere as follows:

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | **Depreciation and** | ** ** | **Net Book** | ** ** | ** ** | ** ** | **Depreciation and** | ** ** | **Net Book** | ** ** |
| **(Dollars in thousands)** | ** ** | **Cost**              | ** ** | **Amortization** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Land                                 |       | $                     | 65,250     |   |   | $ | — |   |   | $ | 65,250 |   | $ | 64,816 |   |   | $ | — |   |   | $ | 64,816 |   |
| Premises                             |       | 468,213               |       |   | 216,160 |   |   | 252,053 |   | 480,838 |   |   | 239,879 |   |   | 240,959 |   |
| Leasehold  improvements              |       | 187,255               |       |   | 124,908 |   |   | 62,347 |   | 209,964 |   |   | 142,513 |   |   | 67,451 |   |
| Furniture, fixtures  and equipment   |       | 599,437               |       |   | 443,013 |   |   | 156,424 |   | 606,786 |   |   | 484,710 |   |   | 122,076 |   |
| Total                                |       | $                     | 1,320,155  |   |   | $ | 784,081 |   |   | $ | 536,074 |   | $ | 1,362,404 |   |   | $ | 867,102 |   |   | $ | 495,302 |   |

 

Rental anddepreciation and amortization expenses were as follows.

| ** **                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**                        | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Rental expense of  premises                                 |       | $                                           | 55,989     |   | $ | 63,618 |   | $ | 56,283 |   |
| Less: rental income                                         |       | 15,205                                      |       | 12,961 |   | 11,642 |   |
| Net rental expense                                          |       | $                                           | 40,784     |   | $ | 50,657 |   | $ | 44,641 |   |
| Other net rental  (income) expense, primarily for equipment |       | $                                           | (237       | ) | $ | 711 |   | $ | 707 |   |
| Depreciation and  amortization of premises and equipment    |       | $                                           | 87,756     |   | $ | 88,822 |   | $ | 90,188 |   |

 

F-74

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note6—Premises and Equipment (Continued)**

Future minimum lease paymentsare as follows.

| **(Dollars in thousands)**                                    | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|
| Years ending  December 31,                                         |       |                            |       |   |   |
| 2007                                                                    |       |                            | $          | 54,270 |   |   |
| 2008                                                                    |       |                            | 53,406     |   |   |
| 2009                                                                    |       |                            | 49,516     |   |   |
| 2010                                                                    |       |                            | 43,969     |   |   |
| 2011                                                                    |       |                            | 35,921     |   |   |
| Later years                                                             |       |                            | 88,120     |   |   |
| Total minimum  operating lease payments                                 |       |                            | $          | 325,202 |   |   |
| Minimum rental income  due in the future under noncancellable subleases |       |                            | $          | 29,590 |   |   |

 

A majority of the leases provide for the payment oftaxes, maintenance, insurance, and certain other expenses applicable to theleased premises. Many of the leases contain extension provisions and escalationclauses.

On December 31, 2005, theCompany recorded a liability of $3.5 million for asset retirement obligationsrelated to both continuing and discontinued operations. These obligationsinclude environmental remediation on buildings and the removal of leaseholdimprovements from leased premises to be vacated. Premises and leaseholdimprovements include an increase of $1.9 million and $1.6 million, respectivelywith $0.3 million in accumulated depreciation and amortization for theseobligations. At December 31, 2006, the Company recorded an additionalliability for asset retirement obligations of $1.3 million. Additional obligations for hazardous materialdisposal and premise restoration related to continuing operations are notestimable due to the uncertainty of disposal or lease termination dates.

**Note 7—Other Assets**

*Cost Basis*

The Company invests in private capital funds eitherdirectly in the privately held companies or indirectly through private equityfunds. These investments are carried at cost. The investments’ fair value isestimated quarterly based on a company’s business model, current and projectedfinancial performance, liquidity and overall economic and market conditions. Iffair value is estimated to be below cost, an evaluation forother-than-temporary impairment is performed. If any of the factors used todetermine fair value indicate that a forecasted recovery is beyond a reasonableperiod of time, an other-than-temporary impairment is recorded. At December 31,2005, private capital investments were carried at cost of $110.4 million. At December 31,2006, private capital investments were carried at cost of $127.9 million andthere were no investments in private capital equity securities or funds withcosts in excess of fair value.

The Company also invests in limited liability partnerships and otherentities operating qualified affordable housing projects to receive taxbenefits in the form of tax deductions from operating losses and tax credits.  These low-income housing credit (LIHC)investments provide tax benefits to investors in the form of tax deductionsfrom operating losses and tax credits. The unguaranteed LIHC investments areinitially recorded at cost, and the carrying value is amortized over the streamof available tax credits and 

F-75

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 7—OtherAssets (Continued)**

tax benefits. At December 31,2005 and December 31, 2006, unguaranteed LIHC investments were carried atthe amortized cost of $141.8 million and $162.0 million, respectively.

The Company records foreclosedassets at the lower of cost or fair value, less selling expenses. At December 31,2005 and 2006, the value of foreclosed assets was $2.8 million and $0.6million, respectively.

*Equity Method*

The Company also invests in guaranteed LIHC investmentswhere the availability of tax credits are guaranteed by a creditworthy entity. Theseinvestments are accounted for under the effective yield method. The investmentsare initially recorded at cost and amortized over the period the tax creditsare allocated to provide a constant effective yield. At December 31, 2005and December 31, 2006, the guaranteed LIHC investments were carried at theamortized cost of $215.0 million and $216.7 million, respectively.

The Company invests in limitedliability partnerships that operate renewable energy projects. Tax credits,taxable income, and distributions associated with these renewable energyprojects are allocated to investors according to the terms of the partnershipagreements. These investments are accounted for under the equity method, withthe initial investment recorded at cost and the carrying value adjusted forpartnership allocations received. These investments are tested annually forimpairment. Impairment is evaluated based on projected operating results andrealizability of tax credits. At December 31, 2005 and December 31,2006, the carrying value of renewable energy investments was $56.2 million and$81.0 million, respectively. 

**Note 8—Deposits**

At December 31,2006, the Company had $390 million in domestic interest bearing time depositswith a remaining term of greater than one year, of which $117 million exceeded$100,000. Maturity information for all domestic interest bearing time depositswith a remaining term of greater than one year is summarized below.

| **(Dollars in thousands)**      | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| Due after one year  through two years     |       |                            | $          | 229,036 |   |   |
| Due after two years  through three years  |       |                            | 75,806     |   |   |
| Due after three years  through four years |       |                            | 46,959     |   |   |
| Due after four years  through five years  |       |                            | 34,898     |   |   |
| Due after five years                      |       |                            | 3,636      |   |   |
| Total                                     |       |                            | $          | 390,335 |   |   |

 

**Note 9—Employee Pension andOther Postretirement Benefits**

The following informationincludes both continuing and discontinued operations.

*Retirement Plan*

The Company maintains the Union Bank of California,N.A. Retirement Plan (the Pension Plan), which is a domestic noncontributorydefined benefit pension plan covering substantially all of the employees of 

F-76

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note9—Employee Pension and Other Postretirement Benefits (Continued)**

the Company.The Pension Plan provides retirement benefits based on years of creditedservice and the final average compensation amount, as defined in the PensionPlan. Employees become eligible for this plan after one year of service andbecome fully vested after five years of service. The Company’s funding policyis to make contributions between the minimum required and the maximumdeductible amount as allowed by the Internal Revenue Code. Contributions areintended to provide not only for benefits attributed to services to date, butalso for those expected to be earned in the future.

*Other PostretirementBenefits*

*General*

The Company maintains the Union Bank of CaliforniaEmployee Health Benefit Plan, which in part provides certain healthcarebenefits for its retired employees and life insurance benefits for thoseemployees who retired prior to January 1, 2001, which together arepresented as “Other Benefits.” The healthcare cost is shared between the Companyand the retiree. The life insurance plan is noncontributory. Theaccounting for the Other Benefits Plan anticipates future cost-sharingchanges that are consistent with the Company’s intent to maintain a levelof cost-sharing at approximately 25 to 50 percent, depending on age andlength of service with the Company. Assets set aside to cover such obligationsare primarily invested in mutual funds and insurance contracts.

*Prescription DrugBenefits*

In 2004, the Company recorded a $6.1 million reductionin employee benefit expense associated with the remeasurement of ourpostretirement benefits as a result of the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (“The Act”). The reduction isattributable to a federal subsidy provided by The Act to employers that sponsorretiree health care plans with drug benefits that are equivalent to thoseoffered under Medicare Part D. The effect of the subsidy on themeasurement of net periodic postretirement benefit cost for the year ended December 31,2004 included a $3.1 million actuarial experience gain, a $1.1 millionreduction in service cost, and a $1.9 million reduction in interest cost on theaccumulated postretirement benefit obligation (APBO). The effect of the subsidyrelated to benefits attributed to past service in measuring the Company’sJanuary 1, 2004 APBO was a reduction of $30.8 million. This is reflectedin the 2004 actuarial gain of $35.9 million in the benefit obligations forother benefits noted below.

Thefollowing table sets forth the fair value of the assets in the Company’sdefined benefit pension plan and other postretirement benefit plan as ofDecember 31, 2004, 2005 and 2006.

| ** **                                   | ** ** | **Pension Benefits**                   | ** ** | **Other Benefits**                     | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** | **Years Ended December 31,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Change in plan assets**                    |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Fair value of plan assets, beginning of year |       | $                                           | 904,878    |                                        | $          | 1,082,823 |   | $ | 1,332,261 |   | $ | 106,245 |   | $ | 122,600 |   | $ | 137,156 |   |
| Actual return on plan assets                 |       | 104,649                                     |       | 93,729                                      |       | 195,241 |   | 10,872 |   | 6,859 |   | 19,865 |   |
| Employer contributions                       |       | 100,000                                     |       | 182,000                                     |       | 100,000 |   | 15,286 |   | 16,952 |   | 17,475 |   |
| Plan participants’ contributions        |       | —                                      |       | —                                      |       | — |   | 2,444 |   | 2,612 |   | 2,612 |   |
| Benefits paid                                |       | (26,704                                     | )          | (26,291                                     | )          | (32,406 | ) | (12,247 | ) | (11,867 | ) | (12,298 | ) |
| Fair value of plan  assets, end of year      |       | $                                           | 1,082,823  |                                        | $          | 1,332,261 |   | $ | 1,595,096 |   | $ | 122,600 |   | $ | 137,156 |   | $ | 164,810 |   |

 

F-77

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 9—Employee Pension andOther Postretirement Benefits (Continued)**

Thefollowing table provides the Company’s actual period-end asset allocation byasset category for the Pension Plan and Other Benefits Plan.

| ** **                       | ** ** | **Pension Plan** | ** ** | **Other Benefits Plan** | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **December 31,** | ** ** | **December 31,**   | ** ** |
| **Asset Category**          | ** ** | **2004**              | ** ** | **2005**                | ** ** | **2006** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Domestic equity  securities      |       |                  | 50         | %                       |       |   | 49 | % |   |   | 47 | % |   |   | 35 | % |   |   | 35 | % |   |   | 38 | % |   |
| International equity  securities |       |                  | 22         |                    |       |   | 22 |   |   |   | 21 |   |   |   | 15 |   |   |   | 17 |   |   |   | 17 |   |   |
| Fixed income debt  securities    |       |                  | 28         |                    |       |   | 29 |   |   |   | 27 |   |   |   | 21 |   |   |   | 22 |   |   |   | 22 |   |   |
| Insurance contracts              |       |                  | 0          |                    |       |   | 0 |   |   |   | 0 |   |   |   | 29 |   |   |   | 26 |   |   |   | 23 |   |   |
| Real estate                      |       |                  | 0          |                    |       |   | 0 |   |   |   | 5 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |
| Total                            |       |                  | 100        | %                       |       |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |   | 100 | % |   |

 

The investment objective for the Company’s PensionPlan and Other Benefits Plan is to maximize total return within reasonable andprudent levels of risk. The Plans’ asset allocation strategy is the principaldeterminant in achieving expected investment returns on the Plans’ assets. Theasset allocation strategy favors equities, with a target allocation of 67percent equity securities, 28 percent debt securities and 5 percent inreal estate investments. Additionally, the Other Benefits Plan holdsinvestments in an insurance contract with Hartford Life that is separate fromthe target allocation. Actual asset allocations may fluctuate within acceptableranges due to market value variability. If market fluctuations cause an assetclass to fall outside of its strategic asset allocation range, the portfoliowill be rebalanced as appropriate. A core equity position of domestic large capand small cap stocks will be maintained, in conjunction with a diversifiedportfolio of international equities and fixed income securities. Plan assetperformance is compared against established indices and peer groups to evaluatewhether the risk associated with the portfolio is appropriate for the level ofreturn.

The Company, aided by an independent advisor,periodically reconsiders the appropriate strategic asset allocation and theexpected long-term rate of return for plan assets. The independent advisorevaluates the investment return volatility of different asset classes andcompares the liability structure of the Company’s plan to those of othercompanies, while considering the Company’s funding policy to maintain a fundedstatus sufficient to meet participants’ benefit obligations, and reducinglong-term funding requirements and pension costs. Based on this information,the Company updates its asset allocation strategy and target investmentallocation percentages for the assets of the plan, as well as adopts anexpected long-term rate of return.

F-78

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note9—Employee Pension and OtherPostretirement Benefits (Continued)**

The following table sets forththe benefit obligation activity, the funded status and the over/(under) fundedstatus recognized in the most recent statement of financial position uponadoption of SFAS No. 158 at December 31, 2006 for each of the Company’splans.

| ** **                                | ** ** | **Pension Benefits**(1)                | ** ** | **Other Benefits**                     | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **Years Ended December 31,** | ** ** | **Years Ended December 31,** | ** ** |
| **(Dollars in thousands)**      | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Change in benefit obligation**          |       |                                        | ** ** | ** **                                  |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation, beginning of year     |       | $                                           | 819,552    |                                        | $          | 1,011,300 |   | $ | 1,176,738 |   | $ | 182,408 |   | $ | 147,625 |   | $ | 167,583 |   |
| Service cost                              |       | 37,659                                      |       | 45,530                                      |       | 54,007 |   | 5,643 |   | 6,204 |   | 7,227 |   |
| Interest cost                             |       | 52,240                                      |       | 58,351                                      |       | 65,147 |   | 9,438 |   | 8,461 |   | 9,197 |   |
| Plan participants’ contributions     |       | —                                      |       | —                                      |       | — |   | 2,444 |   | 2,612 |   | 2,612 |   |
| Amendments(2)                             |       | —                                      |       | —                                      |       | — |   | (4,109 | ) | — |   | — |   |
| Actuarial loss (gain)                     |       | 128,553                                     |       | 87,848                                      |       | (66,376 | ) | (35,952 | ) | 14,548 |   | 7,022 |   |
| Medicare part D employer subsidy payments |       | —                                      |       | —                                      |       | — |   | — |   | — |   | 552 |   |
| Benefits paid                             |       | (26,704                                     | )          | (26,291                                     | )          | (32,406 | ) | (12,247 | ) | (11,867 | ) | (12,298 | ) |
| Benefit obligation, end of year           |       | 1,011,300                                   |       | 1,176,738                                   |       | 1,197,110 |   | 147,625 |   | 167,583 |   | 181,895 |   |
| Over/(under) funded status                |       | $                                           | 71,523     |                                        | $          | 155,523 |   | $ | 397,986 |   | $ | (25,025 | ) | $ | (30,426 | ) | $ | (17,085 | ) |
| Unrecognized transition amount            |       | —                                      |       | —                                      |       |   |   | 16,279 |   | 14,244 |   |   |   |
| Unrecognized net actuarial loss           |       | 320,340                                     |       | 383,701                                     |       |   |   | 36,290 |   | 51,586 |   |   |   |
| Unrecognized prior service cost           |       | 2,390                                       |       | 1,323                                       |       |   |   | (1,153 | ) | (1,057 | ) |   |   |
| Prepaid benefit cost                      |       | $                                           | 394,253    |                                        | $          | 540,547 |   |   |   | $ | 26,391 |   | $ | 34,347 |   |   |   |

----

(1)                   This pension benefits table does not includethe obligations for the Executive Supplemental Benefit Plans (ESBPs).

(2)                   In 2004, the Company made changes to the plandesign for employer contribution subsidies resulting in a reduction of futureobligations.

The accumulated benefitobligation for the pension plan was $1,032.5 million and $1,056.6 million forDecember 31, 2005 and 2006, respectively.

At December 31, 2006, theCompany recognized an adjustment to accumulated other comprehensive income of$161.2 million, net of tax of $99.8 million. This adjustment for previouslyunrecognized transition liabilities, prior service costs and actuarial losseswas $125.6 million, net of tax for pension benefits and $35.6 million, net oftax for other benefits. The Company also recorded a pension asset of $398.0million, other benefits liabilities of $17.1 million and a reduction ofdeferred taxes liabilities of $99.8 million. The incremental effect of applyingthe recognition provisions of SFAS No. 158 on the Company’s statement offinancial position as of December 31, 2006 is as follows.

| **(Dollars in thousands)**  | ** ** | **Before application of   SFAS No. 158** | ** ** | **Effect of Adjustment   Increase/(Decrease)** | ** ** | **After application of   SFAS No. 158** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Other assets                          |       |                                                              | $          | 2,392,612                                                     |       |                                                             |       | $ | (243,658 | ) |   |   | $ | 2,148,954 |   |   |
| Total assets                          |       |                                                              | $          | 52,863,234                                                    |       |                                                             |       | $ | (243,658 | ) |   |   | $ | 52,619,576 |   |   |
| Other liabilities                     |       |                                                              | $          | 1,627,636                                                     |       |                                                             |       | $ | (82,471 | ) |   |   | $ | 1,545,165 |   |   |
| Total liabilities                     |       |                                                              | $          | 48,130,646                                                    |       |                                                             |       | $ | (82,471 | ) |   |   | $ | 48,048,175 |   |   |
| Accumulated other  comprehensive loss |       |                                                              | $          | (98,187                                                       | )          |                                                             |       | $ | (161,187 | ) |   |   | $ | (259,374 | ) |   |
| Total stockholders' equity            |       |                                                              | $          | 4,732,588                                                     |       |                                                             |       | $ | (161,187 | ) |   |   | $ | 4,571,401 |   |   |

 

F-79

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note9—Employee Pension and Other Postretirement Benefits (Continued)**

The following tableillustrates the changes that would have been disclosed in accumulated othercomprehensive loss, before any income tax effect, if the recognitionrequirements of SFAS No. 158 had been applied throughout the periods endedDecember 31, 2004, 2005 and 2006. Pension benefits do not include the ExecutiveSupplemental Benefit Plans (ESBPs).

| **(Dollars in thousands)**                                      | ** ** | **Pension Benefits**           | ** ** | **Other Benefits**       | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| **Amounts Recognized in Other  Comprehensive Income** | ** ** | **Net Actuarial  (Gain)/Loss** | ** ** | **Prior Service  Costs** | ** ** | **Transition  Assets** | ** ** | **Net Actuarial  (Gain)/Loss** | ** ** | **Prior Service  Costs** | ** ** |
| **Balance,  January 1, 2004**                                             |       | $                                   | 227,741    |                          |       | $ | 3,457 |   |   | $ | 22,937 |   |   | $ | 78,099 |   |   |   | $ | (1,249 | ) |   |
| Arising during the  year                                                  |       | 107,033                             |       |                          | —     |   |   | (4,109 | ) |   | (37,813 | ) |   |   | — |   |   |
| Recognized in net  income during the year                            |       | (14,434                             | )          |                          | (1,067     | ) |   | (2,549 | ) |   | (3,996 | ) |   |   | 96 |   |   |
| **Balance,  December 31, 2004**                                           |       | 320,340                             |       |                          | 2,390      |   |   | 16,279 |   |   | 36,290 |   |   |   | (1,153 | ) |   |
| Arising during the  year                                                  |       | 89,985                              |       |                          | —     |   |   | — |   |   | 18,090 |   |   |   | — |   |   |
| Recognized in net  income during the year                            |       | (26,624                             | )          |                          | (1,067     | ) |   | (2,035 | ) |   | (2,794 | ) |   |   | 96 |   |   |
| **Balance,  December 31, 2005**                                           |       | 383,701                             |       |                          | 1,323      |   |   | 14,244 |   |   | 51,586 |   |   |   | (1,057 | ) |   |
| Arising during the  year                                                  |       | (148,178                            | )          |                          | —     |   |   | — |   |   | (979 | ) |   |   | — |   |   |
| Recognized in net  income during the year                            |       | (32,361                             | )          |                          | (1,067     | ) |   | (2,034 | ) |   | (4,242 | ) |   |   | 96 |   |   |
| **Balance, December 31, 2006**                                            |       | $                                   | 203,162    |                          |       | $ | 256 |   |   | $ | 12,210 |   |   | $ | 46,365 |   |   |   | $ | (961 | ) |   |

 

At December 31, 2006, the following amounts wererecognized in accumulated other comprehensive loss for pension and otherbenefits.

| ** **                                    | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **(Dollars in thousands)**          | ** ** | **Gross**                 | ** ** | **Tax**                 | ** ** | **Net of Tax** | ** ** | **Gross** | ** ** | **Tax** | ** ** | **Net of Tax** | ** ** |
| Transition liability                          |       | $                         | —     |                    | $          | — |   | $ | — |   | $ | 12,210 |   | $ | 4,670 |   |   | $ | 7,540 |   |   |
| Net actuarial loss                            |       | 203,162                   |       | 77,709                  |       | 125,453 |   | 46,365 |   | 17,735 |   |   | 28,630 |   |   |
| Prior service costs                           |       | 256                       |       | 98                      |       | 158 |   | (961 | ) | (367 | ) |   | (594 | ) |   |
| Adjustment for adoption of  SFAS No. 158 |       | 203,418                   |       | 77,807                  |       | 125,611 |   | 57,614 |   | 22,038 |   |   | 35,576 |   |   |
| Minimum pension liability adjustment          |       | 21,258                    |       | 8,131                   |       | 13,127 |   | — |   | — |   |   | — |   |   |
| Pension and other  benefits adjustment        |       | $                         | 224,676    |                    | $          | 85,938 |   | $ | 138,738 |   | $ | 57,614 |   | $ | 22,038 |   |   | $ | 35,576 |   |   |

 

The Company expects to makecash contributions of $50 million to the Pension Plan and $20 million to the OtherBenefits Plan for pension and postretirement benefits, respectively, in 2007.

F-80

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note9—Employee Pension and Other Postretirement Benefits (Continued)**

*Estimated FutureBenefit Payments and Subsidies*

Thefollowing pension and postretirement benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid over the next 10 yearsand Medicare Part D Subsidies are expected to be received over the next 10years.

| **(Dollars in thousands)** | ** ** | **Pension  Benefits** | ** ** | **Postretirement  Benefits** | ** ** | **Medical Part D  Subsidies** | ** ** |
|--------------------------------------|------------|-----------------------|------------|------------------------------|------------|-----------------------------------------|------------|
| 2007                                 |       | $                     | 37,390     |                         |       | $                                       | 11,362     |   |   |   | $ | 765 |   |   |
| 2008                                 |       | 41,184                |       |                         | 12,129     |                                    |       |   | 829 |   |   |
| 2009                                 |       | 45,715                |       |                         | 12,815     |                                    |       |   | 886 |   |   |
| 2010                                 |       | 50,460                |       |                         | 13,521     |                                    |       |   | 933 |   |   |
| 2011                                 |       | 55,659                |       |                         | 14,221     |                                    |       |   | 974 |   |   |
| Years 2012-2016                      |       | 374,464               |       |                         | 79,997     |                                    |       |   | 5,733 |   |   |
|                                      |            |                       |            |                              |            |                                         |            |  |  |  |  |  |  |  |

 

Thefollowing tables summarize the assumptions used in computing the present valueof the projected benefit obligations and the net periodic benefit cost.

| ** **                                                                                      | ** ** | **Pension Benefits**                   | ** ** | **Other Benefits**                     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                      | ** ** | **Years Ended December 31,** | ** ** | **Years Ended December 31,** | ** ** |
| ** **                                                                                      | ** ** | ** 2004 **                        | ** ** | ** 2005 **                        | ** ** | ** 2006 ** | ** ** | ** 2004 ** | ** ** | ** 2005 ** | ** ** | ** 2006 ** | ** ** |
| Discount rate in determining  expense                                                           |       |                                        | 6.25       | %                                           |       |   | 5.75 | % |   |   | 5.50 | % |   |   | 6.25 | % |   |   | 5.75 | % |   |   | 5.50 | % |   |
| Discount rate in  determining benefit obligations at year end                                   |       |                                        | 5.75       |                                        |       |   | 5.50 |   |   |   | 6.00 |   |   |   | 5.75 |   |   |   | 5.50 |   |   |   | 6.00 |   |   |
| Rate of increase in  future compensation levels for determining expense                         |       |                                        | 4.50       |                                        |       |   | 4.50 |   |   |   | 4.70 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Rate of increase in  future compensation levels for determining benefit obligations at year end |       |                                        | 4.50       |                                        |       |   | 4.70 |   |   |   | 4.70 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Expected return on plan  assets                                                                 |       |                                        | 8.25       |                                        |       |   | 8.25 |   |   |   | 8.25 |   |   |   | 8.25 |   |   |   | 8.25 |   |   |   | 8.25 |   |   |

 

| ** **                                   | ** ** | **Pension Benefits**                   | ** ** | **Other Benefits**                     | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** | **Years Ended December 31,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2004**                                    | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Components of net periodic  benefit cost** |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Service cost                                 |       | $                                           | 37,659     |                                        | $          | 45,530 |   | $ | 54,007 |   | $ | 5,643 |   | $ | 6,203 |   | $ | 7,227 |   |
| Interest cost                                |       | 52,240                                      |       | 58,351                                      |       | 65,147 |   | 9,438 |   | 8,461 |   | 9,198 |   |
| Expected return on  plan assets              |       | (83,130                                     | )          | (95,865                                     | )          | (113,439 | ) | (9,012 | ) | (10,401 | ) | (11,625 | ) |
| Amortization of prior  service cost          |       | 1,067                                       |       | 1,067                                       |       | 1,067 |   | (96 | ) | (96 | ) | (96 | ) |
| Amortization of  transition amount           |       | —                                      |       | —                                      |       | — |   | 2,549 |   | 2,035 |   | 2,034 |   |
| Recognized net  actuarial loss               |       | 14,434                                      |       | 26,624                                      |       | 32,361 |   | 3,996 |   | 2,794 |   | 4,242 |   |
| Total net periodic  benefit cost             |       | $                                           | 22,270     |                                        | $          | 35,707 |   | $ | 39,143 |   | $ | 12,518 |   | $ | 8,996 |   | $ | 10,980 |   |

 

F-81

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 9—EmployeePension and Other Postretirement Benefits (Continued)**

At December 31, 2006, theCompany estimates that the following amounts will be recognized in 2007 netperiodic benefit costs. These tables do not include the ESBPs.

| **(Dollars in thousands)**                                  | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| Transition liability                                                  |       |                      | $          | —                  |       |   |   | $ | 2,034 |   |   |
| Net actuarial loss                                                    |       |                      | 14,025     |                    |       |   | 3,074 |   |   |
| Prior service costs                                                   |       |                      | 256        |                    |       |   | (96 | ) |   |
| Amounts to be reclassified  from accumulated other comprehensive loss |       |                      | $          | 14,281                  |       |   |   | $ | 5,012 |   |   |

 

The Company’s assumed weighted-average healthcare costtrend rates are as follows.

| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Health care cost  trend rate assumed for next year                             |       | 7.25                                       | %          | 8.93 | % | 8.06 | % |
| Rate to which cost  trend rate is assumed to decline (the ultimate trend rate) |       | 5.00                                       | %          | 5.00 | % | 5.00 | % |
| Year the rate reaches the  ultimate trend rate                                 |       | 2008                                       |       | 2011 |   | 2011 |   |

 

The healthcare cost trend rateassumptions have a significant effect on the amounts reported for the HealthPlan. A one-percentage-point change in assumed healthcare cost trend rateswould have the following effects.

| ** **                                               | ** ** | **1-Percentage-**       | ** ** | **1-Percentage-**       | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Dollars in thousands)**                     | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
| Effect on total of  service and interest cost components |       |                    | $          | 2,564                   |       |   |   | $ | (2,100 | ) |   |
| Effect on postretirement  benefit obligation             |       |                    | 20,832     |                    |       |   | (17,594 | ) |   |

 

*ExecutiveSupplemental Benefit Plans*

The Company has several ESBPs, which provide eligibleemployees with supplemental retirement benefits. The plans are unfunded. Theaccrued liability for ESBPs included in other liabilities in the ConsolidatedBalance Sheets was $54 million at December 31, 2005 and $60 million at December 31,2006. The Company’s expense relating to the ESBPs for the periods ended December 31,2004, 2005, and 2006, was $4.1 million, $5.3 million and $6.4 million,respectively. These plans had intangible assets of $1.6 million, $1.2 millionand $0 million as of December 31, 2004, 2005, and 2006, respectively. Dueto an additional minimum liability, these plans also had accumulated othercomprehensive loss before taxes of $10.8 million, $17.0 million and $21.3million as of December 31, 2004, 2005, and 2006, respectively.

F-82

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 9—Employee Pension andOther Postretirement Benefits (Continued)**

*Section 401(k) SavingsPlans*

The Company has a definedcontribution plan authorized under Section 401(k) of the InternalRevenue Code. All benefits-eligible employees are eligible to participatein the plan. Employees may contribute up to 25 percent of their pre-taxcovered compensation or up to 10 percent of their after-tax coveredcompensation through salary deductions to a combined maximum of 25 percent. TheCompany contributes 50 percent of every pre-tax dollar an employeecontributes up to the first 6 percent of the employee’s pre-tax coveredcompensation. Employees are fully vested in the employer’s contributionsimmediately. In addition, the Company may make a discretionary annual profit-sharingcontribution up to 2.5 percent of an employee’s pay. This profit-sharingcontribution is for all eligible employees, regardless of whether an employeeis participating in the 401(k) plan, and is dependent on the Company’sannual financial performance. All employer contributions are tax deductible bythe Company. The Company’s combined matching contribution expense was $22million, $23 million, and $20 million for the years ended December 31,2004, 2005 and 2006, respectively.

**Note 10—Other NoninterestIncome and Noninterest Expense**

The details of othernoninterest income and noninterest expense are as follows.

**Other Noninterest Income**

| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**         | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Gain on sale of  merchant card portfolio     |       | $                                           | 93,000     |   | $ | — |   | $ | — |   |
| Private capital and  other investment income |       | 30,802                                      |       | 35,307 |   | 29,432 |   |
| International  commission and fees           |       | 10,642                                      |       | 11,316 |   | 9,616 |   |
| Gains on sale of  nonmortgage loans, net     |       | 2,188                                       |       | 122 |   | 313 |   |
| Other                                        |       | 83,252                                      |       | 98,840 |   | 111,000 |   |
| Total other  noninterest income              |       | $                                           | 219,884    |   | $ | 145,585 |   | $ | 150,361 |   |

 

**Other Noninterest Expense**

| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Advertising and  public relations    |       | $                                           | 37,965     |   | $ | 36,803 |   | $ | 44,007 |   |
| Data processing                      |       | 32,528                                      |       | 32,687 |   | 31,844 |   |
| Intangible asset  amortization       |       | 19,471                                      |       | 19,921 |   | 13,686 |   |
| Other                                |       | 120,901                                     |       | 112,501 |   | 123,520 |   |
| Total other  noninterest expense     |       | $                                           | 210,865    |   | $ | 201,912 |   | $ | 213,057 |   |

 

F-83

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 11—Income Taxes**

The following table is an analysisof the effective tax rate on continuing operations.

| ** **                                                         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Federal income tax rate                                            |       |                                        | 35         | % |   |   | 35 | % |   |   | 35 | % |   |
| Net tax effects of:                                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| State income taxes, net of  federal income tax benefit             |       |                                        | 4          |   |   |   | 2 |   |   |   | 2 |   |   |
| California state tax refund,  net of federal and state tax expense |       |                                        | —     |   |   |   | — |   |   |   | (7 | ) |   |
| Tax credits                                                        |       |                                        | (3         | ) |   |   | (3 | ) |   |   | (4 | ) |   |
| Other                                                              |       |                                        | —     |   |   |   | (1 | ) |   |   | — |   |   |
| Effective tax rate                                                 |       |                                        | 36         | % |   |   | 33 | % |   |   | 26 | % |   |

 

The components of income taxexpense were as follows.

| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**              | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Taxes currently payable:                          |       |                                        |       |   |   |   |   |
| Federal                                           |       | $                                           | 281,061    |   | $ | 263,737 |   | $ | 316,711 |   |
| State                                             |       | 40,214                                      |       | 26,226 |   | (89,668 | ) |
| Foreign                                           |       | 950                                         |       | 1,505 |   | 1,949 |   |
| Total currently payable                           |       | 322,225                                     |       | 291,468 |   | 228,992 |   |
| Taxes deferred:                                   |       |                                        |       |   |   |   |   |
| Federal                                           |       | 54,193                                      |       | 63,094 |   | 34,137 |   |
| State                                             |       | 22,515                                      |       | 3,317 |   | 8,498 |   |
| Foreign                                           |       | —                                      |       | (1,181 | ) | (4 | ) |
| Total deferred                                    |       | 76,708                                      |       | 65,230 |   | 42,631 |   |
| Total income tax expense on continuing operations |       | 398,933                                     |       | 356,698 |   | 271,623 |   |
| Income tax expense on discontinued operations     |       | 13,879                                      |       | 73,289 |   | (6,310 | ) |
| Total income taxes                                |       | $                                           | 412,812    |   | $ | 429,987 |   | $ | 265,313 |   |

 

F-84

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note11—Income Taxes (Continued)**

The components of the Company’snet deferred tax balances were as follows.

| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                       | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Deferred tax assets:                                       |       |                  |       |   |   |
| Allowance for loan and off-balance sheet commitment losses |       | $                     | 187,126    |   | $ | 177,003 |   |
| Accrued income and expense                                 |       | 94,594                |       | 89,765 |   |
| Unrealized losses on pension benefits                      |       | 6,376                 |       | 109,982 |   |
| Unrealized net losses on securities available for sale     |       | 45,899                |       | 35,850 |   |
| Unrealized net losses on cash flow hedges                  |       | 21,251                |       | 16,975 |   |
| Other                                                      |       | 10,449                |       | 5,570 |   |
| Total deferred tax assets                                  |       | 365,695               |       | 435,145 |   |
| Deferred tax liabilities:                                  |       |                  |       |   |   |
| Leasing                                                    |       | 484,493               |       | 508,825 |   |
| Depreciation                                               |       | 28,604                |       | 4,690 |   |
| Intangibles                                                |       | 10,789                |       | 8,057 |   |
| Pension liabilities                                        |       | 205,623               |       | 230,624 |   |
| Other                                                      |       | 208                   |       | 2,246 |   |
| Total deferred tax liabilities                             |       | 729,717               |       | 754,442 |   |
| Net deferred tax  liability                                |       | $                     | 364,022    |   | $ | 319,297 |   |

 

It is management’s opinion that no valuation allowanceis necessary because the tax benefits from the Company’s deferred tax assetsare expected to be realized through carrybacks to prior taxable years, futurereversals of existing temporary differences or in future tax returns.

In 2006, the State of California Franchise Tax Board approved asettlement between the Company and the State of California to recover taxespaid for the calendar years 1989 through 1995. The Company received a refund oftax and interest of $113.7 million ($72.8 million net of federal and statetaxes applicable to the refund). The refund was recognized as a credit to stateincome tax expense in 2006.

In 2005, the Company reduced federal income taxexpense by $10.0 million to reflect a reduction to its reserve for estimatedamounts owed to the Internal Revenue Service with respect to certain leverageleasing transactions. The change in estimate reflected management’s view of theliability based on settlement discussions with the IRS Appeals Division.

The Company has filed its 2004 and 2005, and intendsto file its 2006, California franchise tax returns on the worldwide unitarybasis, incorporating the financial results of MUFG and its worldwide affiliates.In 2005, the Company recognized a $4.1 million state income tax benefitprimarily to reflect the difference between the estimate of California statetax expense for 2004 and the actual tax reported in the 2004 Californiafranchise tax return. In 2005, the Company also recognized $3.1 million ofCalifornia Enterprise Zone tax credits for which it qualified during the year.

In 2004, the Companyrecognized a $7.8 million state income tax expense primarily to reflect thedifference between the estimate of California state tax expense for 2003 andthe actual tax reported in the 2003 California franchise tax return.

F-85

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 12—Borrowed Funds**

The following is a summary ofthe major categories of borrowed funds:

| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                                                  | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Federal funds purchased and  securities sold under repurchase agreements with weighted average interest  rates of 3.97% and 5.18% at December 31, 2005 and 2006, respectively(1) |       | $                     | 651,529    |   | $ | 1,083,927 |   |
| Commercial paper, with  weighted average interest rates of 3.60% and 4.99% at December 31, 2005  and 2006, respectively                                                          |       | 680,027               |       | 1,661,163 |   |
| Other borrowed funds, with  weighted average interest rates of 4.05% and 5.12% at December 31, 2005  and 2006, respectively                                                      |       | 134,485               |       | 432,401 |   |
| Total borrowed funds                                                                                                                                                                  |       | $                     | 1,466,041  |   | $ | 3,177,491 |   |
| Federal funds purchased and securities sold under  repurchase agreements:                                                                                                             |       |                  |       |   |   |
| Maximum outstanding at any  month end                                                                                                                                                 |       | $                     | 2,285,569  |   | $ | 1,083,927 |   |
| Average balance during the  year                                                                                                                                                      |       | 898,107               |       | 701,614 |   |
| Weighted average interest  rate during the year(1)                                                                                                                                    |       | 2.88                  | %          | 4.80 | % |
| Commercial paper:                                                                                                                                                                     |       |                  |       |   |   |
| Maximum outstanding at any  month end                                                                                                                                                 |       | $                     | 1,390,504  |   | $ | 1,859,747 |   |
| Average balance during the  year                                                                                                                                                      |       | 1,086,088             |       | 1,582,226 |   |
| Weighted average interest  rate during the year                                                                                                                                       |       | 2.92                  | %          | 4.74 | % |
| Other borrowed funds:                                                                                                                                                                 |       |                  |       |   |   |
| Maximum outstanding at any  month end                                                                                                                                                 |       | $                     | 286,342    |   | $ | 794,701 |   |
| Average balance during the  year                                                                                                                                                      |       | 168,220               |       | 294,977 |   |
| Weighted average interest  rate during the year                                                                                                                                       |       | 3.75                  | %          | 5.20 | % |

----

(1)                   Weightedaverage interest rates provided relate to external funding and do not reflectthe expenses allocated on net funding to discontinued operations. For furtherinformation, see Note 2 to our Consolidated Financial Statements.

At December 31, 2006, federal funds purchased andsecurities sold under repurchase agreements had a weighted average remainingmaturity of less than 4 days. The commercial paper outstanding had a weightedaverage remaining tenure of 22 days.

Included in other borrowedfunds in 2005 and 2006 are assumed mortgage notes related to the Company’sadministrative facility at Monterey Park, California. At December 31,2006, the notes consisted of 10 zero coupon notes with varying maturity datesthrough 2011. Maturities of these notes for the next five years are as follows:$4.9 million in 2007, $5.6 million in 2008, $6.2 million in 2009, $6.2 millionin 2010 and $6.4 million in 2011.

F-86

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 13—Medium And Long-Term Debt**

Thefollowing is a summary of the Company’s medium-term senior debt and long-termsubordinated debt.

| ** **                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                       | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Medium-Term debt, fixed rate  5.75% senior notes due December 2006                                                                                    |       | $                     | 200,968    |   | $ | — |   |
| Long-Term subordinated debt:                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| 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 BTMU. |       | 199,926               |       | 199,976 |   |
| Fixed rate 5.25% notes due  December 2013                                                                                                             |       | 400,201               |       | 395,928 |   |
| Fixed rate 5.95% notes due  May 2016                                                                                                                  |       | —                |       | 722,943 |   |
| Total medium and long-term  debt                                                                                                                           |       | $                     | 801,095    |   | $ | 1,318,847 |   |

 

*Medium-Term Debt*

In December 2006, theCompany’s medium-term notes matured. Prior to the maturity, the Company hadconverted its 5.75 percent fixed rate on these notes to a floating rate ofinterest utilizing a $200 million notional interest rate swap, which qualifiedas a fair value hedge. At inception of the hedge relationship, this transactionmet all of the requirements for utilizing the shortcut method for measuringeffectiveness under SFAS No. 133 “Accounting for Derivative Instrumentsand Hedging Activities.”

*Long-Term debt*

In June 1997, the Company issued $200 million offloating-rate subordinated debt due in June 2007. These notes bearinterest at 0.325 percent above 3-month LIBOR and are payable to theholder of the note, BTMU. As of December 31, 2006, the weighted averageinterest rate of the floating rate notes was 5.46 percent.

On December 8, 2003, the Company issued $400million of long-term subordinated debt. For the year ended December 31,2006, the weighted average interest rate of the long-term subordinated debt,including the impact of the deferred issuance costs, was 5.39 percent. Thenotes are junior obligations to the Company’s existing and future outstandingsenior indebtedness and ranked equally with the existing long-term subordinateddebt with a par value of $200 million.

The Company has converted its 5.25 percent fixed rateon these notes to a floating rate of interest utilizing a $400 million notionalinterest rate swap, which qualified as a fair value hedge at December 31,2006. This transaction meets all of the requirements for utilizing the shortcutmethod for measuring effectiveness under SFAS No. 133. The market valueadjustment to the long-term debt was an unrealized gain of $3.1 million, andthe fair value of the hedge was an unrealized loss of $3.1 million. Theweighted average interest rate, including the impact of the hedge and deferredissuance costs, was 5.77 percent for the year ended December 31, 2006.

On May 11, 2006, the Bank issued $700 million of ten-yearsubordinated notes due on May 11, 2016. The subordinated notes, which wereissued at a discount price of 99.61 percent of their face value, bear a fixedinterest rate of 5.95 percent, payable semi-annually on May 11 and November 11,with the 

F-87

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note13—Medium And Long-Term Debt (Continued)**

first interest payment date onNovember 11, 2006. For the year ended December 31, 2006, the weightedaverage interest rate of the long-term subordinated debt, including the impactof the deferred issuance costs, was 6.02 percent. The subordinated notes arejunior obligations to the Bank’s existing and future outstanding seniorindebtedness and the claims of depositors and general creditors of the Bank.The subordinated notes are not redeemable at the option of the Bank prior tomaturity or subject to repayment at the option of the holders prior tomaturity.

The Bank has converted its 5.95 percent fixed rate onthese notes to a floating rate of interest utilizing $700 million notionalamount of interest rate swaps, which qualified as a fair value hedge at December 31,2006. This transaction meets all of the requirements for utilizing the shortcutmethod for measuring hedge effectiveness. The market value adjustment to thelong-term debt was an unrealized loss of $25.5 million, and the fair value ofthe hedge was an unrealized gain of $25.5 million. After including the impactof the related hedge, the amortization of discount and deferred issuance costs,the weighted average interest rate of the subordinated notes was 5.80 percentfor the year ended December 31, 2006.

The floating rate and fixed rate subordinated debtqualify as Tier 2 risk-based capital under the Federal Reserve Board guidelinesfor assessing regulatory capital. For the Company’s and the Bank’s totalrisk-based capital ratios, the amount of notes that qualify as capital isreduced as the notes approach maturity. For the years ended December 31,2005 and 2006, $440 million and $1.1 billion of the notes, respectively,qualified as risk-based capital for the Company. For the years ended December 31,2005 and 2006, $20 million and $700 million of notes, respectively, qualifiedas risk-based capital for the Bank.

Provisions of the subordinatednotes restrict the Company’s ability to engage in mergers, consolidations, andtransfers of substantially all assets.

**Note 14—UnionBanCal Corporation—JuniorSubordinated Debt Payable To Subsidiary Grantor Trust**

On March 23, 2000, Business Capital Trust Iissued $10 million preferred securities to the public and $0.3 million commonsecurities to the Company. The proceeds of such issuances were invested byBusiness Capital Trust I in $10.3 million aggregate principal amount of theCompany’s 10.875 percent debt securities due March 8, 2030 (the TrustNotes). The Trust Notes represent the sole asset of Business Capital Trust I. TheTrust Notes mature on March 8, 2030, bear interest at the rate of 10.875percent, payable semi-annually, and are redeemable by the Company at a premium(with premium declining each year) beginning on or after March 8, 2010through March 7, 2020 plus any accrued and unpaid interest to theredemption date. On or after March 8, 2020, the Trust Notes are redeemableby the Company at 100 percent of the principal amount.

Holders of the preferred and common securities areentitled to cumulative cash distributions at an annual rate of 10.875 percentof the liquidation amount of $1,000 per capital security. The preferredsecurities are subject to mandatory redemption upon repayment of the TrustNotes and are callable at a premium (with premium declining each year) at105.438 percent of the liquidation amount beginning on or after March 8,2010 through March 7, 2020 plus any accrued and unpaid interest to theredemption date. On or after March 8, 2020, the preferred securities areredeemable at 100 percent of the principal. Business Capital Trust I exists forthe sole purpose of issuing the preferred securities and investing the proceedsin the Trust Notes issued by the Company.

F-88

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 14—UnionBanCal Corporation—Junior SubordinatedDebt Payable To Subsidiary Grantor Trust (Continued)**

On September 7, 2000, MCB Statutory Trust Icompleted an offering of 10.6 percent preferred securities of $3.0 million tothe public and $0.1 million common securities to the Company. The proceeds ofsuch issuance were invested by MCB Statutory Trust I in $3.1 million aggregateprincipal amount of the Company’s 10.6 percent debt securities due September 7,2030 (the Trust Notes). The Trust Notes represent the sole assets of MCBStatutory Trust I. The Trust Notes mature on September 7, 2030, bearinterest at the rate of 10.6 percent, payable semi-annually and are redeemableby the Company at a premium (with premium declining each year) beginning on orafter September 7, 2010 through September 6, 2020 plus any accruedand unpaid interest to the redemption date. On or after September 7, 2020,the Trust Notes are redeemable by the Company at 100 percent of the principalamount.

Holders of the preferred securities and commonsecurities are entitled to cumulative cash distributions at an annual rate of10.6 percent of the liquidation amount of $1,000 per capital security. Thepreferred securities are subject to mandatory redemption upon repayment of theTrust Notes and are callable at a premium (with premium declining each year) at105.3 percent of the liquidation amount beginning on or after September 7,2010 through September 6, 2020 plus any accrued and unpaid interest to theredemption date. On or after September 7, 2020, the preferred securitiesare redeemable at 100 percent of the principal amount. MCB Statutory Trust Iexists for the sole purpose of issuing the preferred securities and investingthe proceeds in the Trust Notes issued by the Company.

On January 16, 2004, the Company completed theacquisition of Business Bancorp, which included Business Capital Trust I andMCB Statutory Trust I. In accordance with SFAS No. 141 the Trust Noteswere recorded at their fair value at the date of acquisition.

The weighted average interestrate for all Trust Notes were 6.12 percent and 6.31 percent for the years endedDecember 31, 2005 and 2006, respectively.

**Note 15—Dividend ReinvestmentAnd Stock Purchase Plan**

The Company has a dividendreinvestment and stock purchase plan for stockholders. Participatingstockholders have the option of purchasing additional shares at the full marketprice with cash payments of $25 to $3,000 per quarter. The Company obtainsshares required for reinvestment primarily through open market purchases.During 2004, 2005 and 2006, 100,596 shares, 88,560 shares and 102,449 shares,respectively, were required for dividend reinvestment purposes, of which 308shares, zero shares and zero shares were considered new issuances during 2004,2005 and 2006, respectively. BTMU did not participate in the plan in 2004, 2005or 2006.

**Note 16—Management Stock Plans**

The Company has two management stock plans. The Year2000 UnionBanCal Corporation Management Stock Plan, as amended (the 2000 StockPlan), and the UnionBanCal Corporation Management Stock Plan, restatedeffective June 1, 1997 (the 1997 Stock Plan), have 20.0 million and 6.6million shares, respectively, of the Company’s common stock authorized to beawarded to key employees, outside directors and consultants of the Company atthe discretion of the Executive Compensation and Benefits Committee of theBoard of Directors (the Committee). Employees on rotational assignment fromBTMU are not eligible for stock awards.

F-89

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note16—Management Stock Plans (Continued)**

The Committee determines the term of each stock optiongrant, up to a maximum of ten years from the date of grant. The exercise priceof the options issued under the stock plans may not be less than the fairmarket value on the date the option is granted. Beginning in 2006, the value ofoptions is recognized as compensation expense over the vesting period duringwhich the employees are required to provide service. Prior to January 1,2006, the Company’s unrecognized compensation expense for nonvested restrictedstock reduced retained earnings. With the adoption of SFAS No. 123(R), $19million was reclassified from retained earnings to additional paid-in capital.The value of the restricted stock at the date of grant is recognized as compensationexpense over its vesting period with a corresponding credit adjustment toadditional paid-in capital. All cancelled or forfeited options and restrictedstock become available for future grants.

Under the 2000 Stock Plan, the Company grants stockoptions and restricted stock and issues shares of common stock upon vesting ofperformance shares and restricted stock units that are settled in common stock.Under the 1997 Stock Plan, the Company issues shares of common stock uponexercise of outstanding stock options. The Company issues new shares of commonstock for all awards under the stock plans. At December 31, 2004, 2005 and2006, a total of 2,937,629 shares, 5,445,979 shares and 3,825,635 shares,respectively, were available for future grants under the 2000 Stock Plan asstock options, restricted stock or shares of common stock issued upon vestingof performance shares and restricted stock units settled in common stock. Theremaining shares under the 1997 Stock Plan are not available for future grants.

In the first quarter of 2006,the Committee determined that performance share awards granted in 2006 were tobe redeemed in shares.

*Stock Options*

Under the 2000 Stock Plan, the Company granted optionsto various key employees, including policy-making officers, and to non-employeedirectors for selected years. Under both stock plans, options granted toemployees vest pro-rata on each anniversary of the grant date and become fullyexercisable three years from the grant date, provided that the employee has completedthe specified continuous service requirement. The options vest earlier if theemployee dies, is permanently disabled, or retires under certain grant, age,and service conditions or terminates employment under certain conditions. Optionsgranted to non-employee directors are fully vested on the grant date andexercisable 33 1¤3percent on each anniversary under the 1997 Stock Plan, and are fully vested andexercisable on the grant date under the 2000 Stock Plan.

F-90

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note16—Management Stock Plans (Continued)**

The following is a summary ofstock option transactions under the stock plans.

| ** **                                       | ** ** | **For the Year Ended December 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Number of  Shares**                                             | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
| Options outstanding, beginning  of the period(1) |       | 8,696,589                                                              |       |   | $ | 45.26 |   |   |   |   |   |   |   |   |   |   |
| Granted                                          |       | 1,106,240                                                              |       |   | 69.85 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                        |       | (1,409,727                                                             | )          |   | 40.24 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                        |       | (66,861                                                                | )          |   | 62.96 |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of the period(1)        |       | 8,326,241                                                              |       |   | $ | 49.24 |   |   |   | 5.44 |   |   |   | $ | 110,012 |   |   |
| Options exercisable, end  of the period          |       | 5,910,252                                                              |       |   | $ | 43.72 |   |   |   | 5.12 |   |   |   | $ | 104,090 |   |   |

----

(1)                   Options notexpected to rest are included in options outstanding. Amounts are not material.

The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model that uses the assumptions noted in thefollowing table. Because the Black-Scholes option pricing model uses tranchesbased on expected terms that result in ranges of input assumptions, such rangesare disclosed below. Expected volatilities are based on historical data andimplied volatilities from traded options on the Company’s stock, and otherfactors. The Company uses historical data to estimate option exercise and employeeterminations within the valuation model. The expected term of an option grantedis derived from the output of the option valuation model, which is based onhistorical data and represents the period of time that the option granted isexpected to be outstanding. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant based on the expected term. 

| ** **                                                 | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted-average fair  value—per share                |       | $                                                            | 16.55      |   | $ | 13.38 |   | $ | 12.31 |   |
| Risk-free interest  rates (a range for 1 to 7 year tenors) |       | 2.8                                                          | %          | 3.4 - 4.3 | % | 4.3 - 5.05 | % |
| Expected volatility                                        |       | 40.0                                                         | %          | 27.0 | % | 16.6 - 22.9 | % |
| Weighted-average  expected volatility                      |       | 40.0                                                         | %          | 27.0 | % | 19.4 | % |
| Expected term (in  years)                                  |       | 5.0                                                          |       | 4.4 |   | 3.4 -   5.4 |   |
| Expected dividend yield                                    |       | 2.4                                                          | %          | 2.7 | % | 2.7 | % |
|                                                            |            |                                                              |            |  |  |  |  |  |  |  |

 

The total intrinsic value of options exercised during2004, 2005 and 2006 was $41.5 million, $50.4 million and $37.9 million,respectively.

The Company recognized $22.4 million of compensationcost for share-based payment arrangements related to stock option awards with$8.4 million of corresponding tax benefit during the year ended December 31,2006. As of December 31, 2006, the total unrecognized compensation costrelated to 

F-91

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note16—Management Stock Plans (Continued)**

nonvestedstock option awards was $15.9 million and the weighted-average period overwhich the cost is expected to be recognized was 0.9 year.

*Restricted Stock*

In general, restricted shares are granted under the2000 Stock Plan to key employees, and in 2005, to non-employee directors. Theawards of restricted stock granted to employees vest pro-rata on eachanniversary of the grant date and become fully vested four years from the grantdate, provided that the employee has completed the specified continuous servicerequirement. They vest earlier if the employee dies, is permanently and totallydisabled, retires under certain grant, age, and service conditions orterminates employment under certain conditions. The awards of restricted stockgranted to existing non-employee directors in 2005 vested in full in July 2006.Restricted stockholders have the right to vote their restricted shares andreceive dividends.

Thefollowing is a summary of the Company’s nonvested restricted stock awards.

| ** **                                                 | ** ** | **For the Year Ended December 31, 2006** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Number of Shares**                                         | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
| Nonvested restricted  awards, beginning of the period |       |                                                                   | 397,957    |   |   |   | $ | 64.06 |   |   |
| Granted                                                    |       |                                                                   | 594,029    |   |   |   | 62.07 |   |   |
| Vested                                                     |       |                                                                   | (136,669   | ) |   |   | 64.23 |   |   |
| Forfeited                                                  |       |                                                                   | (15,314    | ) |   |   | 66.31 |   |   |
| Nonvested restricted awards,  end of the period       |       |                                                                   | 840,003    |   |   |   | $ | 62.59 |   |   |

 

The total fair value of the restricted stock awardsvested was $0.2 million during 2004, $1.5 million during 2005 and $8.8 millionduring 2006.

The Company recognized $14.4million of compensation cost for share-based payment arrangements related torestricted stock awards with $5.4 million of corresponding tax benefit duringthe year ended December 31, 2006. At December 31, 2006, the totalunrecognized compensation cost related to nonvested restricted awards was $40.5million, and the weighted-average period over which it is expected to berecognized was 1.8 years.

*Restricted Stock Units*

In July 2006, the Company granted 12,150restricted stock units to non-employee directors with a weighted average grantdate fair value of $63.65 per share. These restricted stock units consist of aregular grant, and in the case of new non-employee directors, a regular grantand an initial grant. In general, the regular grant vests in full on the firstanniversary of the grant date, and the initial grant vests in three equalinstallments on each of the first three anniversaries of the grant date. Atgrant date, it was estimated that 7 percent of the shares would forfeit by thevesting date. During 2006, the Company recognized $0.3 million of compensationcost with a corresponding $0.1 million in tax benefits related to this year’sgrants. The restricted stock unit participants do not have voting or otherstockholder rights. However, the participants’ 

F-92

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note16—Management Stock Plans (Continued)**

stock unitaccounts receive dividend equivalents, reflecting the aggregate dividendsearned based on the total number of restricted stock units outstanding, in theform of additional restricted stock units. Participants may elect to defer thedelivery of vested shares of common stock at predetermined dates as defined inthe plan agreements. The Company will issue new shares under the 2000 StockPlan upon vesting of these grants, which are redeemable only in shares.

*Performance Share Plan*

Effective January 1, 1997, the Companyestablished a Performance Share Plan. At the discretion of the Committee,eligible participants may earn performance share awards to be redeemed in cashand/or shares three years after the date of grant. Performance shares arelinked to stockholder value in two ways: (1) the market price of theCompany’s common stock; and (2) return on equity, a performance measureclosely linked to value creation. Eligible participants generally receivegrants of performance shares annually. The plan was amended in 2004 increasingthe total number of shares that can be granted under the plan to 2.6 millionshares. There were 2,252,183 performance shares, 2,193,383 performance shares,and 2,132,333 performance shares remaining for future awards as of December 31,2004, 2005 and 2006, respectively. The Company granted 88,500 shares in 2004,78,000 shares in 2005 and 62,100 shares in 2006. All performance shares grantedprior to 2006 are redeemable in cash and are therefore being accounted for asliabilities. No performance shares were forfeited in 2004, 19,200 performanceshares were forfeited in 2005 and 1,050 performance shares were forfeited in2006. The value of a performance share under the liability method is equal tothe average month-end closing price of the Company’s common stock for the finalsix months of the performance period. All cancelled or forfeited performanceshares become available for future grants. At December 31, 2005 and 2006,the Company’s liability for the cash settlement of the performance shares was$15.7 million and $11.7 million, respectively.

Under the Performance SharePlan, the Company granted 62,100 units with a weighted-average grant date fairvalue of $69.96 per share during the year ended December 31, 2006. Theseunits will be settled in stock at the vesting date of December 31, 2008. Atgrant date, it was estimated that 6 percent of the shares would forfeit by thevesting date. In 2006, the Company recognized $2.8 million of compensation costwith a corresponding $1.1 million in tax benefits related to this year’s grants.The Company will issue new shares under the 2000 Stock Plan upon vesting ofthese grants that are redeemable in shares.

**Note 17—Concentrations Of CreditRisk**

Concentrations of credit risk exist when changes ineconomic, industry or geographic factors similarly affect groups ofcounterparties whose aggregate credit exposure is material in relation to the Company’stotal credit exposure. Although the Company’s portfolio of financialinstruments is broadly diversified along industry, product and geographiclines, material transactions are completed with other financial institutions,particularly in the securities portfolio and in deposit accounts.

In connection with the Company’s efforts to maintain adiversified portfolio, the Company limits its exposure to any one country orindividual credit and monitors this exposure on a continuous basis. At December 31,2006, the Company’s most significant concentration of credit risk was with theU.S. Government and its agencies. The Company’s exposure, which primarilyresults from investment securities 

F-93

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note17—Concentrations Of Credit Risk (Continued)**

positions ininstruments issued by the U.S. Government and its agencies, was $6.2 billionand $6.4 billion at December 31, 2005 and 2006, respectively.

**Note 18—Fair Value OfFinancial Instruments**

The fair value of a financial instrument is the amountat which the instrument could be exchanged in a current transaction betweenwilling parties, other than in a forced or liquidation sale. All of the fairvalues presented below are as of their respective period-ends and have beenmade under this definition of fair value unless otherwise disclosed.

It is management’s belief that the fair valuespresented below are reasonable based on the valuation techniques and dataavailable to the Company as of December 31, 2005 and 2006, as more fullydescribed below. It should be noted that the operations of the Company aremanaged on a going concern basis and not on a liquidation basis. As a result,the ultimate value realized for the financial instruments presented could besubstantially different when actually recognized over time through the normalcourse of operations. Additionally, a substantial portion of an institution’sinherent value is its capitalization and franchise value. Neither of thesecomponents has been given consideration in the presentation of fair values thatfollow.

F-94

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 18—FairValue Of Financial Instruments (Continued)**

The table below presents thecarrying value and fair value of the specified assets, liabilities, andoff-balance sheet instruments held by the Company.

| ** **                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2005**              | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Carrying**          | ** ** | **Fair** | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| **(Dollars in thousands)**                              | ** ** | ** **            | ** ** | **Value** | ** ** | **Value** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Assets**                                                        |       |                  |       |   |   |   |   |   |   |
| Cash and cash equivalents                                         |       | $                     | 3,969,876  |   | $ | 3,969,876 |   | $ | 3,981,438 |   | $ | 3,981,438 |   |
| Trading account assets                                            |       | 312,655               |       | 312,655 |   | 376,321 |   | 376,321 |   |
| Securities available  for sale:                                   |       |                  |       |   |   |   |   |   |   |
| Securities pledged as   collateral                                |       | 96,994                |       | 96,994 |   | 89,184 |   | 89,184 |   |
| Held in portfolio                                                 |       | 8,072,286             |       | 8,072,286 |   | 8,667,038 |   | 8,667,038 |   |
| Loans, net of allowance for loan losses(1)                   |       | 32,181,670            |       | 31,526,845 |   | 35,765,943 |   | 34,945,686 |   |
| Private capital investments                                       |       | 110,448               |       | 110,448 |   | 127,908 |   | 127,908 |   |
| **Liabilities**                                                   |       |                  |       |   |   |   |   |   |   |
| Deposits:                                                         |       |                  |       |   |   |   |   |   |   |
| Noninterest bearing                                               |       | 19,489,377            |       | 19,489,377 |   | 17,113,890 |   | 17,113,890 |   |
| Interest bearing                                                  |       | 20,592,862            |       | 20,603,062 |   | 24,855,478 |   | 24,885,778 |   |
| Total deposits                                                    |       | 40,082,239            |       | 40,092,439 |   | 41,969,368 |   | 41,999,668 |   |
| Borrowed funds                                                    |       | 1,466,041             |       | 1,470,300 |   | 3,177,491 |   | 3,187,600 |   |
| Medium and long-term debt                                         |       | 801,095               |       | 797,518 |   | 1,318,847 |   | 1,309,365 |   |
| Junior subordinated debt payable to subsidiary grantor trust |       | 15,338                |       | 14,630 |   | 14,885 |   | 14,300 |   |
| **Off-Balance  Sheet Instruments**                                |       |                  |       |   |   |   |   |   |   |
| Commitments to extend credit                                      |       | 59,081                |       | 59,081 |   | 54,601 |   | 54,601 |   |
| Standby and  commercial letters of credit                    |       | 8,014                 |       | 8,014 |   | 6,697 |   | 6,697 |   |
|                                                                   |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                   Excludes leasefinancing, net of allowance.

The following methods and assumptions were used toestimate fair value of each class of financial instruments for which it ispracticable to estimate that value.

**Cash andcash equivalents:**   The carrying value of cash andcash equivalents is considered a reasonable estimate of fair value.

F-95

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**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 18—Fair Value OfFinancial Instruments (Continued)**

**Tradingaccount assets:**   Trading account assets are shortterm in nature and valued at market based on quoted market prices or dealerquotes. If a quoted market price is not available, the recorded amounts areestimated using quoted market prices for similar securities. Thus, carryingvalue is considered a reasonable estimate of fair value for these financialinstruments.

**Securities:**   Thefair value of securities is based on quoted market prices or dealer quotes. Ifa quoted market price is not available, fair value is estimated using quotedmarket prices for similar securities. Securities available for sale are carriedat their aggregate fair value.

**Loans:**   Thefair value for performing fixed and non-reference rate loans wasestimated by discounting the future cash flows using the current rates at whichsimilar loans would be made to borrowers with similar credit ratings and forsimilar remaining maturities and, where available, discount rates were based oncurrent market rates.

Loans that are on nonaccrual status were not includedin the loan valuation methods discussed previously. The fair value of theseassets was estimated assuming these loans were sold at their carrying valueless their impairment allowance.

The fair value of performing mortgage loans was basedon quoted market prices for loans with similar credit and interest rate riskcharacteristics.

The fair value of credit lines is assumed toapproximate their carrying value.

**Privatecapital investments:**   The value of privatecapital investments is determined by analyzing the value of the equitysecurities underlying the investments using available market information andappropriate valuation methodologies. The fair value approximates the carryingvalue of these instruments.

**Noninterestbearing deposits:**   The fair value of noninterestbearing deposits is the amount payable on demand at the reporting date. Thefair value of the core deposit intangible has not been estimated.

**Interestbearing deposits:**   The fair value of savingsaccounts and certain money market accounts is the amount payable on demand atthe reporting date. The fair value of fixed maturity certificates of depositwas estimated using rates currently being offered on certificates with similarmaturities.

**Borrowedfunds:**   The carrying values of federal fundspurchased and securities sold under repurchase agreements and other short-termborrowed funds are assumed to approximate their fair value due to their limitedduration characteristics. The fair value for commercial paper and term federalfunds purchased was estimated using market quotes.

**Mediumand long-term debt:**   The fair value of thefixed-rate senior and subordinated notes were estimated using market quotes.The carrying value for variable-rate subordinated capital notes isassumed to approximate fair market value.

**Trustnotes:**   The fair value of fixed-rate trust noteswere based upon either market quotes for those traded securities or marketquotes of similar securities, if not traded. This amount differs from the fairvalue of those securities under hedge accounting since a hypothetical valuebased on the present value of cash flows has been used for that purpose.

**Off-balance sheet instruments:**   Thecarrying value of off-balance sheet instruments represents the unamortized feeincome assessed based on the credit quality and other covenants imposed on the 

F-96

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 18—FairValue Of Financial Instruments (Continued)**

borrower. Since theamount assessed represents the market rate that would be charged for similaragreements, management believes that the fair value approximates the carryingvalue of these instruments.

**Note 19—DerivativeInstruments**

The Company is a party to certain derivative and otherfinancial instruments that are used for trading activities of the Company, to meetthe needs of customers, and to change the impact on the Company’s operatingresults due to market fluctuations in currency or interest rates.

Credit risk is defined as thepossibility that a loss may occur from the failure of another party to perform inaccordance with the terms of the contract, which exceeds the value of theexisting collateral, if any. The Company utilizes master netting agreements inorder to reduce its exposure to credit risk. Master netting agreements mitigatecredit risk by permitting the offset of amounts due from and to individualcounterparties in the event of default. Market risk is the possibility thatfuture changes in market conditions may make the financial instrument lessvaluable.

*Trading Activities inDerivative Instruments*

Derivative instruments used for trading purposes arecarried at fair value. The following table reflects the Company’s positionsrelating to trading activities in derivative instruments. Trading activitiesinclude both activities for the Company’s own account and as an accommodationfor customers. At December 31, 2005 and 2006, the majority of the Company’sderivative transactions for customers were essentially offset by contracts withother counterparties.

F-97

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note19—Derivative Instruments (Continued)**

The following is a summary ofderivative instruments held or written for trading purposes and customeraccommodations.

| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**              | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | **Unrealized**        | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **(Dollars in thousands)**                                | ** ** | **Gains**             | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| *Held or  Written for Trading Purposes and Customer Accommodations* |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Foreign exchange forward  contracts:                                |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to purchase                                             |       | $                     | 2,537      |   | $ | (12,416 | ) | $ | (9,879 | ) | $ | 7,349 |   | $ | (7,159 | ) | $ | 190 |   |
| Commitments to sell                                                 |       | 13,054                |       | (2,204 | ) | 10,850 |   | 8,257 |   | (8,021 | ) | 236 |   |
| Foreign exchange OTC  options:                                      |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Options purchased                                                   |       | 1,817                 |       | — |   | 1,817 |   | 2,108 |   | — |   | 2,108 |   |
| Options written                                                     |       | —                |       | (1,817 | ) | (1,817 | ) | — |   | (2,108 | ) | (2,108 | ) |
| Cross currency swaps:                                               |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Commitments to pay                                                  |       | —                |       | (4,994 | ) | (4,994 | ) | — |   | (3,899 | ) | (3,899 | ) |
| Commitments to receive                                              |       | 4,994                 |       | — |   | 4,994 |   | 3,899 |   | — |   | 3,899 |   |
| Energy contracts:                                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Option contracts                                                    |       | 47,091                |       | (46,471 | ) | 620 |   | 36,632 |   | (36,632 | ) | — |   |
| Swap contracts                                                      |       | 74,262                |       | (74,576 | ) | (314 | ) | 138,602 |   | (137,321 | ) | 1,281 |   |
| Interest rate contracts:                                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Caps purchased                                                      |       | 3,074                 |       | — |   | 3,074 |   | 2,356 |   | — |   | 2,356 |   |
| Floors purchased                                                    |       | 8                     |       | — |   | 8 |   | 10 |   | — |   | 10 |   |
| Caps written                                                        |       | —                |       | (3,074 | ) | (3,074 | ) | — |   | (2,356 | ) | (2,356 | ) |
| Floors written                                                      |       | —                |       | (8 | ) | (8 | ) | — |   | (10 | ) | (10 | ) |
| Swap contracts:                                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Pay variable/receive fixed                                          |       | 34,492                |       | (39,949 | ) | (5,457 | ) | 41,703 |   | (34,911 | ) | 6,792 |   |
| Pay fixed/receive variable                                          |       | 48,770                |       | (28,481 | ) | 20,289 |   | 42,660 |   | (33,732 | ) | 8,928 |   |
|                                                                |       | 230,099               |       |   |   |   |   | 283,576 |   |   |   |   |   |
| Effect of master  netting agreements                                |       | (3,960                | )          |   |   |   |   | (9,715 | ) |   |   |   |   |
| Total net credit exposure                                           |       | $                     | 226,139    |   |   |   |   |   | $ | 273,861 |   |   |   |   |   |
|                                                                     |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Derivative Instrumentsand Other Financial Instruments Used for Hedging*

Derivative positions areintegral components of the Company’s designated asset and liability managementactivities. The Company uses interest rate derivatives to manage thesensitivity of the Company’s net interest income to changes in interest rates.These instruments are used to manage interest rate risk relating to specifiedgroups of assets and liabilities, primarily LIBOR-based commercial loans,certificates of deposit, medium-term notes and subordinated debt. The followingdescribes the significant hedging strategies of the Company.

F-98

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note19—Derivative Instruments (Continued)**

*Cash Flow Hedges*

*Hedging Strategies forVariable Rate Loans and Certificates of Deposit and Other Time Deposits*

The Company engages in several types of cash flowhedging strategies for which the hedged transactions are forecasted future loaninterest payments, and the hedged risk is the variability in those payments dueto changes in the designated benchmark rate, i.e. U.S. dollar LIBOR. In thesestrategies, the hedging instruments are matched with groups of variable rateloans such that the tenor of the variable rate loans and that of the hedginginstrument are identical. Cash flow hedging strategies include the utilizationof purchased floor, cap, collar and corridor options and interest rate swaps. AtDecember 31, 2006, the weighted average remaining life of the currentlyactive (excluding any forward positions) cash flow hedges was approximately 1.7years.

The Company uses purchased interest rate floors tohedge the variable cash flows associated with 1-month LIBOR or 3-monthLIBOR indexed loans. Payments received under the floor contract offset thedecline in loan interest income caused by the relevant LIBOR index fallingbelow the floor’s strike rate.

The Company uses interest rate floor corridors tohedge the variable cash flows associated with 1-month LIBOR or 3-monthLIBOR indexed loans. Net payments to be received under the floor corridorcontracts offset the decline in loan interest income caused by the relevantLIBOR index falling below the corridor’s upper strike rate, but only to theextent the index falls to the lower strike rate. The corridor will not provideprotection from declines in the relevant LIBOR index to the extent it fallsbelow the corridor’s lower strike rate.

The Company uses interest rate collars to hedge thevariable cash flows associated with 1-month LIBOR or 3-month LIBORindexed loans. Net payments to be received under the collar contract offset thedecline in loan interest income caused by the relevant LIBOR index fallingbelow the collar’s floor strike rate while net payments to be paid will reducethe increase in loan interest income caused by the LIBOR index rising above thecollar’s cap strike rate.

The Company uses interest rate swaps to hedge thevariable cash flows associated with 1-month LIBOR or 3-month LIBORindexed loans. Payments to be received (or paid) under the swap contract willoffset the fluctuations in loan interest income caused by changes in therelevant LIBOR index. As such, these instruments hedge all fluctuations in theloans’ interest income caused by changes in the relevant LIBOR index.

The Company uses purchased interest rate caps to hedgethe variable interest cash flows associated with the forecasted issuance androllover of short-term, fixed rate CDs. In these hedging relationships, theCompany hedges the LIBOR component of the CD rates, which is 3-monthLIBOR, based on the CDs’ original term to maturity, which reflects theirrepricing frequency. Net payments to be received under the cap contract offsetthe increase in interest expense caused by the relevant LIBOR index risingabove the cap’s strike rate.

The Company uses interest rate cap corridors to hedge the variable cashflows associated with the forecasted issuance and rollover of short-term, fixedrate CDs. In these hedging relationships, the Company hedges the LIBORcomponent of the CD rates, either 1-month LIBOR, 3-month LIBOR, or6-month LIBOR, based on the original term to maturity of the CDs, whichreflects their repricing frequency. Net payments to be received under the capcorridor contract offset the increase in deposit interest expense caused by the

F-99

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note19—Derivative Instruments (Continued)**

relevant LIBOR index risingabove the corridor’s lower strike rate, but only to the extent the index risesto the upper strike rate. The corridor will not provide protection fromincreases in the relevant LIBOR index to the extent it rises above the corridor’supper strike rate.

Hedging transactions are structured at inception sothat the notional amounts of the hedge are matched with an equal principalamount of loans or CDs, the index and repricing frequencies of the hedge matchthose of the loans or CDs, and the period in which the designated hedged cashflows occurs is equal to the term of the hedge. As such, most of the ineffectivenessin the hedging relationship results from the mismatch between the timing ofreset dates on the hedge versus those of the loans or CDs. In 2006, the Companyrecognized a net gain of $0.1 million due to ineffectiveness, which isrecognized in other noninterest expense, compared to a net loss of $0.1 millionin 2005.

For cash flow hedges, basedupon amounts included in accumulated other comprehensive income at December 31,2006, the Company expects to realize approximately $25 million in net interestexpense during 2007. This amount could differ from amounts actually realizeddue to changes in interest rates and the addition of other hedges subsequent toDecember 31, 2006.

*Fair Value Hedges*

*Hedging Strategy forMedium-Term Notes*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s five-year, medium-term debtissuance, in order to convert the liability from a fixed rate to a floating rateinstrument. This strategy mitigates the changes in fair value of the hedgedliability caused by changes in the designated benchmark interest rate, U.S.dollar LIBOR.

The fair value hedgingtransaction for the medium-term notes was structured at inception to mirror allof the provisions of the medium-term notes, which allows the Company to assumethat no ineffectiveness exists.

*Hedging Strategy forSubordinated Debt*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s ten-year, subordinated debtissuance, and in a separate transaction, Union Bank of California, N.A.’sten-year, subordinated debt issuance, in order to convert these liabilitiesfrom fixed rate to floating rate instruments. This strategy mitigates thechanges in fair value of the hedged liability caused by changes in thedesignated benchmark interest rate, U.S. dollar LIBOR.

The fair value hedgingtransaction for the subordinated debt was structured at inception to mirror allof the provisions of the subordinated debt, which allows the Company to assumethat no ineffectiveness exists.

*Other*

The Company uses To-Be-Announced (TBA) contracts tofix the price and yield of anticipated purchases or sales of mortgage-backedsecurities that will be delivered at an agreed upon date. This 

F-100

----

**UnionBanCal Corporation and Subsidiaries Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note19—Derivative Instruments (Continued)**

strategyhedges the risk of variability in the cash flows to be paid or received uponsettlement of the TBA contract.

*Economic HedgingStrategy for “MarketPath” Certificates of Deposit*

The Company engages in an economic hedging strategy inwhich interest bearing certificates of deposit issued to customers, which aretied to the changes in the Standard and Poor’s 500 Index, are exchanged for afixed rate of interest. The Company accounts for the embedded derivative in thecertificates of deposit at fair value. A total return swap that encompasses thevalue of a series of options that had individually hedged each certificate ofdeposit is valued at fair value. The changes in the fair value of the embeddedderivative and the hedge instrument are recognized as interest expense.

The following table reflectssummary information on the Company’s derivative contracts used to hedge ormodify the Company’s risk as of December 31, 2005 and 2006.

| ** **                                          | ** ** | **December 31, 2005** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **Unamortized**                 | ** ** | **Unrealized**                  | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Unamortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **(Dollars in thousands)**                | ** ** | **Premiums**                    | ** ** | **Gains**                       | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Premiums** | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| *Held for  Asset and Liability Management Purposes* | ** ** |                            | ** ** | ** **                      |       |   | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Fair  Value Hedges and Hedged Items:                | ** ** |                            | ** ** | ** **                      |       |   | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** | ** ** |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |
| Interest  rate swap contracts:                      |       |                            |       | ** **                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Medium-term debt interest rate swap    |   |   | $  | —     | ** ** |   |   | $  | 980    |   |    |   | $  | — |    |   |   | $  | 980    |       |       |   | $  | — | ** ** |   |    | $  | — |   |    |   | $  | — |   |   |   | $  | — |   |   |
|----------------------------------------|--------|--------|---------|------------|------------|--------|--------|---------|--------|--------|---------|--------|---------|--------|---------|--------|--------|---------|--------|------------|------------|--------|---------|--------|------------|--------|---------|---------|--------|--------|---------|--------|---------|--------|--------|--------|--------|---------|--------|--------|--------|
| Medium-term note                       |   |   | —  | ** ** |       |   | — |    |   |   | (980    | )      |    |   | (980    | )      |   |    | — | ** ** |       |   | —  |   |       |   | —  |    |   |   | —  |   |    |
| Subordinated debt interest rate swaps  |   |   | —  | ** ** |       |   | 1,354  |    |   |   | —  |   |    |   | 1,354   |   |   |    | — | ** ** |       |   | 25,524  |   |       |   | (3,064  | )       |   |   | 22,460  |   |    |
| Subordinated debt                      |   |   | —  | ** ** |       |   | — |    |   |   | (1,354  | )      |    |   | (1,354  | )      |   |    | — | ** ** |       |   | 3,064   |   |       |   | (25,524 | )       |   |   | (22,460 | )      |    |
| Cash Flow  Hedges:                     |   |   |    | ** ** |       |   |   |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   |    |   |       |   |    |    |   |   |    |   |    |
| Interest  rate option contracts:       |   |   |    | ** ** |       |   |   |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   |    |   |       |   |    |    |   |   |    |   |    |
| Caps purchased                         |   |   | 1,166   | ** ** |       |   | 2,124  |    |   |   | —  |   |    |   | 3,290   |   |   |    | — | ** ** |       |   | —  |   |       |   | —  |    |   |   | —  |   |    |
| Caps written                           |   |   | —  | ** ** |       |   | — |    |   |   | (1,531  | )      |    |   | (1,531  | )      |   |    | — | ** ** |       |   | —  |   |       |   | —  |    |   |   | —  |   |    |
| Floors purchased                       |   |   | 1,920   | ** ** |       |   | — |    |   |   | (1,823  | )      |    |   | 97      |   |   |    | 28,978 | ** ** |       |   | —  |   |       |   | (9,782  | )       |   |   | 19,196  |   |    |
| Interest  rate swap contracts:         |   |   |    | ** ** |       |   |   |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   |    |   |       |   |    |    |   |   |    |   |    |
| Pay variable/receive fixed             |   |   | —  | ** ** |       |   | — |    |   |   | (54,412 | )      |    |   | (54,412 | )      |   |    | — | ** ** |       |   | —  |   |       |   | (34,618 | )       |   |   | (34,618 | )      |    |
| Economic  Hedges:                      |   |   |    | ** ** |       |   |   |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   |    |   |       |   |    |    |   |   |    |   |    |
| Swap  contract indexed to S&P 500: |   |   |    | ** ** |       |   |   |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   |    |   |       |   |    |    |   |   |    |   |    |
| Pay fixed/receive variable             |   |   | —  | ** ** |       |   | 454    |    |   |   | —  |   |    |   | 1,691   |   |   |    | — | ** ** |       |   | 772     |   |       |   | —  |    |   |   | 2,009   |   |    |
| MarketPath certificates of deposit     |   |   | —  | ** ** |       |   | — |    |   |   | (454    | )      |    |   | (454    | )      |   |    | — | ** ** |       |   | —  |   |       |   | (772    | )       |   |   | (772    | )      |    |
|                                   |   |   |    | ** ** |       |   | 4,912  |    |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   | 29,360  |   |       |   |    |    |   |   |    |   |    |
| Effect of master netting agreements    |   |   |    | ** ** |       |   | (980   | )       |   |   |    |   |    |   |    |   |   |    |   | ** ** |       |   | (20,948 | )      |       |   |    |    |   |   |    |   |    |
| Total net credit  exposure             |   |   |    | ** ** |       |   | $      | 3,932   |   |   |    |   |    |   |    |   |   |    |   |       | ** ** |   |    | $      | 8,412      |   |    |    |   |   |    |   |    |   |   |

 

F-101

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 20—Restrictions On Cash AndDue From Banks, Securities, Loans And Dividends**

Federal Reserve Board regulations require the Bank tomaintain reserve balances based on the types and amounts of deposits received.Average reserve balances were approximately $150 million and $104 millionfor the years ended December 31, 2005 and 2006, respectively.

As of December 31, 2005 and 2006, securitiescarried at $3.0 billion and $2.8 billion and loans of $12.1 billion and $13.3billion, respectively, were pledged as collateral for borrowings, to securepublic and trust department deposits, and for repurchase agreements as requiredby contract or law.

The Federal Reserve Act restricts the amount and theterms of both credit and non-credit transactions between a bank and itsnon-bank affiliates. Such transactions may not exceed 10 percent of the bank’scapital and surplus (which for this purpose represents Tier 1 and Tier 2capital, as calculated under the risk-based capital guidelines, plus thebalance of the allowance for loan losses excluded from Tier 2 capital) with anysingle non-bank affiliate and 20 percent of the bank’s capital and surplus withall its non-bank affiliates. Transactions that are extensions of credit mayrequire collateral to be held to provide added security to the bank. See Note21 to these consolidated financial statements for further discussion ofrisk-based capital. At December 31, 2006, $99.2 million remainedoutstanding on fourteen Bankers Commercial Corporation notes payable to theBank. The respective notes were fully collateralized with equipment leasespledged by Bankers Commercial Corporation.

The declaration of a dividendby the Bank to the Company is subject to the approval of the Office of theComptroller of the Currency (OCC) if the total of all dividends declared in thecurrent calendar year plus the preceding two years exceeds the Bank’s total netincome in the current calendar year plus the preceding two years. The paymentof dividends is also limited by minimum capital requirements imposed onnational banks by the OCC.

**Note 21—Regulatory Capital Requirements**

The Company and the Bank are subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory,and possibly additional discretionary, actions by regulators that, ifundertaken, could have a material effect on the Company’s ConsolidatedFinancial Statements. Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Company and the Bank must meetspecific capital guidelines that involve quantitative measures of the Company’sand Bank’s assets, liabilities, and certain off-balance sheet items ascalculated under regulatory accounting practices. The capital amounts and theBank’s prompt corrective action classification are also subject to qualitativejudgments by the regulators about components, risk weightings and other factors.Prompt corrective action provisions are not applicable to bank holdingcompanies such as the Company.

Quantitative measures established by regulation toensure capital adequacy require the Company and the Bank to maintain minimumamounts 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) andof Tier 1 capital (as defined) to quarterly average assets (as defined).Management believes, as of December 31, 2005 and 2006, that the Companyand the Bank met all capital adequacy requirements to which they are subject.

The most recent notification from the OCC categorized the Bank as “well-capitalized”under the regulatory framework for prompt corrective action. To be categorizedas “well-capitalized,” the Bank must 

F-102

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note21—Regulatory Capital Requirements (Continued)**

maintain a minimum total risk-basedcapital ratio of 10 percent, a Tier 1 risk-based capital ratio of 6 percent,and a Tier 1 leverage ratio of 5 percent. There are no conditions or eventssince that notification that management believes have changed the Bank’scategory.

The Company’s and the Bank’scapital amounts and ratios are presented in the following tables.

| ** **                                       | ** ** | **Actual** | ** ** | ** ** | **For Capital  Adequacy Purposes** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|----------------------------------------------|------------|
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**  | ** **                                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Capital Ratios for the Company:**              |       |       |       |       |                                         |       |   |   |   |   |   |   |
| As of December 31, 2005:                    |       |       |       |       |                                         |       |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)         |       | $          | 5,054,873  |       | 11.10                                        | %          | 3 | $ | 3,643,236 |   |   | 3 | 8.0 | % |
| Tier 1 capital (to  risk-weighted assets)        |       | 4,178,160  |       | 9.17       |                                         | 3     | 1,821,618 |   |   | 3 | 4.0 |   |
| Tier 1 capital (to quarterly  average assets)(1) |       | 4,178,160  |       | 8.39       |                                         | 3     | 1,991,595 |   |   | 3 | 4.0 |   |
| As of December 31, 2006:                    |       |       |       |       |                                         |       |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)         |       | $          | 5,843,203  |       | 11.71                                        | %          | 3 | $ | 3,992,336 |   |   | 3 | 8.0 | % |
| Tier 1 capital (to  risk-weighted assets)        |       | 4,333,865  |       | 8.68       |                                         | 3     | 1,996,168 |   |   | 3 | 4.0 |   |
| Tier 1 capital (to quarterly average assets)(1)  |       | 4,333,865  |       | 8.44       |                                         | 3     | 2,054,147 |   |   | 3 | 4.0 |   |

----

(1)                   Excludescertain intangible assets.

| ** **                                       | ** ** | ** ** | ** ** | **For Capital**       | ** ** | **To Be Well-Capitalized  Under Prompt Corrective** | ** **       |
|--------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------------------------------------|------------------|
| ** **                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions**                               | ** **       |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**                                          | ** **       | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Capital  Ratios for the Bank:**                | ** ** | ** ** | ** ** | ** **            | ** ** | ** **                                          | ** **       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| As of  December 31, 2005:                   |       |       |       |                  |       |                                                |             |   |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)         |       | $          | 4,748,824  |                  | 10.59      | %                                                   | 3$3,588,092 |   |   | 38.0 | % |   | 3$4,485,115 |   | 310.0 | % |
| Tier 1 capital (to  risk-weighted assets)        |       | 4,315,471  |       | 9.62                  |       | 3  1,794,046                         |             |   | 34.0 |   |   | 3  2,691,069 |   | 3  6.0 |   |
| Tier 1 capital (to  quarterly average assets)(1) |       | 4,315,471  |       | 8.78                  |       | 3  1,965,090                         |             |   | 34.0 |   |   | 3  2,456,362 |   | 3  5.0 |   |
| As of December 31, 2006:                    |       |       |       |                  |       |                                                |             |   |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)         |       | $          | 5,279,646  |                  | 10.69      | %                                                   | 3$3,950,832 |   |   | 38.0 | % |   | 3$4,938,540 |   | 310.0 | % |
| Tier 1 capital (to  risk-weighted assets)        |       | 4,179,359  |       | 8.46                  |       | 3  1,975,416                         |             |   | 34.0 |   |   | 3  2,963,124 |   | 3  6.0 |   |
| Tier 1 capital (to quarterly  average assets)(1) |       | 4,179,359  |       | 8.25                  |       | 3  2,027,447                         |             |   | 34.0 |   |   | 3  2,534,309 |   | 3  5.0 |   |

----

(1)                   Excludescertain intangible assets.

**Note 22—Earnings Per Share**

Basic EPS ratio is computed by dividing net income bythe weighted average number of common shares outstanding during the period. Forall periods presented, there were no dividends on preferred stock. As of December 31,2006, the Company no longer includes nonvested restricted shares in theweighted average number of common shares outstanding-basic but includes theimpact of those shares in the calculation of diluted shares. The impact of thischange on previous periods is immaterial. Diluted EPS incorporates the dilutiveeffect of common stock equivalents outstanding on an average basis during theperiod. Stock options, nonvested restricted stock, restricted stock units andperformance share units are common stock equivalents.

F-103

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note22—Earnings Per Share (Continued)**

The following table presents areconciliation of basic and diluted EPS for the years ended December 31,2004, 2005 and 2006.

| ** **                                                            | ** ** | **For the Years Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2006** | ** ** |
| **(Amounts in thousands,except  per share data)** | ** ** | **Basic**                              | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Income from  continuing operations                                    |       | $                                      | 710,074    |   | $ | 710,074 |   | $ | 730,640 |   | $ | 730,640 |   | $ | 763,743 |   | $ | 763,743 |   |
| Income (loss) from  discontinued operations                           |       | 22,460                                 |       | 22,460 |   | 132,293 |   | 132,293 |   | (10,747 | ) | (10,747 | ) |
| Net income                                                            |       | $                                      | 732,534    |   | $ | 732,534 |   | $ | 862,933 |   | $ | 862,933 |   | $ | 752,996 |   | $ | 752,996 |   |
| Weighted average  common shares outstanding                           |       | 147,767                                |       | 147,767 |   | 145,109 |   | 145,109 |   | 141,620 |   | 141,620 |   |
| Additional shares due  to:                                            |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Assumed conversion of dilutive share based payments                   |       | —                                 |       | 2,536 |   | — |   | 2,683 |   | — |   | 2,137 |   |
| Adjusted weighted  average common shares outstanding                  |       | 147,767                                |       | 150,303 |   | 145,109 |   | 147,792 |   | 141,620 |   | 143,757 |   |
| Income from  continuing operations per share                          |       | $                                      | 4.81       |   | $ | 4.72 |   | $ | 5.04 |   | $ | 4.94 |   | $ | 5.39 |   | $ | 5.31 |   |
| Income (loss) from  discontinued operations per share                 |       | 0.15                                   |       | 0.15 |   | 0.91 |   | 0.90 |   | (0.07 | ) | (0.07 | ) |
| Net income per share                                                  |       | $                                      | 4.96       |   | $ | 4.87 |   | $ | 5.95 |   | $ | 5.84 |   | $ | 5.32 |   | $ | 5.24 |   |

 

The following table providesthe number of options and the corresponding exercise prices for those options,which were not included in the computation of diluted earnings per share ineach of the years 2004, 2005, and 2006 because they were anti-dilutive.

| ** **                | ** ** | **For the Years Ended** | ** **     |
|---------------------------|------------|----------------------------------------|----------------|
| ** **                | ** ** | **2004**                               | ** **     | **2005** | ** ** | **2006** | ** ** |
| Options outstanding       |       | 42,000                                 |           | 89,230 |   | 1,156,298 |   |
| Exercise price of options |       | $                                      | 57.50 - $59.74 |   | $ | 67.39 - $71.23 |   | $ | 64.59 - $71.23 |   |
|                           |            |                                        |                |  |  |  |  |  |  |  |

 

F-104

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 23—Other Comprehensive Income**

Thefollowing table presents the change in each of the components of othercomprehensive income (loss) and the related tax effect of the change allocatedto each component.

| ** **                                                                                                 | ** ** | **Before** | ** ** | ** ** | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                                 | ** ** | **Tax**    | ** ** | **Tax**    | ** ** | **Net of** | ** ** |
| **(Dollars in thousands)**                                                                       | ** ** | **Amount** | ** ** | **Effect** | ** ** | **Tax**         | ** ** |
| **2004:**                                                                                                  |       |       |       |       |       |            |       |
| Cash flow hedge  activities:                                                                               |       |       |       |       |       |            |       |
| Unrealized net gains  on hedges arising during the year                                                    |       | $          | 3,103      |       | $          | (1,187          | )          | $ | 1,916 |   |
| Less: reclassification  adjustment for net gains on hedges included in net income                          |       | (71,697    | )          | 27,424     |       | (44,273         | )          |
| Net change in  unrealized losses on hedges                                                                 |       | (68,594    | )          | 26,237     |       | (42,357         | )          |
| Securities available  for sale:                                                                            |       |       |       |       |       |            |       |
| Unrealized holding  losses arising during the year on securities available for sale                        |       | (99,908    | )          | 38,215     |       | (61,693         | )          |
| Less: reclassification  adjustment for net losses on securities available for sale included in net  income |       | 12,085     |       | (4,623     | )          | 7,462           |       |
| Net change in  unrealized losses on securities available for sale                                          |       | (87,823    | )          | 33,592     |       | (54,231         | )          |
| Foreign currency  translation adjustments                                                                  |       | 3,924      |       | (1,501     | )          | 2,423           |       |
| Minimum pension  liability adjustment                                                                      |       | (4,703     | )          | 1,799      |       | (2,904          | )          |
| Net change in  accumulated other comprehensive income (loss)                                               |       | $          | (157,196   | )          | $          | 60,127          |       | $ | (97,069 | ) |
| **2005:**                                                                                                  |       |       |       |       |       |            |       |
| Cash flow hedge  activities:                                                                               |       |       |       |       |       |            |       |
| Unrealized net losses  on hedges arising during the year                                                   |       | $          | (41,796    | )          | $          | 15,987          |       | $ | (25,809 | ) |
| Less: reclassification  adjustment for net gains on hedges included in net income                          |       | (16,077    | )          | 6,149      |       | (9,928          | )          |
| Net change in  unrealized losses on hedges                                                                 |       | (57,873    | )          | 22,136     |       | (35,737         | )          |
| Securities available  for sale:                                                                            |       |       |       |       |       |            |       |
| Unrealized holding  losses arising during the year on securities available for sale                        |       | (118,708   | )          | 45,406     |       | (73,302         | )          |
| Less: reclassification  adjustment for net losses on securities available for sale included in net  income |       | 50,039     |       | (19,140    | )          | 30,899          |       |
| Net change in  unrealized losses on securities available for sale                                          |       | (68,669    | )          | 26,266     |       | (42,403         | )          |
| Foreign currency  translation adjustments:                                                                 |       |       |       |       |       |            |       |
| Net gains arising  during the year                                                                         |       | $          | 582        |       | $          | (222            | )          | $ | 360 |   |
| Less: reclassification  of foreign currency translation loss included in net income                        |       | 11,845     |       | (4,071     | )          | 7,774           |       |
| Net change in foreign  currency translation                                                                |       | 12,427     |       | (4,293     | )          | 8,134           |       |
| Minimum pension  liability adjustment                                                                      |       | (5,792     | )          | 2,232      |       | (3,560          | )          |
| Net change in  accumulated other comprehensive income (loss)                                               |       | $          | (119,907   | )          | $          | 46,341          |       | $ | (73,566 | ) |
| **2006:**                                                                                                  |       |       |       |       |       |            |       |
| Cash flow hedge  activities:                                                                               |       |       |       |       |       |            |       |
| Unrealized net losses  on hedges arising during the year                                                   |       | $          | (32,708    | )          | $          | 12,511          |       | $ | (20,197 | ) |
| Less: reclassification  adjustment for net losses on hedges included in net income                         |       | 43,886     |       | (16,786    | )          | 27,100          |       |
| Net change in  unrealized losses on hedges                                                                 |       | 11,178     |       | (4,275     | )          | 6,903           |       |
| Securities available  for sale:                                                                            |       |       |       |       |       |            |       |
| Unrealized holding  gains arising during the year on securities available for sale                         |       | 28,510     |       | (10,905    | )          | 17,605          |       |
| Less: reclassification  adjustment for net gains on securities available for sale included in net  income  |       | (2,242     | )          | 858        |       | (1,384          | )          |
| Net change in  unrealized losses on securities available for sale                                          |       | 26,268     |       | (10,047    | )          | 16,221          |       |
| Foreign currency  translation adjustment                                                                   |       | (67        | )          | 26         |       | (41             | )          |
| Pension and other  benefits adjustment:                                                                    |       |       |       |       |       |            |       |
| SFAS No. 158  adjustment                                                                              |       | (261,032   | )          | 99,845     |       | (161,187        | )          |
| Minimum pension  liability adjustment                                                                      |       | (4,659     | )          | 1,782      |       | (2,877          | )          |
| Net pension and other  benefits adjustment                                                                 |       | (265,691   | )          | 101,627    |       | (164,064        | )          |
| Net change in  accumulated other comprehensive income (loss)                                               |       | $          | (228,312   | )          | $          | 87,331          |       | $ | (140,981 | ) |

 

F-105

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 23—Other ComprehensiveIncome (Continued)**

Thefollowing table presents accumulated other comprehensive income (loss)balances.

| ** **                           | ** ** | **Net**                 | ** ** | **Net**                 | ** ** | ** **      | ** ** | ** **           | ** **  | ** **             | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|----------------------|-------------|------------------------|------------|
| ** **                           | ** ** | **Unrealized**          | ** ** | **Unrealized**          | ** ** | ** **      | ** ** | ** **           | ** **  | ** **             | ** ** |
| ** **                           | ** ** | **Gains (Losses)** | ** ** | **Gains (Losses)** | ** ** | **Foreign**     | ** ** | **Pension and** | ** **  | **Accumulated**        | ** ** |
| ** **                           | ** ** | **on Cash**        | ** ** | **on Securities**  | ** ** | **Currency**    | ** ** | **Other**            | ** **  | **Other**              | ** ** |
| ** **                           | ** ** | **Flow**                | ** ** | **Available**           | ** ** | **Translation** | ** ** | **Benefits**         | ** **  | **Comprehensive**      | ** ** |
| **(Dollars in thousands)** | ** ** | **Hedges**              | ** ** | **For Sale**       | ** ** | **Adjustment**  | ** ** | **Adjustment**(1)    | ** **  | **Income (Loss)** | ** ** |
| **Balance,  December 31, 2003** |       |                    | $          | 43,786                  |       |            |       | $                    | 22,535      |                   |       | $ | (10,293 | ) | $ | (3,786 | ) |   | $ | 52,242 |   |   |
| Change during the  year              |       |                    | (42,357    | )                       |       |            | (54,231    | )                    |        | 2,423                  |       | (2,904 | ) |   | (97,069 | ) |   |
| **Balance,  December 31, 2004** |       |                    | $          | 1,429                   |       |            |       | $                    | (31,696     | )                      |       | $ | (7,870 | ) | $ | (6,690 | ) |   | $ | (44,827 | ) |   |
| Change during the  year              |       |                    | (35,737    | )                       |       |            | (42,403    | )                    |        | 8,134                  |       | (3,560 | ) |   | (73,566 | ) |   |
| **Balance,  December 31, 2005** |       |                    | $          | (34,308                 | )          |            |       | $                    | (74,099     | )                      |       | $ | 264 |   | $ | (10,250 | ) |   | $ | (118,393 | ) |   |
| Change during the  year              |       |                    | 6,903      |                    |       |            | 16,221     |                 |        | (41                    | )          | (164,064 | ) |   | (140,981 | ) |   |
| **Balance, December 31, 2006**  | ** ** | ** **              | **$**      | **(27,405**             | **)**      | ** **      | ** ** | **$**                | **(57,878** | **)**                  | ** ** | **$** | **223** | ** ** | **$** | **(174,314** | **)** | ** ** | **$** | **(259,374** | **)** | ** ** |

----

(1)                   Amountsprior to December 31, 2006 include only the minimum pension liabilityadjustment.

**Note 24—Commitments,Contingencies and Guarantees**

Thefollowing table summarizes the Company’s significant commitments.

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**       | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Commitments to extend  credit              |       | $                     | 20,287,320 |   | $ | 22,738,185 |   |
| Standby letters of  credit                 |       | 3,549,389             |       | 3,574,934 |   |
| Commercial letters of  credit              |       | 98,375                |       | 59,254 |   |
| Commitments to fund  principal investments |       | 110,150               |       | 87,413 |   |
|                                            |            |                       |            |  |  |  |  |

 

Commitments to extend credit are legally bindingagreements to lend to a customer provided there are no violations of anycondition established in the contract. Commitments have fixed expiration datesor other termination clauses and may require maintenance of compensatorybalances. Since many of the commitments to extend credit may expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash-flow requirements.

Standby and commercial letters of credit areconditional commitments issued to guarantee the performance of a customer to athird party. Standby letters of credit generally are contingent upon thefailure of the customer to perform according to the terms of the underlyingcontract with the third party, while commercial letters of credit are issuedspecifically to facilitate foreign or domestic trade transactions. The majorityof these types of commitments have terms of one year or less. At December 31,2006, the carrying value of the Company’s standby and commercial letters ofcredit totaled $6.7 million. Exposure to loss related to these commitments iscovered by the allowance for losses on off-balance sheet commitments. Thecarrying value of the standby and commercial letters of credit and theallowance for losses on off-balance sheet commitments are included in otherliabilities on the consolidated balance sheet. In addition, at December 31,2006, the Company’s maximum exposure to loss for standby and commercial lettersof credit related to discontinued operations had declined to $0.1 million, withno corresponding carrying value of these standby and commercial letters ofcredit.

F-106

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note24—Commitments, Contingencies and Guarantees (Continued)**

The credit risk involved in issuing loan commitmentsand standby and commercial letters of credit is essentially the same as thatinvolved in extending loans to customers and is represented by the contractualamount of these instruments. Collateral may be obtained based on management’scredit assessment of the customer.

Principal investments include direct investments inprivate and public companies and indirect investments in private equity funds. TheCompany issues commitments to provide equity and mezzanine capital financing toprivate and public companies through either direct investments in specificcompanies or through investment funds and partnerships. The timing of futurecash requirements to fund such commitments is generally dependent on theinvestment cycle. This cycle, the period over which privately-held companies arefunded by private equity investors and ultimately sold, merged, or taken publicthrough an initial offering, can vary based on overall market conditions aswell as the nature and type of industry in which the companies operate.

The Company is fund manager for limited liabilitycompanies issuing low-income housing credit (LIHC) investments. LIHCinvestments provide tax benefits to investors in the form of tax deductionsfrom operating losses and tax credits. To facilitate the sale of these LIHCinvestments, the Company guarantees the timely completion of projects anddelivery of tax benefits throughout the investment term. Guarantees may includea minimum rate of return, the availability of tax credits, and operatingdeficit thresholds over an eleven-year weighted average period. Additionally,the Company receives project completion and tax credit guarantees from thelimited liability companies issuing the LIHC investments that reduce theCompany’s ultimate exposure to loss. As of December 31, 2006, the Company’smaximum exposure to loss under these guarantees is limited to a return ofinvestor capital and minimum investment yield, or $146.7 million. The Companymaintains a reserve of $6.0 million for these guarantees.

The Company has rental commitments under long-termoperating lease agreements. For detail of these commitments see Note 6 to theseConsolidated Financial Statements.

The Company has guarantees that obligate it to performif its affiliates are unable to discharge their obligations. These obligationsinclude guarantees of commercial paper obligations and leveraged leasetransactions. The guarantee issued by the Bank for an affiliate’s commercialpaper program is done in order to facilitate the sale of the commercial paper. Asof December 31, 2006, the Bank had a maximum exposure to loss under thecommercial paper program guarantee of $1.7 billion. The Bank’s guarantee has anaverage term of less than nine months and is fully collateralized by a pledgeddeposit. The Company guarantees its subsidiaries’ leveraged lease transactionswith terms ranging from fifteen to thirty years. Following the original fundingof these leveraged lease transactions, the Company has no material obligationto be satisfied. As of December 31, 2006, the Company had no exposure toloss for these agreements.

The Company conducts securities lending transactionsfor institutional customers as a fully disclosed agent. At times, securitieslending indemnifications are issued to guarantee that a security lendingcustomer will be made whole in the event the borrower does not return thesecurity subject to the lending agreement and collateral held is insufficientto cover the market value of the security. All lending transactions arecollateralized, primarily by cash. The amount of securities lent withindemnifications was $2.0 billion and $2.2 billion at December 31, 2005and 2006, respectively. The market value of the associated collateral was $2.0billion and $2.3 billion at December 31, 2005 and 2006, respectively.

F-107

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note24—Commitments, Contingencies and Guarantees (Continued)**

The Company occasionally enters into financialguarantee contracts where a premium is received from another financialinstitution counterparty to guarantee a portion of the credit risk on interestrate swap contracts entered into between the financial institution and itscustomer. The Company becomes liable to pay the financial institution only ifthe financial institution is unable to collect amounts owed to them by theircustomer. As of December 31, 2006, the maximum exposure to loss underthese contracts totaled $10.0 million. At December 31, 2006, the Companymaintained a reserve of $0.1 million for losses related to these guarantees.

The Company is subject tovarious pending and threatened legal actions that arise in the normal course ofbusiness. Reserves for losses from legal actions that are both probable andestimable are recorded at the time of that determination. Management believesthat the disposition of all claims currently pending will not have a materialadverse effect on the Company’s consolidated financial condition or results ofoperations.

**Note 25—Transactions withAffiliates**

The Company had, and expects to have in the future,banking transactions and other transactions in the ordinary course of businesswith BTMU and with its affiliates. During 2004, 2005 and 2006, suchtransactions included, but were not limited to, participation, servicing andremarketing of loans and leases, purchase and sale of acceptances, interestrate derivatives and foreign exchange transactions, funds transfers,custodianships, electronic data processing, investment advice and management,customer referrals, facility leases, and trust services. The Company alsomaintains traditional correspondent bank accounts and has a $200 millionfloating-rate subordinated debt with BTMU. For further information regardingthis subordinated debt, see Note 13 to these Consolidated Financial Statements.In the opinion of management, such transactions were made at rates, terms, andconditions prevailing in the market and do not involve more than the normalrisk of collectibility or present other unfavorable features. In addition, somecompensation for services rendered to the Company is paid to the expatriateofficers from BTMU, and reimbursed by the Company to BTMU under a serviceagreement.

During 2005, the Company repurchased $200 million ofits stock from BTMU at $57.54 per share.

At December 31, 2006, the Company had derivativecontracts totaling $1.5 billion in notional balances with $2.7 million in netunrealized losses with BTMU and its affiliates. At December 31, 2006, theCompany had recorded interest expense of $11.4 million for the year ended 2006relating to the subordinated debt and other correspondent bank accounts.  Additionally, for the year ended 2006, theCompany recorded income of $2.7 million and expenses of $0.8 million for feesand revenue sharing arrangements and income of $2.4 million and expenses of$3.7 million relating to facility and staff training arrangements.

On December 10, 2004, the Company purchasedcorporate trust accounts from BTMU Trust Company for $1.8 million.

The Company has guarantees that obligate it to performif its affiliates are unable to discharge their obligations. These obligationsinclude guarantees of commercial paper obligations and leveraged leasetransactions. The guarantee issued by the Bank for an affiliate’s commercialpaper program is done in order to facilitate their sale. As of December 31,2006, the Bank had a maximum exposure to loss under the commercial paperprogram guarantee of $1.7 billion. The Bank’s guarantee has an average term ofless 

F-108

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note25—Transactions with Affiliates (Continued)**

than ninemonths and is fully collateralized by a pledged deposit. The Company guaranteesits subsidiaries’ leveraged lease transactions with terms ranging from fifteento thirty years. Following the original funding of these leveraged leasetransactions, the Company has no material obligation to be satisfied. As of December 31,2006, the Company had no exposure to loss for these agreements.

**Note 26—Business Segments**

During 2006, theCompany formally reorganized its operating segments by disaggregating thebusinesses that were formerly managed and reported under the Community Bankingand Investment Services Group or the Commercial Financial Services Group. Managementbelieves that this new organizational structure will enhance the Company’sfocus on target markets and enterprise wide sales and service. The variousoperating segments reporting under the Chief Operating Officer and the GroupHead of Pacific Rim Corporate Group have been aggregated into two reportablebusiness segments entitled “Retail Banking” and “Wholesale Banking” based uponthe aggregation criteria prescribed in the SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*.

·       RetailBanking aggregates those operating segments that offer a range of bankingservices, primarily to individuals and small businesses, delivered generallythrough a network of branches and ATMs located in the western United States. Theseservices include mortgages, home equity lines of credit, consumer andcommercial loans, deposit services and cash management, as well as fiduciary,private banking, investment and asset management services for individuals andinstitutions, and risk management for small businesses and individuals. At December 31,2004, 2005 and 2006, Retail Banking had $237.3 million, $222.2 million and$222.2 million, respectively, of goodwill assigned to the operating segments.

·       WholesaleBanking aggregates those operating segments that provide credit, depository andcash management services, insurance, investment and risk management products tobusinesses, individuals and target specialty niches. Services includecommercial and project loans, real estate financing, asset-based financing,trade finance and letters of credit, lease financing, customized cashmanagement services and capital markets products. At December 31, 2004,2005 and 2006, Wholesale Banking had $213.7 million, $231.8 million and $231.2million, respectively, of goodwill assigned to the operating segments.

The information, set forth in the tables that follow,reflects selected income statement and balance sheet items by reportablebusiness segment. The information presented does not necessarily represent thebusiness units’ financial condition and results of operations were theyindependent entities. Unlike financial accounting, there is no authoritativebody of guidance for management accounting equivalent to US GAAP. Consequently,reported results are not necessarily comparable with those presented by othercompanies. Included in the tables, within total assets, are the amounts ofgoodwill for each reportable business segment as of December 31, 2004,2005 and 2006.

The information in the tables is derived from the internal managementreporting system used by management to measure the performance of theindividual segments and the Company overall. The management reporting systemassigns balance sheet and income statement items to each operating segmentbased on internal management accounting policies. Net interest income isdetermined by the Company’s internal funds transfer pricing system, whichassigns a cost of funds or a credit for funds to 

F-109

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note26—Business Segments (Continued)**

assets orliabilities based on their type, maturity or repricing characteristics. Noninterestincome and expense directly attributable to an operating segment are assignedto that operating segment. Certain indirect costs, such as operations andtechnology expense, are allocated to the segments based on studies of billableunit costs for product or data processing. Other indirect costs, such ascorporate overhead, are allocated to the operating segment based on a predeterminedpercentage of usage. Under the Company’s risk-adjusted return on capital(RAROC) methodology, credit expense is charged to an operating segment basedupon expected losses arising from credit risk. In addition, the attribution ofeconomic capital is related to unexpected losses arising from credit, marketand operational risks.

“Other” is comprised ofcertain non-bank subsidiaries of UnionBanCal Corporation, the elimination ofthe fully taxable-equivalent basis amount, the transfer pricing center, theamount of the provision for credit losses over/(under) the RAROC expected lossfor the period, the earnings associated with the unallocated equity capital andallowances for credit losses, and the residual costs of support groups. Inaddition, “Other” includes Corporate Treasury, which is responsible forAsset-Liability Management (ALM), wholesale funding, and the ALM investmentsecurities and derivatives hedging portfolios, and the results of ourdiscontinued operations. Except as discussed above, none of the items in “Other”is significant to the Company’s business.

In the first quarter 2006, the Company changed itsreporting to reflect a “market view” perspective in measuring the businesssegments. The market view is a measurement of customer markets aggregated toshow all revenues generated and expenses incurred from all products andservices sold to those customers regardless of where product areasorganizationally report. Therefore, revenues and expenses are included in boththe business segment that provides the service and the business segment thatmanages the customer relationship. The duplicative results from this internalmanagement accounting view are reflected in “Reconciling Items.”

The reportable business segment results for the priorperiods have been restated to reflect changes in the transfer pricingmethodology, the organizational changes that have occurred, discontinuedoperations and the market view contribution.

F-110

----

**Unionbancal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note26—Business Segments (Continued)**

| ** **                                                       | ** ** | **Retail Banking**                                                               | ** ** | **Wholesale Banking**                                                            | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As of and for the Year Ended December 31,** | ** ** | **As of and for the Year Ended December 31,** | ** ** |
| ** **                                                       | ** ** | **      2004      **      | ** ** | **2005**                                                                              | ** ** | **2006** | ** ** | **      2004      ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results of operations (dollars in thousands):**                | ** ** |                                                                                  | ** ** | ** **                                                                            |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Net interest income (expense)                                    |       |                                                                                  | $          | 718,019                                                                               | ** ** |   | $ | 890,400 |   | $ | 948,356 |   |   | $ | 812,866 | ** ** |   | $ | 997,414 |   | $ | 1,039,706 |   |
| Noninterest income (expense)                                     |       |                                                                                  | 465,139    | ** **                                                                            |       | 487,725 |   | 520,736 |   |   | 417,794 | ** ** |   | 432,304 |   | 417,757 |   |
| Total revenue                                                    |       |                                                                                  | 1,183,158  | ** **                                                                            |       | 1,378,125 |   | 1,469,092 |   |   | 1,230,660 | ** ** |   | 1,429,718 |   | 1,457,463 |   |
| Noninterest expense (income)                                     |       |                                                                                  | 851,537    | ** **                                                                            |       | 911,218 |   | 976,091 |   |   | 570,657 | ** ** |   | 638,240 |   | 679,437 |   |
| Credit expense (income)                                          |       |                                                                                  | 24,017     | ** **                                                                            |       | 25,649 |   | 25,416 |   |   | 118,351 | ** ** |   | 106,480 |   | 95,229 |   |
| Income from continuing  operations before income taxes           |       |                                                                                  | 307,604    | ** **                                                                            |       | 441,258 |   | 467,585 |   |   | 541,652 | ** ** |   | 684,998 |   | 682,797 |   |
| Income tax expense (income)                                      |       |                                                                                  | 117,658    | ** **                                                                            |       | 168,781 |   | 178,851 |   |   | 179,900 | ** ** |   | 233,184 |   | 224,225 |   |
| Income from continuing  operations                               |       |                                                                                  | 189,946    | ** **                                                                            |       | 272,477 |   | 288,734 |   |   | 361,752 | ** ** |   | 451,814 |   | 458,572 |   |
| Income (loss) from  discontinued operations, net of income taxes |       |                                                                                  | —     | ** **                                                                            |       | — |   | — |   |   | — | ** ** |   | — |   | — |   |
| Net income (loss)                                                |       |                                                                                  | $          | 189,946                                                                               | ** ** |   | $ | 272,477 |   | $ | 288,734 |   |   | $ | 361,752 | ** ** |   | $ | 451,814 |   | $ | 458,572 |   |
| Total assets, end of period  (dollars in millions):         |       |                                                                                  | $          | 14,187                                                                                | ** ** |   | $ | 16,178 |   | $ | 17,192 |   |   | $ | 19,406 | ** ** |   | $ | 22,230 |   | $ | 25,238 |   |

 

| ** **                                                       | ** ** | **Other**                                                                             | ** ** | **Reconciling Items**                                                            | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As of and for the Year Ended December 31,** | ** ** | **As of and for the Year Ended December 31,** | ** ** |
| ** **                                                       | ** ** | **      2004      **      | ** ** | **     2005     **                  | ** ** | **     2006     ** | ** ** | **     2004     ** | ** ** | **       2005      ** | ** ** | **     2006     ** | ** ** |
| **Results of operations (dollars  in thousands):**               | ** ** |                                                                                  | ** ** | ** **                                                                            |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net interest income  (expense)                                   |       |                                                                                  | $          | 94,640                                                                                |       |   |   | $ | (45,480 | ) |   |   | $ | (140,247 | ) |   |   | $ | (1,509 | ) |   |   | $ | (3,220 | ) |   |   | $ | (9,660 | ) |   |
| Noninterest income  (expense)                                    |       |                                                                                  | 87,773     |                                                                                  |       |   | (48,419 | ) |   |   | 13,409 |   |   |   | (57,883 | ) |   |   | (66,823 | ) |   |   | (73,403 | ) |   |
| Total revenue                                                    |       |                                                                                  | 182,413    |                                                                                  |       |   | (93,899 | ) |   |   | (126,838 | ) |   |   | (59,392 | ) |   |   | (70,043 | ) |   |   | (83,063 | ) |   |
| Noninterest expense  (income)                                    |       |                                                                                  | 83,361     |                                                                                  |       |   | 95,208 |   |   |   | 74,724 |   |   |   | (31,966 | ) |   |   | (37,420 | ) |   |   | (43,964 | ) |   |
| Credit expense  (income)                                         |       |                                                                                  | (188,020   | )                                                                                     |       |   | (182,580 | ) |   |   | (125,550 | ) |   |   | (105 | ) |   |   | (232 | ) |   |   | (95 | ) |   |
| Income from continuing  operations before income taxes      |       |                                                                                  | 287,072    |                                                                                  |       |   | (6,527 | ) |   |   | (76,012 | ) |   |   | (27,321 | ) |   |   | (32,391 | ) |   |   | (39,004 | ) |   |
| Income tax expense                                               |       |                                                                                  | 111,825    |                                                                                  |       |   | (32,877 | ) |   |   | (116,534 | ) |   |   | (10,450 | ) |   |   | (12,390 | ) |   |   | (14,919 | ) |   |
| Income from continuing  operations                               |       |                                                                                  | 175,247    |                                                                                  |       |   | 26,350 |   |   |   | 40,522 |   |   |   | (16,871 | ) |   |   | (20,001 | ) |   |   | (24,085 | ) |   |
| Income (loss) from  discontinued operations, net of income taxes |       |                                                                                  | 22,460     |                                                                                  |       |   | 132,293 |   |   |   | (10,747 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                                |       |                                                                                  | $          | 197,707                                                                               |       |   |   | $ | 158,643 |   |   |   | $ | 29,775 |   |   |   | $ | (16,871 | ) |   |   | $ | (20,001 | ) |   |   | $ | (24,085 | ) |   |
| Total assets, end of period  (dollars in millions):         |       |                                                                                  | $          | 14,483                                                                                |       |   |   | $ | 10,987 |   |   |   | $ | 10,164 |   |   |   | $ | 22 |   |   |   | $ | 21 |   |   |   | $ | 26 |   |   |

 

| ** **                                                       | ** ** | **UnionBanCal Corporation**                                                                    | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As of and for the the Year Ended December 31,** | ** ** |
| ** **                                                       | ** ** | **      2004      **               | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** |
| **Results of operations (dollars  in thousands):**               | ** ** |                                                                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net interest income  (expense)                                   |       |                                                                                           | $          | 1,624,016 |   |   |   | $ | 1,839,114 |   |   |   | $ | 1,838,155 |   |   |
| Noninterest income  (expense)                                    |       |                                                                                           | 912,823    |   |   |   | 804,787 |   |   |   | 878,499 |   |   |
| Total revenue                                                    |       |                                                                                           | 2,536,839  |   |   |   | 2,643,901 |   |   |   | 2,716,654 |   |   |
| Noninterest expense  (income)                                    |       |                                                                                           | 1,473,589  |   |   |   | 1,607,246 |   |   |   | 1,686,288 |   |   |
| Credit expense  (income)                                         |       |                                                                                           | (45,757    | ) |   |   | (50,683 | ) |   |   | (5,000 | ) |   |
| Income from continuing  operations before  income taxes          |       |                                                                                           | 1,109,007  |   |   |   | 1,087,338 |   |   |   | 1,035,366 |   |   |
| Income tax expense                                               |       |                                                                                           | 398,933    |   |   |   | 356,698 |   |   |   | 271,623 |   |   |
| Income from continuing  operations                               |       |                                                                                           | 710,074    |   |   |   | 730,640 |   |   |   | 763,743 |   |   |
| Income (loss) from  discontinued operations, net of income taxes |       |                                                                                           | 22,460     |   |   |   | 132,293 |   |   |   | (10,747 | ) |   |
| Net income (loss)                                                |       |                                                                                           | $          | 732,534 |   |   |   | $ | 862,933 |   |   |   | $ | 752,996 |   |   |
| Total assets, end of period  (dollars in millions):              |       |                                                                                           | $          | 48,098 |   |   |   | $ | 49,416 |   |   |   | $ | 52,620 |   |   |

 

F-111

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 27—Condensed UnionBanCal Corporation UnconsolidatedFinancial Statements**

**Condensed Balance Sheets**

| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                         | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **Assets**                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                    |       | $                     | 145,034    |   | $ | 261,037 |   |
| Investment in and advances to subsidiaries                   |       | 5,283,968             |       | 5,005,328 |   |
| Other assets                                                 |       | 9,922                 |       | 4,539 |   |
| Total assets                                                 |       | $                     | 5,438,924  |   | $ | 5,270,904 |   |
| **Liabilities and Stockholders’  Equity**               |       |                  |       |   |   |
| Other liabilities                                            |       | $                     | 62,791     |   | $ | 88,714 |   |
| Medium and long-term debt                                    |       | 801,095               |       | 595,904 |   |
| Junior subordinated debt payable to subsidiary grantor trust |       | 15,338                |       | 14,885 |   |
| Total liabilities                                            |       | 879,224               |       | 699,503 |   |
| Stockholders’ equity                                    |       | 4,559,700             |       | 4,571,401 |   |
| Total liabilities and  stockholders’ equity             |       | $                     | 5,438,924  |   | $ | 5,270,904 |   |

 

F-112

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note27—Condensed UnionBanCal Corporation Unconsolidated Financial Statements(Continued)**

**Condensed Statements of Income**

| ** **                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**                                                    | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Income:**                                                                             |       |                                        |       |   |   |   |   |
| Cash dividends from bank  subsidiary                                                    |       | $                                           | 216,500    |   | $ | 546,600 |   | $ | 922,600 |   |
| Cash dividends from nonbank  subsidiaries                                               |       | —                                      |       | — |   | 10,500 |   |
| Interest income on advances  to subsidiaries and deposits in bank                  |       | 9,037                                       |       | 14,764 |   | 19,732 |   |
| Other income                                                                            |       | 1,145                                       |       | 1,680 |   | 471 |   |
| Total income                                                                            |       | 226,682                                     |       | 563,044 |   | 953,303 |   |
| **Expense:**                                                                            |       |                                        |       |   |   |   |   |
| Interest expense                                                                        |       | 20,148                                      |       | 33,655 |   | 45,834 |   |
| Other expense, net                                                                      |       | (84                                         | )          | 1,834 |   | 3,270 |   |
| Total expense                                                                           |       | 20,064                                      |       | 35,489 |   | 49,104 |   |
| Income before income taxes  and equity in undistributed net income of subsidiaries |       | 206,618                                     |       | 527,555 |   | 904,199 |   |
| Recovery of prior loan  losses                                                          |       | 7                                           |       | — |   | — |   |
| Income tax benefit                                                                      |       | (2,883                                      | )          | (7,256 | ) | (12,747 | ) |
| Income before equity in  undistributed net income of subsidiaries                       |       | 209,508                                     |       | 534,811 |   | 916,946 |   |
| Equity in undistributed net income (loss) of  subsidiaries:                             |       |                                        |       |   |   |   |   |
| Bank subsidiary                                                                         |       | 485,247                                     |       | 295,617 |   | (195,563 | ) |
| Nonbank subsidiaries                                                                    |       | 37,779                                      |       | 32,505 |   | 31,613 |   |
| **Net Income**                                                                          |       | $                                           | 732,534    |   | $ | 862,933 |   | $ | 752,996 |   |

 

F-113

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note27—Condensed UnionBanCal Corporation Unconsolidated Financial Statements(Continued)**

**Condensed Statements of Cash Flows**

| ** **                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**                                                    | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Cash Flows from Operating  Activities:**                                              |       |                                        |       |   |   |   |   |
| Net income                                                                              |       | $                                           | 732,534    |   | $ | 862,933 |   | $ | 752,996 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Equity in undistributed net income of subsidiaries                                      |       | (523,026                                    | )          | (328,122 | ) | 163,950 |   |
| Reversal of provision for loan losses                                                   |       | (7                                          | )          | — |   | — |   |
| Other, net                                                                              |       | 27,847                                      |       | (11,825 | ) | 18,616 |   |
| Net cash provided by operating activities                                               |       | 237,348                                     |       | 522,986 |   | 935,562 |   |
| **Cash Flows from Investing  Activities:**                                              |       |                                        |       |   |   |   |   |
| Advances to subsidiaries                                                                |       | (71,910                                     | )          | (171,588 | ) | (41,195 | ) |
| Repayment of advances to subsidiaries                                                   |       | 29,698                                      |       | 46,294 |   | 59,254 |   |
| Net cash provided by (used in) investing activities                                     |       | (42,212                                     | )          | (125,294 | ) | 18,059 |   |
| **Cash Flows from Financing  Activities:**                                              |       |                                        |       |   |   |   |   |
| Repayment of junior subordinated debt                                                   |       | (360,825                                    | )          | — |   | — |   |
| Repayment of medium-term debt                                                           |       | —                                      |       | — |   | (200,000 | ) |
| Payments of cash dividends                                                              |       | (197,198                                    | )          | (224,218 | ) | (251,403 | ) |
| Repurchase of common stock                                                              |       | (210,689                                    | )          | (389,371 | ) | (451,874 | ) |
| Stock-based compensation exercised                                                      |       | 80,309                                      |       | 89,664 |   | 65,659 |   |
| Net cash used in financing activities                                                   |       | (688,403                                    | )          | (523,925 | ) | (837,618 | ) |
| Net increase  (decrease) in cash and cash equivalents                                   |       | (493,267                                    | )          | (126,233 | ) | 116,003 |   |
| Cash and cash  equivalents at beginning of year                                         |       | 764,534                                     |       | 271,267 |   | 145,034 |   |
| Cash and cash  equivalents at end of year                                               |       | $                                           | 271,267    |   | $ | 145,034 |   | $ | 261,037 |   |
| **Cash Paid During the Year for:**                                                      |       |                                        |       |   |   |   |   |
| Interest                                                                                |       | $                                           | 23,244     |   | $ | 33,063 |   | $ | 46,484 |   |
| Income taxes                                                                            |       | 131                                         |       | 64,414 |   | 183 |   |

 

F-114

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note 28—Summary of Quarterly FinancialInformation (Unaudited)**

Unauditedquarterly results are summarized as follows:

| ** **                                                                      | ** ** | **2005 Quarters Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                                                 |       | $                                 | 509,347    |   | $ | 547,493 |   |   | $ | 567,092 |   |   |   | $ | 600,049 |   |   |
| Interest expense                                                                |       | 73,685                            |       | 88,783 |   |   | 102,950 |   |   |   | 119,449 |   |   |
| Net interest income                                                             |       | 435,662                           |       | 458,710 |   |   | 464,142 |   |   |   | 480,600 |   |   |
| Reversal of allowance  for loan losses                                          |       | (12,119                           | )          | (13,564 | ) |   | (15,000 | ) |   |   | (10,000 | ) |   |
| Noninterest income                                                              |       | 205,625                           |       | 203,554 |   |   | 212,188 |   |   |   | 183,420 |   |   |
| Noninterest expense                                                             |       | 392,952                           |       | 388,400 |   |   | 396,696 |   |   |   | 429,198 |   |   |
| Income before income  taxes                                                     |       | 260,454                           |       | 287,428 |   |   | 294,634 |   |   |   | 244,822 |   |   |
| Income tax expense                                                              |       | 80,703                            |       | 99,950 |   |   | 93,388 |   |   |   | 82,657 |   |   |
| Income from  continuing operations                                              |       | 179,751                           |       | 187,478 |   |   | 201,246 |   |   |   | 162,165 |   |   |
| Income (loss) from  discontinued operations before income tax                   |       | 3,639                             |       | (412 | ) |   | (25,612 | ) |   |   | 227,967 |   |   |
| Income tax expense  (benefit)                                                   |       | 1,413                             |       | (116 | ) |   | (9,651 | ) |   |   | 81,643 |   |   |
| Income (loss) from  discontinued operations                                     |       | 2,226                             |       | (296 | ) |   | (15,961 | ) |   |   | 146,324 |   |   |
| Net income                                                                      |       | $                                 | 181,977    |   | $ | 187,182 |   |   | $ | 185,285 |   |   |   | $ | 308,489 |   |   |
| Income from  continuing operations per common share—basic                  |       | $                                 | 1.22       |   | $ | 1.30 |   |   | $ | 1.39 |   |   |   | $ | 1.12 |   |   |
| Net income per common  share—basic                                         |       | $                                 | 1.24       |   | $ | 1.29 |   |   | $ | 1.28 |   |   |   | $ | 2.14 |   |   |
| Income from  continuing operations per common share—diluted                |       | $                                 | 1.20       |   | $ | 1.27 |   |   | $ | 1.36 |   |   |   | $ | 1.10 |   |   |
| Net income per common  share—diluted                                       |       | $                                 | 1.21       |   | $ | 1.27 |   |   | $ | 1.26 |   |   |   | $ | 2.09 |   |   |
| Dividends per share(1)                                                          |       | $                                 | 0.36       |   | $ | 0.41 |   |   | $ | 0.41 |   |   |   | $ | 0.41 |   |   |

 

F-115

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**December 31, 2004, 2005, and 2006 (Continued)**

**Note28—Summary of Quarterly Financial Information (Unaudited) (Continued)**

| ** **                                                                      | ** ** | **2006 Quarters Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                                                 |       | $                                 | 615,202    |   | $ | 657,500 |   |   | $ | 696,803 |   |   |   | $ | 711,980 |   |   |
| Interest expense                                                                |       | 150,109                           |       | 189,858 |   |   | 238,079 |   |   |   | 265,284 |   |   |
| Net interest income                                                             |       | 465,093                           |       | 467,642 |   |   | 458,724 |   |   |   | 446,696 |   |   |
| (Reversal of)  provision for loan losses                                        |       | (7,000                            | )          | (1,000 | ) |   | — |   |   |   | 3,000 |   |   |
| Noninterest income                                                              |       | 217,910                           |       | 219,228 |   |   | 217,255 |   |   |   | 224,106 |   |   |
| Noninterest expense                                                             |       | 414,544                           |       | 413,030 |   |   | 417,021 |   |   |   | 441,693 |   |   |
| Income before income  taxes                                                     |       | 275,459                           |       | 274,840 |   |   | 258,958 |   |   |   | 226,109 |   |   |
| Income tax expense                                                              |       | 94,004                            |       | 92,203 |   |   | 87,048 |   |   |   | (1,632 | ) |   |
| Income from  continuing operations                                              |       | 181,455                           |       | 182,637 |   |   | 171,910 |   |   |   | 227,741 |   |   |
| Income (loss) from  discontinued operations before income tax                   |       | (13,603                           | )          | 431 |   |   | (2,061 | ) |   |   | (1,824 | ) |   |
| Income tax expense  (benefit)                                                   |       | (5,093                            | )          | 157 |   |   | (857 | ) |   |   | (517 | ) |   |
| Income (loss) from  discontinued operations                                     |       | (8,510                            | )          | 274 |   |   | (1,204 | ) |   |   | (1,307 | ) |   |
| Net income                                                                      |       | $                                 | 172,945    |   | $ | 182,911 |   |   | $ | 170,706 |   |   |   | $ | 226,434 |   |   |
| Income from  continuing operations per common share—basic                  |       | $                                 | 1.26       |   | $ | 1.28 |   |   | $ | 1.22 |   |   |   | $ | 1.63 |   |   |
| Net income per common  share—basic                                         |       | $                                 | 1.20       |   | $ | 1.28 |   |   | $ | 1.21 |   |   |   | $ | 1.62 |   |   |
| Income from  continuing operations per common share—diluted                |       | $                                 | 1.24       |   | $ | 1.26 |   |   | $ | 1.21 |   |   |   | $ | 1.61 |   |   |
| Net income per common  share—diluted                                       |       | $                                 | 1.18       |   | $ | 1.26 |   |   | $ | 1.20 |   |   |   | $ | 1.61 |   |   |
| Dividends per share(1)                                                          |       | $                                 | 0.41       |   | $ | 0.47 |   |   | $ | 0.47 |   |   |   | $ | 0.47 |   |   |

----

(1)                Dividendsper share reflect dividends declared on the Company’s common stock outstandingas of the declaration date.

**Note 29—Subsequent Events**

On January 24, 2007, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.47 per share of common stockfor the first quarter of 2007. The dividend will be paid on April 6, 2007to stockholders of record as of March 2, 2007.

F-116

----

**UnionBanCal Corporation and SubsidiariesReport of Independent Registered Public Accounting Firm**

To the Board of Directors and Stockholders ofUnionBanCal Corporation:

We have audited the accompanying consolidated balancesheets of UnionBanCal Corporation and subsidiaries (the “Company”) as of December 31,2005 and 2006, and the related consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2006. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of UnionBanCalCorporation and subsidiaries as of December 31, 2005 and 2006, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2006, in conformity with accountingprinciples generally accepted in the United States of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2006, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 1,2007, expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

As discussed in Note 1 to theconsolidated financial statements, the Company changed its method of accountingfor defined pension and other postretirement plans as of December 31,2006, in accordance with Statement of Financial Accounting Standards No. 158,*Employers’ Accounting for Defined Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and132(R).*

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

SanFrancisco, California

March 1,2007

F-117

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**UnionBanCal Corporationand SubsidiariesManagement’s Report on Internal Control Over Financial Reporting**

The management of UnionBanCal Corporation isresponsible for establishing and maintaining adequate internal control overfinancial reporting, designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Management is also responsible for ensuring compliance with thefederal laws and regulations concerning loans to insiders and the federal andstate laws and regulations concerning dividend restrictions, both of which aredesignated by the Federal Deposit Insurance Corporation (FDIC) as safety and soundnesslaws and regulations.

We maintain a system of internal accounting controlsto provide reasonable assurance that assets are safeguarded and transactionsare executed in accordance with management’s authorization and recordedproperly to permit the preparation of consolidated financial statements inaccordance with generally accepted accounting principles. Management recognizesthat even a highly effective internal control system has inherent risks,including the possibility of human error and the circumvention or overriding ofcontrols, and that the effectiveness of an internal control system can changewith circumstances. Management has assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2006. In makingthis assessment, management used the criteria set out by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework.*Basedon our assessment, we concluded that, as of December 31, 2006, the Company’sinternal control system over financial reporting is effective based on thecriteria established in *InternalControl-Integrated Framework.*

Management assessed its compliance with the designatedsafety and soundness laws and regulations and has maintained records of itsdeterminations and assessments as required by the FDIC. Based on thisassessment, management believes that Union Bank of California, N.A. hascomplied, in all material respects, with the designated safety and soundnesslaws and regulations for the year ended December 31, 2006.

The Company’sassessment of the effectiveness of internal control over financial reportingand the Company’s consolidated financial statements have been audited byDeloitte & Touche LLP, Independent Registered Public Accounting Firm.

|          |     | /s/ TAKASHI MORIMURA                                       |
|----------|----------|------------------------------------------------------------|
|     |     | Takashi Morimura*President and Chief Executive Officer*    |
| * * | * * | */s/*MASASHI OKA                                           |
|     |     | Masashi Oka*Vice Chairman of the Board*                    |
|     |     | /s/ DAVID I. MATSON                                        |
|     |     | David I. Matson*Vice Chairman and Chief Financial Officer* |
|     |     | /s/ DAVID A. ANDERSON                                      |
|     |     | David A. Anderson*Executive Vice President and Controller* |

 

F-118

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**Report of Independent RegisteredPublic Accounting Firm**

To the Board of Directors and Stockholders ofUnionBanCal Corporation:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over Financial Reporting,that UnionBanCal Corporation and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Because management’s assessment andour audit were conducted to meet the reporting requirements of Section 112of the Federal Deposit Insurance Corporation Improvement Act (FDICIA),management’s assessment and our audit of the Company’s internal control overfinancial reporting included controls over the preparation of the schedulesequivalent to the basic financial statements in accordance with theinstructions for the ConsolidatedFinancial Statements for Bank HoldingCompanies (Form FR Y-9C). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing, and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2006, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

F-119

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We have not examined and, accordingly, we do notexpress an opinion or any other form of assurance on management’s statementreferring to compliance with laws and regulations.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States),**the consolidatedfinancial statements as of and for the year ended December 31, 2006 of theCompany and our report dated March 1, 2007, expressed an unqualifiedopinion on those financial statements.

/s/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

SanFrancisco, California

March 1,2007

F-120

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**SIGNATURES**

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934,UnionBanCal Corporation has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|          | UNIONBANCAL CORPORATION (Registrant)                         |
|----------|--------------------------------------------------------------|
|     | By:                                                          | /s/ TAKASHI MORIMURA |
|     |                                                         | Takashi Morimura |
|     |                                                         | *President  and Chief Executive Officer  (Principal Executive Officer)* |
|     | By:                                                          | /s/ DAVID I. MATSON |
|     |                                                         | David I. Matson |
| * * |                                                         | *Vice  Chairman and Chief Financial Officer  (Principal Financial Officer)* |
|     | By:                                                          | /s/ DAVID A. ANDERSON |
|     |                                                         | David A. Anderson |
| * * |                                                         | *Executive  Vice President and Controller  (Principal Accounting Officer)* |
|     | Date:      March 1,  2007 |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of UnionBanCal Corporationand in the capacities and on the date indicated below.
|                     | **Signature** | ** ** | ** ** | **Title** | ** ** | ** ** |
|---------------------|---------------|------------|------------|-----------|------------|------------|
| *                   |          | Director   |
| Aida M. Alvarez     |          |       |
| *                   |          | Director   |
| David R. Andrews    |          |       |
|                |          | Director   |
| Nicholas B. Binkley |          |       |
| *                   |          | Director   |
| L. Dale Crandall    |          |       |
| *                   |          | Director   |
| Murray H. Dashe     |          |       |
| *                   |          | Director   |
| Richard D. Farman   |          |       |
|                |          | Director   |
| Stanley F. Farrar   |          |       |

II-1

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| *                          |       | Director   |
|----------------------------|------------|------------|
| Philip B. Flynn            |       |       |
| *                          |       | Director   |
| Michael J. Gillfillan      |       |       |
| *                          |       | Director   |
| Mohan S. Gyani             |       |       |
|                       |       | Director   |
| Ronald L. Havner, Jr. |       |       |
| *                          |       | Director   |
| Norimichi Kanari           |       |       |
| *                          |       | Director   |
| Mary S. Metz               | ** ** | ** ** |
| *                          |       | Director   |
| Shigemitsu Miki            |       |       |
| *                          |       | Director   |
| Takashi Morimura           |       |       |
|                       |       | Director   |
| J. Fernando Niebla         |       |       |
| *                          |       | Director   |
| Masashi Oka                |       |       |
| *                          |       | Director   |
| Tetsuo Shimura             |       |       |

 
| *By:   | /s/ JOHN H. MCGUCKIN, JR.               |   |   |
|--------|-----------------------------------------|--------|--------|
|   | John H. McGuckin, Jr.*Attorney-in-Fact* |   |   |

 

Dated: March 1, 2007

II-2

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**EXHIBITINDEX**

| No.   | ** ** | **Description**                                                                                                                                                                   |
|-------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |       | Restated Certificate of Incorporation of the  Registrant (1)                                                                                                                      |
| 3.2   |       | Bylaws of the Registrant(1)                                                                                                                                                       |
| 4.1   |       | Trust Indenture between  UnionBanCal Corporation and J.P. Morgan Trust Company, National Association,  as Trustee, dated December 8, 2003(2)                                 |
| 4.2   |       | The Registrant agrees to  furnish upon request to the Commission a copy of each instrument defining the  rights of holders of long-term debt of the Registrant.                   |
| 10.1  |       | UnionBanCal Corporation  Management Stock Plan*(3)                                                                                                                                |
| 10.2  |       | Union Bank of California,  N.A. Deferred Compensation Plan*(4)                                                                                                                    |
| 10.3  |       | Union Bank of California,  N.A. Senior Executive Bonus Plan*(5)                                                                                                                   |
| 10.4  |       | Union Bank of California,  N.A Senior Management Bonus Plan*(6)                                                                                                                   |
| 10.5  |       | Union Bank of California,  N.A. Supplemental Executive Retirement Plan*(7)                                                                                                        |
| 10.6  |       | Amendment No. 1 to the  Union Bank of California, N.A. Supplemental Executive Retirement Plan*(8)                                                                       |
| 10.7  |       | Union Bank Financial  Services Reimbursement Program*(9)                                                                                                                          |
| 10.8  |       | UnionBanCal Corporation  Performance Share Plan*(10)                                                                                                                              |
| 10.9  |       | Amended and Restated 1997  UnionBanCal Corporation Performance Share Plan*(11)                                                                                                    |
| 10.10 |       | Forms of Performance Share  Agreement under the 1997 UnionBanCal Corporation Performance Share Plan*(12)                                                                          |
| 10.11 |       | Form of Terms and  Conditions of Performance Share Plan Stock Unit Deferral Elections*(36)                                                                                   |
| 10.12 |       | Service Agreement Between  Union Bank of California, N.A. and The Bank of Tokyo-Mitsubishi, Ltd.  dated October 1, 1997*(13)                                            |
| 10.13 |       | Year 2000 UnionBanCal  Corporation Management Stock Plan*(14)                                                                                                                     |
| 10.14 |       | Form of 2006  Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal  Corporation Management Stock Plan* (15)                                                   |
| 10.15 |       | Form of 2005  Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(16)                                                    |
| 10.16 |       | Form of 2004  Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(17)                                                    |
| 10.17 |       | Form of 2006 Restricted  Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock  Plan*(18)                                                             |
| 10.18 |       | Form of Restricted  Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock  Plan*(19)                                                                  |
| 10.19 |       | Forms of Restricted Stock  Unit Agreement for Non-Employee Directors under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(20)                                      |
| 10.20 |       | Form of 2004  Nonqualified Stock Option Agreement for Non-Employee Directors under the Year 2000  UnionBanCal Corporation Management Stock Plan*(21)                    |
| 10.21 |       | Terms and Conditions  Applicable to Non-Employee Director Stock Unit Awards under the Year 2000  UnionBanCal Corporation Management Stock Plan*(22)                          |
| 10.22 |       | Forms of Restricted Stock  Agreement for Non-Employee Directors under the Year 2000 UnionBanCal  Corporation Management Stock Plan*(23)                                           |
| 10.23 |       | Union Bank of California,  N.A. Supplemental Retirement Plan for Policy Making Officers*(24)                                                                                      |
| 10.24 |       | Amendment No. 1 to the  Union Bank of California, N.A. Supplemental Retirement Plan for Policy Making  Officers*(25)                                                         |
| 10.25 |       | Form of  Change-of-Control Agreement, dated as of May 1, 2003, between  UnionBanCal Corporation and each of the policy-making officers of UnionBanCal  Corporation*(26) |
| 10.26 |       | Union Bank of California,  N.A. Separation Pay Plan*(27)                                                                                                                          |

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| 10.27 |   | Philip B. Flynn Employment Agreement (effective  April 1, 2004)*(28)                                                                                                                                                       |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28 |   | Philip B. Flynn Amendment of  Employment Agreement (effective May 1, 2005)*(29)                                                                                                                                            |
| 10.29 |   | David I. Matson Employment  Agreement (effective January 1, 1998)*(30)                                                                                                                                                     |
| 10.30 |   | David I. Matson Amendment of  Employment Agreement (effective May 1, 2005)*(31)                                                                                                                                            |
| 10.31 |   | Written Descriptions of  Compensation Arrangements for UnionBanCal Non-Employee Directors*(32)                                                                                                                                  |
| 10.32 |   | Written Description of  Compensation Arrangements for Union Bank of California, N.A. Non-Employee  Directors*(33)                                                                                                               |
| 10.33 |   | Repurchase Agreement between  UnionBanCal Corporation and The Bank of Tokyo-Mitsubishi, Ltd., dated as of  February 23, 2005(34)                                                                                           |
| 10.34 |   | Purchase and Assumption  Agreement by and among Union Bank of California, N.A., Union Bank of  California International, and Union Bank of California Servicos LTDA. and  Wachovia Bank, N.A. dated September 21, 2005(35) |
| 12.1  |   | Computation of Ratio of  Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements(36)                                                                                                                       |
| 21.1  |   | Subsidiaries of the  Registrant(36)                                                                                                                                                                                             |
| 23.1  |   | Consent of  Deloitte & Touche LLP(36)                                                                                                                                                                                  |
| 24.1  |   | Power of Attorney(36)                                                                                                                                                                                                           |
| 24.2  |   | Resolution of Board of  Directors(36)                                                                                                                                                                                           |
| 31.1  |   | Certification of the Chief  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002(36)                               |
| 31.2  |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002(36)                               |
| 32.1  |   | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002(36)                                                           |
| 32.2  |   | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(36)                                                           |

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                (1) Incorporated byreference to the exhibit of the same number to the UnionBanCal CorporationQuarterly Report on Form 10-Q for the quarter ended September 30,2003 (SEC File No. 001-15081).

                (2) Incorporated byreference to Exhibit 99.1 to the UnionBanCal Corporation Current Report onForm 8-K dated December 8, 2003 (SEC File No. 001-15081).

                (3) Incorporated byreference to the exhibit of the same number to the UnionBanCal CorporationAnnual Report on Form 10-K for the year ended December 31, 1997(SEC File No. 000-28118).

                (4) Incorporated byreference to the exhibit of the same number to the UnionBanCal CorporationAnnual Report on Form 10-K for the year ended December 31, 1996(SEC File No. 000-28118).

                (5) Incorporated byreference to Appendix B to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

                (6) Incorporated byreference to Exhibit C to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 27, 2001 (SEC File No. 001-15081).

                (7) Incorporated byreference to Exhibit 10.6 to the UnionBanCal Corporation Annual Report on Form 10-Kfor the year ended December 31, 1997 (SEC File No. 000-28118).

                (8) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2006 (SEC File No. 001-15081).

                (9) Incorporated byreference to Exhibit 10.14 to the UnionBanCal Corporation Current Reporton Form 8-K dated April 1, 1996 (SEC File No. 000-28118).

            (10) Incorporated byreference to Appendix B to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 26, 2004 (SEC File No. 001-15081).

            (11) Incorporated byreference to Appendix A to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

----

 

            (12) Incorporated by reference to (i) Exhibit 10.2to the UnionBanCal Corporation Current Report on Form 8-K dated March 22,2005 and (ii) Exhibit 10.1 to the UnionBanCal Corporation Current Reporton Form 8-K dated March 24, 2006 (SEC File No. 001-15081).

            (13) Incorporated by reference to Exhibit 10.10to the UnionBanCal Corporation Annual Report on Form 10-K for theyear ended December 31, 1997 (SEC File No. 000-28118).

            (14) Incorporated byreference to Appendix A to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 25, 2005 (SEC File No. 001-15081).

            (15) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended March 31, 2006 (SEC File No. 001-15081).

            (16) Incorporated byreference to Exhibit 10.4 to the UnionBanCal Corporation Current Report onForm 8-K dated March 22, 2005 (SEC File No. 001-15081).

            (17) Incorporated byreference to Exhibit 10.3 to the UnionBanCal Corporation Current Report onForm 8-K dated March 22, 2005 (SEC File No. 001-15081).

            (18) Incorporated byreference to Exhibit 10.3 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2006 (SEC File No. 001-15081).

            (19) Incorporated byreference to Exhibit 10.3 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended March 31, 2006 (SEC File No. 001-15081).

            (20) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Current Report onForm 8-K dated July 1, 2006 (SEC File No. 001-15081).

            (21) Incorporated byreference to Exhibit 10.5 to the UnionBanCal Corporation Current Report onForm 8-K dated March 22, 2005 (SEC File No. 001-15081).

            (22) Incorporated byreference to Exhibit 10.6 to the UnionBanCal Corporation Current Report onForm 8-K dated March 22, 2005 (SEC File No. 001-15081).

            (23) Incorporated byreference to Exhibit 10.14 to the UnionBanCal Corporation Annual Report onForm 10-K for the year ended December 31, 2005 (SEC File No. 001-15081).

            (24) Incorporated byreference to Exhibit 10.10 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2000 (SEC File No. 001-15081).

            (25) Incorporated by referenceto Exhibit 10.2 to the UnionBanCal Corporation Quarterly Report on Form 10-Qfor the quarter ended June 30, 2006 (SEC File No. 001-15081).

            (26) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2003 (SEC File No. 001-15081).

            (27) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Current Report onForm 8-K dated March 22, 2005 (SEC File No. 001-15081).

            (28) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended March 31, 2004 (SEC File No. 001-15081).

            (29) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2005 (SEC File No. 001-15081).

            (30) Incorporated byreference to Exhibit 10.13 to the UnionBanCal Corporation Annual Report onForm 10-K for the year ended December 31, 2002 (SEC File No. 001-15081).

            (31) Incorporated byreference to Exhibit 10.2 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended June 30, 2005 (SEC File No. 001-15081).

            (32) Incorporated byreference to (i) Exhibit 10.1 to the UnionBanCal Corporation CurrentReport on Form 8-K dated July 27, 2005 (SEC File No. 001-15081)and (ii) Item 1 of the UnionBanCal Corporation Current Report on Form 8-Kdated October 26, 2005 (SEC File No. 001-15081).

            (33) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Current Report onForm 8-K dated December 7, 2005 (SEC File No. 001-15081).

            (34) Incorporated byreference to Exhibit 10.25 to the UnionBanCal Corporation Annual Report onForm 10-K for the year ended December 31, 2005 (SEC File No. 001-15081).

            (35) Incorporated byreference to Exhibit 10.1 to the UnionBanCal Corporation Quarterly Reporton Form 10-Q for the quarter ended September 30, 2005 (SEC FileNo. 001-15081).

            (36) Providedherewith.

                 * Management contract or compensatory plan,contract or arrangement.

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