**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x      QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended March 31, 2007**

**OR**

**o**  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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 StreetSan Francisco, California 94104-1302**

(Address and zip code ofprincipal executive offices)

Registrant’s telephone number:(415) 765-2969

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 whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. Largeaccelerated filer  þ      Acceleratedfiler  o      Non-acceleratedfiler  o

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

Numberof shares of Common Stock outstanding at April 30, 2007: 138,200,376

 

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**UnionBanCal Corporationand Subsidiaries**

**TABLE OFCONTENTS**
|                                                                                                      | ** ** | **Page  Number** |
|------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART I**                                                                                      | ** ** | ** **       |
| **Financial Information**                                                                            | ** ** | ** **       |
| Condensed Consolidated Financial  Highlights                                                         |       | 5                |
| ITEM 1. FINANCIAL STATEMENTS:                                                                        |       |             |
| Condensed Consolidated Statements of Income                                                          |       | 6                |
| Condensed Consolidated Balance Sheets                                                                |       | 7                |
| Condensed Consolidated  Statements of Changes in Stockholders’ Equity                           |       | 8                |
| Condensed Consolidated  Statements of Cash Flows                                                     |       | 9                |
| Notes to Condensed Consolidated Financial Statements                                                 |       | 10               |
| ITEM 2. MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: |       |             |
| Introduction                                                                                         |       | 28               |
| Executive Overview                                                                                   |       | 28               |
| Discontinued Operations                                                                              |       | 29               |
| Critical Accounting Policies                                                                         |       | 30               |
| Financial Performance                                                                                |       | 31               |
| Net Interest Income                                                                                  |       | 33               |
| Noninterest Income and  Noninterest Expense                                                          |       | 34               |
| Income Tax Expense                                                                                   |       | 35               |
| Loans                                                                                                |       | 36               |
| Cross-Border Outstandings                                                                            |       | 38               |
| Provision for Credit Losses                                                                          |       | 38               |
| Allowances for Credit Losses                                                                         |       | 38               |
| Nonperforming Assets                                                                                 |       | 41               |
| Loans 90 Days or More Past  Due and Still Accruing                                                   |       | 42               |
| Quantitative and Qualitative  Disclosures About Market Risk                                          |       | 42               |
| Liquidity Risk                                                                                       |       | 45               |
| Regulatory Capital                                                                                   |       | 47               |
| Business Segments                                                                                    |       | 48               |
| Regulatory Matters                                                                                   |       | 54               |
| ITEM 3. QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  |       | 55               |
| ITEM 4. CONTROLS AND PROCEDURES                                                                      |       | 55               |
| **PART II**                                                                                     | ** ** | ** **       |
| **Other Information**                                                                                | ** ** | ** **       |
| ITEM 1.   LEGAL PROCEEDINGS                                                                |       | 56               |
| ITEM 1A. RISK FACTORS                                                                                |       | 56               |
| ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES  AND USE OF PROCEEDS                     |       | 64               |
| ITEM 6.    EXHIBITS                                                                        |       | 64               |
| SIGNATURES                                                                                           |       | 65               |

 

2

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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. For adiscussion of risk factors relating to the Company’s business, please refer toItem 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q(this Form 10-Q).

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 of1934, as amended. Wemay make forward-looking statements in our Securities and Exchange Commission(SEC) filings, press releases, news articles, conference calls with analystsand stockholders and when we are speaking on behalf of UnionBanCal Corporation.Forward-looking statements can be identified by the fact that they do notrelate strictly to historical or current facts. Often, they include the words “believe,”“expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,”“project,” or words of similar meaning, or future or conditional verbs such as “will,”“would,” “should,” “could,” “might,” or “may.” These forward-looking statementsare intended to provide investors with additional information with which theymay assess our future potential. All of these forward-looking statements arebased on assumptions about an uncertain future and are based on informationavailable to us at the date of these statements. We do not undertake to updateforward-looking statements to reflect facts, circumstances, assumptions orevents that occur after the date the forward-looking statements are made.

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

·       Our business objectives, strategies and initiatives, the growth of ourbusiness and our 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 or enforcement actionsregarding Bank Secrecy Act and anti-money laundering matters, and their impacton our business

·       The costs and effects of legal actions, investigations, regulatoryactions, criminal proceedings or similar matters, or adverse facts anddevelopments 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

3

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

·       Our relatively high proportion of average noninterest bearing depositsto total deposits

·       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 trading and hedging strategies and our management of the sensitivity of ourbalance sheet

·       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

·       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 our businessand 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 Item 1A “Risk Factors” of Part II and in Item 2“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of Part I of this Form 10-Q.

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.

4

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**PART I. FINANCIALINFORMATION**

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Financial Highlights(Unaudited)**

| ** **                                                                      | ** ** | **As of and for the  Three Months Ended** | ** ** | ** **         | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                      | ** ** | **March 31,**                                                      | ** ** | **March 31,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                                                | ** ** | **2007**           | ** ** | **Change** | ** ** |
| **Results of operations:**                                                      | ** ** | ** **                                                              | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |
| Net interest income(1)                                                          |       | $                                                                       | 466,341    |               | $          | 430,627 |   |   | (7.66 | )% |   |
| (Reversal of) provision for loan losses                                         |       | (7,000                                                                  | )          | 4,000              |       |   | nm |   |   |
| Noninterest income                                                              |       | 217,910                                                                 |       | 222,558            |       |   | 2.13 |   |   |
| Noninterest expense                                                             |       | 414,544                                                                 |       | 422,091            |       |   | 1.82 |   |   |
| Income before income taxes(1)                                                   |       | 276,707                                                                 |       | 227,094            |       |   | (17.93 | ) |   |
| Taxable-equivalent adjustment                                                   |       | 1,248                                                                   |       | 2,115              |       |   | 69.47 |   |   |
| Income tax expense                                                              |       | 94,004                                                                  |       | 75,368             |       |   | (19.82 | ) |   |
| Income from continuing operations                                               |       | 181,455                                                                 |       | 149,611            |       |   | (17.55 | ) |   |
| Loss from discontinued operations, net of taxes                                 |       | (8,510                                                                  | )          | —             |       |   | 100.00 |   |   |
| Net income                                                                      |       | $                                                                       | 172,945    |               | $          | 149,611 |   |   | (13.49 | ) |   |
| **Per common share:**                                                           | ** ** | ** **                                                              | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |
| Basic earnings:                                                                 |       |                                                                    |       |               |       |   |   |   |   |
| From continuing operations                                                      |       | $                                                                       | 1.26       |               | $          | 1.08 |   |   | (14.29 | )% |   |
| Net income                                                                      |       | 1.20                                                                    |       | 1.08               |       |   | (10.00 | ) |   |
| Diluted earnings:                                                               |       |                                                                    |       |               |       |   |   |   |   |
| From continuing operations                                                      |       | 1.24                                                                    |       | 1.07               |       |   | (13.71 | ) |   |
| Net income                                                                      |       | 1.18                                                                    |       | 1.07               |       |   | (9.32 | ) |   |
| Dividends(2)                                                                    |       | 0.41                                                                    |       | 0.47               |       |   | 14.63 |   |   |
| Book value (end of period)                                                      |       | 31.94                                                                   |       | 32.98              |       |   | 3.26 |   |   |
| Common shares outstanding (end of period)(3)(4)                                 |       | 143,402,332                                                             |       | 138,117,370        |       |   | (3.69 | ) |   |
| Weighted average common shares outstanding—basic(3)(4)                     |       | 143,878,106                                                             |       | 137,942,320        |       |   | (4.13 | ) |   |
| Weighted average common shares outstanding—diluted(3)(4)                   |       | 146,026,188                                                             |       | 139,729,681        |       |   | (4.31 | ) |   |
| **Balance sheet (end of period):**                                              | ** ** | ** **                                                              | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |
| Total assets(5)                                                                 |       | $                                                                       | 48,800,945 |               | $          | 54,616,849 |   |   | 11.92 | % |   |
| Total loans                                                                     |       | 33,528,868                                                              |       | 37,251,950         |       |   | 11.10 |   |   |
| Nonperforming assets                                                            |       | 42,392                                                                  |       | 41,744             |       |   | (1.53 | ) |   |
| Total deposits                                                                  |       | 39,155,904                                                              |       | 43,797,924         |       |   | 11.86 |   |   |
| Stockholders’ equity                                                       |       | 4,579,878                                                               |       | 4,555,439          |       |   | (0.53 | ) |   |
| **Balance sheet (period average):**                                             | ** ** | ** **                                                              | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |
| Total assets                                                                    |       | $                                                                       | 48,016,643 |               | $          | 52,973,203 |   |   | 10.32 | % |   |
| Total loans                                                                     |       | 34,052,067                                                              |       | 38,458,014         |       |   | 12.94 |   |   |
| Earning assets                                                                  |       | 43,084,349                                                              |       | 48,354,950         |       |   | 12.23 |   |   |
| Total deposits                                                                  |       | 38,856,033                                                              |       | 41,483,062         |       |   | 6.76 |   |   |
| Stockholders’ equity                                                       |       | 4,538,679                                                               |       | 4,510,205          |       |   | (0.63 | ) |   |
| **Financial ratios****(6)****:**                                                | ** ** | ** **                                                              | ** ** | ** **         | ** ** |   | ** ** | ** ** |   |
| Return on average assets(7):                                                    |       |                                                                    |       |               |       |   |   |   |   |
| From continuing operations                                                      |       | 1.53                                                                    | %          | 1.15               | %          |   |   |   |   |
| Net income                                                                      |       | 1.46                                                                    |       | 1.15               |       |   |   |   |   |
| Return on average stockholders’ equity(7):                                 |       |                                                                    |       |               |       |   |   |   |   |
| From continuing operations                                                      |       | 16.21                                                                   |       | 13.45              |       |   |   |   |   |
| Net income                                                                      |       | 15.45                                                                   |       | 13.45              |       |   |   |   |   |
| Efficiency ratio(8)                                                             |       | 62.10                                                                   |       | 64.47              |       |   |   |   |   |
| Net interest margin(1)                                                          |       | 4.36                                                                    |       | 3.58               |       |   |   |   |   |
| Dividend payout ratio                                                           |       | 32.54                                                                   |       | 43.52              |       |   |   |   |   |
| Tangible equity ratio                                                           |       | 8.46                                                                    |       | 7.53               |       |   |   |   |   |
| Tier 1 risk-based capital ratio(5)                                              |       | 9.09                                                                    |       | 8.42               |       |   |   |   |   |
| Total risk-based capital ratio(5)                                               |       | 10.94                                                                   |       | 11.38              |       |   |   |   |   |
| Leverage ratio(5)                                                               |       | 8.80                                                                    |       | 8.12               |       |   |   |   |   |
| Allowances for credit losses to total loans(9)                                  |       | 1.26                                                                    |       | 1.11               |       |   |   |   |   |
| Allowances for credit losses to nonaccrual loans(9)                             |       | 1,003.48                                                                |       | 997.48             |       |   |   |   |   |
| Net loans charged off to average total loans(7)                                 |       | 0.06                                                                    |       | 0.03               |       |   |   |   |   |
| Nonperforming assets to total loans and foreclosed  assets                      |       | 0.13                                                                    |       | 0.11               |       |   |   |   |   |
| Nonperforming assets  to total assets(5)                                        |       | 0.09                                                                    |       | 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 March 31, 2007, 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)                   Annualized.

(8)                   The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the (reversal of)provision for losses on off-balance sheet commitments, as a percentage of netinterest income (taxable-equivalent basis) and noninterest income and is calculatedfor continuing operations only.

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

nm = not meaningful

5

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**Item 1.**            FinancialStatements

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Statements of Income(Unaudited)**

| ** **                                                                      | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31,**           | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                | ** ** | **2007** | ** ** |
| **Interest Income**                                                             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Loans                                                                           |       | $                                       | 512,323    |   | $ | 601,933 |   |
| Securities                                                                      |       | 96,867                                  |       | 107,990 |   |
| Interest bearing deposits in banks                                              |       | 736                                     |       | 1,109 |   |
| Federal funds sold and securities purchased under  resale agreements            |       | 3,845                                   |       | 11,152 |   |
| Trading account assets                                                          |       | 1,431                                   |       | 1,587 |   |
| Total interest income                                                           |       | 615,202                                 |       | 723,771 |   |
| **Interest Expense**                                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Deposits                                                                        |       | 115,309                                 |       | 222,257 |   |
| Federal funds purchased and securities sold under  repurchase agreements        |       | 8,802                                   |       | 13,524 |   |
| Commercial paper                                                                |       | 12,448                                  |       | 22,264 |   |
| Medium and long-term debt                                                       |       | 10,397                                  |       | 19,695 |   |
| Trust notes                                                                     |       | 238                                     |       | 238 |   |
| Other borrowed funds                                                            |       | 2,915                                   |       | 17,281 |   |
| Total interest expense                                                          |       | 150,109                                 |       | 295,259 |   |
| **Net Interest Income**                                                         |       | 465,093                                 |       | 428,512 |   |
| (Reversal of) provision for loan losses                                         |       | (7,000                                  | )          | 4,000 |   |
| Net interest income after (reversal of) provision for  loan losses              |       | 472,093                                 |       | 424,512 |   |
| **Noninterest Income**                                                          | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                                             |       | 81,635                                  |       | 74,945 |   |
| Trust and investment management fees                                            |       | 50,115                                  |       | 48,560 |   |
| Insurance commissions                                                           |       | 19,518                                  |       | 20,250 |   |
| Brokerage commissions and fees                                                  |       | 7,795                                   |       | 9,660 |   |
| Merchant banking fees                                                           |       | 8,229                                   |       | 9,077 |   |
| Foreign exchange gains, net                                                     |       | 7,818                                   |       | 7,594 |   |
| Card processing fees, net                                                       |       | 6,697                                   |       | 7,127 |   |
| Securities gains (losses), net                                                  |       | (214                                    | )          | 1,220 |   |
| Other                                                                           |       | 36,317                                  |       | 44,125 |   |
| Total noninterest income                                                        |       | 217,910                                 |       | 222,558 |   |
| **Noninterest Expense**                                                         | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Salaries and employee benefits                                                  |       | 252,495                                 |       | 258,515 |   |
| Net occupancy                                                                   |       | 32,837                                  |       | 35,137 |   |
| Outside services                                                                |       | 28,609                                  |       | 19,836 |   |
| Professional services                                                           |       | 14,547                                  |       | 17,087 |   |
| Equipment                                                                       |       | 17,922                                  |       | 16,554 |   |
| Software                                                                        |       | 16,344                                  |       | 14,196 |   |
| Communications                                                                  |       | 10,552                                  |       | 9,791 |   |
| Foreclosed asset expense (income)                                               |       | (7,367                                  | )          | 9 |   |
| (Reversal of) provision for losses on off-balance  sheet commitments            |       | (3,000                                  | )          | 1,000 |   |
| Other                                                                           |       | 51,605                                  |       | 49,966 |   |
| Total noninterest expense                                                       |       | 414,544                                 |       | 422,091 |   |
| Income from continuing operations before income taxes                           |       | 275,459                                 |       | 224,979 |   |
| Income tax expense                                                              |       | 94,004                                  |       | 75,368 |   |
| **Income from Continuing Operations**                                           |       | 181,455                                 |       | 149,611 |   |
| Loss from discontinued operations before income taxes                           |       | (13,603                                 | )          | — |   |
| Income tax benefit                                                              |       | (5,093                                  | )          | — |   |
| **Loss from Discontinued Operations**                                           |       | (8,510                                  | )          | — |   |
| **Net Income**                                                                  |       | $                                       | 172,945    |   | $ | 149,611 |   |
| **Income from continuing operations per common  share—basic**              |       | $                                       | 1.26       |   | $ | 1.08 |   |
| **Net Income per common share—basic**                                      |       | $                                       | 1.20       |   | $ | 1.08 |   |
| **Income from continuing operations per common  share—diluted**            |       | $                                       | 1.24       |   | $ | 1.07 |   |
| **Net Income per common share—diluted**                                    |       | $                                       | 1.18       |   | $ | 1.07 |   |
| **Weighted average common shares outstanding—basic**                       |       | 143,878                                 |       | 137,942 |   |
| **Weighted  average common shares outstanding—diluted**                    |       | 146,026                                 |       | 139,730 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                                   | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| **Assets**                                                                                                                                                                             |       |               |       |                  |       |               |       |   |   |
| Cash and due from banks                                                                                                                                                                |       | $                  | 2,035,544  |                  |       | $                  | 2,213,782  |   |   | $ | 1,913,937 |   |
| Interest bearing deposits in banks                                                                                                                                                     |       | 170,187            |       |                  | 824,456    |               |       | 1,008,327 |   |
| Federal funds sold and securities purchased under  resale agreements                                                                                                                   |       | 513,777            |       |                  | 943,200    |               |       | 2,747,300 |   |
| Total cash and cash equivalents                                                                                                                                                        |       | 2,719,508          |       |                  | 3,981,438  |               |       | 5,669,564 |   |
| Trading account assets                                                                                                                                                                 |       | 329,703            |       |                  | 376,321    |               |       | 297,998 |   |
| Securities available for  sale:                                                                                                                                                        |       |               |       |                  |       |               |       |   |   |
| Securities pledged as collateral                                                                                                                                                       |       | 88,152             |       |                  | 89,184     |               |       | 62,026 |   |
| Held in portfolio                                                                                                                                                                      |       | 8,394,318          |       |                  | 8,667,038  |               |       | 8,524,615 |   |
| Loans (net of allowance for loan losses:  March 31, 2006, $339,443; December 31, 2006, $331,077;  March 31, 2007, $332,679)                                             |       | 33,189,425         |       |                  | 36,340,646 |               |       | 36,919,271 |   |
| Due from customers on acceptances                                                                                                                                                      |       | 20,541             |       |                  | 17,834     |               |       | 18,099 |   |
| Premises and equipment, net                                                                                                                                                            |       | 511,095            |       |                  | 495,302    |               |       | 491,088 |   |
| Intangible assets                                                                                                                                                                      |       | 39,186             |       |                  | 28,930     |               |       | 26,687 |   |
| Goodwill                                                                                                                                                                               |       | 453,489            |       |                  | 453,489    |               |       | 453,489 |   |
| Other assets                                                                                                                                                                           |       | 2,814,603          |       |                  | 2,148,954  |               |       | 2,154,012 |   |
| Assets of discontinued operations to be disposed or  sold                                                                                                                              |       | 240,925            |       |                  | 20,440     |               |       | — |   |
| Total assets                                                                                                                                                                           |       | $                  | 48,800,945 |                  |       | $                  | 52,619,576 |   |   | $ | 54,616,849 |   |
| **Liabilities**                                                                                                                                                                        |       |               |       |                  |       |               |       |   |   |
| Noninterest bearing                                                                                                                                                                    |       | $                  | 18,118,506 |                  |       | $                  | 17,113,890 |   |   | $ | 16,175,362 |   |
| Interest bearing                                                                                                                                                                       |       | 21,037,398         |       |                  | 24,855,478 |               |       | 27,622,562 |   |
| Total deposits                                                                                                                                                                         |       | 39,155,904         |       |                  | 41,969,368 |               |       | 43,797,924 |   |
| Federal funds purchased and securities sold under  repurchase agreements                                                                                                               |       | 292,758            |       |                  | 1,083,927  |               |       | 549,545 |   |
| Commercial paper                                                                                                                                                                       |       | 1,420,276          |       |                  | 1,661,163  |               |       | 1,424,401 |   |
| Other borrowed funds                                                                                                                                                                   |       | 66,472             |       |                  | 432,401    |               |       | 892,852 |   |
| Acceptances outstanding                                                                                                                                                                |       | 20,541             |       |                  | 17,834     |               |       | 18,099 |   |
| Other liabilities                                                                                                                                                                      |       | 2,259,464          |       |                  | 1,545,165  |               |       | 1,292,554 |   |
| Medium and long-term debt                                                                                                                                                              |       | 788,763            |       |                  | 1,318,847  |               |       | 2,071,263 |   |
| Junior subordinated debt payable to subsidiary  grantor trust                                                                                                                          |       | 15,225             |       |                  | 14,885     |               |       | 14,772 |   |
| Liabilities of discontinued operations to be  extinguished or assumed                                                                                                                  |       | 201,664            |       |                  | 4,585      |               |       | — |   |
| Total liabilities                                                                                                                                                                      |       | 44,221,067         |       |                  | 48,048,175 |               |       | 50,061,410 |   |
| Commitments,  contingencies and guarantees—See Note 9                                                                                                                             |       |               |       |                  |       |               |       |   |   |
| **Stockholders’  Equity**                                                                                                                                                         |       |               |       |                  |       |               |       |   |   |
| Preferred stock:                                                                                                                                                                       |       |               |       |                  |       |               |       |   |   |
| Authorized 5,000,000 shares; no shares issued or  outstanding as of March 31, 2006, December 31, 2006 and  March 31, 2007                                               |       | —             |       |                  | —     |               |       | — |   |
| Common stock, par value $1  per share:                                                                                                                                                 |       |               |       |                  |       |               |       |   |   |
| Authorized 300,000,000 shares; issued 154,832,175  shares as of March 31, 2006, 156,460,057 shares as of December 31,  2006 and 156,832,956 shares as of March 31, 2007 |       | 154,832            |       |                  | 156,460    |               |       | 156,833 |   |
| Additional paid-in capital                                                                                                                                                             |       | 1,003,013          |       |                  | 1,083,649  |               |       | 1,109,817 |   |
| Treasury stock—11,429,843 shares as of March 31,  2006, 17,352,803 shares as of December 31, 2006 and 18,715,586 shares as  of March 31,  2007                     |       | (692,783           | )          |                  | (1,064,606 | )                  |       | (1,150,090 | ) |
| Retained earnings                                                                                                                                                                      |       | 4,274,463          |       |                  | 4,655,272  |               |       | 4,669,590 |   |
| Accumulated other comprehensive loss                                                                                                                                                   |       | (159,647           | )          |                  | (259,374   | )                  |       | (230,711 | ) |
| Total stockholders’ equity                                                                                                                                                        |       | 4,579,878          |       |                  | 4,571,401  |               |       | 4,555,439 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                       |       | $                  | 48,800,945 |                  |       | $                  | 52,619,576 |   |   | $ | 54,616,849 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

7

----

 

 

 

 

**UnionBanCal Corporationand SubsidiariesCondensed Consolidated Statements of Changes in Stockholders’ Equity(Unaudited)**

| **(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, 2005**                                        |       | 154,469,215                |       | $                 | 154,469    |                             | $          | 994,956             |       | $                      | (612,732   | )                                                         | $          | 4,141,400                                |       |   | $ | (118,393 | ) |   | $ | 4,559,700 |   |
| Comprehensive income                                                  |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net income—For the  three months ended March 31, 2006       |       |                       |       |              |       |                             |       |                |       | 172,945                |       |                                                      |       |                                     |       | 172,945 |   |
| Other comprehensive income,  net of tax:                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net change in  unrealized losses on cash flow hedges                  |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (11,907    | )                                        |       | (11,907 | ) |
| Net change in  unrealized losses on securities available for sale     |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (29,331    | )                                        |       | (29,331 | ) |
| Foreign currency  translation adjustment                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | (16        | )                                        |       | (16 | ) |
| Total comprehensive  income                                           |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       | 131,691 |   |
| Reclassification due to adoption of SFAS                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| No. 123(R) implementation(1)                                |       |                       |       |              |       | (19,035                          | )          |                |       | 19,035                 |       |                                                      |       |                                     |       | — |   |
| Restricted stock  granted, net of forfeitures                         |       | 2,925                      |       | 3                 |       | 204                              |       |                |       |                   |       |                                                      |       |                                     |       | 207 |   |
| Compensation expense—stock  options                              |       |                       |       |              |       | 6,214                            |       |                |       |                   |       |                                                      |       |                                     |       | 6,214 |   |
| Compensation expense—restricted  stock                           |       |                       |       |              |       | 3,105                            |       |                |       |                   |       |                                                      |       |                                     |       | 3,105 |   |
| Stock options exercised                                               |       | 360,035                    |       | 360               |       | 13,669                           |       |                |       |                   |       |                                                      |       |                                     |       | 14,029 |   |
| Excess tax benefit—stock  options                                |       |                       |       |              |       | 3,900                            |       |                |       |                   |       |                                                      |       |                                     |       | 3,900 |   |
| Common stock  repurchased(2)                                          |       |                       |       |              |       |                             |       | (80,051             | )          |                   |       |                                                      |       |                                     |       | (80,051 | ) |
| Dividends declared on  common stock, $0.41 per share(3)               |       |                       |       |              |       |                             |       |                |       | (58,917                | )          |                                                      |       |                                     |       | (58,917 | ) |
| Net change                                                            |       |                       |       | 363               |       | 8,057                            |       | (80,051             | )          | 133,063                |       |                                                      | (41,254    | )                                        |       | 20,178 |   |
| **BALANCE  MARCH 31, 2006**                                      |       | 154,832,175                |       | $                 | 154,832    |                             | $          | 1,003,013           |       | $                      | (692,783   | )                                                         | $          | 4,274,463                                |       |   | $ | (159,647 | ) |   | $ | 4,579,878 |   |
| **BALANCE  DECEMBER 31, 2006**                                        |       | 156,460,057                |       | $                 | 156,460    |                             | $          | 1,083,649           |       | $                      | (1,064,606 | )                                                         | $          | 4,655,272                                |       |   | $ | (259,374 | ) |   | $ | 4,571,401 |   |
| Comprehensive income                                                  |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net income—For the  three months ended March 31, 2007       |       |                       |       |              |       |                             |       |                |       | 149,611                |       |                                                      |       |                                     |       | 149,611 |   |
| Other comprehensive income,  net of tax:                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       |   |   |
| Net change in unrealized  losses on cash flow hedges                  |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 7,588      |                                     |       | 7,588 |   |
| Net change in  unrealized losses on securities available for sale     |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 17,919     |                                     |       | 17,919 |   |
| Foreign currency  translation adjustment                              |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 39         |                                     |       | 39 |   |
| Pension and other  benefits adjustment                                |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      | 3,117      |                                     |       | 3,117 |   |
| Total comprehensive  income                                           |       |                       |       |              |       |                             |       |                |       |                   |       |                                                      |       |                                     |       | 178,274 |   |
| FIN No. 48  adjustment(4)                                        |       |                       |       |              |       |                             |       |                |       | (49,300                | )          |                                                      |       |                                     |       | (49,300 | ) |
| FSP FAS 13-2  adjustment(5)                                           |       |                       |       |              |       |                             |       |                |       | (20,803                | )          |                                                      |       |                                     |       | (20,803 | ) |
| Stock options  exercised                                              |       | 370,626                    |       | 371               |       | 14,457                           |       |                |       |                   |       |                                                      |       |                                     |       | 14,828 |   |
| Restricted stock  granted, net of forfeitures                         |       | 940                        |       | 1                 |       | (1                               | )          |                |       |                   |       |                                                      |       |                                     |       | — |   |
| Performance share  units vested                                       |       | 1,333                      |       | 1                 |       | (1                               | )          |                |       |                   |       |                                                      |       |                                     |       | — |   |
| Excess tax benefit—stock-based  compensation                     |       |                       |       |              |       | 2,862                            |       |                |       |                   |       |                                                      |       |                                     |       | 2,862 |   |
| Compensation  expense—stock options and other share-based awards |       |                       |       |              |       | 4,720                            |       |                |       |                   |       |                                                      |       |                                     |       | 4,720 |   |
| Compensation expense—restricted  stock                           |       |                       |       |              |       | 3,760                            |       |                |       |                   |       |                                                      |       |                                     |       | 3,760 |   |
| Compensation expense—performance  share units                    |       |                       |       |              |       | 371                              |       |                |       |                   |       |                                                      |       |                                     |       | 371 |   |
| Common stock  repurchased(2)                                          |       |                       |       |              |       |                             |       | (85,484             | )          |                   |       |                                                      |       |                                     |       | (85,484 | ) |
| Dividends declared on  common stock, $0.47 per share(3)               |       |                       |       |              |       |                             |       |                |       | (65,190                | )          |                                                      |       |                                     |       | (65,190 | ) |
| Net change                                                            |       |                       |       | 373               |       | 26,168                           |       | (85,484             | )          | 14,318                 |       |                                                      | 28,663     |                                     |       | (15,962 | ) |
| **BALANCE  MARCH 31, 2007**                                      |       | 156,832,956                |       | $                 | 156,833    |                             | $          | 1,109,817           |       | $                      | (1,150,090 | )                                                         | $          | 4,669,590                                |       |   | $ | (230,711 | ) |   | $ | 4,555,439 |   |

----

(1)                   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.”

(2)                   Common stock repurchased includes commission costs.

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

(4)                   See Note 2 of these condensed consolidated financialstatements for a description of the adoption of FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation ofFASB Statement No. 109” (FIN No. 48).

(5)                   See Note 2 of these condensedconsolidated financial statements for a description of the adoption of FASB StaffPosition (FSP) FAS 13-2, “Accounting for a Change or Projected Change inthe Timing of Cash Flows Relating to Income Taxes Generated by a LeveragedLease Transaction.”

See accompanying notes to condensed consolidated financialstatements.

8

----

 

 

 

 

**UnionBanCal Corporationand SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                   | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                                   | ** ** | **2006**                                                           | ** ** | **2007** | ** ** |
| **Cash Flows from Operating Activities:**                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                                                  | 172,945    |   | $ | 149,611 |   |
| Loss from discontinued  operations, net of taxes                                             |       | (8,510                                                             | )          | — |   |
| Income from continuing  operations, net of taxes                                             |       | 181,455                                                            |       | 149,611 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                               |       |   |   |
| (Reversal of) provision for  loan losses                                                     |       | (7,000                                                             | )          | 4,000 |   |
| (Reversal of) provision for  losses on off-balance sheet commitments                         |       | (3,000                                                             | )          | 1,000 |   |
| Depreciation, amortization  and accretion                                                    |       | 35,223                                                             |       | 30,211 |   |
| Stock-based  compensation—stock options and other share-based compensation              |       | 9,526                                                              |       | 8,851 |   |
| Provision for deferred income  taxes                                                         |       | 50,398                                                             |       | 22,959 |   |
| (Gains) losses on sales of  securities available for sale, net                               |       | 214                                                                |       | (1,220 | ) |
| Net decrease in accrued  expenses                                                            |       | (58,878                                                            | )          | (14,323 | ) |
| Net (increase) decrease in  trading account assets                                           |       | (17,047                                                            | )          | 78,323 |   |
| Net decrease in trading  account liabilities                                                 |       | (1,594                                                             | )          | (99,424 | ) |
| Net increase in prepaid  expenses                                                            |       | (87,878                                                            | )          | (52,738 | ) |
| Net increase (decrease) in  other liabilities                                                |       | 816,410                                                            |       | (119,848 | ) |
| Net increase in other assets                                                                 |       | (632,135                                                           | )          | (37,403 | ) |
| Loans originated for resale                                                                  |       | (58,529                                                            | )          | (248,293 | ) |
| Net proceeds from sales of  loans originated for resale                                      |       | 96,558                                                             |       | 248,060 |   |
| Excess tax benefit—stock-based  compensation                                            |       | (3,900                                                             | )          | (2,862 | ) |
| Other, net                                                                                   |       | 5,680                                                              |       | (5,552 | ) |
| Discontinued operations, net                                                                 |       | 126,736                                                            |       | 14,518 |   |
| Total adjustments                                                                            |       | 270,784                                                            |       | (173,741 | ) |
| Net cash provided by (used  in) operating activities                                         |       | 452,239                                                            |       | (24,130 | ) |
| **Cash Flows from Investing Activities:**                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Proceeds from sales of  securities available for sale                                        |       | 4,041                                                              |       | 164,021 |   |
| Proceeds from matured and  called securities available for sale                              |       | 389,888                                                            |       | 367,395 |   |
| Purchases of securities  available for sale                                                  |       | (758,213                                                           | )          | (331,751 | ) |
| Net (purchases) sales of  premises and equipment                                             |       | 2,923                                                              |       | (15,887 | ) |
| Net increase in loans                                                                        |       | (482,202                                                           | )          | (607,172 | ) |
| Other, net                                                                                   |       | 708                                                                |       | 27 |   |
| Discontinued operations, net                                                                 |       | 622,138                                                            |       | 1,337 |   |
| Net cash used in investing  activities                                                       |       | (220,717                                                           | )          | (422,030 | ) |
| **Cash Flows from Financing Activities:**                                                    | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net increase (decrease) in  deposits                                                         |       | (926,336                                                           | )          | 1,828,556 |   |
| Net decrease in federal funds  purchased and securities sold under repurchase agreements     |       | (358,771                                                           | )          | (534,382 | ) |
| Net increase in commercial  paper and other borrowed funds                                   |       | 672,236                                                            |       | 223,689 |   |
| Proceeds from issuance of  medium-term debt                                                  |       | —                                                             |       | 749,250 |   |
| Common stock repurchased                                                                     |       | (80,051                                                            | )          | (85,484 | ) |
| Payments of cash dividends                                                                   |       | (59,103                                                            | )          | (65,859 | ) |
| Stock-based compensation  exercised                                                          |       | 17,929                                                             |       | 17,690 |   |
| Other, net                                                                                   |       | (16                                                                | )          | 789 |   |
| Discontinued operations, net                                                                 |       | (747,910                                                           | )          | — |   |
| Net cash provided by (used  in) financing activities                                         |       | (1,482,022                                                         | )          | 2,134,249 |   |
| Net increase (decrease) in  cash and cash equivalents                                        |       | (1,250,500                                                         | )          | 1,688,089 |   |
| Cash and cash equivalents at  beginning of period                                            |       | 3,969,876                                                          |       | 3,981,438 |   |
| Effect of exchange rate  changes on cash and cash equivalents                                |       | 132                                                                |       | 37 |   |
| Cash and cash equivalents at  end of period                                                  |       | $                                                                  | 2,719,508  |   | $ | 5,669,564 |   |
| **Cash Paid During the Period For:**                                                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Interest                                                                                     |       | $                                                                  | 143,090    |   | $ | 355,222 |   |
| Income taxes                                                                                 |       | 111,783                                                            |       | 72,071 |   |

 

See accompanying notes to condensed consolidated financial statements.

9

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

**Note 1—Basis of Presentationand Nature of Operations**

The unaudited condensed consolidated financialstatements of UnionBanCal Corporation and subsidiaries have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (US GAAP) for interim financial reporting and the instructions to Form 10-Qand Rule 10-01 of Regulation S-X of the Rules and Regulationsof the Securities and Exchange Commission (SEC). However, they do not includeall of the disclosures necessary for annual financial statements in conformitywith US GAAP. The results of operations for the period ended March 31,2007 are not necessarily indicative of the operating results anticipated forthe full year. Accordingly, these unaudited condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements included in UnionBanCal Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2006 (2006 Form 10-K). Thepreparation of financial statements in conformity with US GAAP also requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpense during the reporting period. Actual results could differ from thoseestimates.

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.

Under a previously announced stock repurchase program,the Company was authorized to repurchase $64.1 million of the Company’scommon stock as of March 31, 2007. The Company repurchased $85.5 millionof common stock in the first quarter of 2007, compared to $80 million in thefirst quarter of 2006. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which is a wholly-owned subsidiary ofMitsubishi UFJ Financial Group, Inc., owned approximately 65percent of the Company’s outstanding common stock at March 31, 2007.

Certain amounts for priorperiods have been reclassified to conform to current financial statementpresentation.

**Note 2—Recently IssuedAccounting Pronouncements**

*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”(FIN No. 48), which clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes.” The Interpretationestablishes a “more-likely-than-not” recognition threshold that must be metbefore a tax benefit can be recognized in the financial statements. For taxpositions that meet the more-likely-than-not threshold, an enterprise shouldrecognize the largest amount of tax benefit that is greater than 50 percentlikely of being realized upon ultimate settlement with the taxing authority. OnJanuary 1, 2007, the Company adopted FIN No. 48 and recognized a$49.3 million reduction to the beginning balance of retained earnings.

The total amount of unrecognized tax benefits as of January 1,2007 was $137.4 million. Included in total unrecognized tax benefits was $83.5million that, if recognized, would result in adjustments to other 

10

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note2—Recently Issued Accounting Pronouncements (Continued)**

income tax accounts, primarilydeferred taxes. The amount of unrecognized tax benefits that would affect theeffective tax rate, if recognized, was $53.9 million.

Interest and penalties pertaining to unrecognized taxbenefits are recognized in income tax expense. The Company had accrued $9.0million of interest expense and no penalties related to unrecognized taxbenefits as of the date of adoption. For the three months ended March 31,2007, the Company accrued $1.6 million of interest expense for its uncertaintax positions. The Company does not accrue interest income on income tax refunds until they are realized.

During the next 12 months, itis reasonably possible that the statute of limitations pertaining to positionstaken by the Company with respect to certain affiliates in prior year state taxreturns may lapse. As a result, the total amount of unrecognized tax benefitsmay decrease by zero up to $20 million, with a net impact to income tax expenseof up to $13 million. The Company’s years open to examination by majorjurisdictions are 2003 and forward for federal and 1998 and forward for state.

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

In July 2006, the FASBissued Staff Position (FSP) FAS 13-2, “Accounting for a Change orProjected Change in the Timing of Cash Flows Relating to Income Taxes Generatedby a Leveraged Lease Transaction.” The FSP requires that if, during the leaseterm, the projected timing of the income tax cash flows generated by aleveraged lease is revised, the rate of return and the allocation of incomemust be recalculated from the inception of the lease. At adoption, the changein the net investment balance resulting from the calculation would berecognized as an adjustment to the beginning balance of retained earnings.Following adoption, a change in the net investment balance resulting from arecalculation would be recognized as a gain or a loss in the period in whichthe assumption is changed. The FSP is effective for all leveraged leases on January 1,2007. The Company invests in lease-in/lease-out (LILO) transactions that havebeen challenged by the Internal Revenue Service (IRS). The Company has paid theIRS the income tax associated with the LILO transactions. However, the Companyis defending the initial filing position as to the timing of the tax benefitsassociated with these transactions. The Company adopted FSP FAS 13-2on January 1, 2007 and recalculated these leases to reflect the potentialchange in the timing of income tax cash flows in accordance with this FSP. Atadoption, the Company’s beginning balance of retained earnings was reduced by$20.8 million. The reduction to beginning retained earnings will be recognizedin interest income over the remaining term of the affected leases.

*The Fair Value Optionfor Financial Assets and Financial Liabilities*

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,Including an amendment of FASB Statement No. 115.” The Statement permitsentities to choose to measure many financial instruments and certain otherassets and liabilities at fair value on an instrument-by-instrument basis, withchanges in fair value recognized in earnings each reporting period. An entitycan elect the fair value option for existing assets and liabilities at the dateof initial adoption and when first recognizing eligible instruments. TheStatement is effective January 1, 2008 with early adoption permittedwithin 120 days of the current fiscal year beginning January 1, 2007 priorto the issuance of interim financial statements. Management is currentlyevaluating the potential impact of this Statement on the Company’s financialposition and results of operations.

11

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note2—Recently Issued Accounting Pronouncements (Continued)**

For additional information onrecently issued accounting pronouncements and other significant accountingprinciples, see Note 1 to the Consolidated Financial Statements in the Company’s2006 Form 10-K.

**Note 3—Discontinued Operations**

During the third quarter of 2005, the Bank signed adefinitive agreement to sell its international correspondent banking operations(previously reported as the International Banking Group for segment reporting)to Wachovia Bank, N.A., effective October 6, 2005.

The Company 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.

Substantiallyall assets and liabilities of the discontinued operations were liquidated as ofMarch 31, 2007. At March 31, 2006 and December 31, 2006 theassets and liabilities identified as discontinued operations were comprised ofthe following:

| ** **                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **2006**           | ** ** | **2006**              | ** ** |
| **Assets**                                                            |       |               |       |                  |       |   |   |
| Cash and due from banks                                               |       | $                  | 108,284    |                  |       | $ | 18,422 |   |   |
| Interest bearing  deposits in banks                                   |       | 18,489             |       |                  | —     |   |   |
| Loans                                                                 |       | 101,134            |       |                  | 1,337      |   |   |
| Due from customers on  acceptances                                    |       | 3,542              |       |                  | 377        |   |   |
| Premises and  equipment                                               |       | 3                  |       |                  | —     |   |   |
| Other assets                                                          |       | 9,473              |       |                  | 304        |   |   |
| Assets of  discontinued operations to be disposed or sold             |       | $             | 240,925    |                  |       | $  | 20,440 |   |   |
| **Liabilities**                                                       |       |               |       |                  |       |   |   |
| Noninterest bearing  deposits                                         |       | $                  | 124,321    |                  |       | $ | — |   |   |
| Interest bearing  deposits                                            |       | 36,440             |       |                  | —     |   |   |
| Other liabilities                                                     |       | 40,904             |       |                  | 4,585      |   |   |
| Liabilities of discontinued  operations to be extinguished or assumed |       | $             | 201,665    |                  |       | $  | 4,585 |   |   |

 

Interest expense was allocated to discontinuedoperations based on average net assets. The amount of interest expenseallocated to discontinued operations for the three months ended March 31,2006 was $0.6 million. Noninterestexpense for the three months ended March 31, 2006 included complianceexpenses of $4.8 million.

12

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note3—Discontinued Operations (Continued)**

The components of loss fromdiscontinued operations for the three months ended March 31, 2006 were:

| ** **                                             | ** ** | **For the Three** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **Months Ended**       | ** ** |
| ** **                                             | ** ** | **March 31,**          | ** ** |
| **(Dollars in thousands)**                   | ** ** | **2006**                    | ** ** |
| Net interest income                                    |       |                        | $          | 1,725 |   |   |
| Noninterest income                                     |       |                        | 5,811      |   |   |
| Noninterest expense                                    |       |                        | 21,139     |   |   |
| Loss from  discontinued operations before income taxes |       |                        | (13,603    | ) |   |
| Income tax benefit                                     |       |                        | (5,093     | ) |   |
| Loss from discontinued  operations                     |       |                        | $          | (8,510 | ) |   |

 

**Note 4—Earnings Per Share**

Basic earnings per share (EPS) ratio is computed bydividing net income by the weighted average number of common shares outstandingduring the period. Subsequent to the quarter ended March 31, 2006, theCompany no longer includes nonvested restricted shares in the weighted averagenumber of common shares outstanding—basic but includes the impact of thoseshares in the calculation of diluted shares. The impact of this change for thequarter ended March 31, 2006 is immaterial. Diluted EPS incorporatesthe dilutive effect of common stock equivalents outstanding on an average basisduring the period. Stock options, nonvested restricted stock, nonvested restrictedstock units and nonvested performance shares are common stock equivalents.

Thefollowing table presents a reconciliation of basic and diluted EPS for thethree months ended March 31, 2006 and 2007.

| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| **(Amounts in thousands, except per share data)** | ** ** | **Basic**                                            | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Income from  continuing operations                                              |       | $                                                    | 181,455    |   | $ | 181,455 |   | $ | 149,611 |   | $ | 149,611 |   |
| Loss from  discontinued operations                                              |       | (8,510                                               | )          | (8,510 | ) | — |   | — |   |
| Net income                                                                      |       | $                                                    | 172,945    |   | $ | 172,945 |   | $ | 149,611 |   | $ | 149,611 |   |
| Weighted average common shares outstanding                                      |       | 143,878                                              |       | 143,878 |   | 137,942 |   | 137,942 |   |
| Additional shares due to:                                                       |       |                                                 |       |   |   |   |   |   |   |
| Assumed conversion of dilutive share-based compensation                         |       | —                                               |       | 2,148 |   | — |   | 1,788 |   |
| Adjusted weighted  average common shares outstanding                            |       | 143,878                                              |       | 146,026 |   | 137,942 |   | 139,730 |   |
| Income from continuing operations per share                                     |       | $                                                    | 1.26       |   | $ | 1.24 |   | $ | 1.08 |   | $ | 1.07 |   |
| Loss from  discontinued operations per share                                    |       | (0.06                                                | )          | (0.06 | ) | — |   | — |   |
| Net income per share                                                            |       | $                                                    | 1.20       |   | $ | 1.18 |   | $ | 1.08 |   | $ | 1.07 |   |

 

13

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note4—Earnings Per Share (Continued)**

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 forthe three months ended March 31, 2006 and 2007 because they wereanti-dilutive.

| ** **                | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                               | ** ** | **2007** | ** ** |
| Options outstanding       |       | 52,100                                                                 |       | 1,148,281 |   |
| Exercise price of options |       | $69.18 - $71.23                                                        |       | $64.59 - $71.23 |   |

 

14

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note 5—Accumulated OtherComprehensive Income (Loss)**

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**         | ** ** |
| **For the Three Months Ended March 31, 2006:**                                                     |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                             |       |       |       |       |       |            |       |
| Unrealized net losses on  hedges arising during the period                                              |       | $          | (25,004    | )          | $          | 9,564           |       | $ | (15,440 | ) |
| Reclassification adjustment  for net losses on hedges included in net income                            |       | 5,722      |       | (2,189     | )          | 3,533           |       |
| Net change in unrealized  losses on hedges                                                              |       | (19,282    | )          | 7,375      |       | (11,907         | )          |
| Securities available for sale:                                                                          |       |       |       |       |       |            |       |
| Unrealized holding losses  arising during the period on securities available for sale              |       | (47,713    | )          | 18,250     |       | (29,463         | )          |
| Reclassification adjustment  for net losses on securities available for sale included in net income     |       | 214        |       | (82        | )          | 132             |       |
| Net change in unrealized  losses on securities available for  sale                                      |       | (47,499    | )          | 18,168     |       | (29,331         | )          |
| Foreign currency translation  adjustment                                                                |       | (26        | )          | 10         |       | (16             | )          |
| Net change in accumulated  other comprehensive income (loss)                                            |       | $          | (66,807    | )          | $          | 25,553          |       | $ | (41,254 | ) |
| **For the Three Months Ended March 31, 2007:**                                                     |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                             |       |       |       |       |       |            |       |
| Unrealized net gains on  hedges arising during the period                                               |       | $          | 2,787      |       | $          | (1,066          | )          | $ | 1,721 |   |
| Reclassification adjustment  for net losses on hedges included in net income                            |       | 9,502      |       | (3,635     | )          | 5,867           |       |
| Net change in unrealized  losses on hedges                                                              |       | 12,289     |       | (4,701     | )          | 7,588           |       |
| Securities available for  sale:                                                                         |       |       |       |       |       |            |       |
| Unrealized holding gains  arising during the period on securities available for sale               |       | 30,238     |       | (11,566    | )          | 18,672          |       |
| Reclassification adjustment  for net gains on securities available for sale included in net income |       | (1,220     | )          | 467        |       | (753            | )          |
| Net change in unrealized  losses on securities available for  sale                                      |       | 29,018     |       | (11,099    | )          | 17,919          |       |
| Foreign currency translation  adjustment                                                                |       | 63         |       | (24        | )          | 39              |       |
| Reclassification adjustment  for pension and other benefits included in net income:                     |       |       |       |       |       |            |       |
| Amortization of prior  service costs                                                                    |       | 573        |       | (219       | )          | 354             |       |
| Amortization of transition  amount                                                                      |       | (24        | )          | 9          |       | (15             | )          |
| Recognized net actuarial  loss                                                                          |       | 4,499      |       | (1,721     | )          | 2,778           |       |
| Net change in pension and  other benefits                                                               |       | 5,048      |       | (1,931     | )          | 3,117           |       |
| Net change in accumulated  other comprehensive income (loss)                                            |       | $          | 46,418     |       | $          | (17,755         | )          | $ | 28,663 |   |

 

15

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note5—Accumulated Other Comprehensive Income (Loss) (Continued)**

The following table presentsaccumulated other comprehensive income (loss) balances.

| ** **                           | ** ** | **Net**                 | ** ** | **Net**                 | ** ** | ** **      | ** ** | ** **         | ** ** | ** **             | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|--------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Unrealized**          | ** ** | **Unrealized**          | ** ** | ** **      | ** ** | ** **         | ** ** | ** **             | ** ** |
| ** **                           | ** ** | **Gains (Losses)** | ** ** | **Gains (Losses)** | ** ** | **Foreign**     | ** ** | **Pension**        | ** ** | **Accumulated**        | ** ** |
| ** **                           | ** ** | **on Cash**        | ** ** | **on Securites**   | ** ** | **Currency**    | ** ** | **and Other** | ** ** | **Other**              | ** ** |
| ** **                           | ** ** | **Flow**                | ** ** | **Available**           | ** ** | **Translation** | ** ** | **Benefits**       | ** ** | **Comprehensive**      | ** ** |
| **(Dollars in thousands)** | ** ** | **Hedges**              | ** ** | **For Sale**       | ** ** | **Adjustment**  | ** ** | **Adjustment**(1)  | ** ** | **Income (Loss)** | ** ** |
| **Balance,  December 31, 2005** |       |                    | $          | (34,308                 | )          |            |       | $                  | (74,099    | )                      |       |   | $ | 264 |   |   | $ | (10,250 | ) |   | $ | (118,393 | ) |   |
| Change during the  period            |       |                    | (11,907    | )                       |       |            | (29,331    | )                  |       |                   | (16        | ) |   | — |   |   | (41,254 | ) |   |
| **Balance,  March 31, 2006**    |       |                    | $          | (46,215                 | )          |            |       | $                  | (103,430   | )                      |       |   | $ | 248 |   |   | $ | (10,250 | ) |   | $ | (159,647 | ) |   |
| **Balance,  December 31, 2006** |       |                    | $          | (27,405                 | )          |            |       | $                  | (57,878    | )                      |       |   | $ | 223 |   |   | $ | (174,314 | ) |   | $ | (259,374 | ) |   |
| Change during the  period            |       |                    | 7,588      |                    |       |            | 17,919     |               |       |                   | 39         |   |   | 3,117 |   |   | 28,663 |   |   |
| **Balance, March 31, 2007**     |       |                    | $          | (19,817                 | )          |            |       | $                  | (39,959    | )                      |       |   | $ | 262 |   |   | $ | (171,197 | ) |   | $ | (230,711 | ) |   |

----

(1)                   Amounts prior to December 31, 2006 include onlythe minimum pension liability adjustment.

**Note 6—Goodwill and IntangibleAssets**

The tablebelow reflects the Company’s identifiable intangible assets and accumulated amortizationat March 31, 2006 and 2007.

| ** **                           | ** ** | **March 31, 2006** | ** ** | **March 31, 2007**  | ** ** |
|--------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Core Deposit Intangibles             |       | $                            | 67,237     |                          |       | $ | (47,368 | ) |   | $ | 19,869 |   | $ | 58,956 |   |   | $ | (47,632 | ) |   | $ | 11,324 |   |
| Rights-to-Expiration                 |       | 36,608                       |       |                          | (18,532    | ) |   | 18,076 |   | 36,608 |   |   | (22,120 | ) |   | 14,488 |   |
| Other                                |       | 2,100                        |       |                          | (859       | ) |   | 1,241 |   | 2,100 |   |   | (1,225 | ) |   | 875 |   |
| Total                                |       | $                            | 105,945    |                          |       | $ | (66,759 | ) |   | $ | 39,186 |   | $ | 97,664 |   |   | $ | (70,977 | ) |   | $ | 26,687 |   |

 

Totalamortization expense for the three months ended March 31, 2006 and 2007was $3.4 million and $2.2 million, respectively.

| **(Dollars in thousands)**                  | ** ** | **Core Deposit  Intangibles** | ** ** | **Rights-to-  Expiration** | ** ** | **Other**  | ** ** | **Total Identifiable  Intangibles** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|------------|------------|------------------------------------------|------------|
| Estimated amortization  expense for the years ending: | ** ** |                               | ** ** | ** **                 |       | ** ** | ** ** | ** **                               | ** ** |   | ** ** | ** ** |   |
| Remaining 2007                                        |       |                               | $          | 4,103                      | ** ** |       | $          | 2,366                                    |       | $ | 224 |   |   | $ | 6,693 | ** ** |   |
| 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 | ** ** |   |
| 2012                                                  |       |                               | 336        | ** **                 |       | 1,217      |       | —                                   |       |   | 1,553 | ** ** |   |
| thereafter                                            |       |                               | 626        | ** **                 |       | 2,610      |       | —                                   |       |   | 3,236 | ** ** |   |
| Total amortization expense  after March 31, 2007 |       |                               | $          | 11,324                     | ** ** |       | $          | 14,488                                   |       | $ | 875 |   |   | $ | 26,687 | ** ** |   |

 

16

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note6—Goodwill and Intangible Assets (Continued)**

The changes in the carryingamount of goodwill during the three months ended March 31, 2006 and 2007are shown below.

| **(Dollars in thousands)**     | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Balance,  January 1,                |       | $        | 454,015    |     | $          | 453,489 |   |
| Adjustment for  contingent consideration |       | (526     | )          | —   |       |
| Balance, March 31,                  |       | $        | 453,489    |     | $          | 453,489 |   |

 

**Note 7—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.Management believes that this new organizational structure will enhance theCompany’s focus on target markets and enterprise wide sales and service. Thevarious operating segments reporting under the Chief Operating Officer and theGroup Head of Pacific Rim Corporate Group have been aggregated into tworeportable business segments entitled “Retail Banking” and “Wholesale Banking”based upon the aggregation criteria prescribed in the SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related 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.These services 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 March 31,2006 and 2007, Retail Banking had $222.2 million of goodwill assigned to theoperating 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 March 31, 2006 and2007, Wholesale Banking had $231.3 million of goodwill assigned to theoperating segments.

The information, set forth in the table that follows,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 table, within total assets, are the amounts ofgoodwill for each reportable business segment as of March 31, 2006 and2007.

The information in the table 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 

17

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note7—Business Segments (Continued)**

Company’s internal fundstransfer pricing system, which assigns a cost of funds or a credit for funds toassets or liabilities based on their type, maturity or repricingcharacteristics. Noninterest income and expense directly attributable to anoperating segment are assigned to that operating segment. Certain indirectcosts, such as operations and technology expense, are allocated to the segmentsbased on studies of billable unit costs for product or data processing. Otherindirect costs, such as corporate overhead, are allocated to the operatingsegment based on a predetermined percentage of usage. Under the Company’srisk-adjusted return on capital (RAROC) methodology, credit expense is chargedto an operating segment based upon expected losses arising from credit risk. Inaddition, the attribution of economic capital is related to unexpected lossesarising from credit, market and operational risks.

“Other” is comprised of certain non-bank subsidiariesof UnionBanCal Corporation, the elimination of the fully taxable-equivalentbasis amount, the transfer pricing center, the amount of the provision forcredit losses over/(under) the RAROC expected loss for the period, the earningsassociated with the unallocated equity capital and allowances for creditlosses, and the residual costs of support groups. In addition, “Other” includesCorporate Treasury, which is responsible for Asset-Liability Management (ALM),wholesale funding, and the ALM investment securities and derivatives hedgingportfolios, and the results of discontinued operations. Except as discussedabove, none of the items in “Other” is significant to the Company’s business.

The Company’s business segments are reported from a “marketview” perspective in measuring the profitability of the business segments. Themarket view is a measurement of customer markets aggregated to show allrevenues generated and expenses incurred from all products and services sold tothose customers regardless of where product areas organizationally report.Therefore, revenues and expenses are included in both the business segment thatprovides the service and the business segment that manages the customerrelationship. The duplicative results from this internal management accountingview are reflected in “Reconciling Items.”

The reportable business segment results for the priorperiods have been restated to reflect any changes in the transfer pricingmethodology, organizational changes that have occurred, discontinued operationsand the market view contribution.

18

----

**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note 7—BusinessSegments (Continued)**

| ** **                                                               | ** ** | **Retail Banking**                          | ** ** | **Wholesale Banking**                       | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                               | ** ** | **As of and for the**        | ** ** | **As of and for the**        | ** ** |
| ** **                                                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                                               | ** ** | **2006**                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Results  of operations—Market View (dollars in thousands):**      |       |                                             |       |                                             |       |   |   |   |   |
| Net interest income (expense)                                            |       | $                                                | 230,231    |                                             | $          | 229,878 |   | $ | 252,535 |   | $ | 241,576 |   |
| Noninterest income (expense)                                             |       | 129,902                                          |       | 125,632                                          |       | 103,124 |   | 110,021 |   |
| Total revenue                                                            |       | 360,133                                          |       | 355,510                                          |       | 355,659 |   | 351,597 |   |
| Noninterest expense (income)                                             |       | 236,373                                          |       | 242,804                                          |       | 167,580 |   | 165,840 |   |
| Credit expense (income)                                                  |       | 6,566                                            |       | 6,274                                            |       | 25,321 |   | 25,071 |   |
| Income from continuing operations before income taxes                    |       | 117,194                                          |       | 106,432                                          |       | 162,758 |   | 160,686 |   |
| Income tax expense (income)                                              |       | 44,827                                           |       | 40,710                                           |       | 54,482 |   | 49,137 |   |
| Income from continuing operations                                        |       | 72,367                                           |       | 65,722                                           |       | 108,276 |   | 111,549 |   |
| Loss from discontinued operations, net of income taxes                   |       | —                                           |       | —                                           |       | — |   | — |   |
| Net income (loss)                                                        |       | $                                                | 72,367     |                                             | $          | 65,722 |   | $ | 108,276 |   | $ | 111,549 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                                | 16,337     |                                             | $          | 17,245 |   | $ | 23,341 |   | $ | 25,557 |   |

 

| ** **                                                                    | ** ** | ** **                                       | ** ** | ** **                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** | **UnionBanCal** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                                    | ** ** | **Other**                                        | ** ** | **Reconciling Items**                       | ** ** | **Corporation**                                  | ** ** |
| ** **                                                                    | ** ** | **As of and for the**        | ** ** | **As of and for the**        | ** ** | **As of and for the**        | ** ** |
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                                                    | ** ** | **2006**                                         | ** ** | **2007**                                         | ** ** | **2006**                                         | ** ** | **2007**   | ** ** | **2006**        | ** ** | **2007** | ** ** |
| **Results of operations—Market  View (dollars in thousands):**      | ** ** | ** **                                       | ** ** | ** **                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** |
| Net interest income (expense)                                                 |       | $                                                | (15,274    | )                                                | $          | (40,854                                          | )          | $          | (2,399     | )               | $          | (2,088 | ) | $ | 465,093 |   | $ | 428,512 |   |
| Noninterest income (expense)                                                  |       | 2,853                                            |       | 5,930                                            |       | (17,969                                          | )          | (19,025    | )          | 217,910         |       | 222,558 |   |
| Total revenue                                                                 |       | (12,421                                          | )          | (34,924                                          | )          | (20,368                                          | )          | (21,113    | )          | 683,003         |       | 651,070 |   |
| Noninterest expense (income)                                                  |       | 21,527                                           |       | 25,216                                           |       | (10,936                                          | )          | (11,769    | )          | 414,544         |       | 422,091 |   |
| Credit expense (income)                                                       |       | (38,861                                          | )          | (27,317                                          | )          | (26                                              | )          | (28        | )          | (7,000          | )          | 4,000 |   |
| Income from continuing operations before income taxes                         |       | 4,913                                            |       | (32,823                                          | )          | (9,406                                           | )          | (9,316     | )          | 275,459         |       | 224,979 |   |
| Income tax expense (income)                                                   |       | (1,707                                           | )          | (10,916                                          | )          | (3,598                                           | )          | (3,563     | )          | 94,004          |       | 75,368 |   |
| Income from continuing operations                                             |       | 6,620                                            |       | (21,907                                          | )          | (5,808                                           | )          | (5,753     | )          | 181,455         |       | 149,611 |   |
| Loss from discontinued operations, net of income  taxes                       |       | (8,510                                           | )          | —                                           |       | —                                           |       | —     |       | (8,510          | )          | — |   |
| Net income (loss)                                                             |       | $                                                | (1,890     | )                                                | $          | (21,907                                          | )          | $          | (5,808     | )               | $          | (5,753 | ) | $ | 172,945 |   | $ | 149,611 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                                | 9,141      |                                             | $          | 11,841                                           |       | $          | (18        | )               | $          | (26 | ) | $ | 48,801 |   | $ | 54,617 |   |

 

**Note 8—Derivative Instrumentsand Other Financial Instruments Used For Hedging**

Derivative positions areintegral components of the Company’s designated ALM activities. The Companyuses interest rate derivatives to manage the sensitivity of the Company’s netinterest income to changes in interest rates. These instruments are used tomanage interest rate risk relating to specified groups of assets andliabilities, primarily LIBOR-based commercial loans, certificates of depositand other time deposits (CDs), and subordinated debt. The following describesthe significant hedging strategies of the Company.

19

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note8—Derivative Instruments and Other Financial Instruments Used For Hedging(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 and corridor options and interest rate swaps. At March31, 2007, the weighted average remaining life of the currently active(excluding any forward positions) cash flow hedges was approximately 1.8  years.

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 purchasedinterest rate caps to hedge the variable cash flows associated with theforecasted issuance and rollover of short-term, fixed rate CDs. In thesehedging relationships, the Company hedges the LIBOR component of the CD rates,which is 3-month LIBOR, based on the CDs’ original term to maturity,which reflects their repricing frequency. Net payments to be received under thecap contract offset the increase in interest expense caused by the relevantLIBOR index rising above 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

20

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note8—Derivative Instruments and Other Financial Instruments Used For Hedging(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 thecorridor’s upper strike rate.

Hedging transactions arestructured at inception so that the notional amounts of the hedge are matchedwith an equal principal amount of loans or CDs, the index and repricingfrequencies of the hedge matches those of the loans or CDs, and the period inwhich the designated hedged cash flows occurs is equal to the term of the hedge.As such, most of the ineffectiveness in the hedging relationship results fromthe mismatch between the timing of reset dates on the hedge versus those of theloans or CDs. In the first quarter of 2007, the Company recognized a net gainof less than $0.1 million due to ineffectiveness, which is recognized in othernoninterest expense, compared to a net loss of less than $0.1 million in thefirst quarter of 2006.

*Fair Value Hedges*

*Hedging Strategy forMedium-Term Notes*

In December 2006, the Company’s medium-term debtmatured. Prior to the maturity, the Company engaged 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 debt issuance,in order to convert the liability from a fixed rate to a floating rateinstrument. This strategy mitigated 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 mirrorall of the provisions of the medium-term notes, and allowed the Company toassume that 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 usesTo-Be-Announced (TBA) contracts to fix the price and yield of anticipatedpurchases or sales of mortgage-backed securities that will be delivered at anagreed upon date. This strategy hedges the risk of variability in the cashflows to be paid or received upon settlement of the TBA contract.

21

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note8—Derivative Instruments and Other Financial Instruments Used For Hedging(Continued)**

*Economic HedgingStrategy for “MarketPath” Certificates of Deposit*

The Company engages in aneconomic hedging strategy in which interest bearing certificates of depositissued to customers, which are tied to the changes in the Standard and Poor’s500 Index, are exchanged for a fixed rate of interest. The Company accounts forthe embedded derivative in the certificates of deposit at fair value. A totalreturn swap that encompasses the value of a series of options that hadindividually hedged each certificate of deposit is valued at fair value. Thechanges in the fair value of the embedded derivative and the hedge instrumentare recognized as interest expense.

**Note 9—Commitments,Contingencies and Guarantees**

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. As of March 31,2007, the Company’s maximum exposure to loss for standby and commercial lettersof credit was $3.7 billion and $57.4 million, respectively. At March 31, 2007,the carrying value of the Company’s standby and commercial letters of credittotaled $6.0 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 onthe condensed consolidated balance sheet.

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 companiesare funded by private equity investors and ultimately sold, merged, or takenpublic through an initial offering, can vary based on overall market conditionsas well as the nature and type of industry in which the companies operate. AtMarch 31, 2007, the Company had commitments to fund principal investments of$116.7 million.

The Company is fund manager for limited liability companies issuinglow-income housing credit (LIHC) investments. LIHC investments provide taxbenefits to investors in the form of tax deductions from operating losses and taxcredits. To facilitate the sale of these LIHC investments, the Companyguarantees the timely completion of projects and delivery of tax benefits throughoutthe investment term. Guarantees may include a minimum rate of return, theavailability of tax credits, and operating deficit thresholds over an eleven-yearweighted average period. Additionally, the Company receives project completionand tax credit guarantees from the limited liability companies issuing the LIHCinvestments that reduce the Company’s ultimate exposure to loss. As of March31, 2007, the Company’s maximum exposure to loss 

22

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)**

**Note9—Commitments, Contingencies and Guarantees (Continued)**

under these guarantees islimited to a return of investor capital and minimum investment yield, or $144.1million. The Company maintains a reserve of $5.9 million for these guarantees.

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 March 31, 2007, the Bank had a maximum exposure to loss under the commercialpaper program guarantee of $1.4 billion. The Bank’s guarantee has an averageterm of less than nine months and is fully collateralized by a pledged deposit.The Company guarantees its subsidiaries’ leveraged lease transactions withterms ranging from fifteen to thirty years. Following the original funding ofthese leveraged lease transactions, the Company has no material obligation tobe satisfied. As of March 31, 2007, the Company had no exposure to loss forthese 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 are collateralized,primarily by cash. The amount of securities lent with indemnifications was $2.6billion at March 31, 2007. The market value of the associated collateral was$2.7 billion at March 31, 2007.

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 March 31, 2007, the maximum exposure to loss under these contractstotaled $2.8 million. At March 31, 2007, the Company maintained a reserve of$0.1 million for losses related to these guarantees.

The Company is subject to various pending andthreatened legal actions that arise in the normal course of business. Reservesfor losses from legal actions that are both probable and estimable are recordedat the time of that determination. Management believes that the disposition ofall claims currently pending will not have a material adverse effect on theCompany’s consolidated financial condition or results of operations.

For further discussion of theCompany’s commitments, contingencies and guarantees, see Note 24 to theConsolidated Financial Statements in the Company’s 2006 Form 10-K.

23

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)(Unaudited)**

 

 

 

**Note 10—Employee Pension andOther Postretirement Benefits**

Thefollowing table summarizes the components of net periodic benefit cost for thethree months ended March 31, 2006 and 2007.

| ** **                                   | ** ** | **Pension Benefits**                                                | ** ** | **Other Benefits**                                                  | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Three Months   Ended March 31,** | ** ** | **For the Three Months   Ended March 31,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2006**                                                                 | ** ** | **2007**                                                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Components of net periodic  benefit cost** |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Service cost                                 |       | $                                                                        | 13,625     |                                                                     | $          | 12,186 |   | $ | 1,785 |   | $ | 2,058 |   |
| Interest cost                                |       | 16,049                                                                   |       | 17,516                                                                   |       | 2,240 |   | 2,788 |   |
| Expected return on  plan assets              |       | (28,356                                                                  | )          | (31,579                                                                  | )          | (2,843 | ) | (3,470 | ) |
| Amortization of prior  service cost          |       | 267                                                                      |       | 64                                                                       |       | 508 |   | 509 |   |
| Amortization of  transition amount           |       | —                                                                   |       | —                                                                   |       | (23 | ) | (24 | ) |
| Recognized net  actuarial loss               |       | 7,563                                                                    |       | 3,506                                                                    |       | 1,065 |   | 993 |   |
| Total net periodic benefit  cost             |       | $                                                                        | 9,148      |                                                                     | $          | 1,693 |   | $ | 2,732 |   | $ | 2,854 |   |

 

The Company made cash contributions of $50 million tothe Pension Plan in the first quarter of 2007. During 2007, the Company plansto make $20 million in contributions to the Other Benefits Plans for postretirementbenefits.

For further discussion of theCompany’s employee pension and other postretirement benefits, see Note 9to the Consolidated Financial Statements in the Company’s 2006 Form 10-K.

**Note 11—Medium-Term Debt**

On March 23, 2007, theBank issued $750 million of Floating Rate Senior Bank Notes due on March 23,2009. The Senior Notes were issued at 100 percent of their face value, and beara floating interest rate of 3-Month LIBOR plus 2 basis points. Interestis payable and reset quarterly on the 23rd ofMarch, June, September and December of each year, with the firstinterest payment and interest reset date on June 23, 2007. The SeniorNotes are not redeemable at the option of the Bank prior to maturity or subjectto repayment at the option of the holders prior to maturity.

**Note 12—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). Under these plans, theCompany’s common stock is authorized to be awarded to key employees, outsidedirectors and consultants of the Company at the discretion of the ExecutiveCompensation and Benefits Committee of the Board of Directors (the Committee). Employeeson rotational assignment from BTMU are not eligible for stock awards. Forfurther discussion of the Company’s stock plans, see Note 16 to theConsolidated Financial Statements in the Company’s 2006 Form 10-K.

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.

24

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)(Unaudited)**

 

 

 

**Note12—Management Stock Plans (Continued)**

Under the 2000 Stock Plan, theCompany grants stock options and restricted stock and issues shares of commonstock upon vesting of performance shares and restricted stock units that aresettled in common stock. The Company issues new shares of common stock uponexercise of outstanding stock options, granting of restricted stock awards andsettlement of other awards under the stock plans. At March 31, 2007, atotal of 3,832,713 shares were available for future grants under the 2000 StockPlan as stock options, restricted stock or shares of common stock issued uponvesting of performance shares and restricted stock units settled in commonstock. The remaining shares under the 1997 Stock Plan are not available forfuture grants.

*Stock Options*

**Thefollowing is a summary of stock option transactions under the stock plans forthe three months ended March 31, 2007.**

| ** **                                    | ** ** | **For the Three Months Ended March 31, 2007** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of   Shares**                                                 | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                    | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Options outstanding,  beginning of the period |       | 8,326,241                                                                        |       |   | $ | 49.24 |   |   |   |   |   |   |   |   |   |   |
| Granted                                       |       | —                                                                           |       |   | — |   |   |   |   |   |   |   |   |   |   |
| Exercised                                     |       | (370,626                                                                         | )          |   | 40.01 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                     |       | (9,351                                                                           | )          |   | 67.84 |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of the period        |       | 7,946,264                                                                        |       |   | $ | 49.64 |   |   |   | 5.23 |   |   |   | $ | 116,821 |   |   |
| Options exercisable,  end of the period       |       | 5,586,713                                                                        |       |   | $ | 44.12 |   |   |   | 4.91 |   |   |   | $ | 108,285 |   |   |

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model. TheBlack-Scholes option pricing model uses tranches based on expected terms thatresult in ranges of input assumptions. Expected volatilities are based onhistorical data and implied volatilities from trade options on the Company’sstock, and other factors. The Company uses historical data to estimate optionexercise and employee terminations within the valuation model. The expectedterm of an option granted is derived from the output of the option valuationmodel, which is based on historical data and represents the period of time thatthe option granted is expected to be outstanding. The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant based on the expected term.

The weighted-average fair value of options grantedduring the three months ended March 31, 2006 was $11.85 per share. Therewere no options granted during the three months ended March 31, 2007. Thetotal intrinsic value of options exercised during the three months ended March 31,2006 and 2007 was $11.0 million and $8.4 million, respectively. The total fairvalue of options vested during the three months ended March 31, 2006 and2007 was $0.8 million and $0.5 million, respectively.

The Company recognized $4.5 million of compensationcost for share-based payment arrangements related to stock option awards with$1.7 million of corresponding tax benefit for the three months ended March 31,2007. As of March 31, 2007, the total unrecognized compensation costrelated to nonvested 

25

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)(Unaudited)**

 

 

 

**Note12—Management Stock Plans (Continued)**

stock optionawards was $11.3 million and the weighted-average period over which it isexpected to be recognized was 11 months.

*Restricted Stock*

In general, restricted shares are granted under the2000 Stock Plan to key employees. The awards of restricted stock granted toemployees vest pro-rata on each anniversary of the grant date and become fullyvested four years from the grant date, provided that the employee has completedthe specified continuous service requirement. They vest earlier if the employeedies, is permanently and totally disabled, retires under certain grant, age,and service conditions or terminates employment under certain conditions. Restrictedstockholders have the right to vote their restricted shares and receivedividends.

Thefollowing is a summary of the Company’s nonvested restricted stock awards as ofMarch 31, 2007 and changes during the period ended March 31, 2007.

| ** **                                            | ** ** | **For the Three Months Ended   March 31, 2007** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Number of  Shares**                                                         | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
| Nonvested restricted  awards, beginning of the period |       | 840,003                                                                            |       |   | $ | 62.59 |   |   |
| Granted                                               |       | 8,200                                                                              |       |   | 61.25 |   |   |
| Vested                                                |       | (8,543                                                                             | )          |   | 66.52 |   |   |
| Forfeited                                             |       | (7,260                                                                             | )          |   | 63.21 |   |   |
| Nonvested restricted  awards, end of the period       |       | 832,400                                                                            |       |   | $ | 62.54 |   |   |

 

The total fair value of the restricted stock awardsthat vested during the three months ended March 31, 2006 and 2007 was $0.1million and $0.6 million, respectively.

The Company recognized $3.8million of compensation cost for share-based payment arrangements related torestricted stock awards with $1.4 million of corresponding tax benefit for thethree months ended March 31, 2007. As of March 31, 2007, the totalunrecognized compensation cost related to nonvested restricted awards was $36.8million, and the weighted-average period over which it is expected to berecognized was 1.7 years.

*Restricted Stock Units*

Starting in July 2006, the Company granted restricted stock unitsto non-employee directors. These restricted stock units consist of a regulargrant, and in the case of new non-employee directors, a regular grant and aninitial 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 units would forfeit by thevesting date. During the three months ended March 31, 2007, the Companygranted 900 restricted stock units with a weighted-average grant date fairvalue of $61.17 per unit. There were no restricted stock units vested orforfeited during the three months ended March 31, 2007. For the threemonths ended March 31, 2007, the Company recognized $0.2 million ofcompensation cost with a corresponding $0.1 million in tax benefits related tothese grants. As of March 31, 2007, the total unrecognized compensationcost related 

26

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**UnionBanCal Corporation and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements (Continued)(Unaudited)**

 

 

 

**Note12—Management Stock Plans (Continued)**

to restricted stock units was$0.3 million, and the weighted-average period over which it is expected to berecognized was 9 months.

The restricted stock unitparticipants do not have voting or other stockholder rights. However, theparticipants’ stock unit accounts receive dividend equivalents, reflecting theaggregate dividends earned based on the total number of restricted stock unitsoutstanding, in the form of additional restricted stock units. Participants mayelect to defer the delivery of vested shares of common stock at predetermineddates as defined in the plan agreements. The Company will issue new sharesunder the 2000 Stock Plan upon vesting of these grants, which are redeemableonly 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 2,132,333 performance shares remaining for future awards asof March 31, 2007.

All performance shares granted prior to 2006 are redeemablein cash and are therefore being accounted for as liabilities. The value of aperformance share under the liability method is equal to the average month-endclosing price of the Company’s common stock for the final six months of theperformance period. All cancelled or forfeited performance shares becomeavailable for future grants. The total fair value of the performance sharesthat vested during the three months ended March 31, 2006 and 2007 was $3.5million and $7.1 million, respectively. These amounts were paid in cash duringthe respective quarters, except for $0.3 million which was deferred during thethree months ended March 31, 2006. There were no performance sharesforfeited for the three months ended March 31, 2007. At March 31,2006 and 2007, the Company’s liability for the cash settlement of theperformance shares was $14.3 million and $5.1 million, respectively. The Company recognized $0.4 million ofcompensation cost related to these grants with $0.2 million of correspondingtax benefit for the three months ended March 31, 2007. As of March 31,2007, the total unrecognized compensation cost related to these grants that areredeemable in cash was $1.0 million, and the weighted-average period over whichit is expected to be recognized was 6 months.

During the three months ended March 31, 2007,there were no grants or forfeitures of performance shares that are redeemablein shares. The total fair value of these performance shares which vested was$0.2 million during the three months ended March 31, 2007. For the threemonths ended March 31, 2007, the Company recognized $0.4 million ofcompensation cost with a corresponding $0.1 million in tax benefits related tothese grants. As of March 31, 2007, the total unrecognized compensationcost related to performance shares was $2.4 million, and the weighted-averageperiod over which it is expected to be recognized was 1 year. The Companyissues new shares under the 2000 Stock Plan upon vesting of these grants thatare redeemable in shares.

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**Item 2.**            Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*This*report includes forward-looking statements,which include forecasts of our financial results and condition, expectationsfor our operations 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 II Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q(this Form 10-Q) for a discussion of some factors that may causeresults to differ.

You should read the following discussion and analysisof our condensed consolidated financial condition and results of operations forthe period ended March 31, 2007 in this Form 10-Q together withour Consolidated Financial Statements and the Notes to Consolidated FinancialStatements included in our AnnualReport on Form 10-K for the year ended December 31, 2006 (2006Form 10-K). Averages, as presented in the following tables, aresubstantially all based upon daily average balances.

As used in this Form 10-Q,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, bankholding company whose major subsidiary, Union Bank of California, N.A. (theBank), is a commercial bank. We had consolidated assets of $55 billion at March 31,2007. At March 31, 2007, The Bank of Tokyo-Mitsubishi UFJ, Ltd., ourmajority owner, owned approximately 65 percent 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 ourfirst quarter 2007 results and that could impact our future results. Furtherdetailed information will be found in other portions of this Form 10-Qthat will complete your understanding of trends, events and uncertainties thatwill impact us.

Average loans grew 13 percent over the first quarterof 2006, with much of that growth coming from commercial and constructionlending. Although the growth in residential mortgage lending slowed, our growthin that portfolio was still a solid 8 percent over the first quarter of 2006.

Our overall credit quality continues to be strong. Ournonperforming assets were $42 million, flat compared to first quarter 2006. Ournet charge offs were $2 million in the first quarter of 2007 compared to $5million in the first quarter of 2006. We provided $5 million for credit lossesin the first quarter of 2007, compared with reversals of $10 million in thefirst quarter of 2006. Our provision was due to growth in our loan portfolio, ashift in risk-grade mix and changes in our loss factors. We expect that we willcontinue to provide for credit losses throughout 2007 as our credit portfoliocontinues to grow.

Offsetting our strong loan growth and credit qualitywas the decline in our noninterest bearing deposits. Compared to first quarter2006, average noninterest bearing deposits declined by $2.4 billion as ourcustomers shifted their balances to higher-cost deposits. In addition, between March 31,2006 and March 31, 2007, the average cost of interest bearing depositsrose from 2.19 percent to 3.42 percent, but we believe that pricing hasstabilized. Although our noninterest bearing deposits have declined, wecontinue to enjoy a relatively high proportion of average noninterest bearingdeposits to total deposits compared to our peers. Based on the most recentstatistics available, our percentage of average noninterest bearing deposits toaverage total deposits ranked us second of the largest 50 U.S. banks.

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In the first quarter of 2007, our net interest incomewas $428.5 million, a decline of $36.6 million over the first quarter of 2006,continuing the trend experienced throughout 2006 as our higher funding costsoutstripped interest income earned on our loan growth.

Noninterest income grew 2 percent in the first quarterof 2007 over the first quarter of 2006 as gains on private capital investmentsoffset reductions in our service charges on deposits.

Noninterest expense increased approximately 2 percentin the first quarter of 2007 compared to the first quarter of 2006. Althoughsalary and employee benefits rose by 2 percent, employee benefits were lower asa result of the increase in the discount rate used to determine our pensionobligations. In addition, the decreased cost for outside services was primarilydue to the lower cost of services related to title and escrow deposit balances.

Our effective tax rate declined to 33.5 percentcompared to 34.1 percent in the first quarter of 2006. The lower effective taxrate in 2007 results from higher income tax credits expected during the year.

In the first quarter of 2007,we repurchased 1.4 million shares of common stock for a total of $85.5 million.At March 31, 2007, we were authorized to repurchase an additional $64.1 million.

**Discontinued Operations**

During 2005, we committed to a plan to exit ourinternational correspondent banking business and entered into a definitive agreementto sell this business to Wachovia Bank, N.A. This business consisted ofinternational payment and trade processing along with the related lendingactivities. The principal legal closing of the transaction occurred on October 6,2005 and we received $245 million. During the second quarter of 2006, wereceived an additional $4 million as a contingent purchase price payment.

This transaction has been accounted for as adiscontinued operation and all prior periods, except where specificallymentioned, have been restated to reflect this accounting treatment. All of theassets and liabilities of the discontinued operations have been separatelyidentified on our condensed consolidated balance sheet and the assets are shownat 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. For the detailed components of our assetsand liabilities from discontinued operations at March 31, 2006 and December 31,2006, see Note 3 to the Condensed Consolidated Financial Statements of this Form 10-Q.Substantially all assets and liabilities of the discontinued operations were liquidatedas of March 31, 2007.

For thethree months ended March 31, 2006, loss from discontinued operationsincluded the following:

| ** **                                             | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                   | ** ** | **2006**                                                           | ** ** |
| Net interest income                                    |       |                                                               | $          | 1,725 |   |   |
| Noninterest income                                     |       |                                                               | 5,811      |   |   |
| Noninterest expense                                    |       |                                                               | 21,139     |   |   |
| Loss from  discontinued operations before income taxes |       |                                                               | (13,603    | ) |   |
| Income tax benefit                                     |       |                                                               | (5,093     | ) |   |
| Loss from discontinued  operations                     |       |                                                               | $          | (8,510 | ) |   |

 

For the three months ended March 31, 2006, netinterest income included the allocation of interest expense from continuingoperations to discontinued operations of approximately $0.6 million. Interestexpense allocated to discontinued operations is calculated based on its averagenet assets and the corresponding cost of funds rate equivalent to the averagefederal funds purchased rate for the period. 

29

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Includedin noninterest expense were compliance related expenses of $4.8 million for thethree months ended March 31, 2006.

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

**Critical Accounting Policies**

UnionBanCal Corporation’s consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America (US GAAP) and the general practices ofthe banking industry. The financial information contained within our statementsis, to a significant extent, financial information that is based on approximatemeasures of the financial effects of transactions and events that have alreadyoccurred. A variety of factors could affect the ultimate value that is obtainedeither when earning income, recognizing an expense, recovering an asset orrelieving a liability. In many instances, we use a discount factor to determinethe present value of assets and liabilities. A change in the discount factorcould increase or decrease the values of those assets and liabilities and sucha change would result in either a beneficial or adverse impact to our financialresults. We use historical loss factors, adjusted for current conditions, todetermine the inherent loss that may be present in our loan and lease portfolio.Actual losses could differ significantly from the loss factors that we use.Other significant estimates that we use are employee turnover factors forpension purposes, residual values in our leasing portfolio, fair value of ourderivatives and securities, expected useful lives of our depreciable assets andassumptions regarding our effective income tax rates. We enter into derivativecontracts to accommodate our customers and for our own risk management purposes.The derivative contracts are generally swaps and option contracts indexed toenergy commodities, interest rates or foreign currencies, although we couldenter into other types of derivative contracts. We value these contracts atfair value, using either readily available, market quoted prices or informationthat can be extrapolated to approximate a market price. We are subject to USGAAP that may change from one previously acceptable method to another method. Althoughthe economics of our transactions would be the same, the timing of events thatwould impact our transactions could change.

Our most significant estimates are approved by ourChief Executive Officer Forum (CEO Forum), which is comprised of our mostsenior officers. For each financial reporting period, a review of theseestimates is presented to and discussed with the Audit Committee of our Boardof Directors.

Understanding our accountingpolicies is fundamental to understanding our consolidated financial conditionand consolidated results of operations. Accordingly, both our CriticalAccounting Policies and our significant accounting policies are discussed indetail in our 2006 Form 10-K filed with the Securities and ExchangeCommission (the SEC).

30

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**Financial Performance**

**Summary of Financial Performance**

| ** **                                                          | ** ** | **For the Three Months** | ** ** | ** ** | **Increase (Decrease)**   | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **Ended March 31,**           | ** ** | ** ** | **2007 versus 2006** | ** ** |
| **(Dollars in thousands)**                                | ** ** | **2006**                                | ** ** | **2007**   | ** **                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of Operations**                                           |       |                                    |       |       |                           |       |   |   |   |   |   |   |
| Net interest income(1)                                              |       | $                                       | 465,093    |       | $                              | 428,512    |   |   | $ | (36,581 | ) |   | (7.9 | )% |   |
| Noninterest income                                                  |       |                                    |       |       |                           |       |   |   |   |   |   |   |
| Service charges on deposit accounts                                 |       | 81,635                                  |       | 74,945     |                           |       | (6,690 | ) |   | (8.2 | ) |   |
| Trust and investment management fees                                |       | 50,115                                  |       | 48,560     |                           |       | (1,555 | ) |   | (3.1 | ) |   |
| Brokerage commissions and fees                                      |       | 7,795                                   |       | 9,660      |                           |       | 1,865 |   |   | 23.9 |   |   |
| Securities gains (losses), net                                      |       | (214                                    | )          | 1,220      |                           |       | 1,434 |   |   | nm |   |   |
| Gain on private capital investments, net                            |       | 2,827                                   |       | 9,095      |                           |       | 6,268 |   |   | nm |   |   |
| Other noninterest income                                            |       | 75,752                                  |       | 79,078     |                           |       | 3,326 |   |   | 4.4 |   |   |
| Total noninterest  income                                           |       | 217,910                                 |       | 222,558    |                           |       | 4,648 |   |   | 2.1 |   |   |
| Total revenue                                                       |       | 683,003                                 |       | 651,070    |                           |       | (31,933 | ) |   | (4.7 | ) |   |
| (Reversal of)  provision for loan losses                            |       | (7,000                                  | )          | 4,000      |                           |       | 11,000 |   |   | nm |   |   |
| Noninterest expense                                                 |       |                                    |       |       |                           |       |   |   |   |   |   |   |
| Salaries and employee benefits                                      |       | 252,495                                 |       | 258,515    |                           |       | 6,020 |   |   | 2.4 |   |   |
| Net occupancy                                                       |       | 32,837                                  |       | 35,137     |                           |       | 2,300 |   |   | 7.0 |   |   |
| Outside services                                                    |       | 28,609                                  |       | 19,836     |                           |       | (8,773 | ) |   | (30.7 | ) |   |
| Professional services                                               |       | 14,547                                  |       | 17,087     |                           |       | 2,540 |   |   | 17.5 |   |   |
| Software                                                            |       | 16,344                                  |       | 14,196     |                           |       | (2,148 | ) |   | (13.1 | ) |   |
| Advertising and public relations                                    |       | 10,231                                  |       | 8,389      |                           |       | (1,842 | ) |   | (18.0 | ) |   |
| Foreclosed asset expense (income)                                   |       | (7,367                                  | )          | 9          |                           |       | 7,376 |   |   | nm |   |   |
| (Reversal of) provision for losses on off-balance sheet commitments |       | (3,000                                  | )          | 1,000      |                           |       | 4,000 |   |   | nm |   |   |
| Other noninterest expense                                           |       | 69,848                                  |       | 67,922     |                           |       | (1,926 | ) |   | (2.8 | ) |   |
| Total noninterest  expense                                          |       | 414,544                                 |       | 422,091    |                           |       | 7,547 |   |   | 1.8 |   |   |
| Income from  continuing operations before income taxes              |       | 275,459                                 |       | 224,979    |                           |       | (50,480 | ) |   | (18.3 | ) |   |
| Income tax expense                                                  |       | 94,004                                  |       | 75,368     |                           |       | (18,636 | ) |   | (19.8 | ) |   |
| Income from continuing  operations                                  |       | $                                       | 181,455    |       | $                              | 149,611    |   |   | $ | (31,844 | ) |   | (17.5 | )% |   |

----

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

nm = not meaningful

*The primary contributors to our financial performancefor the first quarter of 2007 compared to the first quarter of 2006 arepresented below.*

·       Afterseveral years of reducing the level of our allowances for credit losses, weprovided a total of $5 million for credit losses primarily due to loan growth,a shift in risk-grade mix and changes in our loss factors. Overall creditquality remained excellent. However, we believe that the trend of improvingcredit quality could be at its peak. (See our discussion under “Allowances forCredit Losses.”)

·       Ournet interest income was unfavorably influenced by higher rates on interestbearing liabilities, lower hedge income and lower noninterest bearing depositvolumes. Offsetting these negative influences to our net interest income werehigher earning asset volumes (including higher volume for commercial, financialand industrial loans, residential mortgages and construction loans) and higheraverage yields on our earning assets. (See our discussion under “Net InterestIncome.”)

31

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The increase in our noninterestincome was due to several factors:

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

—              Trust and investmentmanagement fees were lower primarily due to a $3.8 million one-time increase intrust fees resulting from a refinement in accrual methodology in the firstquarter of 2006, which was partly offset by an increase in fund fees in thefirst quarter of 2007 due to growth in asset balances and better rates ofreturn. Managed assets increased by approximately 8 percent, while non-managedassets increased by approximately 11 percent from March 31, 2006 to March 31,2007. Total assets under administration increased by approximately 11 percent,to $240.1 billion, for the same period;

—              Net gains on privatecapital investments were higher compared to the prior year due to higher salesand capital distributions; and

—              Insurancecommissions, merchant banking fees and gains on the sale of syndicated loansalso increased our other noninterest income compared to first quarter 2006.

Our higher noninterestexpense was due to several factors:

—              Salariesand employee benefits increased primarily as a result of:

·       annualmerit increases; and

·       higherbonuses and other performance-related incentives; partially offset by

·       lower pension expensesrelated to a change in the discount rate used to estimate future liabilities,which increased from 5.5% to 6.0%;

—              Outside servicesexpense decreased mainly due to lower cost of services related to the 12percent decline in title and escrow deposits and a shift by our customers tothe utilization of lower yielding title and escrow loans;

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

—              Software expensedecreased mainly due to a $1.4 million write-off of a project in the firstquarter of 2006;

—              Provision for losseson off-balance sheet commitments increased as a result of higher growth in ourloan commitments and a shift in the risk-grade mix, partially offset bydeclines in our loss factors; and

—              Foreclosed assetincome reflected a gain on the sale of a foreclosed property in the firstquarter of 2006.

32

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**Net Interest Income**

The following tableshows the major components of net interest income and net interest margin.

| ** **                                                               | ** ** | **For the Three Months Ended** | ** ** | ** **              | ** ** | ** **                 | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **March 31, 2006**        | ** ** | **March 31, 2007** | ** ** | **Increase (Decrease) in** | ** ** |
| ** **                                                               | ** ** | ** **                     | ** ** | **Interest**            | ** ** | **Average**                | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Interest   Income/** | ** ** |
| ** **                                                               | ** ** | **Average**                    | ** ** | **Income/**             | ** ** | **Yield/**                 | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Balance** | ** ** | **Expense** (1) | ** ** |
| **(Dollars in thousands)**                                     | ** ** | **Balance**                    | ** ** | **Expense**(1)          | ** ** | **Rate**(1)(2)             | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                               |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:**(3)**                                                            |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial  and industrial                                    |       | $                              | 12,371,594 |                    |       | $                          | 195,952    |   |   | 6.42 | % | $ | 14,684,098 |   |   | $ | 237,278 |   |   | 6.55 | % | $ | 2,312,504 |   |   | 19 | % |   | $ | 41,326 |   |   | 21 | % |   |
| Construction                                                             |       | 1,523,270                      |       |                    | 26,958     |                       |       | 7.18 |   | 2,233,131 |   |   | 42,775 |   |   | 7.77 |   | 709,861 |   |   | 47 |   |   | 15,817 |   |   | 59 |   |   |
| Residential mortgage                                                     |       | 11,446,831                     |       |                    | 143,340    |                       |       | 5.01 |   | 12,386,306 |   |   | 163,766 |   |   | 5.29 |   | 939,475 |   |   | 8 |   |   | 20,426 |   |   | 14 |   |   |
| Commercial mortgage                                                      |       | 5,652,445                      |       |                    | 97,301     |                       |       | 6.98 |   | 6,064,169 |   |   | 106,966 |   |   | 7.15 |   | 411,724 |   |   | 7 |   |   | 9,665 |   |   | 10 |   |   |
| Consumer                                                                 |       | 2,489,296                      |       |                    | 45,095     |                       |       | 7.35 |   | 2,542,507 |   |   | 48,979 |   |   | 7.81 |   | 53,211 |   |   | 2 |   |   | 3,884 |   |   | 9 |   |   |
| Lease financing                                                          |       | 568,631                        |       |                    | 4,342      |                       |       | 3.05 |   | 547,803 |   |   | 3,738 |   |   | 2.73 |   | (20,828 | ) |   | (4 | ) |   | (604 | ) |   | (14 | ) |   |
| Total Loans                                                              |       | 34,052,067                     |       |                    | 512,988    |                       |       | 6.09 |   | 38,458,014 |   |   | 603,502 |   |   | 6.34 |   | 4,405,947 |   |   | 13 |   |   | 90,514 |   |   | 18 |   |   |
| Securities—taxable                                                  |       | 8,233,854                      |       |                    | 96,053     |                       |       | 4.67 |   | 8,580,315 |   |   | 107,268 |   |   | 5.00 |   | 346,461 |   |   | 4 |   |   | 11,215 |   |   | 12 |   |   |
| Securities—tax-exempt                                               |       | 65,204                         |       |                    | 1,298      |                       |       | 7.96 |   | 57,654 |   |   | 1,154 |   |   | 8.01 |   | (7,550 | ) |   | (12 | ) |   | (144 | ) |   | (11 | ) |   |
| Interest bearing  deposits in banks                                      |       | 59,847                         |       |                    | 736        |                       |       | 4.99 |   | 79,562 |   |   | 1,109 |   |   | 5.65 |   | 19,715 |   |   | 33 |   |   | 373 |   |   | 51 |   |   |
| Federal funds sold and  securities purchased under resale agreements     |       | 345,342                        |       |                    | 3,845      |                       |       | 4.52 |   | 846,042 |   |   | 11,152  |   |   | 5.35 |   | 500,700 |   |   | 145 |   |   | 7,307 |   |   | 190 |   |   |
| Trading account assets                                                   |       | 328,035                        |       |                    | 1,530      |                       |       | 1.89 |   | 333,363 |   |   | 1,701 |   |   | 2.07 |   | 5,328 |   |   | 2 |   |   | 171 |   |   | 11 |   |   |
| Total earning assets                                                     |       | 43,084,349                     |       |                    | 616,450    |                       |       | 5.77 |   | 48,354,950 |   |   | 725,886 |   |   | 6.06 |   | 5,270,601 |   |   | 12 |   |   | 109,436 |   |   | 18 |   |   |
| Allowance for loan  losses                                               |       | (348,626                       | )          |                    |       |                       |       |   |   | (330,277 | ) |   |   |   |   |   |   | 18,349 |   |   | (5 | ) |   |   |   |   |   |   |   |
| Cash and due from  banks                                                 |       | 2,119,926                      |       |                    |       |                       |       |   |   | 1,949,232 |   |   |   |   |   |   |   | (170,694 | ) |   | (8 | ) |   |   |   |   |   |   |   |
| Premises and  equipment,  net                                            |       | 527,001                        |       |                    |       |                       |       |   |   | 493,055 |   |   |   |   |   |   |   | (33,946 | ) |   | (6 | ) |   |   |   |   |   |   |   |
| Other assets                                                             |       | 2,633,993                      |       |                    |       |                       |       |   |   | 2,506,243 |   |   |   |   |   |   |   | (127,750 | ) |   | (5 | ) |   |   |   |   |   |   |   |
| Total assets                                                             |       | $                              | 48,016,643 |                    |       |                       |       |   |   |   | $ | 52,973,203 |   |   |   |   |   |   |   | $ | 4,956,560 |   |   | 10 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                          |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                                     |       | $                              | 13,261,888 |                    |       | $                          | 62,358     |   |   | 1.91 |   | $ | 13,534,373 |   |   | $ | 91,505 |   |   | 2.74 |   | $ | 272,485 |   |   | 2 | % |   | $ | 29,147 |   |   | 47 |   |   |
| Savings and consumer  time                                               |       | 4,467,627                      |       |                    | 18,487     |                       |       | 1.68 |   | 4,415,261 |   |   | 26,957 |   |   | 2.48 |   | (52,366 | ) |   | (1 | ) |   | 8,470 |   |   | 46 |   |   |
| Large time                                                               |       | 3,608,597                      |       |                    | 34,464     |                       |       | 3.87 |   | 8,435,137 |   |   | 103,795 |   |   | 4.99 |   | 4,826,540 |   |   | 134 |   |   | 69,331 |   |   | 201 |   |   |
| Total interest bearing  deposits                                         |       | 21,338,112                     |       |                    | 115,309    |                       |       | 2.19 |   | 26,384,771 |   |   | 222,257 |   |   | 3.42 |   | 5,046,659 |   |   | 24 |   |   | 106,948 |   |   | 93 |   |   |
| Federal funds  purchased and securities sold under repurchase agreements |       | 874,055                        |       |                    | 9,410      |                       |       | 4.37 |   | 1,046,439 |   |   | 13,524 |   |   | 5.24 |   | 172,384 |   |   | 20 |   |   | 4,114 |   |   | 44 |   |   |
| Net funding allocated  from (to) discontinued  operations**(4)**    |       | (57,088                        | )          |                    | (608       | )                          |       | 4.32 |   | — |   |   | — |   |   | — |   | 57,088  |   |   | (100 | ) |   | 608 |   |   | (100 | ) |   |
| Commercial paper                                                         |       | 1,242,465                      |       |                    | 12,448     |                       |       | 4.06 |   | 1,783,758 |   |   | 22,264 |   |   | 5.06 |   | 541,293 |   |   | 44 |   |   | 9,816 |   |   | 79 |   |   |
| Other borrowed funds                                                     |       | 268,262                        |       |                    | 2,915      |                       |       | 4.41 |   | 1,309,102 |   |   | 17,281 |   |   | 5.35 |   | 1,040,840 |   |   | 388 |   |   | 14,366 |   |   | 493 |   |   |
| Medium and long-term  debt                                               |       | 800,014                        |       |                    | 10,397     |                       |       | 5.27 |   | 1,371,446 |   |   | 19,695 |   |   | 5.82 |   | 571,432 |   |   | 71 |   |   | 9,298 |   |   | 89 |   |   |
| Trust notes                                                              |       | 15,280                         |       |                    | 238        |                       |       | 6.24 |   | 14,827 |   |   | 238 |   |   | 6.43 |   | (453 | ) |   | (3 | ) |   | — |   |   | 0 |   |   |
| Total borrowed funds                                                     |       | 3,142,988                      |       |                    | 34,800     |                       |       | 4.49 |   | 5,525,572 |   |   | 73,002 |   |   | 5.36 |   | 2,382,584 |   |   | 76 |   |   | 38,202 |   |   | 110 |   |   |
| Total interest bearing  liabilities                                      |       | 24,481,100                     |       |                    | 150,109    |                       |       | 2.49 |   | 31,910,343 |   |   | 295,259 |   |   | 3.75 |   | 7,429,243 |   |   | 30 |   |   | 145,150 |   |   | 97 |   |   |
| Noninterest bearing  deposits                                            |       | 17,517,921                     |       |                    |       |                       |       |   |   | 15,098,291 |   |   |   |   |   |   |   | (2,419,630 | ) |   | (14 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                        |       | 1,478,943                      |       |                    |       |                       |       |   |   | 1,454,364 |   |   |   |   |   |   |   | (24,579 | ) |   | (2 | ) |   |   |   |   |   |   |   |
| Total liabilities                                                        |       | 43,477,964                     |       |                    |       |                       |       |   |   | 48,462,998 |   |   |   |   |   |   |   | 4,985,034 |   |   | 11 |   |   |   |   |   |   |   |   |
| **Stockholders’ Equity**                                            |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                            |       | 4,538,679                      |       |                    |       |                       |       |   |   | 4,510,205 |   |   |   |   |   |   |   | (28,474 | ) |   | (1 | ) |   |   |   |   |   |   |   |
| Total stockholders’  equity                                         |       | 4,538,679                      |       |                    |       |                       |       |   |   | 4,510,205 |   |   |   |   |   |   |   | (28,474 | ) |   | (1 | ) |   |   |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                         |       | $                              | 48,016,643 |                    |       |                       |       |   |   |   | $ | 52,973,203 |   |   |   |   |   |   |   | $ | 4,956,560 |   |   | 10 | % |   |   |   |   |   |   |   |
| **Net Interest Income/Margin**                                           |       |                           |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income/margin (taxable-equivalent  basis)                  |       |                           |       |                    | 466,341    |                       |       | 4.36 | % |   |   |   | 430,627  |   |   | 3.58 | % |   |   |   |   |   |   | (35,714 | ) |   | (8 | ) |   |
| Less:  taxable-equivalent adjustment                                     |       |                           |       |                    | 1,248      |                       |       |   |   |   |   |   | 2,115 |   |   |   |   |   |   |   |   |   |   | 867 |   |   | 69 |   |   |
| Net interest income                                                      |       |                           |       |                    | $          | 465,093                    |       |   |   |   |   |   |   | $ | 428,512 |   |   |   |   |   |   |   |   |   |   | $ | (36,581 | ) |   | (8 | )% |   |

 

|            | **Average Assets and Liabilities of  Discontinued Operations for the  Three Months Ended:** | ** ** | ** ** | ** ** | **March 31,  2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|            | **Assets**                                                                                                                               | ** ** | ** ** | ** ** | $                        | 618,653    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | **Liabilities**                                                                                                                          | ** ** | ** ** | ** ** | $                        | 561,565    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|            | **Net assets**                                                                                                                           | ** ** | ** ** | ** ** | $                        | 57,088     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

----

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

(2)                   Annualized.

(3)                   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, representing anadjustment to the yield.

33

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(4)                   Net funding allocated from (to)discontinued operations represents the shortage (excess) of assets overliabilities of discontinued operations. The expense (earning) on fundsallocated from (to) discontinued operations is calculated by taking the netbalance and applying an earnings rate or a cost of funds equivalent to thecorresponding period’s Federal funds purchased rate.

Net interest income in thefirst quarter of 2007, on a taxable-equivalent basis, decreased 8 percentfrom the first quarter of 2006. Our net interest margin decreased by 78 basispoints. These results were primarily due to the following:

·       Averageearning assets increased $5.3 billion, or 12.2 percent, primarily due to anincrease in average loans. The increase in average loans was largely due to a$2.3 billion increase in average commercial loans, including a $0.7 billionincrease in lower yielding loans related to title and escrow customers, and a$0.9 billion increase in average residential mortgages;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 29basis points, despite being negatively impacted by lower hedge income, whichdecreased by $2.5 million;

·       Averagenoninterest bearing deposits decreased $2.4 billion, or 14 percent. Averagecommercial noninterest bearing deposits, excluding title and escrow deposits,declined $1.7 billion, or 15 percent, primarily due to changes in customerbehavior in response to rising short-term interest rates. Consumer demanddeposits decreased $0.4 billion, or 12 percent. Average noninterest bearingdeposits represented 36 percent of average total deposits in the first quarterof 2007 compared to 45 percent in the first quarter of 2006; and

·       Inthe first quarter of 2007, the annualized average all-in cost of funds was 2.55percent, reflecting an average deposit-to-loan ratio of 108 percent and arelatively high proportion of average noninterest bearing deposits to totaldeposits compared to our peers. In the first quarter of 2006, the annualizedall-in cost of funds was 1.45 percent and our average deposit-to-loan ratio was114 percent.

We use derivatives to hedge expected changes in theyields on our variable rate loans and term certificates of deposit and othertime deposits (CDs), and to convert our long-term, fixed-rate borrowings tofloating rate. For loans, we had hedge expense of $7.8 million and $10.3million for the quarters ended March 31, 2006 and 2007, respectively. Fordeposits and long-term fixed rate borrowings, we had hedge income of $0.9million and $0.1 million for the quarters ended March 31, 2006 and 2007,respectively.

**Noninterest Income and Noninterest Expense**

The following tables detailour noninterest income and noninterest expense that exceeded 1% of our totalrevenues for the three months ended March 31, 2006 and 2007.

**Noninterest Income**

| ** **                               | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **March 31,**                                 | ** ** | **March 31,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**     | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts      |       | $                                                  | 81,635     |   | $ | 74,945 |   | $ | (6,690 | ) |   | (8.2 | )% |   |
| Trust and investment management fees     |       | 50,115                                             |       | 48,560 |   | (1,555 | ) |   | (3.1 | ) |   |
| Insurance commissions                    |       | 19,518                                             |       | 20,250 |   | 732 |   |   | 3.8 |   |   |
| Brokerage commissions and fees           |       | 7,795                                              |       | 9,660 |   | 1,865 |   |   | 23.9 |   |   |
| Merchant banking fees                    |       | 8,229                                              |       | 9,077 |   | 848 |   |   | 10.3 |   |   |
| Foreign exchange gains, net              |       | 7,818                                              |       | 7,594 |   | (224 | ) |   | (2.9 | ) |   |
| Card processing fees, net                |       | 6,697                                              |       | 7,127 |   | 430 |   |   | 6.4 |   |   |
| Securities gains (losses), net           |       | (214                                               | )          | 1,220 |   | 1,434 |   |   | nm |   |   |
| Gain on private capital investments, net |       | 2,827                                              |       | 9,095 |   | 6,268 |   |   | nm |   |   |
| Other                                    |       | 33,490                                             |       | 35,030 |   | 1,540 |   |   | 4.6 |   |   |
|                                          |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

34

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| Total noninterest income |   | $ | 217,910 |   | $ | 222,558 |   | $ | 4,648 |   |   | 2.1 | % |   |
|--------------------------|--------|---|---------|--------|---|---------|--------|---|-------|--------|--------|-----|---|--------|

----

nm - not meaningful

**Noninterest Expense**

| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                           | ** ** | **March 31,**                                 | ** ** | **March 31,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries and other  compensation                                     |       | $                                                  | 194,259    |   | $ | 207,657 |   | $ | 13,398 |   |   | 6.9 | % |   |
| Employee benefits                                                    |       | 58,236                                             |       | 50,858 |   | (7,378 | ) |   | (12.7 | ) |   |
| Salaries and employee benefits                                       |       | 252,495                                            |       | 258,515 |   | 6,020 |   |   | 2.4 |   |   |
| Net occupancy                                                        |       | 32,837                                             |       | 35,137 |   | 2,300 |   |   | 7.0 |   |   |
| Outside services                                                     |       | 28,609                                             |       | 19,836 |   | (8,773 | ) |   | (30.7 | ) |   |
| Professional services                                                |       | 14,547                                             |       | 17,087 |   | 2,540 |   |   | 17.5 |   |   |
| Equipment                                                            |       | 17,922                                             |       | 16,554 |   | (1,368 | ) |   | (7.6 | ) |   |
| Software                                                             |       | 16,344                                             |       | 14,196 |   | (2,148 | ) |   | (13.1 | ) |   |
| Communications                                                       |       | 10,552                                             |       | 9,791 |   | (761 | ) |   | (7.2 | ) |   |
| Advertising and  public relations                                    |       | 10,231                                             |       | 8,389 |   | (1,842 | ) |   | (18.0 | ) |   |
| Data processing                                                      |       | 7,398                                              |       | 8,241 |   | 843 |   |   | 11.4 |   |   |
| Intangible asset  amortization                                       |       | 3,430                                              |       | 2,243 |   | (1,187 | ) |   | (34.6 | ) |   |
| Foreclosed asset  expense (income)                                   |       | (7,367                                             | )          | 9 |   | 7,376 |   |   | nm |   |   |
| (Reversal of) provision  for losses on off-balance sheet commitments |       | (3,000                                             | )          | 1,000 |   | 4,000 |   |   | nm |   |   |
| Other                                                                |       | 30,546                                             |       | 31,093 |   | 547 |   |   | 1.8 |   |   |
| Total noninterest  expense                                           |       | $                                                  | 414,544    |   | $ | 422,091 |   | $ | 7,547 |   |   | 1.8 | % |   |

----

nm - not meaningful

**Income Tax Expense**

Our effective tax rate in the first quarter of 2007was 33.5 percent compared to 34.1 percent for the first quarter of 2006. Thelower effective tax rate in 2007 was due primarily to higher tax credits in2007.

For further informationregarding income tax expense, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Income Tax Expense” in our 2006Form 10-K.

35

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**Loans**

Thefollowing table shows loans outstanding by loan type at the end of each periodpresented.

| ** **                           | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)  March 31, 2007 From:** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31,  2006**                                          | ** ** | **December 31,  2006** | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** | **Amount**                                                        | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial |       | $                  | 11,666,818 |                  |       | $                  | 12,944,771 |                                                              |       | $ | 13,274,776 |   | $ | 1,607,958 |   |   | 13.8 | % |   | $ | 330,005 |   |   | 2.5 | % |   |
| Construction                         |       | 1,598,162          |       |                  | 2,175,545  |               |       | 2,258,668                                                         |       | 660,506 |   |   | 41.3 |   |   | 83,123 |   |   | 3.8 |   |   |
| Mortgage:                            |       |               |       |                  |       |               |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                          |       | 11,570,355         |       |                  | 12,343,792 |               |       | 12,419,376                                                        |       | 849,021 |   |   | 7.3 |   |   | 75,584 |   |   | 0.6 |   |   |
| Commercial                           |       | 5,647,089          |       |                  | 6,028,242  |               |       | 6,158,255                                                         |       | 511,166 |   |   | 9.1 |   |   | 130,013 |   |   | 2.2 |   |   |
| Total mortgage                       |       | 17,217,444         |       |                  | 18,372,034 |               |       | 18,577,631                                                        |       | 1,360,187 |   |   | 7.9 |   |   | 205,597 |   |   | 1.1 |   |   |
| Consumer:                            |       |               |       |                  |       |               |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Installment                          |       | 947,881            |       |                  | 1,137,401  |               |       | 1,192,442                                                         |       | 244,561 |   |   | 25.8 |   |   | 55,041 |   |   | 4.8 |   |   |
| Revolving lines of credit            |       | 1,532,671          |       |                  | 1,401,173  |               |       | 1,341,608                                                         |       | (191,063 | ) |   | (12.5 | ) |   | (59,565 | ) |   | (4.3 | ) |   |
| Total consumer                       |       | 2,480,552          |       |                  | 2,538,574  |               |       | 2,534,050                                                         |       | 53,498 |   |   | 2.2 |   |   | (4,524 | ) |   | (0.2 | ) |   |
| Lease financing                      |       | 563,491            |       |                  | 581,203    |               |       | 548,624                                                           |       | (14,867 | ) |   | (2.6 | ) |   | (32,579 | ) |   | (5.6 | ) |   |
| Total loans held to   maturity       |       | 33,526,467         |       |                  | 36,612,127 |               |       | 37,193,749                                                        |       | 3,667,282 |   |   | 10.9 |   |   | 581,622 |   |   | 1.6 |   |   |
| Total loans held for sale            |       | 2,401              |       |                  | 59,596     |               |       | 58,201                                                            |       | 55,800 |   |   | nm |   |   | (1,395 | ) |   | (2.3 | ) |   |
| Total loans                          |       | $                  | 33,528,868 |                  |       | $                  | 36,671,723 |                                                              |       | $ | 37,251,950 |   | $ | 3,723,082 |   |   | 11.1 | % |   | $ | 580,227 |   |   | 1.6 | % |   |

----

nm = not meaningful

*Commercial, Financialand Industrial Loans*

The commercial, financial and industrial loanportfolio continues to represent the largest category in our loan portfolio.These loans are extended principally to corporations, middle-market businesses,and small businesses, with no industry concentration exceeding 10 percent oftotal loans. Although many of our customers are located in California, theportfolio has a high degree of geographic diversification based upon ourcustomers’ revenue bases, which we believe lowers our vulnerability to changesin the economic outlook of any 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 in the first quarter of 2007 from the first quarter of 2006mainly due to increased loan demand primarily in the oil and gas, nationalcorporate and California middle market segments.

36

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***Constructionand Commercial 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 in the firstquarter of 2007 from the first quarter of 2006 was due to increased demand forincome property and residential construction projects with apartment financingrepresenting the largest component.

The commercial mortgage loanportfolio consists of loans on commercial income properties primarily inCalifornia. The increase in commercial mortgages between the first quarter of2007 and the first quarter of 2006 was mainly due to increased demand in the California middle market forreal 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 March 31, 2007, 64 percent of our residentialmortgage loans 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 do not offer subprime loan products. However, we dohave several loan products that allow a customer to move more quickly throughthe loan origination process by reducing or eliminating the need to verify theincome or assets of the customer. We refer to these loans as “no doc” or “lowdoc” loans. “No doc” loans are only available for owner-occupied properties andeliminate the verification of both income and assets, while “low doc” loansrequire the verification of assets. In both cases, these loans require lowerLTV ratios and higher FICO®credit scores than for fully documented residential loans. Although these loanscomprise nearly half of our residential loan portfolio, the delinquency ratesrelative to the outstanding balances at March 31, 2007 were significantlylower than fully documented loans. At March 31, 2007, the total amount of “nodoc” and “low doc” loans past due 30 days or more was $5.8 million.

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

*Consumer Loans*

We originate consumer loans,such as auto loans and home equity loans and lines, through our branch network.The primary driver of the increase in consumer loans from the first quarter of2006 was our “Flex Equity Line/Loan” product. The “Flex Equity Line/Loan”allows our customers the flexibility to manage a line of credit with as many asfour fixed rate loans under a single product. When customers convert their “FlexEquity Lines/Loans” to fixed rate loans, these new loans are classified asinstallments loans. We offer a “Flex Equity High LTV” product, which allows ourcustomers to draw up to 100 percent of the value of their real estate or $150thousand, whichever is less.

***LeaseFinancing***

We offer two types of leases to our customers:  direct financing leases, where the assetsleased are acquired without additional financing from other sources; andleveraged leases, where a substantial portion of the financing is provided bydebt with no recourse to us. Included in our lease portfolio are leveraged 

37

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leases of $524 million, whichare net of non-recourse debt of approximately $1.1 billion. We utilize a numberof special purpose entities for our leveraged leases. These entities servelegal and tax purposes and do not function as vehicles to shift liabilities toother parties or to deconsolidate affiliates for financial reporting purposes. Asallowed by US GAAP and by law, the gross lease receivable is offset by thequalifying non-recourse debt. In leveraged lease transactions, the third-partylender may only look to the collateral value of the leased assets forrepayment.

On January 1, 2007, weadopted FASB Staff Position FAS 13-2, “Accounting for a Change orProjected Change in the Timing of Cash Flows Relating to Income Taxes Generatedby a Leveraged Lease Transaction.”  SeeNote 2 to the Condensed Consolidated Financial Statements in this Form 10-Qfor information regarding the adoption of this FSP.

**Cross-BorderOutstandings**

Our cross-borderoutstandings reflect certain additional economic and political risks that arenot reflected in domestic outstandings. These risks include those arising fromexchange rate fluctuations and restrictions on the transfer of funds. Thefollowing table sets forth our cross-border outstandings as of March 31,2007 for those countries where such outstandings exceeded 1 percent of totalassets. For the periods ended March 31, 2006 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 with foreign entities. For thecountries shown in the table below, any significant local currency outstandingsare either hedged or funded by local currency borrowings.

| ** **                          | ** ** | ** **       | ** ** | **Public**   | ** ** | **Corporations**   | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|--------------|------------|--------------------|------------|------------------|------------|
| ** **                          | ** ** | **Financial**    | ** ** | **Sector**   | ** ** | **and Other** | ** ** | **Total**        | ** ** |
| **(Dollars in millions)** | ** ** | **Institutions** | ** ** | **Entities** | ** ** | **Borrowers**      | ** ** | **Outstandings** | ** ** |
| March 31, 2007                 |       |             |       |         |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Canada                              |       |             | $          | 270          |       |               |       | $                | —     |   |   |   | $ | 603 |   |   |   | $ | 873 |   |   |
| Germany                             |       |             | 610        |         |       |               | —     |             |       |   | — |   |   |   | 610 |   |   |
| Switzerland                         |       |             | 600        |         |       |               | —     |             |       |   | — |   |   |   | 600 |   |   |
|                                     |            |                  |            |              |            |                    |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Provision for CreditLosses**

We recorded a provision forloan losses of $4 million in the first quarter of 2007, compared with areversal of the allowance for loan losses of $7 million in the first quarter of2006. There was a $1 million provision for losses related to the change in theallowance for losses on off-balance sheet commitments in the first quarter of2007 compared to a $3 million reversal of allowance for losses on off-balancesheet commitments in the first quarter of 2006. The provisions for loan lossesand for losses on off-balance sheet commitments are charged to income to bringour total allowances for credit losses to a level deemed appropriate bymanagement based on the factors discussed under “Allowances for Credit Losses”below.

**Allowances for CreditLosses**

*Allowance Policy andMethodology*

We maintain allowances forcredit losses (defined as both the allowance for loan losses and the allowancefor off-balance sheet commitment losses) to absorb losses inherent in the loanportfolio as well as for leases and off-balance sheet commitments. Understandingour policies on the allowances for credit losses is fundamental tounderstanding our consolidated financial condition and consolidated results of 

38

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operations. Accordingly,our significant policies and methodology on the allowances for credit lossesare discussed in detail in Note 1 to our Consolidated Financial Statements andin the section “Allowances for Credit Losses” included in our “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour 2006 Form 10-K.

*Comparison of the Total Allowances and RelatedProvision for Credit Losses from December 31, 2006*

At March 31, 2007, our total allowances forcredit losses were $415 million, which consisted of $333 million related toloans and $82 million related to off-balance sheet commitments. The allowancesfor credit losses consisted of $358 million and $57 million of allocated andunallocated allowance, respectively. At March 31, 2007, our allowances forcredit loss coverage ratios were 1.11 percent of total loans and 997 percent oftotal nonaccrual loans. At December 31, 2006, our total allowances forcredit losses were $412 million, or 1.12 percent of the total loan portfolioand 987 percent of total nonaccrual loans.

In addition, the allowances incorporate the results ofmeasuring impaired loans as provided in SFAS No. 114, “Accounting byCreditors for Impairment of a Loan” as amended by SFAS No. 118, “Accountingby Creditors for Impairment of a Loan—Income Recognition and Disclosures.”  These accounting standards prescribe themeasurement methods, income recognition and disclosures related to impairedloans. At both March 31, 2007 and December 31, 2006, total impairedloans were $27 million, and the associated impairment allowance was $3 million.

At March 31, 2007 and December 31, 2006, theallowance for losses related to off-balance sheet commitments included withinour total allowances for credit losses, was $82 million and $81 million,respectively. In determining the adequacy of our allowances for credit losses,we consider both the allowance for loan losses and for off-balance sheetcommitment losses.

We recorded a provision for credit losses of $5million in the first quarter of 2007, as a result of management’s assessment offactors, including the credit quality of our credit portfolio, slower futuregrowth in the U.S. economy (including a significant slow down in the housingmarket and the potential adverseimpact of higher fuel prices on the economy) and growth and changes in thecomposition of our credit portfolio.

During the first quarter of2007, there were no material changes in estimation methods or assumptions thataffected our methodology for assessing the appropriateness of the formula andspecific allowances for credit losses.

*Changes in the Allocated (Formula and Specific)Allowance*

At March 31, 2007, theformula allowance increased to $352 million from $347 million at December 31,2006. The net increase was due primarily to a shift in the risk-grade mix ofloans and growth in our loanportfolio, partially offset by declines in our loss factors. At March 31,2007, the specific allowance of $6 million was unchanged from December 31,2006.

39

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*Changes in the Unallocated Allowance*

At March 31, 2007, the unallocated allowance decreased modestly to$57 million from $59 million at December 31, 2006, reflecting management’sbelief that maintaining the unallocated allowance near our December 31,2006 assessment is appropriate based on continuing uncertainty associated withour principal portfolio segments as we approach a turning point in creditquality trends. Additionally, the reasons for which we believe an unallocatedallowance is warranted are detailed below.

In our assessment as of March 31, 2007, management focused, inparticular, on the factors and conditions set out below. There can be noassurance that the adverse impact of any of these conditions on us will not bein excess of the ranges set forth.

Although in certain instances the downgrading of a loan resulting fromthe effects of the conditions described below has been reflected in the formulaallowance, management believes that the impact of these events on thecollectibility of the applicable loans may not have been reflected in the levelof nonperforming loans or in the internal risk grading process with respect tosuch loans. In addition, our formula allowance does not take into considerationsector-specific changes in the severity of losses that are expected to arisefrom current economic conditions compared with our historical losses. Accordingly,our evaluation of the probable losses related to the impact of these factorswas reflected in the unallocated allowance. The evaluations of the inherentlosses with respect to these factors are subject to higher degrees ofuncertainty because they are not identified with specific problem credits.

The following describessome of the specific conditions we considered.

·       Withrespect to commercial real estate, we considered the substantial weakness inthe residential construction market, partly offset by improvement in thecommercial real estate construction sector, which could be in the range of $8million to $22 million.

·       Withrespect to fuel prices, we considered the ability of borrowers to absorb higherfuel prices without anticipated negative effects, the prospects of high costsof oil and petroleum products and the impact across virtually all sectors ofthe economy, which could be in a range of $3 million to $14 million.

·       Withrespect to concentrated sales, which include suppliers of “big box” stores likeCostco, Wal-Mart, Home Depot, Lowe’s and other companies that generate 15percent or more of their revenues from one customer, we considered thepotential negative impact competitive market pricing would have on their profitmargins, which could be in the range of $7 million to $12 million.

·       Withrespect to contractors, we considered the weakening residential housing market,partly offset by an improvement in commercial real estate construction, whichcould be in the range of $5 million to $7 million.

·       Withrespect to our customers whose revenues are dependent on advertising, weconsidered the pressures on earnings of newspapers and radio and televisionstations due to decreases in advertising sale revenues, which could be in therange of $2 million to $4 million.

Accordingly, our evaluation ofthe probable losses related to the impact of these factors was reflected in theunallocated allowance.

40

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*Change in the Total Allowances for Credit Losses*

The following table sets fortha reconciliation of changes in our allowances for credit losses.

| ** **                                                            | ** ** | **For the Three Months** | ** ** | ** **                   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **Ended March 31,**           | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                                  | ** ** | **2006**                                | ** ** | **2007**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Balance, beginning of period                                          |       | $                                       | 351,532    |                         | $          | 331,077    |       | $ | (20,455 | ) | (5.8 | )% |
| Loans charged off:                                                    |       |                                    |       |                         |       |       |       |   |   |
| Commercial, financial and  industrial                                 |       | 10,744                                  |       | 3,078                        |       | (7,666     | )          | (71.4 | ) |
| Consumer                                                              |       | 918                                     |       | 1,341                        |       | 423        |       | 46.1 |   |
| Lease financing                                                       |       | 19                                      |       | —                       |       | (19        | )          | (100.0 | ) |
| Total loans charged off                                               |       | 11,681                                  |       | 4,419                        |       | (7,262     | )          | (62.2 | ) |
| Recoveries of loans previously charged off:                           |       |                                    |       |                         |       |       |       |   |   |
| Commercial, financial and  industrial                                 |       | 1,909                                   |       | 1,694                        |       | (215       | )          | (11.3 | ) |
| Mortgage                                                              |       | 2                                       |       | —                       |       | (2         | )          | (100.0 | ) |
| Consumer                                                              |       | 440                                     |       | 281                          |       | (159       | )          | (36.1 | ) |
| Lease financing                                                       |       | 4,228                                   |       | 8                            |       | (4,220     | )          | (99.8 | ) |
| Total recoveries of loans  previously  charged off                    |       | 6,579                                   |       | 1,983                        |       | (4,596     | )          | (69.9 | ) |
| Net loans charged off                                                 |       | 5,102                                   |       | 2,436                        |       | (2,666     | )          | (52.3 | ) |
| (Reversal of) provision for  loan losses                              |       | (7,000                                  | )          | 4,000                        |       | 11,000     |       | nm |   |
| Foreign translation  adjustment and other net additions               |       | 13                                      |       | 38                           |       | 25         |       | nm |   |
| Ending balance of allowance  for loan losses                          |       | $                                       | 339,443    |                         | $          | 332,679    |       | $ | (6,764 | ) | (2.0 | ) |
| Allowance for losses on  off-balance sheet commitments                |       | 83,374                                  |       | 82,374                       |       | (1,000     | )          | (1.2 | ) |
| Allowances for credit losses                                          |       | $                                       | 422,817    |                         | $          | 415,053    |       | $ | (7,764 | ) | (1.8 | )% |
| Allowances for credit losses  to total loans                          |       | 1.26                                    | %          | 1.11                         | %          |       |       |   |   |
| (Reversal of) provision for  loan losses to net loans charged off     |       | nm                                      |       | 164.20                       |       |       |       |   |   |
| Net loans charged off to average loans outstanding  for the period(1) |       | 0.06                                    |       | 0.03                         |       |       |       |   |   |

----

(1)                   Annualized.

nm = not meaningful

Total loans charged off in thefirst quarter of 2007 decreased from the first quarter of 2006, primarily dueto the charge off of four commercial loans, each in excess of $1 million, inthe first quarter of 2006. Charge offs reflect the realization of losses in theportfolio that were recognized previously through provision for credit losses.In addition, first quarter 2007 recoveries of loans previously charged offdecreased from the first quarter of 2006 primarily as result of the higherlevels of loans charged off in periods prior to March 31, 2006. Suchfluctuations in loan recoveries from year-to-year are due to variability intiming of recoveries and tend to trail the periods in which charge offs arerecorded.

**Nonperforming Assets**

Nonperforming assets consist of nonaccrual loans andforeclosed assets. 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. For a more detailed discussion of the accounting for nonaccrualloans, see Note 1 to the Consolidated Financial Statements included in our 2006Form 10-K.

41

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Foreclosed assets include property where we acquiredtitle through foreclosure or “deed in lieu” of foreclosure.

Thefollowing table sets forth an analysis of nonperforming assets.

| ** **                                                 | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)  March 31, 2007 From:** | ** ** |                            |
|------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|
| ** **                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31, 2006**                                      | ** ** | **December 31, 2006** | ** ** |   |
| **(Dollars in thousands)**                       | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** | **Amount**                                                        | ** ** | **Percent**                     | ** ** | **   Amount   ** | ** ** | **   Percent   ** | ** ** |
| Commercial, financial and industrial                       |       | $                  | 18,691     |                  |       | $                  | 7,552      |                                                              |       |                            | $ | 5,120 |   |   | $ | (13,571 | ) |   | (72.6 | )% |   |   | $ | (2,432 | ) |   |   | (32.2 | )% |   |
| Commercial mortgage                                        |       | 8,257              |       |                  | 19,187     |               |       |                                                              | 21,489     |                            |   | 13,232 |   |   | nm |   |   |   | 2,302 |   |   |   | 12.0 |   |   |
| Lease financing                                            |       | 15,187             |       |                  | 15,047     |               |       |                                                              | 15,001     |                            |   | (186 | ) |   | (1.2 | ) |   |   | (46 | ) |   |   | (0.3 | ) |   |
| Total nonaccrual loans                                     |       | 42,135             |       |                  | 41,786     |               |       |                                                              | 41,610     |                            |   | (525 | ) |   | (1.2 | ) |   |   | (176 | ) |   |   | (0.4 | ) |   |
| Foreclosed assets                                          |       | 257                |       |                  | 579        |               |       |                                                              | 134        |                            |   | (123 | ) |   | (47.9 | ) |   |   | (445 | ) |   |   | (76.9 | ) |   |
| Total nonperforming assets                                 |       | $                  | 42,392     |                  |       | $                  | 42,365     |                                                              |       |                            | $ | 41,744 |   |   | $ | (648 | ) |   | (1.5 | ) |   |   | $ | (621 | ) |   |   | (1.5 | ) |   |
| Allowances for credit losses(1)                            |       | $                  | 422,817    |                  |       | $                  | 412,451    |                                                              |       |                            | $ | 415,053 |   |   | $ | (7,764 | ) |   | (1.8 | )% |   |   | $ | 2,602 |   |   |   | 0.6 | % |   |
| Nonaccrual loans to total loans                            |       | 0.13               | %          |                  | 0.11       | %                  |       |                                                              | 0.11       | %                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowances for credit losses to nonaccrual loans           |       | 1,003.48           |       |                  | 987.06     |               |       |                                                              | 997.48     |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets to total loans and foreclosed  assets |       | 0.13               |       |                  | 0.12       |               |       |                                                              | 0.11       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets  to total assets                      |       | 0.09               |       |                  | 0.08       |               |       |                                                              | 0.08       |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

(1)                   Includes allowance for losses related to off-balancesheet commitments. 

nm = not meaningful

During the first quarter of2007, we had $2.7 million in sales of nonperforming loans compared to $17.7million in sales in the first quarter of 2006. Losses and recoveries thatresult when the sale decision is made are reflected in our net charge offs.

**Loans 90 Days or More Past Due and Still Accruing**

| ** **                                               | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)  March 31, 2007 From:** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31, 2006**                                      | ** ** | **December 31, 2006** | ** ** |
| **(Dollars in thousands)**                     | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** | **Amount**                                                        | ** ** | **Percent** | ** ** | ** Amount ** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial                     |       |               | $          | 412                   |       |               |       | $                                                                 | 3,085      |   |   |   | $ | 648 |   |   |   | $ | 236 |   |   |   | 57.3 | % |   |   | $ | (2,437 | ) |   |   | (79.0 | )% |   |
| Mortgage:                                                |       |               |       |                  |       |               |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |       |               | 2,968      |                  |       |               | 2,359      |                                                              |       |   | 3,793 |   |   |   | 825 |   |   |   | 27.8 |   |   |   | 1,434 |   |   |   | 60.8 |   |   |
| Commercial                                               |       |               | 1,007      |                  |       |               | 2,155      |                                                              |       |   | 201 |   |   |   | (806 | ) |   |   | (80.0 | ) |   |   | (1,954 | ) |   |   | (90.7 | ) |   |
| Total mortgage                                           |       |               | 3,975      |                  |       |               | 4,514      |                                                              |       |   | 3,994 |   |   |   | 19 |   |   |   | 0.5 |   |   |   | (520 | ) |   |   | (11.5 | ) |   |
| Consumer and other                                       |       |               | 812        |                  |       |               | 1,706      |                                                              |       |   | 1,540 |   |   |   | 728 |   |   |   | 89.7 |   |   |   | (166 | ) |   |   | (9.7 | ) |   |
| Total loans 90 days or  more past due and still accruing |       |               | $          | 5,199                 |       |               |       | $                                                                 | 9,305      |   |   |   | $ | 6,182 |   |   |   | $ | 983 |   |   |   | 18.9 | % |   |   | $ | (3,123 | ) |   |   | (33.6 | )% |   |

 

**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 Treasury 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.

The Board of Directors, through its Finance and CapitalCommittee, 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 

42

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tolerance guidelines byoutlining standards for measuring market risk, creates Board-level limits forspecific market risks, establishes guidelines for reporting market risk, andrequires independent review 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 broad and strategic guidance of market risk management byformulating high-level strategies for market risk management and defining therisk/return stance for the Bank and by approving the investment, derivatives,and trading policies that govern the Bank’s activities. ALCO is alsoresponsible for ongoing management of market risk and approves specific riskmanagement programs, including those related to interest rate hedging,investment securities, and wholesale funding.

The Treasurer is primarily responsible for theimplementation of Asset Liability risk management strategies approved by ALCOand for operating management of market risk through the funding, investment,and derivatives hedging activities of Corporate Treasury. The manager of theGlobal Markets Division is responsible for operating management of price riskthrough the trading activities conducted in that division. The Market RiskMonitoring unit is responsible for the monitoring of market risk and functionsindependently of all 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)*

During the first quarter of 2007, our interest raterisk profile remained neutral to slightly liability sensitive primarily as aresult of trends in our unhedged, core balance sheet including wholesalefunding replacing declining noninterest bearing deposit balances. In February 2007,we added $500 million of new floor hedges to maintain our downside neutral toliability-sensitivity (see our discussion of “ALM Derivatives” below).

At March 31, 2007,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 0.36 percent, while a similardownward shift would increase it by 1.07 percent. This compares with an estimated1.01 percent increase and 1.21 percent decrease, respectively, at March 31,2006. We caution that ongoing enhancements to our interest rate risk modelingmay make prior-year comparisons of Economic NII less meaningful. Economic NIIadjusts our reported NII for the effect of certain noninterest bearing depositrelated fee and expense items. Those adjustment items are innately liabilitysensitive, meaning that reported NII is more asset sensitive or less liabilitysensitive than Economic NII.

**Economic NII**

| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| **(Dollars in millions)** | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| +200 basis points                   |       |               | $          | 20.4                  |       |               |       | $ | (7.0 | ) |   |   | $ | (6.5 | ) |   |
| as a percentage of  base case NII   |       |               | 1.01       | %                     |       |               | (0.37      | )% |   |   | (0.36 | )% |   |
| -200  basis points                  |       |               | $          | (24.5                 | )          |               |       | $ | 20.5 |   |   |   | $ | 19.6 |   |   |
| as a percentage of base case  NII   |       |               | (1.21      | )%                    |       |               | 1.09       | % |   |   | 1.07 | % |   |

 

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-parallelyield curve changes, our Economic NII is liability sensitive to changes inshort-term rates (with long-term rates held constant) and asset sensitive tochanges in long-term rates 

43

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(withshort-term rates held constant). In other words, our Economic NII will benefitfrom curve steepening with short (long) rates dropping (rising) and willcontract from the curve further inverting with long (short) rates dropping(rising).

*ALM Activities*

During the first quarter of2007, our unhedged, core balance sheet became significantly less assetsensitive compared to the first quarter of 2006. The change in the risk profileof the core balance sheet resulted primarily from a decline in core depositbalances and an increased asset growth funded by proportionally more short-termwholesale liabilities. At March 31, 2007, the core balance sheet continuesto be slightly asset sensitive meaning that the current mix of assets repricesslightly faster than our current mix of liabilities. In managing the interestrate sensitivity of our balance sheet, we use the ALM investment securitiesportfolio and derivatives positions as the primary tools to adjust our interestrate risk profile, if necessary. During the first quarter of 2007, wereinvested proceeds from maturing ALM securities into securities with liketerms and asset allocation. New derivative hedges were also added during thequarter as described below.

*ALM Securities*

At March 31, 2006 and 2007, our available forsale securities portfolio included $6.6 billion and $6.5 billion, respectively,of securities for ALM purposes. At March 31, 2007, approximately $2.8billion of the portfolio was pledged to secure trust and public deposits andfor other purposes as required or permitted by law. During the first quarter of2007, we purchased approximately $203 million of securities while approximately$361 million of ALM securities matured or were called. The composition of theportfolio is expected to remain relatively stable in 2007. Based on currentprepayment projections, the estimated ALM portfolio effective duration was 2.0at March 31, 2007, compared to 2.3 at March 31, 2006.

Effective duration is ameasure of price sensitivity of a bond portfolio to immediate parallel shiftsin interest rates. An effective duration of 2.0 suggests an expected pricechange of approximately minus 2.0 percent for an immediate 1.0 percent increasein interest rates*.*

*ALM Derivatives*

During the first quarter of 2007, the ALM derivativesportfolio decreased by a net $300 million notional amount, as $500 million ofnotional amount of LIBOR floor contracts were purchased to maintain thedownside neutral to liability-sensitivity of our overall risk position, offsetpartially by maturities of $800 million notional amount of receive fixedinterest rate swaps.

The fair value of the ALM derivative contractsincreased during the first quarter of 2007 as a result of maturities anddeclines in the remaining maturity of several interest rate swap contracts in aloss position. In addition, the value of our remaining receive fixed interestrate swaps and floor option contracts gained with the decline in expectedfuture interest rates. For additional discussion of derivative instruments andour hedging strategies, see Note 8 to the Condensed Consolidated FinancialStatements included in this Form 10-Q and Note 19 to theConsolidated Financial Statements included in our 2006 Form 10-K.

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Thefollowing table provides the notional value and the fair value of our ALMderivatives portfolio as of March 31, 2006, December 31, 2006 and March 31,2007 and the change in fair value between December 31, 2006 and March 31,2007.

| **(Dollars in thousands)**                                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** | **Increase / (Decrease)  From December 31, 2006  to March 31, 2007** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| Total gross notional  amount of positions held for purposes other than trading: |       | $                        | 6,800,000  |                        | $          | 8,250,000                |       | $                                                                                                            | 7,950,000  |   |   | $ | (300,000 | ) |   |
| Of which, interest rate swaps pay fixed rates of interest:                 |       | $                        | —     |                        | $          | —                   |       | $                                                                                                            | —     |   |   | $ | — |   |   |
| Fair value of  positions held for purposes other than trading:                  |       |                     |       |                        |       |                     |       |                                                                                                         |       |   |   |
| Gross positive fair value                                                       |       | $                        | 13,370     |                        | $          | 44,720                   |       | $                                                                                                            | 46,739     |   |   | $ | 2,019 |   |   |
| Gross negative fair value                                                       |       | $                        | 69,746     |                        | $          | 37,682                   |       | $                                                                                                            | 25,411     |   |   | $ | (12,271 | ) |   |
| Positive (Negative)  Fair value of positions, net                          |       | $                        | (56,376    | )                           | $          | 7,038                    |       | $                                                                                                            | 21,328     |   |   | $ | 14,290 |   |   |

 

*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.

As of March 31, 2007, we had $10.6 billionnotional amount of interest rate derivative contracts, which includedapproximately $5.3 billion notional amount of derivative contracts entered intoas an accommodation for customers. We act as an intermediary and match thesecontracts, at a credit spread, to contracts with major dealers, thus neutralizingthe related market risk on all customer transactions.

We market energy derivative contracts to existingenergy industry customers, primarily oil and gas producers, in order to meettheir hedging needs. Consistent with our customer interest rate derivativesbusiness, all transactions are fully matched to remove our exposure to marketrisk, with income earned on the credit spread. As of March 31, 2007, wehad $3.5 billion notional amount of energy derivative contracts, whichincluded, approximately $1.8 billion notional amount of derivative contractsentered into as an accommodation for customers.

For information about ourmarket risk, please see “Quantitative and Qualitative Disclosures about MarketRisk” in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our 2006 Form 10-K.

**Liquidity Risk**

Liquidity risk is the undue risk to our earnings andcapital, which would result from our inability to meet our obligations as theycome due without incurring unacceptable costs. The management of liquidity riskis governed by the ALM Policy under the oversight of ALCO. Liquidity is managedusing a total balance sheet perspective that analyzes both funding capacityavailable through increased liabilities and liquidation of assets relative toprojected demands for liquidity. The primary sources of liquidity are coredeposits, asset liquidation, including securities sold under repurchaseagreements, and wholesale funding, which includes funds raised from interbankand other sources, both domestic and offshore. The Treasurer is responsible foroperating management of liquidity through the funding and investment functionsof 

45

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Corporate Treasury. ALCO alsomaintains a Liquidity Contingency Plan, the objective of which is to identifyactions to be taken to ensure adequate liquidity if an event should occur thatdisrupts or adversely affects the Bank’s normal funding activities.

Core deposits provide us with a sizable source ofrelatively stable and low-cost funds. Our $33 billion in average core deposits (whichconsists of demand deposits, money market demand accounts, savings and consumertime deposits), combined with average common stockholders’ equity, funded 71percent of average total assets of approximately $53 billion in the firstquarter of 2007. Most of the remaining funding was provided by short-termborrowings in the form of certificates of deposit, large time deposits, federalfunds purchased, securities sold under repurchase agreements, commercial paper,and other borrowings. During the first quarter of 2007, we modestlyextended the weighted average maturity of our wholesale borrowing position toenhance our overall liquidity profile.

Our securities portfolio provides additionalenhancement to our liquidity position, which may be created through eithersecurities sales or repurchase agreements. At March 31, 2007, we couldhave sold or transferred under repurchase agreements approximately $4.2 billionof our available for sale securities including excess pledged securitiesavailable for withdrawal on short notice. 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 $1.3 billion in the first quarter of 2007. Additionalliquidity may be provided through loan maturities and sales.

In first quarter 2007, the Bank issued $750 million oftwo-year floating rate senior notes under the $4 billion Bank Note Programinitiated in 2006. Combined with the $700 million, ten-year, fixed ratesubordinated note issuance in 2006, remaining available funding from the BankNote Program is $2.55 billion. In first quarter 2007, the Bankcompleted the process to become an active member of the Federal Home Loan Bankof San Francisco. Membership will give the Bank an additional back-up source ofliquidity.

In addition to the funding provided by our banksubsidiary, we raise funds at the holding company level. UnionBanCalCorporation has in place a shelf registration statement with the SEC permittingready access to the public debt markets. As of March 31, 2007, $600million of debt or other securities were available for issuance under thisshelf registration. Although we do not have firm commitments in place to sellsecurities under the Bank Note Program or the shelf registration statement, thesesources, in addition to our core deposit and equity capital, provide a stablefunding base. Management does not rely on any single source of liquidity andmanages availability in response to changing balance sheet needs.

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**Regulatory Capital**

The following tables summarizeour risk-based capital, risk-weighted assets, and risk-basedcapital ratios.

**UnionBanCal Corporation**
|                                      | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Minimum**     | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------|------------|
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **Regulatory**  | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** | **Requirement** | ** ** |
| **Capital Components**               |       |               |       |                  |       |               |       |            |       |   |   |
| Tier 1 capital                       |       | $                  | 4,243,053  |                  |       | $                  | 4,333,865  |            |       | $ | 4,291,483 |   |   |   |
| Tier 2 capital                       |       | 862,051            |       |                  | 1,509,338  |               |       | 1,511,809       |       |   |   |
| Total risk-based  capital            |       | $                  | 5,105,104  |                  |       | $                  | 5,843,203  |            |       | $ | 5,803,292 |   |   |   |
| Risk-weighted assets                 |       | $                  | 46,657,433 |                  |       | $                  | 49,904,203 |            |       | $ | 50,996,413 |   |   |   |
| Quarterly average assets             |       | $                  | 48,200,458 |                  |       | $                  | 51,353,681 |            |       | $ | 52,858,843 |   |   |   |

 
| Capital Ratios                      | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**                  | ** ** | **Ratio** | ** **             |
|------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------------------|------------|-----------|------------------------|
| Total capital (to risk-weighted assets)  |       | $          | 5,105,104  |      | 10.94      | %          | $          | 5,843,203 |       | 11.71      | %          | $         | 5,803,292  |                        | 11.38      | %         | 3$ 4,079,713 |   |   | 8.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 4,243,053  |       | 9.09      |       | 4,333,865  |       | 8.68      |       | 4,291,483  |       | 8.42      |       | 3  2,039,857 |       |      | 4.0                    |   |   |
| Leverage(1)                              |       | 4,243,053  |       | 8.80      |       | 4,333,865  |       | 8.44      |       | 4,291,483  |       | 8.12      |       | 3  2,114,354 |       |      | 4.0                    |   |   |
|                                          |            |            |            |           |            |            |            |           |            |            |            |           |            |                             |            |           |                        |  |  |  |  |  |

----

(1)                   Tier 1 capital divided by quarterlyaverage assets (excluding certain intangible assets).

**Union Bank of California, N.A.**
|                                      | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Minimum**     | ** ** | **Well-Capitalized** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **Regulatory**  | ** ** | **Regulatory**       | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**           | ** ** | **2006**              | ** ** | **2007**           | ** ** | **Requirement** | ** ** | **Requirement**      | ** ** |
| **Capital Components**               |       |               |       |                  |       |               |       |            |       |                 |       |   |   |
| Tier 1 capital                       |       | $                  | 4,377,832  |                  |       | $                  | 4,179,359  |            |       | $                    | 4,218,036  |   |   |   |   |   |
| Tier 2 capital                       |       | 426,955            |       |                  | 1,100,287  |               |       | 1,103,054       |       |                 |       |   |   |
| Total risk-based  capital            |       | $                  | 4,804,787  |                  |       | $                  | 5,279,646  |            |       | $                    | 5,321,090  |   |   |   |   |   |
| Risk-weighted assets                 |       | $                  | 45,943,246 |                  |       | $                  | 49,385,397 |            |       | $                    | 50,527,546 |   |   |   |   |   |
| Quarterly average  assets            |       | $                  | 47,563,560 |                  |       | $                  | 50,686,185 |            |       | $                    | 52,300,597 |   |   |   |   |   |

 
| Capital Ratios                      | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**                  | ** ** | **Ratio** | ** **             | **Amount** | ** ** | **Ratio**                   | ** ** |
|------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------------------|------------|-----------|------------------------|------------|------------|-----------------------------|------------|
| Total capital (to risk-weighted assets)  |       | $          | 4,804,787  |      | 10.46      | %          | $          | 5,279,646 |       | 10.69      | %          | $         | 5,321,090  |                        | 10.53      | %         | 3$ 4,042,204 |       |       | 8.0                         | %          |   | 3$ 5,052,755 |   |   | 10.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 4,377,832  |       | 9.53      |       | 4,179,359  |       | 8.46      |       | 4,218,036  |       | 8.35      |       | 3  2,021,102 |       |      | 4.0                    |       |       | 3  3,031,653 |       |   | 6.0 |   |   |
| Leverage(1)                              |       | 4,377,832  |       | 9.20      |       | 4,179,359  |       | 8.25      |       | 4,218,036  |       | 8.06      |       | 3  2,092,024 |       |      | 4.0                    |       |       | 3  2,615,030 |       |   | 5.0 |   |   |
|                                          |            |            |            |           |            |            |            |           |            |            |            |           |            |                             |            |           |                        |            |            |                             |            |  |  |  |  |  |  |  |

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(1)                   Tier 1 capital divided by quarterlyaverage assets (excluding certain intangible assets).

We and Union Bank ofCalifornia are subject to various regulations of the federal banking agencies,including minimum capital requirements. We both are required to maintainminimum ratios of Total and Tier 1 capital to risk-weighted assets and ofTier 1 capital to quarterly average assets (the Leverage ratio).

The decrease in the Tier 1 andTotal capital ratios from December 31, 2006 was primarily due to anincrease in risk-weighted assets stemming from growth in our loan portfolio anda decrease in capital resulting from the adoption of FIN No. 48 and FSPFAS 13-2. For additional information on the impact of adoption of theseaccounting pronouncements, see Note 2 to the Condensed Consolidated FinancialStatements of this Form 10-Q. The decrease in our leverage ratiosfrom December 31, 2006 was primarily due to the increase in our quarterlyaverage assets.

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As of March 31, 2007,management believes the capital ratios of Union Bank of California met allregulatory requirements of “well-capitalized” institutions, which are 10percent for the Total risk-based capital ratio, 6 percent for the Tier 1risk-based capital ratio and 5 percent for the Leverage ratio.

**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 table that followsreflects the condensed income statements, selected average balance sheet items,and selected financial ratios, including changes from the prior year, for eachof our 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 and servicessold to those customers regardless of where product areas organizationallyreport. Therefore, revenues and expenses are included in both the operatingsegment that provides the service and the operating segment that manages thecustomer relationship. The duplicative results from this internal managementaccounting view are reflected in “Reconciling Items.” The market viewapproach fosters cross-selling with a total profitability view of theproducts and services being managed. For example, the Securities Trading andSales unit within the Global Markets Division is a business unit that managesthe fixed income securities activities for all retail and corporate customersthroughout the Bank. This unit retains and also allocates revenues and expensesto divisions responsible for such retail and commercial 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. Net 

48

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interestincome is determined using our internal funds transfer pricing system, whichassigns a cost of funds to assets or a credit for funds to liabilities andcapital, based on their type, maturity or repricing characteristics.Noninterest income and expense directly or indirectly attributable to abusiness unit are assigned to that business. The business units are assignedthe costs of products and services directly attributable to their businessactivity through standard unit cost accounting based on volume of usage. Allother corporate expenses (overhead) are allocated to the business units basedon a predetermined percentage of usage.

Thereportable business segment results for the prior periods have been adjusted toreflect changes in the transfer pricing methodology, the organizational changesthat have occurred, our discontinued operations and the market viewcontribution.

| ** **                                                         | ** ** | **Retail Banking**                                      | ** ** | ** **              | ** ** | ** **                    | ** ** | **Wholesale Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | **As of and for the  three Months** | ** ** | ** **              | ** ** | ** **                    | ** ** | **As of and for the  three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Ended March 31,**                                | ** ** | **Increase/(decrease)** | ** ** | **Ended March 31,** | ** ** | **Increase/(decrease)**                                      | ** ** |
| ** **                                                         | ** ** | **2006**                                                     | ** ** | **2007**                | ** ** | **Amount**                    | ** ** | **Percent**                                                  | ** ** | **2006**   | ** ** | **2007**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market View (dollars in thousands):** | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** |                                                         | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                     |       | $                                                            | 230,231    |                    | $          | 229,878                       |       | $                                                            | (353       | )          |       | 0          | %          |   | $ | 252,535 |   | $ | 241,576 |   | $ | (10,959 | ) |   | (4 | )% |   |
| Noninterest income  (expense)                                      |       | 129,902                                                      |       | 125,632                 |       | (4,270                        | )          |                                                         | (3         | )          |       | 103,124    |       | 110,021 |   | 6,897 |   |   | 7 |   |   |
| Total revenue                                                      |       | 360,133                                                      |       | 355,510                 |       | (4,623                        | )          |                                                         | (1         | )          |       | 355,659    |       | 351,597 |   | (4,062 | ) |   | (1 | ) |   |
| Noninterest expense  (income)                                      |       | 236,373                                                      |       | 242,804                 |       | 6,431                         |       |                                                         | 3          |       |       | 167,580    |       | 165,840 |   | (1,740 | ) |   | (1 | ) |   |
| Credit expense  (income)                                           |       | 6,566                                                        |       | 6,274                   |       | (292                          | )          |                                                         | (4         | )          |       | 25,321     |       | 25,071 |   | (250 | ) |   | (1 | ) |   |
| Income from continuing  operations before income taxes             |       | 117,194                                                      |       | 106,432                 |       | (10,762                       | )          |                                                         | (9         | )          |       | 162,758    |       | 160,686 |   | (2,072 | ) |   | (1 | ) |   |
| Income tax expense  (income)                                       |       | 44,827                                                       |       | 40,710                  |       | (4,117                        | )          |                                                         | (9         | )          |       | 54,482     |       | 49,137 |   | (5,345 | ) |   | (10 | ) |   |
| Income from continuing  operations                                 |       | 72,367                                                       |       | 65,722                  |       | (6,645                        | )          |                                                         | (9         | )          |       | 108,276    |       | 111,549 |   | 3,273 |   |   | 3 |   |   |
| Loss from discontinued  operations, net of income taxes            |       | —                                                       |       | —                  |       | —                        |       |                                                         | na         |       |       | —     |       | — |   | — |   |   | na |   |   |
| Net income (loss)                                                  |       | $                                                            | 72,367     |                    | $          | 65,722                        |       | $                                                            | (6,645     | )          |       | (9         | )          |   | $ | 108,276 |   | $ | 111,549 |   | $ | 3,273 |   |   | 3 |   |   |
| **Average balances—Market View (dollars in  millions):**      |       |                                                         |       |                    |       |                          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Total loans                                                        |       | $                                                            | 15,266     |                    | $          | 16,249                        |       | $                                                            | 983        |       |       | 6          |       |   | $ | 18,811 |   | $ | 22,204 |   | $ | 3,393 |   |   | 18 |   |   |
| Total assets                                                       |       | 16,137                                                       |       | 17,087                  |       | 950                           |       |                                                         | 6          |       |       | 23,446     |       | 27,131 |   | 3,685 |   |   | 16 |   |   |
| Total deposits                                                     |       | 19,158                                                       |       | 18,592                  |       | (566                          | )          |                                                         | (3         | )          |       | 18,440     |       | 18,256 |   | (184 | ) |   | (1 | ) |   |
| **Financial ratios—Market View**                              |       |                                                         |       |                    |       |                          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Risk adjusted return  on capital(1)                                |       | 46                                                           | %          | 40                      | %          |                          |       |                                                         |       |       |       | 21         | %          | 20 | % |   |   |   |   |   |   |
| Return on average  assets(1)                                       |       | 1.82                                                         |       | 1.56                    |       |                          |       |                                                         |       |       |       | 1.87       |       | 1.67 |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                |       | 65.63                                                        |       | 68.29                   |       |                          |       |                                                         |       |       |       | 49.19      |       | 47.17 |   |   |   |   |   |   |   |

 

| ** **                                                          | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **UnionBanCal** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **Other**                                                    | ** ** | ** **              | ** ** | ** **                    | ** ** | **Reconciling Items**                                   | ** ** | **Corporation**                                              | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                                          | ** ** | **As of and for the  three Months** | ** ** | ** **              | ** ** | ** **                    | ** ** | **As of and for the  three Months** | ** ** | **As of and for the  three Months** | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                                          | ** ** | **Ended March 31,**                                | ** ** | **Increase/(decrease)** | ** ** | **Ended March 31,** | ** ** | **Ended March 31,**                                | ** ** | **Increase/(decrease)**                                      | ** ** |
| ** **                                                          | ** ** | **2006**                                                     | ** ** | **2007**                | ** ** | **Amount**                    | ** ** | **Percent**                                                  | ** ** | **2006**                                                     | ** ** | **2007**   | ** ** | **2006**        | ** ** | **2007**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market View  (dollars in thousands):** | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** |                                                         | ** ** | ** **                                                   |       | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Net interest income  (expense)                                      |       | $                                                            | (15,274    | )                       | $          | (40,854                       | )          | $                                                            | (25,580    | )                                                            |       | (167       | )%         |            | $          | (2,399     | )          | $          | (2,088     | ) | $ | 465,093 |   | $ | 428,512 |   | $ | (36,581 | ) | (8 | )% |
| Noninterest income  (expense)                                       |       | 2,853                                                        |       | 5,930                   |       | 3,077                         |       |                                                         | 108        |                                                         |       | (17,969    | )          | (19,025         | )          | 217,910    |       | 222,558    |       | 4,648 |   | 2 |   |
| Total revenue                                                       |       | (12,421                                                      | )          | (34,924                 | )          | (22,503                       | )          |                                                         | (181       | )                                                            |       | (20,368    | )          | (21,113         | )          | 683,003    |       | 651,070    |       | (31,933 | ) | (5 | ) |
| Noninterest expense  (income)                                       |       | 21,527                                                       |       | 25,216                  |       | 3,689                         |       |                                                         | 17         |                                                         |       | (10,936    | )          | (11,769         | )          | 414,544    |       | 422,091    |       | 7,547 |   | 2 |   |
| Credit expense  (income)                                            |       | (38,861                                                      | )          | (27,317                 | )          | 11,544                        |       |                                                         | 30         |                                                         |       | (26        | )          | (28             | )          | (7,000     | )          | 4,000      |       | 11,000 |   | 157 |   |
| Income from continuing  operations before income taxes              |       | 4,913                                                        |       | (32,823                 | )          | (37,736                       | )          |                                                         | (768       | )                                                            |       | (9,406     | )          | (9,316          | )          | 275,459    |       | 224,979    |       | (50,480 | ) | (18 | ) |
| Income tax expense  (income)                                        |       | (1,707                                                       | )          | (10,916                 | )          | (9,209                        | )          |                                                         | (539       | )                                                            |       | (3,598     | )          | (3,563          | )          | 94,004     |       | 75,368     |       | (18,636 | ) | (20 | ) |
| Income from continuing  operations                                  |       | 6,620                                                        |       | (21,907                 | )          | (28,527                       | )          |                                                         | (431       | )                                                            |       | (5,808     | )          | (5,753          | )          | 181,455    |       | 149,611    |       | (31,844 | ) | (18 | ) |
| Loss from discontinued  operations, net of income taxes             |       | (8,510                                                       | )          | —                  |       | 8,510                         |       |                                                         | 100        |                                                         |       | —     |       | —          |       | (8,510     | )          | —     |       | 8,510 |   | 100 |   |
| Net income (loss)                                                   |       | $                                                            | (1,890     | )                       | $          | (21,907                       | )          | $                                                            | (20,017    | )                                                            |       | (1,059     | )          |            | $          | (5,808     | )          | $          | (5,753     | ) | $ | 172,945 |   | $ | 149,611 |   | $ | (23,334 | ) | (13 | ) |
| **Average balances—Market View  (dollars in millions):**       |       |                                                         |       |                    |       |                          |       |                                                         |       |                                                         |       |       |       |            |       |       |       |       |       |   |   |   |   |
| Total loans                                                         |       | $                                                            | (8         | )                       | $          | 30                            |       | $                                                            | 38         |                                                         |       | 475        |       |            | $          | (17        | )          | $          | (25        | ) | $ | 34,052 |   | $ | 38,458 |   | $ | 4,406 |   | 13 |   |
| Total assets                                                        |       | 8,457                                                        |       | 8,783                   |       | 326                           |       |                                                         | 4          |                                                         |       | (23        | )          | (28             | )          | 48,017     |       | 52,973     |       | 4,956 |   | 10 |   |
| Total deposits                                                      |       | 1,846                                                        |       | 5,189                   |       | 3,343                         |       |                                                         | 181        |                                                         |       | (588       | )          | (554            | )          | 38,856     |       | 41,483     |       | 2,627 |   | 7 |   |
| **Financial ratios—Market View**                               |       |                                                         |       |                    |       |                          |       |                                                         |       |                                                         |       |       |       |            |       |       |       |       |       |   |   |   |   |
| Risk adjusted return on  capital(1)                                 |       | na                                                           |       | na                      |       |                          |       |                                                         |       |                                                         |       | na         |       | na              |       | na         |       | na         |       |   |   |   |   |
| Return on average assets(1)                                         |       | na                                                           |       | na                      |       |                          |       |                                                         |       |                                                         |       | na         |       | na              |       | 1.53       | %          | 1.15       | %          |   |   |   |   |
| Efficiency ratio(2)                                                 |       | na                                                           |       | na                      |       |                          |       |                                                         |       |                                                         |       | na         |       | na              |       | 62.10      |       | 64.47      |       |   |   |   |   |
|                                                                     |            |                                                              |            |                         |            |                               |            |                                                              |            |                                                              |            |            |            |                 |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                       Annualized.

(2)                       The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the (reversal of)provision for losses on off-balance sheet commitments, as a percentage of netinterest income and noninterest income.

na = not applicable

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*Retail Banking*

Retail Banking providesfinancial products including credit, deposit, trust, investment management andrisk management delivered through our branches, relationship managers, privatebankers and trust administrators, to individuals, small businesses andinstitutional clients. Retail Banking is focused on executing a segment basedstrategy that will identify targeted opportunities within the consumer andsmall business markets, and develop product, marketing and sales strategies toretain customers and attract new customers in these identified target markets.While the primary focus of Retail Banking’s segment based strategy is depositgrowth, an additional focus continues to be consumer and small business loangeneration.

During the first quarter of2007 Retail Banking net income decreased 9 percent over the same period in2006, primarily due to lower noninterest income and higher noninterest expense.Net interest income was flat as a result of higher loan balances, primarilyresidential mortgages, offset by lower loan spreads and lower deposit balances.

Average total depositsdeclined 3 percent in the first quarter of 2007, compared to the first quarterof 2006, primarily from increased competition for interest bearing deposits.Despite the decline in average deposits in the first quarter of 2007, RetailBanking’s customer segmentation strategy continues to focus on retaining andattracting consumer and small business deposits through marketing activities,increasing customer cross-sell, relationship management, increasing andimproving sales resources, establishing new locations and new products.

Noninterest income was 3percent lower in the first quarter of 2007. Deposit fees contributed 2 percentto the decrease primarily due to lower overdraft fees. Trust fees contributed 1percent to the decrease due to a one-time $3.8 million increase in fees in thefirst quarter of 2006 resulting from a refinement in accrual methodology, whichwas primarily offset by an increase in fund fees due to growth in assetbalances and better rates of return.

Noninterest expense increased3 percent from the prior period due to higher allocated data processing andother overhead costs, offset by lower software expenses which resultedprimarily from a $1.4 million write-off of a project in first quarter of 2006as well as lower amortization of intangible assets.

*Retail Banking***is comprised of the following major divisions:Retail Banking Branches, Consumer Asset Management, Wealth Management andInstitutional 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 116 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 isorganized geographically. We serve 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;

—              throughin-store branches; and

—              throughour network of over 600 ATM machines.

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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 otherfinancial institutions, Consumer Asset Management offers additional productsand services, such as credit cards and merchant bank cards.

Our Retail Banking Branchesand Consumer Asset management divisions operate in a highly competitiveenvironment including traditional banking institutions as well asnon-traditional competitors such as investment brokerage companies, consumerfinance companies and residential real estate lenders.

We have anextensive branch network that provides convenient banking hours and a full menuof products and services to meet the needs of consumers and small businesses.

·       *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.Custody Services provides both domestic and internationalsafekeeping/settlement services in addition to securities lending. CorporateTrust acts as trustee for corporate and municipal debt issues, provides escrowservices and trustee services for project finance. Retirement Services providesa full range of defined benefit and defined contribution administrativeservices, including trustee services, administration, investment management,and 401(k) valuation services. The client base of Institutional Servicesincludes financial institutions, corporations, government agencies, unions,insurance companies, mutual funds, investment managers and non-profitorganizations. Institutional Services’ strategy is to continue to leverage andexpand its position in our target markets.

*Wholesale Banking*

Wholesale Banking offersfinancing, depository, cash management and insurance services to middle marketand large corporate businesses primarily headquartered in the western UnitedStates. Wholesale Banking continues to focus on specific geographic markets andindustry segments such as energy, entertainment, and real estate. Relationshipmanagers provide credit services, including commercial loans, accountsreceivable and inventory financing, project financing, lease financing, tradefinancing and real estate financing. In addition to credit services, WholesaleBanking offers cash management services delivered through deposit managers withsignificant industry expertise and experience in cash management solutions forbusinesses, U.S. correspondent banks and government entities, as well asinvestment and risk management products.

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During the first quarter of 2007, Wholesale Bankingnet income increased 3 percent from the same period in 2006, due to highernoninterest income, lower noninterest expense and higher tax credits associatedwith the financing of low income housing projects.

The decrease in net interest income of 4 percent fromthe prior period resulted primarily from the impact of title and escrow loanswhich are highly rate-advantaged and volatile compared to other commercialloans. Excluding title and escrow loans, average loans increased by 15 percent,compared to the first quarter of 2006. This was primarily due to increasedcommercial loan demand in the oil and gas and national corporate segments, aswell as the California middle market. The construction loan portfolio alsoincreased due to increased demand for residential construction projects withapartment financing representing the largest component. Additionally, themargin on deposits was essentially flat as a higher credit for deposits offsetthe shift in customer balances from noninterest bearing to interest bearingaccounts.

Noninterest income was 7 percent higher than the prioryear due to higher net gains on private capital investments, partially offsetby lower account analysis fees resulting from a higher earnings credit.Noninterest expense decreased primarily as a result of lower deposit balancesin the title and escrow industries along with their increased usage of titleand escrow loans, which when combined resulted in lower vendor billing expenseincurred on behalf of these customers. Offsetting these decreases innoninterest expense were foreclosed asset recoveries in the first quarter of2006, which did not occur in 2007.

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.

*Wholesale Banking*iscomprised 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, commercialmortgages 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;

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·       the*Global Markets**Division*, which serves our customers’ insurance, foreignexchange, interest rate risk management and investment needs. The GlobalMarkets Division offers energy derivative contracts, on a limited basis, toserve our energy sector client base. The division takes market risk when buyingand selling securities and foreign exchange contracts for its own account, buttakes no market risk when providing insurance or derivative contracts, sincethe market risk for these products is offset with third parties. The divisionalso includes UnionBanc Investment Services LLC, which is a subsidiary of UnionBank of California;

·       the*Insurance Services Division* productsare sold through UnionBanc Insurance Services, Inc., the insurance agencysubsidiary of UBOC Insurance, Inc. UBOC Insurance, Inc. is asubsidiary of Union Bank of California; and

·       the*Pacific Rim Corporate Group*offers a range of credit, deposit, and investment management products andservices to companies in the U.S., which are affiliated with companiesheadquartered in Japan.

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.Consistent with this strategy, Wholesale Banking business units attempt toserve a large part of the targeted customers’ credit and depository needs. TheWholesale Banking business units compete with other banks primarily on thebasis of the quality of our relationship managers, the level of industryexpertise, the delivery of quality customer service, and our reputation as a “businessbank.” We also compete with a variety of other financial services companies aswell as non-bank companies. Competitors include other major California banks,as well as regional, national and international banks. In addition, we competewith investment banks, commercial finance companies, leasing companies andinsurance companies.

*Other*

Net loss for “Other” increased by $20.0 million in thefirst quarter of 2007 over the same period in 2006 due to higher net interestexpense primarily related to the net impact of funds transfer pricing as marketrates increased, higher credit expense on expected loan and lease losses thancalculated under our RAROC method (which is used to determine credit expensesat the business unit level), higher noninterest expense, partly offset byhigher noninterest income, a higher income tax credit adjustment, and an $8.5million loss on our discontinued operations in the first quarter of 2006.

“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;

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·       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.

The first quarter of2007 financial results were 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 $25.6 million to ($40.9) million compared to 2006 primarilydue to the net impact of changes in transfer pricing rates as market ratesincreased;

·       creditexpense (income) of ($27.3) million was due to the difference between the $4.0million provision for loan losses calculated under our US GAAP methodology andthe $31.3 million in expected losses for the reportable business segments,which utilizes the RAROC methodology;

·       noninterestincome of $5.9 million;

·       noninterestexpense of $25.2 million related to residual costs of support groups andcorporate activities not directly related to either of the two businesssegments; and

·       incometax expense (income) of ($10.9) million was due to the calculated tax onreported pretax loss and the difference between the 33.5 percent effective taxrate for our consolidated results and the actual tax expense calculated forreportable segments using the RAROC effective rate of 38.25 percent.

The first quarter of2006 financial results were impacted by the following factors:

·       netinterest income (expense) of ($15.3) million;

·       creditexpense (income) of ($38.9) million was due to the difference between the $7.0million reversal of provision for loan losses calculated under our US GAAPmethodology and the $31.9 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       noninterestincome of $2.9 million;

·       noninterest expense of$21.5 million related to residual costs of support groups and corporateactivities not directly related to either of the two business segments;

·       income tax expense (income)of ($1.7) million was due to the calculated tax on reported pretax income andthe difference between the 34.1 percent effective tax rate for our consolidatedresults and the actual tax expense calculated for reportable segments using theRAROC effective rate of 38.25 percent; and

·       loss from discontinuedoperations, net of taxes, of $8.5 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 (BSA/AML) controlsand processes. With the liquidation of Union Bank of California Internationalin March 2007, the written agreement is no longer effective. In March 2005,Union Bank of California entered into a memorandum of understanding with theOffice of the Comptroller of the Currency, which requires Union Bank ofCalifornia to strengthen its BSA/AML controls and processes. The memorandum ofunderstanding remains in effect at the time of filing this Form 10-Q.

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Management is committed to resolving the issues raisedby the regulators and continues to take actions it believes to be appropriateto achieve this objective. We have committed significant resources tostrengthening all of our BSA/AML controls and processes in order to meetregulatory requirements and expectations. However, our actions are subject toongoing review and evaluation, the results of which may include furtherregulatory action. In recent years, certain banks and bank holding companieshave been subject to regulatory actions, including cease and desist orders, formalwritten agreements and the assessment of significant civil money penalties, andcriminal sanctions, including the imposition of significant fines, as a resultof failures to comply with the Bank Secrecy Act and other anti-money launderinglaws and regulations. We cannot assure that the actions we have taken or willtake will be sufficient to prevent further regulatory action or other sanctionsrelating to this subject.

The Bank of Tokyo-Mitsubishi UFJ, Ltd., a wholly-ownedsubsidiary of Mitsubishi UFJ Financial Group, Inc., owns a majority of theoutstanding shares of our common stock. In December 2006, Mitsubishi UFJFinancial Group, The Bank of Tokyo-Mitsubishi UFJ and its wholly ownedsubsidiary, Bank of Tokyo-Mitsubishi UFJ Trust Company, entered into a seriesof agreements with the Federal Deposit Insurance Corporation, the FederalReserve Bank of San Francisco, the Federal Reserve Bank of New York andthe New York State Banking Department, which require a strengthening of theirBSA/AML controls and processes.

Until resolved, these pending regulatory matters, orany future regulatory or other government actions concerning the Bank SecrecyAct or anti-money laundering controls and processes, may adversely affectUnionBanCal Corporation’s and Union Bank of California’s ability to obtainregulatory approvals for future initiatives, including acquisitions. Also, anyfuture actions relating to noncompliance or repeat violations could result inthe assessment of civil money penalties or the imposition of fines, which couldbe substantial.

The SEC is conducting aninquiry regarding certain practices related to our mutual fund activities. Theinquiry concerns the use of a portion of the fees received under an agreementfrom the HighMark Funds by an unaffiliated administrator to pay expensesrelated to the marketing and distribution of fund shares. The HighMark Funds isa family of mutual funds managed by HighMark Capital Management, Inc., theinvestment management subsidiary of Union Bank of California. We arecooperating with this inquiry.

**Item 3.**            Quantitative andQualitative Disclosures About Market Risk

A discussion of our marketrisk exposure is incorporated by reference to Part I, Item 2 of this Form 10-Qunder the caption “Quantitative and Qualitative Disclosures About Market Risk”and to Part II, Item 1A of this Form 10-Q under the caption “RiskFactors.”

**Item 4.**            Controls andProcedures

Our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer) haveconcluded that the design and operation of our disclosure controls andprocedures are effective as of March 31, 2007. This conclusion is based onan evaluation conducted under the supervision and with the participation ofmanagement. Disclosure controls and procedures are those controls andprocedures which ensure that information required to be disclosed in thisfiling is accumulated and communicated to management and is recorded,processed, summarized and reported in a timely manner and in accordance withSecurities and Exchange Commission rules and regulations.

During the quarter ended March 31, 2007, therewere no changes in our internal controls over financial reporting thatmaterially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1. Legal Proceedings**

For a discussion of the action filed by DataTreasuryCorporation, refer to Item 3 of Part I of our 2006 Form 10-K.

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 financialposition or results of operations.

**Item 1A. Risk Factors**

We are subject to numerousrisks and uncertainties, including but not limited to those risks set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RegulatoryMatters” in Item 2 of Part I of this Form 10-Q and thefollowing information:

***Industry Factors***

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

Significant increases in market interest rates onloans, or the perception that an increase may occur, could adversely affectboth our ability to originate new loans and our ability to grow. Conversely,decreases in interest rates could result in an acceleration of loanprepayments. An increase in market interest rates could also adversely affectthe ability of our floating-rate borrowers to meet their higher paymentobligations. If this occurred, it could cause an increase in nonperformingassets and charge offs, which could adversely affect our business.

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

Changes in market interest rates on deposits or otherfunding sources, including changes in the relationship between short-term andlong-term market interest rates or between different interest rate indices, canimpact our margin spread, that is, the difference between the interest rates wecharge on interest earning assets, such as loans, and the interest rates we payon interest bearing liabilities, such as deposits or other borrowings. Thisimpact could result in a decrease in our interest income relative to interestexpense.

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

The banking industry and we are facing increasingdeposit-pricing pressures. Checking and savings account balances and otherforms of deposits can decrease when our deposit customers perceive alternativeinvestments, such as the stock market, other non-depository investments or higheryielding deposits, as providing superior expected returns. Technology and otherchanges have made it more convenient for bank customers to transfer funds intoalternative investments or other deposit accounts, including products offeredby other financial institutions or non-bank service providers. Additionalincreases in short-term interest rates could increase such transfers ofdeposits to higher yielding deposits or other investments either with us orwith external providers. Efforts and initiatives we undertake to retain andincrease deposits, including deposit pricing, can increase our costs. When bankcustomers move money out of bank deposits in favor of alternative investmentsor into higher yielding deposits, we can lose a relatively inexpensive sourceof funds, increasing our funding cost.

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

Deposits of Union Bank of California, N.A. are insured up to statutorylimits by the Federal Deposit Insurance Corporation (FDIC), and, accordingly,are subjected to deposit insurance assessments to maintain the DepositInsurance Fund. In November 2006, the FDIC issued a final rule, effective January 1,2007, that created a new assessment system designed to more closely tie whatbanks pay for deposit insurance to the risks they pose and adopted a new baseschedule of rates that the FDIC can adjust up or down, depending on the revenueneeds of the insurance fund. This new assessment system is expected to resultin annual assessments on deposits of Union Bank of California of 5 to 7 basispoints. Prior to this change, Union Bank of California was not paying anyinsurance assessments on deposits under the FDIC’s risk-related assessmentsystem. An FDIC credit for prior contributions is expected to offset theassessment for 2007. Once the credit is exceeded, the deposit insuranceassessments Union Bank of California pays will increase our costs. Any futureincreases in the deposit insurance assessments Union Bank of California payswould further increase our costs.

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

Acts or threats of terrorism and actions taken by theU.S. or other governments as a result of such acts or threats and otherinternational hostilities may result in a disruption of U.S. and globaleconomic and financial conditions and could adversely affect business andeconomic and financial conditions in the U.S. and globally and in our principalmarkets.

*Substantial competitioncould adversely affect us*

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 and major foreign-affiliated or foreign banks, aswell as many financial and nonfinancial firms that offer services similar tothose offered by us, including many large securities firms. Some of ourcompetitors are community or regional banks that have strong local marketpositions. Other competitors include large financial institutions that havesubstantial capital, technology and marketing resources that are well in excessof ours. Such large financial institutions may have greater access to capitalat a lower cost than us, which may adversely affect our ability to competeeffectively. We also experience competition, especially for deposits, frominternet-based banking institutions, which have grown rapidly 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 to significant federal and stateregulation and supervision, which is primarily for the benefit and protectionof our customers and the Deposit Insurance Fund and not for the benefit ofinvestors in our stock or other securities. In the past, our business has beenmaterially affected by these regulations. This will likely continue in thefuture. Laws, regulations or policies, including accounting standards andinterpretations, currently affecting us and our subsidiaries may change at anytime. Regulatory authorities may also change their interpretation of thesestatutes and regulations. Therefore, our business may be adversely affected bychanges in laws, regulations, policies or interpretations or regulatoryapproaches to compliance and enforcement, as well as by supervisory action orcriminal proceedings taken as a result of noncompliance which could result inthe imposition of significant civil money penalties or fines. Internationallaws, regulations and policies affecting us, our subsidiaries and the businesswe conduct may change at any time and affect our business opportunities andcompetitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi UFJcontrolling ownership of us, laws, regulations, policies, fines and othersupervisory actions adopted or enforced by the Government of Japan and theFederal Reserve Board may adversely affect our activities and investments andthose of our subsidiaries in the future.

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We maintain systems and procedures designed to complywith applicable laws and regulations. However, some legal/regulatory frameworksprovide for the imposition of criminal or civil penalties (which can besubstantial) for noncompliance. In some cases, liability may attach even if thenoncompliance was inadvertent or unintentional and even if there were in placeat the time compliance systems and procedures. There may be other negativeconsequences from a finding of noncompliance, including restrictions on certainactivities and damage to our reputation.

Additionally, our business is affected significantlyby the fiscal and monetary policies of the U.S. federal government and itsagencies. We are particularly affected by the policies of the Federal ReserveBoard, which regulates the supply of money and credit in the U.S. Underlong-standing policy of the Federal Reserve Board, a bank holding company isexpected to act as a source of financial strength for its subsidiary banks. Asa result of that policy, we may be required to commit financial and otherresources to our subsidiary bank in circumstances where we might not otherwisedo so. Among the instruments of monetary policy available to the FederalReserve Board are (a) conducting open market operations in U.S. governmentsecurities, (b) changing the discount rates on borrowings by depositoryinstitutions, and (c) imposing or changing reserve requirements againstcertain borrowings by banks and their affiliates. These methods are used invarying degrees and combinations to directly affect the availability of bankloans and deposits, as well as the interest rates charged on loans and paid ondeposits. The policies of the Federal Reserve Board may have a material effecton our business, prospects, results of operations and financial condition.

Refer to “Supervision and Regulation” in our 2006Form 10-K and Management’s Discussion and Analysis of FinancialCondition and Results of Operations (MD&A)—Regulatory Matters” in this Form 10-Qfor discussion of other laws and regulations, and certain pending regulatorymatters, including those relating to the Bank Secrecy Act and other anti-moneylaundering laws and regulations, that may have a material effect on ourbusiness, prospects, results of operations and financial condition.

*Changes in accountingstandards could materially impact our financial statements*

From time to time the Financial Accounting StandardsBoard and the SEC change the financial accounting and reporting standards thatgovern the preparation of our financial statements. These changes can be verydifficult to predict and can materially impact how we record and report ourfinancial condition and results of operations. In some cases, we could berequired to apply a new or revised standard retroactively, resulting in ourrestating prior period financial statements.

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

Technology and other changesincreasingly allow parties to complete financial transactions electronically,and in many cases, without banks. For example, consumers can pay bills andtransfer funds over the internet and by telephone without banks. Many non-bankfinancial service providers have lower overhead costs and are subject to fewerregulatory constraints. If consumers do not use banks to complete theirfinancial transactions, we could potentially lose fee income, deposits andincome generated from those deposits.

***Company Factors***

*Adverse Californiaeconomic conditions could adversely affect our business*

A substantial majority of our assets, deposits and feeincome are generated in California, and a substantial majority of ourresidential real estate loans are in California. As a result, poor economicconditions in California may cause us to incur losses associated with higherdefault rates and decreased collateral values in our loan portfolio. Economicconditions in California are subject to various uncertainties at this time,including the softening in the California real estate market and housingindustry. If economic conditions in California decline, our level of problemassets could increase and our prospects for growth could be impaired.

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*Adverse economic factors affecting certain industrieswe serve could adversely affect our business*

We are subject tocertain industry-specific economic factors. For example, a significant andincreasing portion of our total loan portfolio is related to residential realestate, especially in California. Increases in residential mortgage loan interestrates could have an adverse effect on our operations by depressing new mortgageloan originations. Additionally, a downturn in the residential real estate andhousing industries in California could have an adverse effect on our operationsand the quality of our real estate loan portfolio. Although we do not engage insubprime or negative amortization lending, effects of recent subprime marketchallenges, combined with the ongoing correction in the U.S. and Californiareal estate markets, could result in further price reductions in single familyhome prices and a lack of liquidity in refinancing markets. These factors couldadversely impact the quality of our residential construction and residentialmortgage portfolio in various ways, including by decreasing the value of thecollateral for our mortgage loans. These factors could also negatively affectthe economy in general and thereby our overall loan portfolio.

We provide financing to businesses in a number ofother industries that may be particularly vulnerable to industry-specificeconomic factors, including the commercial real estate industry, thecommunications/media industry, the retail industry, the energy industry and thetechnology industry. Increases in fuel prices and energy costs could adverselyaffect businesses in several of these industries. Industry-specific risks arebeyond our control and could adversely affect our portfolio of loans,potentially resulting in an increase in nonperforming loans or charge offs anda slowing of growth or reduction in our loan portfolio.

*Higher credit lossescould require us to increase our allowance for credit losses through a chargeto earnings*

When we loan money or commit to loan money, we incurcredit risk, or the risk of losses if our borrowers do not repay their loans.We reserve for credit losses by establishing an allowance through a charge toearnings. The amount of this allowance is based on our assessment of creditlosses inherent in our loan portfolio and our unfunded credit commitments. Theprocess for determining the amount of the allowance is critical to ourfinancial results and condition. It requires difficult, subjective and complexjudgments about the future impact from current economic conditions that mightimpair the ability of our borrowers to repay their loans.

We might underestimate the credit losses inherent inour loan portfolio and have credit losses in excess of the amount reserved. Or,we might increase the allowance because of changing economic conditions, whichwe conclude have caused losses to be sustained in our portfolio. For example,in a rising interest rate environment, borrowers with adjustable rate loanscould see their payments increase. In the absence of offsetting factors such asincreased economic activity and higher wages, this could reduce borrowers’ability to repay their loans, resulting in our increasing the allowance.Increased fuel and energy costs could also adversely impact some borrowers’ability to repay their loans. We might also increase the allowance because ofunexpected events. Any increase in the allowance would result in a charge toearnings.

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

Banks, securities firms, and insurance companies cannow combine as a “financial holding company.” Financial holding companies canoffer virtually any type of financial service, including banking, securitiesunderwriting, insurance (both agency and underwriting), and merchant banking.Many of our competitors have elected to become financial holding companies. Anumber of foreign banks have acquired financial holding companies in the U.S.,further increasing competition in the U.S. market. Under current regulatoryinterpretations, Mitsubishi UFJ Financial Group, Inc. would be required tomake a financial holding company election in order for us to have the benefitsof this status. Mitsubishi UFJ Financial Group is not presently a financialholding company.

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*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 of Tokyo-Mitsubishi UFJ, a wholly-ownedsubsidiary of Mitsubishi UFJ Financial Group, owns a majority of theoutstanding shares of our common stock. As a result, The Bank ofTokyo-Mitsubishi UFJ can elect all of our directors and can control the vote onall matters, including: approval of mergers or other business combinations; asale of all or substantially all of our assets; issuance of any additionalcommon stock or other equity securities; incurrence of debt other than in theordinary course of business; the selection and tenure of our Chief ExecutiveOfficer; payment of dividends with respect to our common stock or other equitysecurities; and other matters that might be favorable to The Bank ofTokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group.

The Bank of Tokyo-Mitsubishi UFJ’s ability to preventan unsolicited bid for us or any other change in control could also have anadverse effect on the market price for our common stock. A majority of ourdirectors are independent of The Bank of Tokyo-Mitsubishi UFJ and are notofficers or employees of UnionBanCal Corporation or any of our affiliates,including The Bank of Tokyo-Mitsubishi UFJ. However, because of The Bank ofTokyo-Mitsubishi UFJ’s control over the election of our directors, we coulddesignate ourselves as a “controlled company” under the New York Stock Exchangerules and could change the composition of our Board of Directors so thatthe Board would not have a majority of independent directors. We have not doneso.

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

The Bank of Tokyo-Mitsubishi UFJ may sell shares ofour common stock. By virtue of The Bank of Tokyo-Mitsubishi UFJ’s currentcontrol of us, The Bank of Tokyo-Mitsubishi UFJ could sell large amounts ofshares of our common stock by causing us to file a registration statement thatwould allow it to sell shares more easily. In addition, The Bank ofTokyo-Mitsubishi UFJ could sell shares of our common stock without registrationunder certain circumstances, such as in a private transaction. Although we canmake no prediction as to the effect, if any, that such sales would have on themarket price of our common stock, sales of substantial amounts of our commonstock, or the perception that such sales could occur, could adversely affectthe market price of our common stock. If The Bank of Tokyo-Mitsubishi UFJ sellsor transfers shares of our common stock as a block, another person or entitycould 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 operations independently of The Bank ofTokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group and believe ourbusiness is not necessarily closely related to the business or outlook of TheBank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. However, TheBank of Tokyo-Mitsubishi UFJ’s and Mitsubishi UFJ Financial Group’s creditratings may affect our credit ratings.

The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJFinancial Group are also subject to regulatory oversight, review andsupervisory action (which can include fines or penalties) by Japanese and U.S.regulatory authorities. Our business operations and expansion plans could be negativelyaffected by regulatory concerns or supervisory action in the U.S. and in Japanagainst The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. Foradditional information, see “MD&A—Regulatory Matters.”

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

The views of The Bank of Tokyo-Mitsubishi UFJ andMitsubishi UFJ Financial Group regarding possible new businesses, strategies,acquisitions, divestitures or other initiatives, including compliance and 

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risk management processes, maydiffer from ours. This may delay or hinder us from pursuing individualinitiatives or cause us to incur additional costs and subject us to additionaloversight.

Also, as part of The Bank of Tokyo-Mitsubishi UFJ’s normalrisk management processes, The Bank of Tokyo-Mitsubishi UFJ manages globalcredit and other types of exposures and concentrations on an aggregate basis,including exposures and concentrations at UnionBanCal. Therefore, at certainlevels or in certain circumstances, our ability to approve certain credits orother banking transactions and categories of customers is subject to theconcurrence of The Bank of Tokyo-Mitsubishi UFJ. We may wish to extend creditor furnish other banking services to the same customers as The Bank ofTokyo-Mitsubishi UFJ. Our ability to do so may be limited for various reasons,including The Bank of Tokyo-Mitsubishi UFJ’s aggregate exposure and marketingpolicies.

Certain directors’ and officers’ ownership interestsin Mitsubishi UFJ Financial Group’s common stock or service as a director orofficer or other employee of both us and The Bank of Tokyo-Mitsubishi UFJ couldcreate or appear to create potential conflicts of interest, especially sinceboth of us compete in U.S. banking markets.

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

As a holding company, a substantial portion of ourcash flow typically comes from dividends our bank and non-bank subsidiaries payto us. Various statutory provisions restrict the amount of dividends oursubsidiaries can pay to us without regulatory approval. In addition, if any ofour subsidiaries were to liquidate, that subsidiary’s creditors will beentitled to receive distributions from the assets of that subsidiary to satisfytheir claims against it before we, as a holder of an equity interest in thesubsidiary, will be 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 obtain regulatory approval ofacquisitions is subject to constraints related to the Bank Secrecy Act and theCRA, as described in “Business—Supervision and Regulation” in our 2006 Form10-K and in “MD&A—Regulatory Matters” in this Form 10-Q. Subject to ourability to address successfully these regulatory concerns, we may seek toacquire or invest in financial and non-financial companies that complement ourbusiness.

We may not be successful in completing any suchacquisition or investment as this will depend on the availability ofprospective target opportunities at valuation levels we find attractive and thecompetition for such opportunities from other parties. In addition, we continueto evaluate the performance of all of our businesses and business lines and maysell or restructure a business or business line. Any acquisitions, divestituresor restructurings may result in the issuance of potentially dilutive equitysecurities, significant write-offs, including those related to goodwill andother intangible assets, and/or the incurrence of debt, any of which could havea material adverse effect on our business, results of operations and financialcondition.

Acquisitions, divestitures or restructurings couldinvolve numerous additional risks including difficulties in obtaining anyrequired regulatory approvals and in the assimilation or separation ofoperations, services, products and personnel, the diversion of management’sattention from other business concerns, higher than expected deposit attrition,divestitures required by regulatory authorities, the disruption of ourbusiness, the potential loss of key employees and unexpected contingent liabilitiesarising from any business we might acquire. We may not be successful inaddressing these or any other significant risks encountered in connection withany acquisition we might make.

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*Privacy restrictions could adversely affect ourbusiness*

Our business model relies, inpart, upon cross-marketing the products and services offered by us and oursubsidiaries to our customers. Laws that restrict our ability to shareinformation about customers within our corporate organization could adverselyaffect our business, results of operations and financial condition.

*We rely on third parties for important products andservices*

Third-party vendors providekey components of our business infrastructure such as internet connections,network access and mutual fund distribution and we do not control theiractions. Any problems caused by these third parties, including as a result oftheir not providing us their services for any reason or their performing theirservices poorly, could adversely affect our ability to deliver products andservices to our customers and otherwise to conduct our business. Replacingthese third-party vendors could also entail significant delay and expense.

*Our business could suffer if we fail to attract andretain skilled personnel*

Our success depends, in largepart, on our ability to attract and retain key personnel, including executives.Any of our current employees, including our senior management, may terminatetheir employment with us at any time. Competition for qualified personnel in ourindustry can be intense. We may not be successful in attracting and retainingsufficient qualified personnel. We may also incur increased expenses and berequired to divert the attention of other senior executives to recruitreplacements for the loss of any key personnel.

*Significant legal actions could subject us tosubstantial uninsured liabilities*

We are from time to timesubject to claims related to our operations. These claims and legal actions,which could include supervisory or enforcement actions by the bank regulatoryauthorities, or criminal proceedings by prosecutorial authorities, couldinvolve large monetary claims, including civil money penalties or fines imposedby government authorities, and significant defense costs. To protect ourselvesfrom the cost of these claims, we maintain insurance coverage in amounts andwith deductibles that we believe are appropriate for our operations. However,our insurance coverage would not cover any civil money penalties or fines bygovernment authorities and may not cover all other claims against us orcontinue to be available to us at a reasonable cost. As a result, we may beexposed to substantial uninsured liabilities, which could adversely affect ourbusiness, prospects, results of operations and financial condition.

*Changes in our tax rates could affect our futureresults*

The State of Californiarequires us to file our franchise tax returns as a member of a unitary groupthat includes Mitsubishi UFJ Financial Group and either all worldwideaffiliates or only U.S. affiliates. Our future effective tax rates could befavorably or unfavorably affected by increases or decreases in Mitsubishi UFJFinancial Group’s taxable profits, which in turn are affected by changes in theworldwide economy, especially in Japan, and decisions that they may make aboutthe timing of the recognition of credit losses or other matters. Our effectivetax rates could also be affected by changes in the valuation of our deferredtax assets and liabilities, changes in tax laws or their interpretation, or bythe outcomes of examinations of our income tax returns by the Internal RevenueService and other tax authorities.

*We are subject to operational risks*

We are subject to many typesof operational risks throughout our organization. Operational risk is thepotential loss from our operations due to factors, such as failures in internalcontrol, systems failures or external events, that do not fall into the marketrisk or credit risk categories described in “MD&A—Business Segments.”  Operational risk includes reputational risk,legal and compliance risk, the risk or fraud or theft by employees, customersor outsiders, unauthorized transactions by employees or operational errors, 

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includingclerical or record-keeping errors or those resulting from faulty or disabledcomputer or telecommunications systems. A discussion of risks associated withregulatory compliance appears above under the caption “*The effects of, changes in or supervisory enforcementof, banking or other laws and regulations or governmental fiscal or monetarypolicies could adversely affect us*.”

We depend on the continuedefficacy of our technical systems, operational infrastructure, relationshipswith third parties and our colleagues in our day-to-day and ongoing operations.Our dependence upon automated systems to record and process transactions mayfurther increase the risk that technical system flaws or employee tampering ormanipulation of those systems will result in losses that are difficult todetect. Failures in our internal control or operational systems could impairour ability to operate our business and result in potential liability tocustomers, reputational damage and regulatory intervention, any of which couldharm our operating results and financial condition.

We may also be subject todisruptions of our operating systems arising from events that are wholly orpartially beyond our control, such as computer hacking or viruses or electricalor telecommunications outages, which may give rise to disruption of service to customersand to financial loss or liability. Our business recovery plan may not work asintended or may not prevent significant interruptions of our operations.

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

As a financial institution,our earnings and capital are subject to risks associated with negative publicopinion. Negative public opinion could result from our actual or allegedconduct in any number of activities, including lending practices, the failureof any product or service sold by us to meet our customers’ expectations orapplicable regulatory requirements, corporate governance and acquisitions, orfrom actions taken by regulators and community organizations in response tothose activities. We fund our operations independently of The Bank ofTokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group and believe ourbusiness is not necessarily closely related to the business or outlook of TheBank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. However,negative public opinion could also result from regulatory concerns regarding,or supervisory actions in the U.S. or Japan against, us or Union Bank ofCalifornia, or The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ FinancialGroup. Negative public opinion can adversely affect our ability to keep andattract and/or retain customers and can expose us to litigation and regulatoryaction. Actual or alleged conduct by one of our businesses can result innegative public opinion about our other businesses. Negative public opinioncould also affect our credit ratings, which are important to our access tounsecured wholesale or other borrowings; significant changes in these ratingscould change the cost and availability of these sources of funding.

*Our framework for managing risks may not be effectivein mitigating risk and loss to our company*

Our risk management frameworkis made up of various processes and strategies to manage our risk exposure.Types of risk to which we are subject include liquidity risk, credit risk,market risk, interest rate risk, operational risk, legal risk, compliance risk,reputation risk, fiduciary risk and private equity risk, among others. Ourframework to manage risk, including the framework’s underlying assumptions, maynot be effective under all conditions and circumstances. If our risk managementframework proves ineffective, we could suffer unexpected losses and could bematerially adversely affected.

*Our disclosure controls and procedures may not preventor detect all errors or acts of fraud*

Our disclosure controls andprocedures are designed to provide reasonable assurance that informationrequired to be disclosed by us in reports we file or submit under the ExchangeAct is accumulated and communicated to management, and recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Any disclosure controls and procedures or internal controls 

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andprocedures, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.

These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people or by an unauthorized override of the controls. Accordingly,because of the inherent limitations in our control system, misstatements due toerror or fraud may occur and not be detected.

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

*Repurchases of EquitySecurities*

The following table presentsrepurchases by us of our equity securities during the first quarter 2007.

| ** **            | ** ** | ** **                          | ** ** | ** **                       | ** ** | ** **                              | ** ** | **Approximate**                         | ** ** |
|-----------------------|------------|-------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **            | ** ** | ** **                          | ** ** | ** **                       | ** ** | ** **                              | ** ** | **Dollar **                        | ** ** |
| ** **            | ** ** | ** **                          | ** ** | ** **                       | ** ** | **Total Number**                   | ** ** | **Value of Shares that** | ** ** |
| ** **            | ** ** | ** **                          | ** ** | ** **                       | ** ** | **of Shares Purchased ** | ** ** | **May Yet Be**                | ** ** |
| ** **            | ** ** | **Total Number of ** | ** ** | **Average Price Paid** | ** ** | **as Part of Publicly**  | ** ** | **Purchased**                           | ** ** |
| **Period**            | ** ** | **Shares Purchased**(1)        | ** ** | **per Share**               | ** ** | **Announced Programs**             | ** ** | **under the Programs**        | ** ** |
| **January 2007**      | ** ** |                                | ** ** | ** **                       |       |                                    | ** ** | ** **                              |       |   | ** ** | ** ** |   | ** ** |   |
| (January 2-31, 2007)  |       |                                | 241,234    | ** **                       |       |                                    | $          | 63.08                                   | ** ** |   |   | 239,100 | ** ** |   | $ | 134,396,304 |   |
| **February 2007**     | ** ** |                                | ** ** | ** **                       |       |                                    | ** ** | ** **                              |       |   | ** ** | ** ** |   | ** ** |   |
| (February 1-26, 2007) |       |                                | 449,171    | ** **                       |       |                                    | $          | 64.33                                   | ** ** |   |   | 448,800 | ** ** |   | $ | 105,499,745 |   |
| **March 2007**        | ** ** |                                | ** ** | ** **                       |       |                                    | ** ** | ** **                              |       |   | ** ** | ** ** |   | ** ** |   |
| (March 1-28, 2007)    |       |                                | 672,378    | ** **                       |       |                                    | $          | 61.54                                   | ** ** |   |   | 671,101 | ** ** |   | $ | 64,123,856 | (2) |
| **Total**             |       |                                | 1,362,783  | ** **                       |       |                                    | $          | 62.73                                   | ** ** |   |   | 1,359,001 | ** ** |   |   |   |

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(1)                   Includes 2,134 shares, 371 shares and1,277 shares of common stock repurchased during January, February andMarch 2007, respectively, from employees for required personal income taxwithholdings on the vesting of restricted stock issued under the Year 2000UnionBanCal Corporation Management Stock Plan.

(2)                   In the first quarter of 2007, UnionBanCal Corporationused $85.5 million from the $500 million repurchase program announced onApril 26, 2006.

**Item 6. Exhibits**

| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Union Bank of  California, N.A. Separation Pay Plan(1)                                                                                                               |
| 31.1 |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)                                                      |
| 31.2 |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)                                                      |
| 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(1) |
| 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(1) |

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(1)                   Filedherewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                         | UNIONBANCAL CORPORATION (Registrant)         |
|-------------------------|----------------------------------------------|
|                    |                                         |
| Date: May 8,  2007 | By:                                          | /s/ TAKASHI MORIMURA |
|                    | Takashi  Morimura                            |
| *** ***            | *President  and Chief Executive Officer*     |
|                    | *(Principal  Executive Officer)*             |
| Date: May 8,  2007 | By:                                          | /s/ DAVID I. MATSON |
|                    | David  I. Matson                             |
| * *                | *Vice  Chairman and Chief Financial Officer* |
|                    | *(Principal  Financial Officer)*             |
| Date: May 8,  2007 | By:                                          | /s/ DAVID A. ANDERSON |
|                    | David  A. Anderson                           |
| * *                | *Executive  Vice President and Controller*   |
|                    | *(Chief  Accounting Officer)*                |

 

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**EXHIBITINDEX**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Union Bank of California, N.A. Separation Pay Plan(1)                                                                                                                |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 31.2 |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 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(1) |
| 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(1) |

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(1)                   Filedherewith.

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