Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        to


Commission
file number 1-15081

UnionBanCal Corporation(Exact name of registrant as specified in its charter)

Delaware

94-1234979(State of Incorporation)

(I.R.S. Employer Identification No.)


400 California Street
San Francisco, California 94104-1302(Address and zip code of principal executive offices)

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

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes þ    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)

Smaller reporting company o


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

Number of shares of Common Stock outstanding at July 31, 2009: 136,330,829

THE
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.



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Table of Contents



UnionBanCal Corporation and Subsidiaries    TABLE OF CONTENTS



Page
NumberPART IFinancial InformationCondensed Consolidated Financial Highlights

6ITEM 1. FINANCIAL STATEMENTS:Condensed Consolidated Statements of Income

8Condensed Consolidated Balance Sheets

9Condensed Consolidated Statements of Changes in Stockholder's
Equity

10Condensed Consolidated Statements of Cash Flows

11Notes to Condensed Consolidated Financial Statements:Note 1Basis of Presentation and Nature of Operations

12Note 2Recently Issued Accounting Pronouncements

12Note 3Privatization

16Note 4Securities

17Note 5Loans and Allowance for Loan Losses

22Note 6Goodwill and Intangible Assets

23Note 7Employee Pension and Other Postretirement
Benefits

25Note 8Other Noninterest Income and Noninterest Expense

26Note 9Income Taxes

27Note 10Borrowed Funds

28Note 11Medium- and Long-Term Debt

29Note 12Fair Value Measurement and Fair Value of Financial
Instruments

30Note 13Derivative Instruments and Other Financial Instruments Used
For Hedging

38Note 14Accumulated Other Comprehensive Loss

44Note 15Discontinued Operations

45Note 16Commitments, Contingencies and Guarantees

48Note 17Business Segments

50Note 18Subsequent Event

53ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:Introduction

54Executive Overview

54Critical Accounting Estimates

56Financial Performance

58Net Interest Income

61Noninterest Income and Noninterest Expense

64Income Tax Expense

65Discontinued Operations

66Securities

66Loans

68Cross-Border Outstandings

70Provision for Credit Losses

70Allowances for Credit Losses

71Nonperforming Assets

74Loans 90 Days or More Past Due and Still Accruing

76Fair Value of Financial Instruments

76Quantitative and Qualitative Disclosures About Market Risk

77Liquidity Risk

80


2

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Table of Contents

Page
NumberRegulatory Capital

82Business Segments

82ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

90ITEM 4. CONTROLS AND PROCEDURES

90PART IIOther InformationITEM 1. LEGAL PROCEEDINGS

91ITEM 1A. RISK FACTORS

91ITEM 6. EXHIBITS

98SIGNATURES

99


3

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our
operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts
and expectations. See Part II, Item 1A. "Risk Factors," and the other risks described in this report for factors to be considered when reading any forward-looking statements in this
filing.

This
document includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E
of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are
speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate
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 statements are intended to provide investors with additional information
with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of
these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events 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:



4

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There
are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are
beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not
limited to, those listed in Item 1A "Risk Factors" of Part II and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I
of this Form 10-Q.

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

5

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Table of Contents



PART I. FINANCIAL INFORMATION  UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Financial Highlights  (Unaudited)

As of and for the
Three Months Ended(Dollars in thousands)

June 30,
2008

June 30,
2009

Percent
ChangeResults of operations:Net interest income(1)

$
512,887

$
553,094


7.84
%Provision for loan losses


95,000


360,000


nmNoninterest income


199,626


183,213


(8.22
)Noninterest expense


419,312


532,058


26.89Income (loss) before income taxes(1)


198,201


(155,751
)

nmTaxable-equivalent adjustment


2,329


2,748


17.99Income tax expense (benefit)


61,574


(78,492
)

nmIncome (loss) from continuing operations


134,298


(80,007
)

nmIncome from discontinued operations, net of taxes


7,047





100.00Net income (loss)

$
141,345

$
(80,007
)

nmBalance sheet (end of period):Total assets(2)

$
60,593,921

$
73,984,788


22.10
%Total loans


46,041,358


48,896,520


6.20Nonperforming assets


224,944


1,144,602


nmTotal deposits


42,604,419


58,338,959


36.93Medium- and long-term debt


2,809,329


5,131,068


82.64Stockholder's equity


4,708,790


7,429,500


57.78Balance sheet (period average)(3):Total assets

$
59,269,965

$
71,495,226


20.63
%Total loans


45,494,161


49,556,222


8.93Earning assets


54,935,058


65,008,223


18.34Total deposits


43,203,180


54,352,412


25.81Stockholder's equity


4,616,596


7,303,050


58.19Financial ratios(4):Return on average assets(3):From continuing operations


0.91
%

(0.45
)%Net income (loss)


0.96


(0.45
)Return on average stockholder's equity(3):From continuing operations


11.70


(4.39
)Net income (loss)


12.31


(4.39
)Efficiency ratio(5)


56.94


68.28Net interest margin(1)(3)


3.74


3.41Tangible equity ratio(6)


7.22


6.56Tier 1 risk-based capital ratio(2)


7.96


8.68Total risk-based capital ratio(2)


10.84


11.54Leverage ratio(2)


7.95


7.89Allowance for loan losses to(7):Total loans


1.14


2.21Nonaccrual loans


243.59


98.14Allowance for credit losses to(8):Total loans


1.37


2.55Nonaccrual loans


291.42


113.24Net loans charged off to average total loans(3)


0.28


1.23Nonperforming assets to total loans andforeclosed assets


0.49


2.34Nonperforming assets to total assets(2)


0.37


1.55


---

6

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Financial Highlights (Continued)  (Unaudited)

As of and for the
Six Months Ended(Dollars in thousands, except per share data)

June 30,
2008

June 30,
2009

Percent
ChangeResults of operations:Net interest income(1)

$
975,991

$
1,115,714


14.32
%Provision for loan losses


167,000


609,000


nmNoninterest income


395,022


357,929


(9.39
)Noninterest expense


822,518


1,053,441


28.08Income (loss) before income taxes(1)


381,495


(188,798
)

nmTaxable-equivalent adjustment


4,855


5,365


10.50Income tax expense (benefit)


119,944


(104,348
)

nmIncome (loss) from continuing operations


256,696


(89,815
)

nmLoss from discontinued operations, net of taxes


(6,761
)




100.00Net income (loss)

$
249,935

$
(89,815
)

nmBalance sheet (end of period):Total assets(2)

$
60,593,921

$
73,984,788


22.10
%Total loans


46,041,358


48,896,520


6.20Nonperforming assets


224,944


1,144,602


nmTotal deposits


42,604,419


58,338,959


36.93Medium- and long-term debt


2,809,329


5,131,068


82.64Stockholders' equity


4,708,790


7,429,500


57.78Balance sheet (period average)(3):Total assets

$
57,951,110

$
69,296,183


19.58
%Total loans


44,097,805


49,671,989


12.64Earning assets


53,561,569


62,743,021


17.14Total deposits


43,408,469


50,514,116


16.37Stockholders' equity


4,667,429


7,319,518


56.82Financial ratios(4):Return on average assets(3):From continuing operations


0.89
%

(0.26
)%Net income (loss)


0.87


(0.26
)Return on average stockholders' equity(3):From continuing operations


11.06


(2.47
)Net income (loss)


10.77


(2.47
)Efficiency ratio(5)


57.75


66.98Net interest margin(1)(3)


3.65


3.56Tangible equity ratio(6)


7.22


6.56Tier 1 risk-based capital ratio(2)


7.96


8.68Total risk-based capital ratio(2)


10.84


11.54Leverage ratio(2)


7.95


7.89Allowance for loan losses to(7):Total loans


1.14


2.21Nonaccrual loans


243.59


98.14Allowance for credit losses to(8):Total loans


1.37


2.55Nonaccrual loans


291.42


113.24Net loans charged off to average total loans(3)


0.20


1.09Nonperforming assets to total loans andforeclosed assets


0.49


2.34Nonperforming assets to total assets(2)


0.37


1.55


---

7

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Table of Contents

Item 1.   Financial Statements

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Statements of Income  (Unaudited)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,(Amounts in thousands)

2008

2009

2008

2009Interest IncomeLoans

$
615,656

$
584,532

$
1,247,242

$
1,186,374Securities


97,938


98,385


203,578


201,282Interest bearing deposits in banks


228


3,550


356


4,450Federal funds sold and securities purchased under resale agreements


1,093


97


3,786


238Trading account assets


1,042


210


3,501


360Total interest income


715,957


686,774


1,458,463


1,392,704Interest ExpenseDeposits


144,509


100,186


365,169


205,224Federal funds purchased and securities sold under repurchase agreements


13,057


19


28,772


72Commercial paper


8,279


954


18,071


2,546Medium- and long-term debt


19,692


29,415


39,149


56,944Trust notes


238


238


476


476Other borrowed funds


19,624


5,616


35,690


17,093Total interest expense


205,399


136,428


487,327


282,355Net Interest Income


510,558


550,346


971,136


1,110,349Provision for loan losses


95,000


360,000


167,000


609,000Net interest income after provision for loan losses


415,558


190,346


804,136


501,349Noninterest IncomeService charges on deposit accounts


77,706


71,843


152,442


143,165Trust and investment management fees


43,802


34,130


87,190


68,037Trading account activities


16,687


16,251


27,699


38,943Merchant banking fees


11,085


19,924


22,878


33,756Brokerage commissions and fees


10,635


8,506


20,494


16,813Card processing fees, net


8,167


8,124


15,931


15,660Securities losses, net





(172
)

(2
)

(172
)Other


31,544


24,607


68,390


41,727Total noninterest income


199,626


183,213


395,022


357,929Noninterest ExpenseSalaries and employee benefits


243,299


233,057


484,969


476,620Net occupancy


38,232


43,222


74,434


85,143Intangible asset amortization


670


40,281


1,340


81,168Regulatory agencies


4,897


52,836


7,506


70,774Outside services


20,295


22,948


37,304


41,782Professional services


15,931


19,489


30,528


35,427Equipment


15,141


16,602


30,488


32,015Software


14,409


14,205


29,204


29,243Foreclosed asset expense


83


3,282


172


4,168Provision for losses on off-balance sheet commitments


5,000


15,000


13,000


41,000Privatization-related expense





7,433





34,252Other


61,355


63,703


113,573


121,849Total noninterest expense


419,312


532,058


822,518


1,053,441Income (loss) from continuing operations before income taxes


195,872


(158,499
)

376,640


(194,163
)Income tax expense (benefit)


61,574


(78,492
)

119,944


(104,348
)Income (Loss) from Continuing Operations


134,298


(80,007
)

256,696


(89,815
)Income (loss) from discontinued operations before income taxes


3,068





(14,517
)

Income tax benefit


(3,979
)




(7,756
)

Income (Loss) from Discontinued Operations


7,047





(6,761
)

Net Income (Loss)

$
141,345

$
(80,007
)
$
249,935

$
(89,815
)


See accompanying notes to condensed consolidated financial statements.

8

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Balance Sheets  (Unaudited)

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009AssetsCash and due from banks

$
1,800,313

$
1,568,578

$
1,285,780Interest bearing deposits in banks


65,788


2,872,698


8,556,837Federal funds sold and securities purchased under resale agreements


172,345


63,069


198,955Total cash and cash equivalents


2,038,446


4,504,345


10,041,572Trading account assets:Pledged as collateral





6,283


51,714Held in portfolio


1,136,416


1,210,496


853,922Securities available for sale:Pledged as collateral


1,079,491


54,525


Held in portfolio


7,396,824


8,140,013


7,403,173Securities held to maturity (fair value: June 30, 2009, $1,112,813)








1,171,380Loans (net of allowance for loan losses: June 30, 2008, $526,401; December 31, 2008, $737,767; June 30, 2009, $1,081,633)


45,514,957


48,847,783


47,814,887Due from customers on acceptances


21,272


23,131


19,944Premises and equipment, net


480,366


680,004


664,673Intangible assets, net


5,117


713,485


641,406Goodwill


355,287


2,369,326


2,369,326Other assets


2,559,694


3,571,995


2,952,791Assets of discontinued operations to be disposed or sold


6,051


4


Total assets

$
60,593,921

$
70,121,390

$
73,984,788LiabilitiesNoninterest bearing

$
13,440,290

$
13,566,873

$
14,926,564Interest bearing


29,164,129


32,482,896


43,412,395Total deposits


42,604,419


46,049,769


58,338,959Federal funds purchased and securities sold under repurchase agreements


2,296,587


172,758


203,205Commercial paper


1,397,159


1,164,327


492,127Other borrowed funds


4,719,809


8,196,597


606,019Trading account liabilities


892,240


1,034,663


690,704Acceptances outstanding


21,272


23,131


19,944Other liabilities


1,012,403


1,685,412


1,059,508Medium- and long-term debt


2,809,329


4,288,488


5,131,068Junior subordinated debt payable to subsidiary grantor trust


14,206


13,980


13,754Liabilities of discontinued operations to be extinguished or assumed


117,707


7,960


Total liabilities


55,885,131


62,637,085


66,555,288Commitments, contingencies and guaranteesSee Note 16Stockholder's EquityPreferred stock:Authorized 5,000,000 shares; no shares issued or outstanding as of June 30, 2008, December 31, 2008 and June 30, 2009








Common stock, par value $1 per share:Authorized 300,000,000 shares; issued 157,811,268 shares as of June 30, 2008, 136,330,829 shares as of December 31, 2008 and 136,330,829 shares as
of June 30, 2009


157,811


136,331


136,331Additional paid-in capital


1,182,978


3,195,023


3,195,023Treasury stock: 19,760,597 shares as of June 30, 2008, no shares as of December 31, 2008 and June 30, 2009


(1,204,469
)




Retained earnings


5,018,601


4,964,802


4,874,987Accumulated other comprehensive loss


(446,131
)

(811,851
)

(776,841
)Total stockholder's equity


4,708,790


7,484,305


7,429,500Total liabilities and stockholder's equity

$
60,593,921

$
70,121,390

$
73,984,788


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Statements of Changes in Stockholder's 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
stockholder's
equityBALANCE DECEMBER 31, 2007


157,559,521

$
157,559

$
1,153,737

$
(1,202,584
)
$
4,912,392

$
(283,123
)
$
4,737,981Comprehensive income:Net incomeFor the six months ended June 30, 2008














249,935





249,935Other comprehensive income (loss), net of tax:Net change in unrealized gains on cash flow hedges

















14,251


14,251Net change in unrealized losses on securities available for sale

















(181,747
)

(181,747
)Foreign currency translation adjustment

















(217
)

(217
)Net change in pension and other benefits

















4,705


4,705Total comprehensive income, net of tax




















86,927EITF 06-4 adjustment














(236
)




(236
)EITF 06-11 adjustment








162











162Stock options exercised


249,163


249


9,842











10,091Restricted stock granted, net of forfeitures


2,584


3


(3
)










Excess tax benefitstock-based compensation








190











190Compensation expensestock options








6,781











6,781Compensation expenserestricted stock








8,733











8,733Compensation expenserestricted stock units, performance share units and other share-based compensation








3,536











3,536Common stock repurchased(1)











(1,885
)







(1,885
)Dividends declared on common stock, $1.04 per share(2)














(143,490
)




(143,490
)Net change





252


29,241


(1,885
)

106,209


(163,008
)

(29,191
)BALANCE JUNE 30, 2008


157,811,268

$
157,811

$
1,182,978

$
(1,204,469
)
$
5,018,601

$
(446,131
)
$
4,708,790BALANCE DECEMBER 31, 2008


136,330,829

$
136,331

$
3,195,023

$


$
4,964,802

$
(811,851
)
$
7,484,305Comprehensive loss:Net lossFor the six months ended June 30, 2009














(89,815
)




(89,815
)Other comprehensive income (loss), net of tax:Net change in unrealized gains on cash flow hedges(3)

















(13,577
)

(13,577
)Net change in unrealized losses on securities(3)

















40,985


40,985Foreign currency translation adjustment

















201


201Net change in pension and other benefits

















7,401


7,401Total comprehensive loss, net of tax




















(54,805
)Net change














(89,815
)

35,010


(54,805
)BALANCE JUNE 30, 2009


136,330,829

$
136,331

$
3,195,023

$


$
4,874,987

$
(776,841
)
$
7,429,500


---

See accompanying notes to condensed consolidated financial statements.

10

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Statements of Cash Flows  (Unaudited)

For the Six Months
Ended June 30,(Dollars in thousands)

2008

2009Cash Flows from Operating Activities:Net income (loss)

$
249,935

$
(89,815
)Loss from discontinued operations, net of taxes


(6,761
)

Income (loss) from continuing operations, net of taxes


256,696


(89,815
)Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for loan losses


167,000


609,000Provision for losses on off-balance sheet commitments


13,000


41,000Depreciation, amortization and accretion


56,405


81,551Stock-based compensationstock options and other share-based compensation


19,050


Provision for (reversal of) deferred income taxes


60,065


(34,590
)Net losses on sales of securities


2


172Net decrease in accrued expenses


(250,868
)

(253,101
)Net (increase) decrease in trading account assets


(533,083
)

311,143Net increase (decrease) in trading account liabilities


541,183


(343,959
)Net increase in prepaid expenses


(7,243
)

(23,188
)Net increase in fees and other receivables


(14,961
)

(55,404
)Net increase (decrease) in other liabilities


185,301


(413,091
)Net increase in other assets


(159,142
)

(326,619
)Loans originated for resale


(382,759
)

(64,953
)Net proceeds from sale of loans originated for resale


258,831


37,531Excess tax benefitstock-based compensation


(190
)

Other, net


6,588


31,430Discontinued operations, net


84,721


(6,027
)Total adjustments


43,900


(409,105
)Net cash provided by (used in) operating activities


300,596


(498,920
)Cash Flows from Investing Activities:Proceeds from sales of securities available for sale


10,300


24,234Proceeds from matured and called securities available for sale


807,237


1,191,246Purchases of securities available for sale


(1,132,494
)

(1,513,612
)Proceeds from matured securities held to maturity





2,366Purchases of premises and equipment, net


(43,141
)

(38,854
)Net (increase) decrease in loans


(4,767,468
)

442,279Other, net


(32
)

(1,566
)Discontinued operations, net


3,732


Net cash provided by (used in) investing activities


(5,121,866
)

106,093Cash Flows from Financing Activities:Net increase (decrease) in deposits


(75,772
)

12,289,190Net increase in federal funds purchased and securities sold under repurchase agreements


664,985


30,447Net increase (decrease) in commercial paper and other borrowed funds


2,974,693


(7,262,778
)Proceeds from issuance of medium- and long-term debt


901,000


1,625,000Repayment of medium-term debt





(750,000
)Common stock repurchased


(1,885
)

Payments of cash dividends


(143,462
)

Stock options exercised


10,281


Other, net


(217
)

201Discontinued operations, net


7,905


(1,929
)Net cash provided by financing activities


4,337,528


5,930,131Net increase (decrease) in cash and cash equivalents


(483,742
)

5,537,304Cash and cash equivalents at beginning of period


2,521,633


4,504,345Effect of exchange rate changes on cash and cash equivalents


555


(77
)Cash and cash equivalents at end of period

$
2,038,446

$
10,041,572Cash Paid During the Period For:Interest

$
506,653

$
304,247Income taxes, net


147,689


289,040Supplemental Schedule of Noncash Investing and Financing Activities:Securities available for sale transferred to securities held to maturity

$


$
1,144,036Loans transferred to foreclosed assets (OREO)


8,612


32,371


See accompanying notes to condensed consolidated financial statements.

11

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Table of Contents

UnionBanCal Corporation and Subsidiaries        Notes to Condensed Consolidated Financial Statements        (Unaudited)

Note 1Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in
the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial
statements in conformity with US GAAP. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.
The results of operations for the period ended June 30, 2009 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in UnionBanCal Corporation's Annual Report on Form 10-K
for the year ended December 31, 2008 (2008 Form 10-K). The preparation of financial statements in conformity with US GAAP also requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ compared to those estimates.

UnionBanCal
Corporation is a financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial 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.

On
November 4, 2008, the Company became a privately held company (privatization transaction). All of the Company's issued and outstanding shares of common stock are owned by The
Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU). Prior to the transaction, BTMU owned approximately 64 percent of the Company's outstanding shares of common stock.

See
Note 3 to these condensed consolidated financial statements in this Form 10-Q for additional information on the Company's privatization transaction.

Note 2Recently Issued Accounting Pronouncements



In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 141(R), "Business Combinations," which replaces SFAS No. 141. The Statement requires that all business combinations be accounted for under the "acquisition method." The Statement
requires that the assets, liabilities and noncontrolling interests of a business combination be measured at fair value at the acquisition date. The acquisition date is defined as the date an acquirer
obtains control of the entity, which is typically the closing date. The Statement requires that all acquisition and restructuring related costs be expensed as incurred and that any contingent
consideration be measured at fair value and recorded as either equity or a liability with the liability remeasured at fair value in subsequent periods. The Statement was effective January 1,
2009. At adoption, there was no impact on the Company's financial position or results of operations.

12

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan
amendment to ARB No. 51." The Statement requires that a noncontrolling interest (formerly minority interest) be measured at fair value at the acquisition date and be presented in the equity
section on the balance sheet. The Statement requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions with no resulting
gain or loss. If control is lost, the noncontrolling interest is remeasured to fair value and a gain or loss is recorded. The Statement was effective January 1, 2009. At adoption, there was no
impact on the Company's financial position or results of operations.



In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan
amendment of FASB Statement No. 133." The Statement requires expanded qualitative, quantitative and credit-risk disclosures of derivative instruments and hedging activities. These
disclosures include more detailed information about gains and losses, location of derivative instruments in financial statements, and credit-risk-related contingent features in
derivative instruments. The Statement also clarifies that derivative instruments are subject to concentration of credit risk disclosures under SFAS No. 107, "Disclosure About Fair Value of
Financial Instruments." The Statement, which applies only to disclosures, was effective January 1, 2009. Disclosures required under this Statement are included in Note 13 to these
condensed consolidated financial statements.



In April 2008, the FASB issued Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible
Assets." The FSP requires that an entity consider its own assumptions about the renewal or extension period, adjusted for entity-specific factors, when determining the useful life of a recognized
intangible asset. In the absence of that experience an entity should consider market participant assumptions. The FSP was effective January 1, 2009. At adoption there was no impact on the
Company's financial position or results of operations.



In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan
Assets," which expands the disclosure requirements related to an employer's defined benefit pension or other postretirement plan set forth in FAS No. 132 (R), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The FSP requires additional disclosure information, including how a company makes investment allocation decisions, the fair value of each major category of
plan assets and the nature and amount of concentration risk within or across those plan asset categories. Additionally, the FSP requires disclosures about the valuation of plan assets similar to those
required in SFAS No. 157, "Fair Value Measurements," including the level within the fair value hierarchy in which fair value measurements of plan assets fall and information about the inputs
and valuation techniques used to measure the fair value of plan assets. The FSP, which applies only to disclosures, is effective December 31, 2009.

13

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In April 2009, the FASB issued FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies." The FSP requires that an asset or liability assumed in a business combination that arises from a contingency be recognized at fair value on the
acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined during the measurement period, the accounting for the acquired contingency should
follow the guidance of SFAS No. 5, "Accounting for Contingencies." The FSP was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results
of operations.



In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB) 28-1,
"Interim Disclosures about Fair Value of Financial Instruments." The FSP requires the fair value disclosure of financial instruments mandated by SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" to be reported for interim periods. The FSP, which applies only to disclosures, was effective April 1, 2009. Disclosures required under this FSP are included in
Note 12 to these condensed consolidated financial statements.



In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." The FSP provides additional guidance for estimating fair value under SFAS No. 157, "Fair
Value Measurements," when the volume and level of activity for an asset or liability has significantly decreased. The FSP provides factors to consider when determining whether there has been a
significant decline in volume or level of activity. The FSP
also affirms that the objective of a fair value measurement is the price that would be received to sell an asset in an orderly transaction under current market conditions, even if the market is
inactive. The FSP was effective April 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.



In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments." The FSP amends guidance for the determination and recognition of other-than-temporary impairment related to debt
securities. The FSP establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. A
company is required to assert whether it intends or it is more likely than not that it will need to sell a security with an unrealized loss before full recovery of the amortized cost basis. If it is
likely that a security will be sold prior to full recovery, the security must be written down to its current fair value and the entire loss recognized in earnings immediately. If it is likely that the
security will not be sold prior to recovery, but the amortized cost basis will not be collected, the security must be written down to its current fair value. However, in that case, only the credit
loss component shall be recognized in earnings immediately with the remaining

14

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)

non-credit
related loss portion recorded in other comprehensive income. The FSP was effective April 1, 2009. At adoption, there was no impact on the Company's financial position or
results of operations.



In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which requires an evaluation of events or transactions that
occur after the balance sheet date through the date that the financial statements are issued or available to be issued. The Statement also provides guidance about when such a subsequent event should
be recognized in the financial statements and requires the disclosure of the date through which subsequent events were evaluated and whether that represents the date the financial statements were
issued or available to be issued. The Statement was effective June 30, 2009. At adoption, there was no impact on the Company's financial position or results of operations. Disclosures required
under this statement are included in Note 18 to these condensed consolidated financial statements.



In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets-an
amendment of FASB Statement 140."The Statement amends transfer of financial asset guidance to eliminate the concept of qualifying special purpose entities (QSPEs) and modifies
financial asset derecognition guidance. The elimination of the QSPE concept will require many sponsors to consolidate these vehicles. The derecognition modifications require that companies consider
all arrangements such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates when determining whether derecognition is appropriate for a
transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a participating interest. The guidance also requires that all
beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are also amended to require the disclosure of a company's continuing involvement with
transferred financial assets and details regarding financial or other support provided. The Statement is effective January 1, 2010. Management is currently evaluating the impact this Statement
may have on the Company's financial position and results of operations.



In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)."The Statement amends consolidation guidance related to variable interest entities (VIEs) by changing the approach for determining the primary beneficiary of
a VIE. A company would be required to determine the primary beneficiary of a VIE based on a qualitative assessment of the power and economic structure and to continually reassess that conclusion. The
Statement also states that if power is shared by multiple parties such that no one party has the power to direct the activities of the VIE, no party shall consolidate the VIE. Disclosures are also
amended to require disclosure of continuing involvement with VIEs and judgments used in the consolidation analysis such as the method, significant judgments and assumptions used for determining the
primary beneficiary. The Statement is effective January 1, 2010. Management is currently evaluating the impact this Statement may have on the Company's financial position and results of
operations.

15

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162."The Statement establishes the FASB Accounting Standards
Codification (Codification) as the single source of authoritative US GAAP. The Codification does not significantly change current US GAAP and merely restructures the information in a
topical format. The Codification is effective July 1, 2009. Management believes that, upon adoption, this Statement will not have a material impact on the Company's financial position or
results of operations.

Note 3Privatization

The privatization transaction was accounted for as a business combination and the purchase price was pushed down to the Company's consolidated financial statements. Accordingly, the
purchase price paid by BTMU plus related purchase accounting adjustments were reflected on the Company's consolidated balance sheet as of October 1, 2008. This resulted in a new basis of
accounting which reflects an adjustment for the estimated fair value of the Company's assets and liabilities.

After
all of the fair value adjustments to the Company's assets and liabilities were assigned, the remainder of the purchase price was recorded as goodwill. The fair value adjustments
are subject to revision for up to one year after the close of the privatization transaction in the event that better estimates are developed based on additional information. As of June 30,
2009, there were no revisions to the fair value adjustments.

The
amortization (accretion) of the fair value adjustments by category for the three and six months ended June 30, 2009, respectively, were $40 million and
$80 million for intangibles, $2 million and $4 million for
premises and equipment, ($22) million and ($55) million for loans, $4 million and $7 million for cash flow hedges, ($10) million and ($17) million for securities, and $1 million
and $2 million for debt.

During
the three and six months ended June 30, 2009, the Company recorded expenses for the privatization transaction of $7 million and $34 million, respectively,
which primarily consisted of compensation expense for amortization of bridge award compensation.

16

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.

Securities Available for Sale

December 31, 2008

June 30, 2009(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueOther U.S. government

$
761,000

$
17,988

$


$
778,988

$
697,942

$
12,188

$
434

$
709,696Residential mortgage-backed securities


6,010,860


87,803


136,630


5,962,033


6,388,334


157,029


99,055


6,446,308State and municipal


52,749


2,185


87


54,847


48,353


1,926


65


50,214Asset-backed and debt securities


1,837,287


48,921


597,310


1,288,898


113,405





16,435


96,970Equity securities


109,919


126


355


109,690


100,156


158


417


99,897Foreign securities


82








82


88








88Total securities available for sale

$
8,771,897

$
157,023

$
734,382

$
8,194,538

$
7,348,278

$
171,301

$
116,406

$
7,403,173


Securities Held to Maturity

June 30, 2009Recognized in Other
Comprehensive Income (OCI)(2)



Not recognized in
OCI(2)(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueCollateralized loan obligations (CLOs)

$
1,736,180

$


$
564,800

$
1,171,380

$
49,218

$
107,785

$
1,112,813Total securities held to maturity

$
1,736,180

$


$
564,800

$
1,171,380

$
49,218

$
107,785

$
1,112,813


---

For the three and six months ended June 30, 2009, interest income included $0.6 million and $1.3 million, respectively, from
non-taxable securities.

Transfer of Securities from Available for Sale to Held to Maturity

The Company's collateralized loan obligations (CLOs) consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that
securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and
principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, management
reassessed the classification of its CLOs. On February 28, 2009, the Company reclassified its CLOs, which totaled $1.1 billion

17

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

at
fair value, from available for sale to held to maturity. The related unrealized pre-tax loss of $589 million included in accumulated OCI remained in OCI and is being amortized as
a yield adjustment through earnings over the remaining terms of the CLOs. However, there is no impact on earnings, as an equal fair value discount on the securities is being accreted through earnings
over the remaining terms of the CLOs. No gain or loss was recognized at the time of reclassification. Accordingly, no change was recorded in the amortized cost basis of the securities as a result of
the transfer. The Company considers the held to maturity classification to be more appropriate because the Company has the ability and the intent to hold these securities to maturity.

The
amortized cost and fair value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right
to call or prepay obligations, with or without call or prepayment penalties.

Maturity Schedule of Securities

Securities Available for Sale(1)

June 30, 2009(Dollars in thousands)

Amortized
Cost(3)

Fair
ValueDue in one year or less

$
203,076

$
206,962Due after one year through five years


803,152


815,420Due after five years through ten years


1,419,870


1,455,758Due after ten years


4,822,024


4,825,136Equity securities(2)


100,156


99,897Total securities available for sale

$
7,348,278

$
7,403,173


Securities Held to Maturity

June 30, 2009(Dollars in thousands)

Amortized
Cost(3)

Fair
ValueDue in one year or less

$


$
Due after one year through five years


7,628


5,893Due after five years through ten years


1,196,858


813,233Due after ten years


531,694


293,687Total securities held to maturity

$
1,736,180

$
1,112,813


---

18

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

For the six months ended June 30 2009, proceeds from sales of securities available for sale were $24.2 million with gross realized
gains of $0.6 million and no gross realized losses. The specific identification method is used to calculate realized gains and losses.

Analysis of Unrealized Losses on Securities

At December 31, 2008 and June 30, 2009, the Company's securities, shown below, were in a continuous unrealized loss
position for the periods less than 12 months and 12 months or more.

Securities Available for Sale

December 31, 2008Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$


$





$


$





$


$



Residential mortgage-backed securities


519,865


54,567


35


791,135


82,063


93


1,311,000


136,630


128State and municipal


3,242


74


5


1,669


13


7


4,911


87


12Asset-backed and debt securities


38,221


9,261


3


1,088,480


588,049


218


1,126,701


597,310


221Equity securities


5,085


355


3











5,085


355


3Total securities available for sale

$
566,413

$
64,257


46

$
1,881,284

$
670,125


318

$
2,447,697

$
734,382


364




June 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$
151,379

$
434


4

$


$





$
151,379

$
434


4Residential mortgage-backed securities


746,712


4,962


22


766,918


94,093


63


1,513,630


99,055


85State and municipal


2,942


19


9


2,090


46


8


5,032


65


17Asset-backed and debt securities


5,693


1,112


2


91,277


15,323


13


96,970


16,435


15Equity securities


156


37


1


38


380


1


194


417


2Total securities available for sale

$
906,882

$
6,564


38

$
860,323

$
109,842


85

$
1,767,205

$
116,406


123


19

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

Securities Held to Maturity

June 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountCollateralized loan obligations

$
76,848

$
33,365


20

$
1,035,965

$
639,220


202

$
1,112,813

$
672,585


222Total securities held to maturity

$
76,848

$
33,365


20

$
1,035,965

$
639,220


202

$
1,112,813

$
672,585


222


The Company's securities are primarily investments in debt securities. Debt securities available for sale and debt securities held to maturity are
subject to quarterly impairment testing when a security's fair value is lower than its amortized cost. Debt securities with unrealized losses are considered
other-than-temporarily impaired if the Company intends to sell the security, if it is more likely than not that the Company will be required to sell the security before
recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of the security. Any impairment on securities the Company intends or is more likely than
not required to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities the Company does not intend or it is not more likely
than not required to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings,
and the amount related to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows,
discounted using the security's effective interest rate, and the amortized cost of the security.

The
following describes the nature of the Company's investments, the causes of impairment, the severity and duration of the impairment, if applicable, and the conclusions reached on the
temporary or other-than-temporary status of the unrealized losses.

At
June 30, 2009, the Company does not have the intent to sell temporarily impaired securities until a recovery of the fair value, which may be maturity, and it is more likely
than not that the Company will not have to sell the securities prior to recovery of fair value.



Other U.S. Government securities are securities issued by one of the several Government-Sponsored Enterprises (GSEs) such as Fannie
Mae, Freddie Mac, Federal Home Loan Banks or Federal Farm Credit Banks. They are not backed by the full faith and credit of the United States government. These securities are issued with a stated
interest rate and mature in less than five years. The unrealized losses on other U.S. Government securities resulted from rising interest rates subsequent to purchase and not credit quality. As a
result, the securities were not other-than-temporarily impaired at June 30, 2009.



Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie
Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The fair value of agency mortgage-backed securities in a loss position and the
related unrealized losses at June 30, 2009 was $1,076.1 million and $8.6 million, respectively. The

20

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

unrealized
losses on these securities resulted from rising interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than temporarily
impaired at June 30, 2009.

Non-agency
residential mortgage backed securities are issued by financial institutions with no guarantee from GSEs. These securities are collateralized by residential
mortgage loans and may be prepaid at par prior to maturity. The securities are primarily AAA rated. The fair value of non-agency mortgage-backed securities in a loss position and the
related unrealized losses at June 30, 2009 was $437.5 million and $90.4 million, respectively. The unrealized losses on these securities resulted from rising interest rates
subsequent to purchase and additional credit spreads widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. Based on
this assessment of expected credit losses of each security, the Company concluded these securities were not other-than temporarily impaired at June 30, 2009.



State and municipal securities are primarily securities issued by state and local governments to finance operating expenses and various
projects. These securities are issued at a stated interest rate and have varying expected maturities ranging up to 30 years. The unrealized losses on the state and municipal securities resulted
from rising interest rates subsequent to purchase and not from credit quality. As a result, the securities were not other-than-temporarily impaired at June 30, 2009.



Asset-backed and debt securities in a loss position at June 30, 2009 consist of $92.1 million in privately placed debt
securities issued by power and utilities companies and $4.9 million in commercial mortgage-backed securities. Expected cash flows of debt securities to power and utilities companies are
assessed to determine if the amortized cost basis of the securities is recoverable. Based on this assessment, the Company concluded that these securities were not
other-than-temporarily impaired as of June 30, 2009.



CLOs are classified as held to maturity (see discussion above). Certain of these CLOs are highly illiquid securities for which fair
values are difficult to obtain. Unrealized losses arise from rising interest rates, widening credit spreads, credit quality of the underlying collateral, uncertainty
regarding the valuation of such securities and the market's opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an estimate of
other-than-temporary impairment, which is performed quarterly on lower rated securities. Any security with a change in credit rating is also subject to cash flow analysis to
determine whether or not an other-than-temporary impairment exists. The fair value of the CLO portfolio was adversely impacted in 2008 and 2009 by the overall financial market
crisis. Although none of the CLOs in the Company's portfolio contain subprime loan assets, widening credit spreads caused their value to decline. An analysis was performed as of June 30, 2009,
in accordance with FSP FAS 115-2 and FAS 124-2. Based on this analysis, an insignificant amount of impairment was recognized on one CLO security. Since no
observable credit quality issues were present in the remaining CLO portfolio at June 30, 2009, the Company concluded that these securities were not other-than-temporarily impaired.

21

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)



Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of
securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the
same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

The
Company reports securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. Trading securities pledged
as collateral, which totaled $51.7 million at June 30, 2009, have been separately identified in the condensed consolidated balance sheet. If the secured party cannot resell or repledge
the securities that have been placed as collateral, those securities are not separately identified. At June 30, 2009, the Company had $4.3 billion of securities available for sale
pledged as collateral where the secured party can not resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($0.4 billion), to support
unrealized losses on derivative transactions reported in trading liabilities ($0.3 billion) and to secure public and trust department deposits ($3.6 billion).

At
June 30, 2009, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $199.0 million, which included $168.0 million
of collateral received that has been repledged
to secure bankruptcy deposits. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.

Note 5Loans and Allowance for Loan Losses

A summary of loans, net of unearned interest and deferred fees (costs) of ($10) million, $14 million and $48 million, at June 30, 2008, December 31, 2008 and
June 30, 2009, respectively, is as follows:

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009Commercial, financial and industrial

$
16,602,393

$
18,469,023

$
17,064,253Construction


2,622,740


2,744,062


2,791,583Mortgage:Residential


14,852,058


15,880,835


16,216,264Commercial


7,912,592


8,186,388


8,255,659Total mortgage


22,764,650


24,067,223


24,471,923Consumer:Installment


1,957,379


2,201,602


2,353,090Revolving lines of credit


1,295,047


1,435,494


1,508,078Total consumer


3,252,426


3,637,096


3,861,168Lease financing


640,612


645,765


657,339Total loans held to maturity


45,882,821


49,563,169


48,846,266Total loans held for sale


158,537


22,381


50,254Total loans


46,041,358


49,585,550


48,896,520Allowance for loan losses


526,401


737,767


1,081,633Loans, net

$
45,514,957

$
48,847,783

$
47,814,887


22

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Loans and Allowance for Loan Losses (Continued)

Changes
in the allowance for loan losses were as follows:

For the Six Months
Ended June 30,(Dollars in thousands)

2008

2009Allowance for loan losses, beginning of period

$
402,726

$
737,767Loans charged off


46,545


271,050Recoveries of loans previously charged off


3,411


3,093Total net loans charged off


43,134


267,957Provision for loan losses


167,000


609,000Adjustments related to privatization





2,062Foreign translation adjustment


(191
)

761Allowance for loan losses, end of period


526,401


1,081,633Allowance for losses on off-balance sheet commitments


103,374


166,374Allowances for credit losses, end of period

$
629,775

$
1,248,007


The
provision for loan losses increased by $442 million to $609 million for the six months ended June 30, 2009, primarily due to higher criticized assets, especially
in the commercial real estate portfolio, higher nonaccrual loans and increase in certain loss factors related to the consumer and small business portfolios.

Nonaccrual
loans totaled $216.1 million and $1.1 billion at June 30, 2008 and 2009, respectively. There were $1.5 million and $11.0 million
($1.5 million of which are on accrual status at June 30, 2009) of troubled debt restructured loans at June 30, 2008 and 2009, respectively. Effective January 1, 2009,
consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in
foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans
were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans totaling $167.7 million
($5.7 million of which are restructured loans) have been placed on nonaccrual status as of June 30, 2009. Loans 90 days or more past due and still accruing totaled
$51.2 million and $4.0 million at June 30, 2008 and 2009, respectively.

Note 6Goodwill and Intangible Assets

As part of the Company's privatization transaction, the Company recorded goodwill of $2,014 million and intangible assets of $752 million. See Note 3 to these
condensed consolidated financial statements in this Form 10-Q for information on the Company's privatization transaction.



There were no changes in the carrying amount of goodwill during the six months ended June 30, 2008 and 2009. The carrying amount
of goodwill at June 30, 2008 and 2009 was $355 million and $2.4 billion respectively.

23

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Goodwill and Intangible Assets (Continued)

The
Company reviews its goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The annual
goodwill impairment test as of January 1, 2009 was performed during the first quarter of 2009, and no impairment was recognized.

During
the second quarter of 2009, the Company changed the date of its annual goodwill impairment test from January 1st to April 1st. The change was made to more
closely align the impairment testing date with the testing date used by BTMU, as the Company became a wholly owned subsidiary in the fourth quarter of 2008.

The
change in goodwill impairment testing date is deemed a change in accounting principle. Management believes that the change in accounting principle will not delay, accelerate, or
avoid a goodwill impairment charge. Management determined that the change in accounting principle is preferable under the circumstances and does not result in adjustments to the Company's financial
statements when applied retrospectively.

In
order to transition to the new annual goodwill impairment test date and to ensure that no more than twelve months elapse before the next annual goodwill impairment test is performed,
goodwill impairment testing as of April 1, 2009 was performed during the second quarter of 2009. No impairment was recognized.



The table below reflects the Company's identifiable intangible assets and accumulated amortization at June 30, 2008,
December 31, 2008 and June 30, 2009.

June 30, 2008

December 31, 2008

June 30, 2009(Dollars in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountCore deposit intangibles

$
43,114

$
(37,997
)
$
5,117

$
619,398

$
(79,585
)
$
539,813

$
619,397

$
(156,313
)
$
463,084Trade name











108,733


(683
)

108,050


108,733


(2,057
)

106,676Customer relationships











53,761


(1,323
)

52,438


53,761


(3,427
)

50,334Other











9,555





9,555


9,555


(962
)

8,593Subtotalintangibles with a definite useful life

$
43,114

$
(37,997
)
$
5,117

$
791,447

$
(81,591
)
$
709,856

$
791,446

$
(162,759
)
$
628,687Other intangibles with an indefinite useful life











3,629





3,629


12,719





12,719Total intangibles

$
43,114

$
(37,997
)
$
5,117

$
795,076

$
(81,591
)
$
713,485

$
804,165

$
(162,759
)
$
641,406


Total amortization expense for the six months ended June 30, 2008 and 2009 was $1.3 million and $81.2 million, respectively.

24

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Goodwill and Intangible Assets (Continued)

Estimated
future amortization expense at June 30, 2009 is as follows.

(Dollars in thousands)

Core Deposit
Intangibles (CDI)

Trade Name

Customer
Relationships

Other

Total identifiable
intangible assetsEstimated amortization expense for the years ending:Remaining 2009

$
76,728

$
1,373

$
2,104

$
913

$
81,1182010


114,029


2,747


4,246


1,497


122,5192011


88,016


2,747


3,968


1,490


96,2212012


69,259


2,747


3,679


1,490


77,1752013


44,743


2,747


3,436


1,490


52,416Thereafter


70,309


94,315


32,901


1,713


199,238Total estimated amortization expense

$
463,084

$
106,676

$
50,334

$
8,593

$
628,687


In
the second quarter of 2009, the Company acquired an asset management business and recorded $9.1 million of identifiable intangible assets. These identifiable intangible assets
have been determined to have indefinite lives and therefore will not be amortized.

Note 7Employee Pension and Other Postretirement Benefits

The following tables summarizes the components of net periodic benefit cost for the three and six months ended June 30, 2008 and 2009.

Pension Benefits

Other Benefits

Superannuation,
SERP and ESBPFor the Three Months
Ended June 30,

For the Three Months
Ended June 30,

For the Three Months
Ended June 30,(Dollars in thousands)

2008

2009

2008

2009

2008

2009Components of net periodic benefit costService cost

$
12,521

$
12,571

$
1,939

$
2,332

$
234

$
256Interest cost


19,329


20,723


2,700


3,055


930


941Expected return on plan assets


(33,413
)

(35,086
)

(3,376
)

(2,501
)




Amortization of prior service cost








(23
)

(16
)

51


Amortization of transition amount








510


328





Recognized net actuarial loss


2,328


3,036


603


2,153


423


305Total net periodic benefit cost

$
765

$
1,244

$
2,353

$
5,351

$
1,638

$
1,502


25

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 7Employee Pension and Other Postretirement Benefits (Continued)



Pension Benefits

Other Benefits

Superannuation, SERP and ESBPFor the Six Months
Ended June 30,

For the Six Months
Ended June 30,

For the Six Months
Ended June 30,(Dollars in thousands)

2008

2009

2008

2009

2008

2009Components of net periodic benefit costService cost

$
25,568

$
26,188

$
4,037

$
4,664

$
470

$
511Interest cost


38,823


41,534


5,642


6,110


1,861


1,882Expected return on plan assets


(66,822
)

(70,305
)

(6,739
)

(5,002
)




Amortization of prior service cost








(48
)

(31
)

101


Amortization of transition amount








1,018


656





Recognized net actuarial loss


4,966


6,090


1,681


4,306


846


1,171Total net periodic benefit cost

$
2,535

$
3,507

$
5,591

$
10,703

$
3,278

$
3,564


Note 8Other Noninterest Income and Noninterest Expense

The details of other noninterest income and noninterest expense are as follows.

Other Noninterest Income

For the Three Months
Ended

For the Six Months
Ended(Dollars in thousands)

June 30,
2008

June 30,
2009

June 30,
2008

June 30,
2009Gains (losses) on private capital investments, net

$
1,282

$
(1,123
)
$
2,352

$
(3,244
)Gain on the VISA IPO redemption








14,211


Other


30,262


25,730


51,827


44,971Total other noninterest income

$
31,544

$
24,607

$
68,390

$
41,727


Other Noninterest Expense

For the Three Months
Ended

For the Six Months
Ended(Dollars in thousands)

June 30,
2008

June 30,
2009

June 30,
2008

June 30,
2009Advertising and public relations

$
12,857

$
11,349

$
20,956

$
21,970Low income housing credit investment amortization


8,493


11,026


17,632


21,192Communications


9,111


9,192


18,486


17,910Data processing


7,784


8,042


14,860


16,617Other


23,110


24,094


41,639


44,160Total other noninterest expense

$
61,355

$
63,703

$
113,573

$
121,849


26

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9Income Taxes

The following table is an analysis of the effective tax rate on income (loss) from continuing operations:

For the Three
Months Ended
June 30,

For the Six
Months Ended
June 30,2008

2009

2008

2009Federal income tax rate


35
%

(35
)%

35
%

(35
)%Net tax effects of:State income taxes, net of federal income tax benefit


2


(2
)

3


Tax credits


(7
)

(11
)

(7
)

(18
)Other


1


(2
)

1


(1
)Effective tax rate


31
%

(50
)%

32
%

(54
)%


A
negative federal income tax rate in the above table indicates an expected income tax benefit on the loss from continuing operations before taxes.

The
change in the effective tax rate from the second quarter of 2008 was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current
year, as well as the impact of tax credits and state income taxes. The Company's effective tax rate for the second quarter of 2009 may not be indicative of the effective tax rate for future quarters
and the full year. In addition, the quarterly effective tax rate in 2009 is being computed on an individual quarterly basis, as compared to the Company's historical computation, which was based on an
estimated average
effective tax rate for the year. During 2009, the effective tax rate, which will be impacted by expected tax credits, is expected to vary from quarter to quarter in relation to changes in the
Company's pre-tax income or loss.

In
2008, California enacted a new statute mandating a 20 percent penalty on corporate tax underpayments outstanding after May 31, 2009. During the second quarter of 2009,
the Company filed amended tax returns and made payments of $187.0 million of tax and $43.7 million of interest with respect to tax positions taken in prior year worldwide unitary tax
returns, which primarily involved the method of apportionment of worldwide income to California. The payments were made in order to protect the Company from potential penalties that may be asserted by
the tax authorities. The Company intends to file refund claims and to defend its positions through negotiations with the California Franchise Tax Board and through the California courts, if necessary.
The payments did not affect the recognition or measurement of unrecognized state tax benefits under FIN 48, and they had no impact on income tax expense.

27

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 10Borrowed Funds

The following is a summary of the major categories of borrowed funds:

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 2.16%, 0.53% and 0.03% at June 30,
2008, December 31, 2008 and June 30, 2009, respectively(1)

$
2,296,587

$
172,758

$
203,205Commercial paper, with weighted average interest rates of 2.16%, 1.48%, and 0.47% at June 30, 2008, December 31, 2008 and June 30, 2009,
respectively(1)


1,397,159


1,164,327


492,127Other borrowed funds:Federal Home Loan Bank borrowings, with weighted average interest rates of 2.30%, 2.22% and 0.86% at June 30, 2008, December 31, 2008 and
June 30, 2009, respectively(1)


1,150,000


1,850,000


400,000Term federal funds purchased, with weighted average interest rates of 2.51%, 2.60% and 0.72% at June 30, 2008, December 31, 2008 and June 30,
 2009, respectively(1)


822,959


1,230,060


102,000Federal Reserve Bank Term Borrowings, with weighted average interest rate of 2.34% at June 30, 2008 and 0.79% at December 31, 2008(1)


2,650,000


5,000,000


All other borrowed, with weighted average interest rates of 4.78%, 5.42% and 1.29% at June 30, 2008, December 31, 2008 and June 30, 2009,
respectively(1)


96,850


116,537


104,019Total borrowed funds

$
8,413,555

$
9,533,682

$
1,301,351


---

28

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11Medium- and Long-Term Debt

The following is a summary of the Company's medium-term senior debt and long-term subordinated debt:

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009Medium-Term senior debt:Floating rate notes due March 2009. These notes bear interest at 0.02% above 3-month London Interbank Offered Rate (LIBOR)

$
750,000

$
750,000

$
Federal Home Loan Bank Advances: Floating, which is at a spread above 3-month LIBOR, or fixed rate, at a weighted average rate of 2.75% at June 30,
2008, 3.21% at December 31, 2008 and 2.38% at June 30, 2009


901,000


2,276,000


2,901,000Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.70% at June 30, 2009








500,000Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.82% at June 30, 2009








500,000Long-Term subordinated debt:Fixed rate 5.25% notes due December 2013


410,216


451,930


441,422Fixed rate 5.95% notes due May 2016


748,113


810,558


788,646Total medium- and long-term debt

$
2,809,329

$
4,288,488

$
5,131,068


In
March 2009, the Company's $750 million of floating rate notes matured at par plus accrued interest and were repaid.

As
of June 30, 2008, December 31, 2008 and June 30, 2009, the Company had pledged loans of $31.0 billion, $40.2 billion and $39.5 billion,
respectively, as collateral for short- and medium-term advances from the Federal Reserve Bank and Federal Home Loan Bank.

In
October 2008, the Federal Deposit Insurance Corporation (FDIC) established the Temporary Liquidity Guarantee (TLG) Program. On March 16, 2009, the Bank issued
$1.0 billion principal amount of Senior Floating Rate Notes under the TLG Program. The proceeds thereof were used for general corporate purposes. Of the $1.0 billion of senior notes,
$500 million in principal amount bear interest at a rate equal to three-month LIBOR plus 0.08% per annum and mature on March 16, 2011 (2011 Notes). The remaining $500 million in
principal amount bear interest at a rate equal to three-month LIBOR plus 0.20% per annum and mature on March 16, 2012 (2012 Notes). In connection with the FDIC guarantee under the TLG Program,
a fee of 1% per annum is charged to the Bank on the $1.0 billion of senior notes. The interest on the 2011 Notes and the 2012 Notes is payable and reset quarterly on the
16th of March, June, September and December of each year.

Under
the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity of more than 30 days and issued between October 14, 2008 and
October 31, 2009 is guaranteed by the full faith and credit of the United States. As of June 30, 2009, the Company had $1.3 billion of remaining capacity

29

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11Medium- and Long-Term Debt (Continued)

to
issue guaranteed debt under the TLG Program. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or June 30,
2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or December 31, 2012.

Note 12Fair Value Measurement and Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements," for most fair value measurements required for financial assets and liabilities.
Under FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," the Company deferred application of SFAS No. 157 for one year and adopted the
Statement effective January 1, 2009 for nonrecurring measurements of fair value for non-financial assets and liabilities, such as goodwill, intangible assets and other real estate
owned. At adoption, there was no effect on the Company's financial position or results of operations.



As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability
(i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company maximizes the use of observable market inputs
and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's
estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy established under
SFAS No. 157. This hierarchy is based on the quality and reliability of the information used to determine fair value.



In
assigning the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to SFAS No. 157. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant
to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be many significant inputs that are readily observable.

Valuation Methodologies

The Company has an established and documented process for determining fair value for financial assets and financial liabilities within
the scope of SFAS No. 157. When available, quoted market prices are used to

30

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

determine
fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such
as interest rates, yield curves, foreign exchange rates, volatilities and credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These
adjustments include amounts that reflect counterparty credit quality and, with the adoption of SFAS No. 157, that consider the Company's creditworthiness in determining the fair value of its
trading liabilities. A description of the valuation methodologies used for certain financial assets and financial liabilities measured at fair value is as follows.

Recurring
Fair Value Measurements:



Nonrecurring
Fair Value Measurements:



31

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)



The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of
June 30, 2008, December 31, 2008 and June 30, 2009, by major category and by SFAS No. 157 valuation hierarchy.

June 30, 2008(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets

$
34,937

$
1,122,265

$


$
(20,786
)
$
1,136,416Securities available for sale


845,467


6,116,012


1,514,836





8,476,315Other assets(2)





163,065





(51,178
)

111,887Total assets

$
880,404

$
7,401,342

$
1,514,836

$
(71,964
)
$
9,724,618LiabilitiesTrading account liabilities

$
1,560

$
962,644

$


$
(71,964
)
$
892,240Medium- and long-term debt





1,161,288








1,161,288Total liabilities

$
1,560

$
2,123,932

$


$
(71,964
)
$
2,053,528


---

32

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

December 31, 2008(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets

$
72,860

$
1,203,697

$


$
(59,778
)
$
1,216,779Securities available for sale


888,675


6,102,771


1,203,092





8,194,538Other assets(2)





317,569





(93,599
)

223,970Total assets

$
961,535

$
7,624,037

$
1,203,092

$
(153,377
)
$
9,635,287LiabilitiesTrading account liabilities

$
56,470

$
1,131,570

$


$
(153,377
)
$
1,034,663Total liabilities

$
56,470

$
1,131,570

$


$
(153,377
)
$
1,034,663


---

33

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

June 30, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets:U.S. Treasury

$
66,829

$


$


$


$
66,829Other U.S. government


46,895











46,895State and municpal





8,446








8,446Commercial paper





47,194








47,194Derivatives


1,985


801,314





(67,027
)

736,272Total trading account assets


115,709


856,954





(67,027
)

905,636Securities available for sale:U.S. Treasury














Other U.S. government


709,696











709,696Residential Mortgage-backed securities





6,446,308








6,446,308State and municpal





45,466


4,748





50,214Asset-backed and debt securities





96,970








96,970Equity securities


98,337





1,560





99,897Foreign securities





88








88Total securities available for sale


808,033


6,588,832


6,308





7,403,173Other assets(2)





139,765





(50,126
)

89,639Total assets

$
923,742

$
7,585,551

$
6,308

$
(117,153
)
$
8,398,448LiabilitiesTrading account liabilities:Derivatives

$
5,590

$
757,265

$


$
(117,153
)
$
645,702Securities sold, not yet purchased


45,002











45,002Total trading account liabilities


50,592


757,265





(117,153
)

690,704Total liabilities

$
50,592

$
757,265

$


$
(117,153
)
$
690,704


---

34

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

The following table presents a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and
six months ended June 30, 2008 and 2009. Level 3 available for sale securities at June 30, 2009 primarily consist of community redevelopment bonds. These bonds were carried at
cost, which approximates fair value.

For the Three Months Ended(Dollars in thousands)

June 30, 2008

June 30, 2009Balance, beginning of period

$
1,494,114

$
4,731Total gains/(losses) (realized/unrealized):Included in income before taxes


61


Included in other comprehensive income


20,264


39Purchases, issuances and settlements


397


1,538Transfers in (out) Level 3





Balance, end of period

$
1,514,836

$
6,308Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$
29

$





For the Six Months Ended(Dollars in thousands)

June 30, 2008

June 30, 2009Balance, beginning of period

$
1,765,497

$
1,203,092Total gains/(losses) (realized/unrealized):Included in income before taxes


122


20Included in other comprehensive income


(251,169
)

(54,711
)Purchases, issuances and settlements


386


1,721Transfers in (out) Level 3(1)





(1,143,814
)Balance, end of period

$
1,514,836

$
6,308Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$
58

$



---



Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that
result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the six months ended
June 30, 2008 and 2009 that were still held on the condensed consolidated balance sheet as of the

35

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

respective
periods ended, the following tables present the carrying value of such financial instruments by the level of valuation assumptions used to determine each fair value adjustment.

June 30, 2008(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Losses for the
Three Months Ended
June 30, 2008

Losses for the
Six Months Ended
June 30, 2008Loans

$
33,465

$


$
3,943

$
29,522

$
(7,405
)
$
(7,457
)Other assets














(561
)

(561
)Total

$
33,465

$


$
3,943

$
29,522

$
(7,966
)
$
(8,018
)




June 30, 2009(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Loss for the Three
Months Ended
June 30, 2009

Loss for the Six
Months Ended
June 30, 2009Securities:Held to maturity Investments

$
1,556

$


$


$
1,556

$
(767
)
$
(767
)Loans:Loans Held for Sale


24,506





8,525


15,981


(85
)

(85
)Impaired Loans


360,790








360,790


(75,345
)

(115,635
)Other Assets:OREO


8,861








8,861


(2,224
)

(2,884
)CRA Investments


8,165








8,165


(5,103
)

(5,493
)Private Equity Investments


24,095








24,095


(2,473
)

(4,827
)Total

$
427,973

$


$
8,525

$
419,448

$
(85,997
)
$
(129,691
)


Securities
held to maturity include investments classified as held to maturity that were written down to fair value during the period due to OTTI. Fair value was determined using a
pricing model and broker quotes. The model uses internally developed assumptions and available market data obtained from market participants and credit rating agencies.

Loans
include residential mortgage and commercial loans held for sale measured at the lower of cost or fair value and loans impaired under SFAS No. 114 that are measured based on
the fair value of the underlying collateral or the fair value of the loan. The fair value of fixed-rate residential mortgage loans was determined using whole loan forward prices obtained
from GSEs. The fair value of commercial loans was determined using market pricing for similar assets, adjusted for management judgment. The fair value of SFAS No. 114 loans was determined based
on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment.

Other
assets consist of private equity and CRA related investments that were written down to fair value due to impairment, and OREO that was measured at the lower of cost or fair value.
The fair value of private equity and CRA related investments was estimated based on the underlying investee's current and projected financial performance. The fair value of OREO was primarily based on
independent appraisals.

36

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)



In addition to financial instruments recorded at fair value in the Company's financial statements, SFAS No. 107 requires
disclosure of the estimated fair value of financial instruments that are not carried at fair value. Excluded from this disclosure requirement are lease financing arrangements, investments accounted
for under the equity method, employee pension and other postretirement obligations and all nonfinancial assets and liabilities, including goodwill and other intangible assets such as
long-term customer relationships. The fair values presented are estimates for certain individual financial instruments and do not represent an estimate of the fair value of the Company as
a whole.

Certain
financial instruments that are not recognized at fair value on the consolidated balance sheet are carried at amounts that approximate fair value due to their
short-term nature. These financial instruments include cash and due from banks, interest bearing deposits in banks, federal funds sold and purchased, securities purchased under resale
agreements, securities sold under repurchase agreements and commercial paper. In addition, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits,
interest-bearing checking, and market rate and other savings are deemed to equal their carrying values.

Although
off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are not required to be recorded at fair value
on the consolidated balance sheet, they are carried at amounts that approximate fair value. The carrying value of these off-balance sheet instruments represents the unamortized fee income
assessed based on the credit quality and other covenants imposed on the borrower. Since the amount assessed represents the market rate that would be charged for similar agreements, management believes
that the carrying value approximates the fair value of these instruments. Financial instruments for which their carrying values do not approximate fair value include loans, interest bearing deposits
with stated maturities, other borrowed funds, medium- and long-term debt, and trust notes.

Securities held to maturity:The fair value of CLOs classified as held to maturity was estimated using a pricing model and broker
quotes. The model
is based on internally developed assumptions and available market data obtained from market participants and credit rating agencies.

Loans:The fair values of mortgage loans were estimated based on quoted market prices for loans with similar credit and interest rate
risk
characteristics. The fair values of other types of loans were estimated based upon the type of loan and maturity. The fair value of these loans was determined by discounting the future expected cash
flows using the current origination rates for similar loans made to borrowers with similar credit ratings.

Interest bearing deposits:The fair values of savings accounts and certain money market accounts were based on the amounts payable on
demand at the
reporting date. The fair value of fixed maturity certificates of deposit was estimated using a discounted cash flow calculation that applies current interest rates being offered on certificates with
similar maturities.

Other borrowed funds:The fair values of Federal Reserve Bank term borrowings, Federal Home Loan Bank borrowing and term federal funds
purchased were
estimated using a discounted cash flow calculation that applies current market rates for applicable maturities. The carrying values of other short-term borrowed funds were assumed to
approximate their fair value due to their limited duration.

37

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12Fair Value Measurement and Fair Value of Financial Instruments (Continued)

Medium- and long-term debt:The fair value of medium- and long-term debt was estimated using either a discounted
cash flow analysis based on current market interest rates for debt with similar maturities and credit quality or estimated using market quotes.

Trust notes:The fair value of trust notes was estimated using market quotes of similar securities.

The
table below presents the carrying value and estimated fair value of certain financial instruments held by the Company as of December 31, 2008 and June 30, 2009.

December 31, 2008

June 30, 2009(Dollars in thousands)

Carrying
Value

Fair
Value

Carrying
Value

Fair
ValueAssetsSecurities held to maturity

$


$


$
1,171,380

$
1,112,813Loans, net of allowance for loan losses


48,205,818


47,507,685


47,161,748


47,254,835LiabilitiesInterest bearing deposits


32,482,896


32,528,349


43,412,395


43,411,251Other borrowed funds


8,196,597


8,203,032


606,019


606,694Medium- and long-term debt


4,288,488


4,067,878


5,131,068


4,932,075Junior subordinated debt payable to subsidiary grantor trust


13,980


11,700


13,754


12,747Off-Balance Sheet InstrumentsCommitments to extend credit


92,644


92,644


126,361


126,361Standby and commercial letters of credit


6,465


6,465


5,504


5,504


Note 13Derivative Instruments and Other Financial Instruments Used For Hedging

The Company is a party to certain derivative and other financial instruments that are entered into for the purpose of trading, meeting the needs of customers, and changing the impact on
the Company's operating results due to market fluctuations in currency and/or interest rates.

Credit
and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance
with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting agreements in order to reduce its exposure to credit risk. Master
netting agreements mitigate credit risk by permitting the offset of amounts due from and to individual counterparties in the event of default. Additionally, the Company establishes a credit reserve
for potential losses in the event of counterparty default. This reserve is reflected in the fair value amount of the derivative instrument. Market risk is the possibility that future changes in market
conditions may make the financial instrument less valuable.

Derivatives
are used to manage exposure to interest rate and foreign currency risk, generate profits from proprietary trading and assist customers with their risk management objectives.
The Company designates derivative instruments as those used for SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," hedge accounting purposes, trading or economic
hedge purposes based on SFAS No. 133. All

38

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

derivative
instruments are recognized as assets or liabilities on the condensed consolidated balance sheet at fair value.

The
table below presents the notional amounts, and the location and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheet, segregated by
derivative instruments designated and qualifying as hedging instruments under SFAS No. 133 and all other derivative instruments as of June 30, 2009.

June 30, 2009Asset Derivatives(1)

Liability Derivatives(1)(Dollars in thousands)

Notional
Amount

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueDerivatives designated as hedging instruments under SFAS No. 133:Interest rate contracts(2)

$
6,250,000

Other assets

$
139,765

Other liabilities

$
Total derivatives designated as hedging instruments under SFAS No. 133:

$
6,250,000



$
139,765



$
Derivatives not designated as hedging instruments under SFAS No. 133:Foreign exchange contracts

$
3,138,371

Trading account assets

$
51,673

Trading account liabilities

$
42,479Energy contracts


3,501,515

Trading account assets


255,498

Trading account liabilities


259,186Interest rate contracts


24,859,280

Trading account assets


489,442

Trading account liabilities


454,504Equity contracts


148,234

Trading account assets


6,686

Trading account liabilities


6,686Other contracts


5,778

Other assets


194

Other liabilities


(1,043
)Total derivatives not designated as hedging instruments under SFAS No. 133

$
31,653,178



$
803,493



$
761,812


---

Certain of the Company's derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the
Company's credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and
ongoing full overnight collateralization for those derivative instruments in net liability positions. At June 30, 2009, the aggregate fair value of all derivative instruments with
credit-risk- related contingent features that are in a liability position was $287.9 million. The Company has pledged securities collateral of $256.8 million in
the normal course of business. If all of the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2009, the Company would
have been required to provide an additional securities collateral of $31.1 million to settle these contracts.

39

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)



Derivative instruments are integral components of the Company's asset and liability management activities. The Company uses interest
rate derivatives to manage the Company's
net interest income sensitivity to changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily
LIBOR-based commercial loans, certificates of deposit, borrowings, and fixed rate subordinated debt. The following describes the significant hedging strategies of the Company.



The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged
risk being the variability in those payments due to changes in the designated benchmark rate, i.e., U.S. dollar LIBOR. In these strategies, the hedging instruments are matched with groups of
similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of
purchased floor, cap, collars and corridor options and interest rate swaps. At June 30, 2009, the weighted average remaining life of the currently active (excluding any forward positions) cash
flow hedges was approximately 2.1 years.

The
Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received under
the floor contract offset the decline in loan interest income if the relevant LIBOR index falls below the floor's strike rate.

The
Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Net payments to be
received under the floor corridor contracts offset the decline in loan interest income if the relevant LIBOR index falls below the corridor's upper strike rate, but only to the extent the index
remains above the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate.

The
Company uses interest rate collars to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Net payments received under the
collar contract offset declines in loan interest income if the relevant LIBOR index falls below the
collar's floor strike rate, while net payments paid reduce the increase in loan interest income if the LIBOR index rises above the collar's cap strike rate.

The
Company uses interest rate swaps to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received (or paid) under
the swap contract offset fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by
changes in the relevant LIBOR index.

40

---





Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with 1-month or 3-month LIBOR indexed borrowings. Payments
received under the cap contract offset the increase in borrowing interest expense if the relevant LIBOR index rises above the cap's strike rate.

The
Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate CDs. In
these hedging relationships, the Company hedges the change in interest rates based on 1-month, 3-month, and 6-month LIBOR, which is consistent with the CDs'
original term to maturity and reflects their repricing frequency. Net payments to be received under the cap contract offset increases in interest expense caused by the relevant LIBOR index rising
above the cap's strike rate.

The
Company uses interest rate cap corridors to hedge the variable cash flows associated with the forecasted issuance and rollover of short-term, fixed rate CDs. In these
hedging relationships, the Company hedges changes in interest rates, either 1-month, 3-month, or 6-month LIBOR, based on the original term to maturity of the CDs.
Net payments received under the cap corridor contract offset increases in deposit interest expense caused by the relevant LIBOR index rising above the corridor's lower strike rate, but only to the
extent the index does not exceed the upper strike rate. The corridor will not provide protection from increases in the relevant LIBOR index to the extent it rises above the corridor's upper strike
rate.

Hedging
transactions are structured at inception so that the notional amounts of the hedging instruments are matched to an equal principal amount of loans, CDs, or borrowings, the index
and repricing frequencies of the hedging instruments match those of the loans, CDs, or borrowings and the period in which the designated hedged cash flows occurs is equal to the term of the hedge
instruments. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedging instruments versus those of the loans, CDs or
borrowings.

For
cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the
same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness or hedge components excluded from the assessment of
hedge effectiveness are recognized in noninterest expense in the period in which they arise. Based upon amounts included in accumulated other comprehensive income at June 30, 2009, the Company
expects to realize approximately $72.2 million in net interest income during the twelve months ending June 30, 2010. This amount could differ from amounts actually realized due to
changes in interest rates and the addition of other hedges subsequent to June 30, 2009.

41

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The
following tables presents the amount and location of the net gains and losses recorded in the Company's condensed consolidated statements of income and changes in stockholder's
equity for derivatives designated as cash flow hedges for the three and six months ended June 30, 2009.

For the Three Months Ended June 30, 2009Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)Amount of Gain or (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)(Dollars in thousands)

Location

Amount

Location

AmountDerivatives in SFAS No. 133 Cash Flow Hedging RelationshipsInterest Income

$
33,198Interest rate contracts

$
28,675

Interest Expense


41

Noninterest Expense

$
61Total

$
28,675



$
33,239



$
61




For the Six Months Ended June 30, 2009Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)Amount of Gain or (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)(Dollars in thousands)

Location

Amount

Location

AmountDerivatives in SFAS No. 133 Cash Flow Hedging RelationshipsInterest Income

$
65,336Interest rate contracts

$
35,657

Interest Expense


15

Noninterest Expense

$
75Total

$
35,657



$
65,351



$
75




In the first quarter of 2009, the Company terminated all of its interest rate swaps, which were previously used to hedge subordinated
debt. The notional amount of the terminated swaps was $950 million. These swaps were not replaced. As a result of the termination, the Company received $167.7 million in cash, which is
treated as a deferred gain and recognized over the remaining contractual life of the subordinated debt.



Derivative instruments classified as trading include both derivatives entered into for the Company's own account and as an
accommodation for customers. Derivatives held for trading purposes are included in trading assets or trading liabilities with changes in fair value reflected in trading income or losses. The majority
of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures. Derivatives used for economic hedges but
not designated in a hedging relationship for accounting purposes, are included in derivative assets or derivative liabilities and include CDs tied to the changes in the Standard and Poor's 500 Index
(S&P 500).

42

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The
Company engages in an economic hedging strategy in which interest bearing CDs issued to customers, which are tied to the changes in the S&P 500, are exchanged for a fixed rate
of interest. The Company accounts for the derivative embedded in the CD separately at fair value. A total return swap that encompasses the value of a series of options that had individually hedged
each CD is recorded at fair value. The changes in the fair value of the embedded derivative and the hedge instrument are recognized as interest expense. Beginning in late 2008, the Company began
offering market-linked certificates of deposit. The terms of the market-linked CD allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to the S&P 500.
The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched over-the-counter call option. Both the embedded derivative
and call option are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.

The
following table presents the amount and location of the net gains and losses reported in the condensed consolidated statement of income for derivative instruments classified as
trading and derivatives used as economic hedges for the three and six months ended June 30, 2009.

Gain or (Loss) Recognized in Income on Derivative InstrumentsFor the Three Months Ended
June 30, 2009

For the Six Months Ended
June 30, 2009(Dollars in thousands)

Location

Amount

AmountDerivatives not Designated as Hedging Instruments under SFAS No. 133:Interest rate contracts

Trading account activities

$
3,976

$
8,533Foreign exchange contracts

Trading account activities


9,376


17,447Energy contracts

Trading account activities


(3,882
)

453Equity contracts

Trading account activities


681


1,108Other contracts

Interest expense


(44
)

(82
)Total



$
10,107

$
27,459


43

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Accumulated Other Comprehensive Loss

The following table presents the change in each of the components of other comprehensive loss and the related tax effect of the change allocated to each component.

(Dollars in thousands)

Before
Tax
Amount

Tax
Effect

Net of
TaxFor the Six Months Ended June 30, 2008:Cash flow hedge activities:Unrealized net gains on hedges arising during the period

$
58,445

$
(22,355
)
$
36,090Less: reclassification adjustment for net losses on hedges included in net income


(35,367
)

13,528


(21,839
)Net change in unrealized gains on hedges


23,078


(8,827
)

14,251Securities:Unrealized holding losses arising during the period on securities available for sale


(294,326
)

112,580


(181,746
)Less: reclassification adjustment for net gains on securities available for sale included in net income


(2
)

1


(1
)Net change in unrealized losses on securities


(294,328
)

112,581


(181,747
)Foreign currency translation adjustment


(352
)

135


(217
)Reclassification adjustment for pension and other benefits included in net income:Amortization of prior service costs


(48
)

19


(29
)Amortization of transition amount


1,018


(389
)

629Recognized net actuarial loss


6,647


(2,542
)

4,105Net change in pension and other benefits


7,617


(2,912
)

4,705Net change in accumulated other comprehensive loss

$
(263,985
)
$
100,977

$
(163,008
)For the Six Months Ended June 30, 2009:Cash flow hedge activities:Unrealized net gains on hedges arising during the period

$
35,657

$
(14,010
)
$
21,647Less: accretion of fair value adjustment


7,330


(2,804
)

4,526Less: Reclassification adjustment for net gains on hedges included in net income


(65,351
)

25,601


(39,750
)Net change in unrealized gains on hedges


(22,364
)

8,787


(13,577
)Securities:Unrealized holding gains arising during the period on securities available for sale


54,706


(21,494
)

33,212Reclassification adjustment for net gains on securities available for sale included in net income


(598
)

235


(363
)Less: accretion of fair value adjustment on securities available for sale


(10,553
)

4,146


(6,407
)Less: accretion of fair value adjustment on held-to-maturity securities


(6,414
)

2,520


(3,894
)Less: accretion of net unrealized losses on held-to-maturity securities


30,369


(11,932
)

18,437Net change in unrealized losses on securities


67,510


(26,525
)

40,985Foreign currency translation adjustment


331


(130
)

201Reclassification adjustment for pension and other benefits included in net income:Amortization of prior service costs


(31
)

12


(19
)Amortization of transition amount


656


(258
)

398Recognized net actuarial loss


11,567


(4,545
)

7,022Net change in pension and other benefits


12,192


(4,791
)

7,401Net change in accumulated other comprehensive loss

$
57,669

$
(22,659
)
$
35,010


44

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Accumulated Other Comprehensive Loss (Continued)

The following table presents the change in accumulated other comprehensive loss balances.

(Dollars in thousands)

Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges

Net
Unrealized
Gains (Losses)
on Securities

Foreign
Currency
Translation
Adjustment

Pension and
Other
Benefits
Adjustment

Accumulated
Other
Comprehensive
LossBalance, December 31, 2007

$
23,563

$
(129,163
)
$
740

$
(178,263
)
$
(283,123
)Change during the period


14,251


(181,747
)

(217
)

4,705


(163,008
)Balance, June 30, 2008

$
37,814

$
(310,910
)
$
523

$
(173,558
)
$
(446,131
)Balance, December 31, 2008

$
73,308

$
(352,710
)
$
(1,113
)
$
(531,336
)
$
(811,851
)Change during the period


(13,577
)

40,985


201


7,401


35,010Balance, June 30, 2009

$
59,731

$
(311,725
)
$
(912
)
$
(523,935
)
$
(776,841
)


Note 15Discontinued Operations

The Company's discontinued operations consist of two separate businesses: retirement recordkeeping business and insurance brokerage services. The retirement recordkeeping business (RRB)
was sold in the fourth quarter of 2007 to Prudential Retirement, a subsidiary of Prudential Financial, Inc., for $103.0 million. The Company recorded a pre-tax gain of
$94.7 million, net of $2.1 million in transaction costs and a $6.2 million elimination of intangible assets, consisting of goodwill of $4.8 million and other intangibles of
$1.4 million attributed to this business. The RRB was previously included in the Retail Banking reportable business segment.

In
June 2008, the Company sold its insurance brokerage business (IBB) subsidiary, UnionBanc Insurance Services, Inc., to a wholly-owned subsidiary of BB&T Corporation. The Company
recorded a total pre-tax gain of $10.0 million, net of $1.6 million in transaction costs, and an elimination of intangible assets consisting of goodwill of
$74.7 million and other intangibles of $11.0 million. The IBB was previously included in the Wholesale Banking reportable business segment.

These
transactions have been accounted for as discontinued operations. All prior period financial statements have been restated to reflect this accounting treatment. The assets and
liabilities of the discontinued operations have been separately identified on the condensed consolidated balance sheet and the assets are shown as "held for sale" at the lower of cost or fair value
less costs to dispose. The average net assets or liabilities of our discontinued operations are reflected in our analysis of net interest
margin. Interest expense (income) was attributed to discontinued operations based on average net assets (liabilities).

Substantially
all of the assets and liabilities of the retirement recordkeeping and insurance brokerage businesses were liquidated by the end of the first quarter of 2009.

45

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Discontinued Operations (Continued)



At June 30 and December 31, 2008, the assets and liabilities identified as the RRB discontinued operations consisted of
the following:

(Dollars in thousands)

June 30,
2008

December 31,
2008AssetsPremises and equipment

$
58

$
Other assets


5,993


Assets of discontinued operations to be disposed or sold

$
6,051

$
LiabilitiesInterest bearing deposits

$
106,426

$
1,929Other liabilities


11,205


5,217Liabilities of discontinued operations to be extinguished or assumed

$
117,631

$
7,146


The
components of income from the RRB discontinued operations for the three and six months ended June 30, 2008 are presented in the table below. There was no impact in the same
periods in 2009.

(Dollars in thousands)

For the Three Months Ended
June 30, 2008

For the Six Months Ended
June 30, 2008Net interest income

$
477

$
1,314Noninterest income


6,527


17,528Noninterest expense


10,111


22,180Loss from discontinued operations before income taxes


(3,107
)

(3,338
)Income tax benefit


(1,095
)

(1,164
)Loss from discontinued operations

$
(2,012
)
$
(2,174
)


The RRB's net interest income for the three and six months ended June 30, 2008 included the allocation of interest income (based on its
average net liabilities) of $0.6 million and $1.5 million, respectively. Noninterest income for the three and six months ended June 30, 2008 included trust fees of
$3.1 million and $6.4 million, respectively. Noninterest income for the three and six months ended June 30, 2008 also included $4.1 million and $11.8 million,
respectively, of servicing revenues from Prudential. For the three and six months ended June 30, 2008, noninterest expense included salaries and benefits expense of $4.7 million and
$11.3 million, respectively.

46

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Discontinued Operations (Continued)



At June 30 and December 31, 2008, the assets and liabilities identified as the IBB discontinued operations consisted of
the following:

(Dollars in thousands)

June 30,
2008

December 31,
2008AssetsOther assets

$


$
4Assets of discontinued operations to be disposed or sold

$


$
4LiabilitiesOther liabilities

$
77

$
814Liabilities of discontinued operations to be extinguished or assumed

$
77

$
814


The components of income from the IBB discontinued operations for the three and six months ended June 30, 2008 are presented in the table
below. There was no impact in the same periods in 2009.

(Dollars in thousands)

For the
Three Months Ended
June 30, 2008

For the
Six Months Ended
June 30, 2008Net interest expense

$
(213
)
$
(993
)Noninterest income


18,369


35,591Noninterest expense


11,981


45,777Income (loss) from discontinued operations before income taxes


6,175


(11,179
)Income tax benefit


(2,885
)

(6,592
)Income (loss) from discontinued operations

$
9,060

$
(4,587
)


The
IBB's net interest expense for the three and six months ended June 30, 2008 was mainly comprised of the allocation of interest expense (based on its average net assets).
Noninterest income for the three and six months ended June 30, 2008 included insurance commissions of $8.4 million and $25.7 million, respectively. Noninterest income for the
three and six months ended June 30, 2008 also included a $9.8 million pre-tax gain from the sale of the IBB. Noninterest expense for the three and six months ended
June 30, 2008 included salaries and benefits expense of $9.0 million and $20.7 million, respectively. For the six months ended June 30, 2008, noninterest expense also
included an $18.7 million goodwill impairment charge. This charge was recorded in the first quarter of 2008, when the Company determined that the value of the net assets was greater than the
fair value of the IBB, which was based on indicative prices for insurance agencies.

47

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees

The following table summarizes the Company's significant commitments.

(Dollars in thousands)

June 30, 2009Commitments to extend credit

$
21,657,392Standby letters of credit


4,875,381Commercial letters of credit


61,396Risk participations in bankers' acceptances


70Commitments to fund principal investments


105,027Commitments to fund low-income housing credit (LIHC) investments


158,189


Commitments
to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed
expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash flow requirements.

Standby
and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are
contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate
foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an
acceptance of another bank. The majority of these types of commitments have terms of one year or less. At June 30, 2009, the carrying value of the Company's risk participations in bankers'
acceptances and standby and commercial letters of credit totaled $5.5 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on
off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in
other liabilities on the condensed consolidated balance sheet.

The
credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is
represented by the contractual amount of these instruments. Collateral may be obtained based on management's credit assessment of the customer.

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

The
Company invests in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by a creditworthy entity. The
unguaranteed LIHC investments carry partial guarantees covering the timely completion of projects, availability of tax credits and

48

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees (Continued)

operating
deficit thresholds from the issuer. For these LIHC investments, the Company has committed to provide additional funding as stipulated by its investment participation.

The
Company is a fund manager for LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate
the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company
receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC
investments that reduce the Company's ultimate exposure to loss. As of June 30, 2009, the Company's maximum exposure to loss under these guarantees is limited to a return of investor capital
and minimum investment yield, or $199.8 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory performance of
the underlying properties. The Company has a reserve of $7.1 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were
recognized at inception.

The
Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantees of commercial paper obligations
and leveraged lease transactions. The guarantee issued by the Bank for an affiliate's commercial paper program facilitates the sale of the commercial paper. As of June 30, 2009, the Bank had a
maximum exposure to loss under the commercial paper program guarantee of $572.8 million. The Bank's guarantee has an average term of less than nine months and is fully collateralized by a
pledged deposit placed with the Bank. The Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these
leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of June 30, 2009, the Company did not have any exposure to loss for these agreements.

The
Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a
security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of
the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $2.1 billion at June 30, 2009. The market value of
the associated collateral was $2.1 billion at June 30,
2009. As of June 30, 2009, the Company had no exposure that would require it to pay under this securities lending indemnification, since the collateral market value exceeds the securities lent.

The
Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk
on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable
to collect amounts owed to them by their customer. As of June 30, 2009, the maximum exposure to loss under these contracts totaled $56.1 million. The risk that the Company would be
required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by the Company based on the estimated
probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those
considered special mention, substandard, doubtful and loss. Based on these criteria, at June 30, 2009 the Company had a maximum exposure to loss under these contracts with a low, moderate, and
high risk of

49

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees (Continued)

payment
exposure of $11.4 million, $38.1 million, and $6.6 million, respectively. At June 30, 2009, the Company maintained a reserve of $2.0 million for losses
related to these guarantees.

The
Company is a member of the Visa USA network (Visa). Visa's bylaws obligate its members to indemnify Visa for losses in connection with the settlement of certain antitrust lawsuits.
The Company's indemnification obligation is limited to its proportionate share. Under FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of OthersAn Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34," the Company had a liability of
$4.3 million and $3.4 million at December 31, 2008 and June 30, 2009, respectively, representing the estimated fair value of the Company's obligations under the indemnity
provisions. The decrease in this liability from December 31, 2008 to June 30, 2009 was primarily due to Visa's decision to make a $700 million contribution to the litigation
escrow account effective June 30, 2009 on behalf of members, offset by the Company's revised assessment of the likely settlement amount for one of the cases. The $3.4 million liability
represents the Company's estimate of the fair value of its proportionate share of the sum of Visa's remaining amounts owed to American Express and Discover Card under previously executed settlement
agreements plus the Company's estimate of Visa's future settlements under pending lawsuits, after subtracting the balance in Visa's escrow account. The Company's maximum exposure to loss for the
remaining pending Visa antitrust lawsuits is not determinable, as it is dependent on the outcome of the litigation, but any loss will be proportionate to the Company's ownership interest in Visa. At
June 30, 2009, the risk that the Company would be required to pay as a result of this guarantee is considered to be low, based on Visa's continued cash funding of the escrow account to pay its
antitrust lawsuit settlements.

The
Company is subject to various pending and threatened legal actions that arise in the normal course of business. Reserves for losses from legal actions that are both probable and
estimable are recorded at the time of that determination. Management believes that the disposition of all claims currently pending will not have a material adverse effect on the Company's consolidated
financial condition, operating results or liquidity.

Note 17Business Segments

The various operating segments reporting under the Chief Operating Officer and the Group Head of Pacific Rim Corporate Group have been aggregated into two reportable business segments
entitled "Retail Banking" and "Wholesale Banking" based upon the aggregation criteria prescribed in SFAS No. 131,"Disclosures about Segments of an Enterprise and Related
Information."

As
part of the Company's privatization transaction in 2008, goodwill of $980 million and $1,034 million was recorded in the reportable business segments Retail Banking and
Wholesale Banking, respectively. See Note 3 to these condensed consolidated financial statements in this Form 10-Q for further detail on the Company's privatization
transaction.



50

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)



The
information, set forth in the tables that follow, reflects selected income statement and balance sheet items by reportable business segment. The information presented does not
necessarily represent the business units' financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for
management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. Included in the tables, within total assets,
are the amounts of goodwill for both reportable business segments as of June 30, 2008 and 2009.

The
information in the tables are derived from the internal management reporting system used by management to measure the performance of the individual segments and the Company overall.
The management reporting system assigns balance sheet and income statement items to each operating segment based on internal management accounting policies. Net interest income is determined by the
Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest
income and expense directly attributable to an operating segment are assigned to that operating segment. Certain indirect costs, such as operations and technology expense, are allocated to the
segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to an operating segment based on a predetermined
percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to an operating segment based upon expected losses arising from
credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks.

"Other"
is comprised of certain non-bank subsidiaries of UnionBanCal Corporation, the elimination of the fully taxable-equivalent basis amount, the transfer pricing center,
the amount of the provision for credit losses over/(under) the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowances for credit losses, and the
residual costs of support groups. In addition, "Other" includes Corporate Treasury, which is responsible for Asset-Liability Management (ALM), wholesale funding, and the ALM investment securities and
derivatives hedging portfolios, and the results of discontinued operations. The discontinued operations consist of two separate businesses: retirement recordkeeping services and insurance brokerage
services. For further detail on discontinued operations, see Note 15 to these condensed consolidated financial statements. Except as discussed above, none of the items in "Other" is significant
to the Company's business.

The
Company reflects a "market view" perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and
expenses incurred
from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that
provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in "Reconciling Items."

51

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)

The
reportable business segment results for prior periods have been restated to reflect changes in the transfer pricing methodology, the organizational changes that have occurred,
discontinued operations and the market view contribution.

Retail Banking

Wholesale BankingAs of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,2008

2009

2008

2009Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
233,006

$
280,147

$
283,017

$
414,070Noninterest income (expense)


126,085


110,139


88,111


100,539Total revenue


359,091


390,286


371,128


514,609Noninterest expense (income)


242,338


250,843


151,708


183,779Credit expense (income)


6,842


7,364


49,397


86,462Income (loss) from continuing operations before income taxes


109,911


132,079


170,023


244,368Income tax expense (benefit)


42,041


51,643


47,980


74,438Income (loss) from continuing operations


67,870


80,436


122,043


169,930Income from discontinued operations, net of income taxes











Net income (loss)

$
67,870

$
80,436

$
122,043

$
169,930Total assets, end of periodMarket View (dollars in millions):

$
20,519

$
23,826

$
31,504

$
34,489




Other

Reconciling Items

UnionBanCal
CorporationAs of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,2008

2009

2008

2009

2008

2009Results of operationsMarket View
(dollars in thousands):Net interest income (expense)

$
(3,205
)
$
(134,905
)
$
(2,260
)
$
(8,966
)
$
510,558

$
550,346Noninterest income (expense)


6,198


(8,689
)

(20,768
)

(18,776
)

199,626


183,213Total revenue


2,993


(143,594
)

(23,028
)

(27,742
)

710,184


733,559Noninterest expense (income)


37,845


109,616


(12,579
)

(12,180
)

419,312


532,058Credit expense (income)


38,779


266,192


(18
)

(18
)

95,000


360,000Income (loss) from continuing operations before income taxes


(73,631
)

(519,402
)

(10,431
)

(15,544
)

195,872


(158,499
)Income tax expense (benefit)


(24,457
)

(198,495
)

(3,990
)

(6,078
)

61,574


(78,492
)Income (loss) from continuing operations


(49,174
)

(320,907
)

(6,441
)

(9,466
)

134,298


(80,007
)Income from discontinued operations, net of income taxes


7,047











7,047


Net income (loss)

$
(42,127
)
$
(320,907
)
$
(6,441
)
$
(9,466
)
$
141,345

$
(80,007
)Total assets, end of periodMarket View (dollars in millions):

$
8,589

$
15,707

$
(18
)
$
(37
)
$
60,594

$
73,985


52

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)



Retail Banking

Wholesale BankingAs of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,2008

2009

2008

2009Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
454,031

$
528,849

$
539,471

$
756,442Noninterest income (expense)


246,747


215,391


165,770


185,211Total revenue


700,778


744,240


705,241


941,653Noninterest expense (income)


473,667


538,149


299,259


358,338Credit expense (income)


13,281


15,143


86,540


155,030Income (loss) from continuing operations before income taxes


213,830


190,948


319,442


428,285Income tax expense (benefit)


81,790


74,661


89,269


124,843Income (loss) from continuing operations


132,040


116,287


230,173


303,442Loss from discontinued operations, net of income taxes











Net income (loss)

$
132,040

$
116,287

$
230,173

$
303,442Total assets, end of periodMarket View (dollars in millions):

$
20,519

$
23,826

$
31,504

$
34,489




Other

Reconciling Items

UnionBanCal
CorporationAs of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,2008

2009

2008

2009

2008

2009Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
(18,603
)
$
(164,384
)
$
(3,763
)
$
(10,558
)
$
971,136

$
1,110,349Noninterest income (expense)


20,543


(5,740
)

(38,038
)

(36,933
)

395,022


357,929Total revenue


1,940


(170,124
)

(41,801
)

(47,491
)

1,366,158


1,468,278Noninterest expense (income)


72,284


180,184


(22,692
)

(23,230
)

822,518


1,053,441Credit expense (income)


67,212


438,874


(33
)

(47
)

167,000


609,000Income (loss) from continuing operations before income taxes


(137,556
)

(789,182
)

(19,076
)

(24,214
)

376,640


(194,163
)Income tax expense (benefit)


(43,818
)

(294,384
)

(7,297
)

(9,468
)

119,944


(104,348
)Income (loss) from continuing operations


(93,738
)

(494,798
)

(11,779
)

(14,746
)

256,696


(89,815
)Loss from discontinued operations, net of income taxes


(6,761
)










(6,761
)

Net income (loss)

$
(100,499
)
$
(494,798
)
$
(11,779
)
$
(14,746
)
$
249,935

$
(89,815
)Total assets, end of periodMarket View (dollars in millions):

$
8,589

$
15,707

$
(18
)
$
(37
)
$
60,594

$
73,985


Note 18Subsequent Event

The Company has evaluated the potential disclosure of subsequent events through the filing date of this Form 10-Q and has determined that there are no subsequent
events required to be disclosed.

53

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Table of Contents

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

This report includes forward-looking statements, which include forecasts of our financial
results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might
differ significantly compared to our forecasts and expectations. Please refer to Part 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 cause results to differ.

You
should read the following discussion and analysis of our consolidated financial condition and results of operations for the period ended June 30, 2009 in this
Form 10-Q together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2008 (2008 Form 10-K). Averages, as presented in the following tables, are substantially 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 to UnionBanCal Corporation, Union Bank, N.A., one or more of their
condensed consolidated subsidiaries, or to all of them together.

Introduction

We are a California-based financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a
commercial bank. We had consolidated assets of approximately $74 billion at June 30, 2009.

On
November 4, 2008, we became a privately held company (privatization transaction). All of our issued and outstanding shares of common stock are owned by The Bank of
Tokyo-Mitsubishi UFJ, Ltd. (BTMU). Prior to the transaction, BTMU owned approximately 64 percent of our outstanding shares of common stock. Refer to Note 3 to our condensed
consolidated financial statements in this Form 10-Q for further information on UnionBanCal's privatization transaction.

Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that impacted our second
quarter 2009 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read
this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties
that impact us.

Continued
weakness in the global economy, rising unemployment and deteriorating credit quality challenged the banking industry in the second quarter of 2009. In the face of these severe
market
conditions, we continued to generate deposit growth, as well as grow net interest income. In the second quarter of 2009, our average total loans grew 9 percent from the second quarter of 2008
to $49.6 billion. This strong growth took place during the last half of 2008 and the first quarter of 2009 and was spread across all major categories, including commercial, residential real
estate, consumer and commercial real estate, due to increased loan demand and reduced competition. However, overall loan levels were flat during the current quarter due to continued recessionary
market conditions, combined with reduced borrower demand.

During
the second quarter of 2009, we provided $375 million for our allowances for credit losses compared to $100 million in the second quarter of 2008. The increase was
primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small
business portfolios. We anticipate a continued recessionary environment during the remainder of 2009, resulting in additional deterioration in our loan portfolio. See further discussion below in
"Allowances for Credit Losses."

54

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Table of Contents

Our
nonperforming assets totaled $437 million and $1.1 billion at December 31, 2008 and June 30, 2009, respectively. The increase in nonperforming assets was
primarily due to increases in the commercial, financial and industrial portfolio of $101 million, construction portfolio of $215 million, commercial real estate portfolio of
$209 million and residential mortgage portfolio of $142 million. (See discussion below in "Nonperforming Assets" regarding our accounting policy change related to nonaccrual status of
residential mortgage loans.) Net charge offs were $152 million in the second quarter of 2009, compared to $32 million in the second quarter of 2008.

At
December 31, 2008 and June 30, 2009, our allowances for credit losses as a percent of total loans were 1.74 percent and 2.55 percent, respectively. At
December 31, 2008 and June 30, 2009, our allowances for credit losses as a percent of nonaccrual loans were 208 percent and 113 percent, respectively. At
December 31, 2008 and June 30, 2009, our allowance for loan losses as a percent of total loans were 1.49 percent and 2.21 percent, respectively. At December 31, 2008
and June 30, 2009, our allowance for loan losses as a percent of nonaccrual loans were 178 percent and 98 percent, respectively.

In
the second quarter of 2009, our average noninterest bearing deposits increased 8 percent compared to the second quarter of 2008 to $13.9 billion. Average interest
bearing deposits increased by 33 percent in the second quarter of 2009 compared to the second quarter of 2008 to $40.4 billion. The increase reflects deposit-gathering marketing
initiatives in both the retail and commercial lines of business, as well as significant increases in money market account deposits from government agencies and institutional escrow clients. Average
noninterest bearing deposits represented 26 percent of average total deposits in the second quarter of 2009, compared to 30 percent in the second quarter of 2008. The annualized
average all-in-cost of funds improved to 0.88 percent, compared to 1.56 percent in the second quarter of 2008.

In
the second quarter of 2009, our net interest income increased 8 percent from the second quarter of 2008 to $533 million, primarily due to lower rates paid on interest
bearing liabilities, strong loan growth, and purchase price accounting accretions related to our privatization, partially offset by lower yields on earning assets.

In
the second quarter of 2009, our noninterest income declined 8 percent from the second quarter of 2008 to $183 million primarily due to lower service charges on deposit
accounts, lower trust and investment management fees, and a $7.1 million pre-tax gain on the partial redemption of MasterCard Inc. common stock in the second quarter of 2008,
partially offset by higher merchant banking fees.

In
the second quarter of 2009, our noninterest expense grew by 27 percent from the second quarter of 2008 to $532 million. The increase was primarily due to
privatization-related expenses and related intangible asset amortization, higher regulatory agencies expenses resulting from a one-time FDIC special assessment and an
industry-wide FDIC deposit insurance assessment rate increase, and higher provision for losses on off-balance sheet commitments.

Our
effective tax rate was (49.5) percent in the second quarter of 2009, compared to 31.4 percent in the second quarter of 2008. The change in the effective tax rate was primarily
due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes.

In
the fourth quarter of 2008, we elected to participate in the voluntary Temporary Liquidity Guarantee (TLG) Program established by the FDIC in October 2008. Under the TLG Program, all
senior unsecured debt issued by insured depository institutions between October 14, 2008 and October 31, 2009 with a maturity of more than 30 days is guaranteed by the FDIC. In
the first quarter of 2009, the Bank issued $1.0 billion principal amount of Senior Floating Rate Notes guaranteed through the TLG Program. As of June 30, 2009, we had $1.3 billion
of remaining capacity to issue FDIC guaranteed debt under the TLG Program.

The
discussion of our financial results is based on results from continuing operations, unless otherwise stated.

55

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Table of Contents

Critical Accounting Estimates

UnionBanCal Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America (US GAAP) and the general practices of the banking industry. The financial information contained within our statements is, to a significant extent, financial
information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained
either when earning income, recognizing an expense, recovering an asset or relieving a liability. In many instances, we use a discount factor and other assumptions to determine the fair value of
assets and liabilities. A change in the discount factor or in an assumption could increase or decrease the values of those assets and liabilities and result in either a beneficial or adverse impact to
our financial results. We use historical loss factors, adjusted for current conditions, to estimate the inherent credit loss 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 include employee turnover factors for our pension obligation, residual values in our leasing portfolio, fair
value of certain derivatives and securities, expected useful lives of our depreciable assets and assumptions regarding our effective income tax rates.

We
enter into derivative contracts to accommodate our customers and for our own risk management purposes. The derivative contracts are primarily swaps and option contracts indexed to
energy commodities, interest rates or foreign currencies. We record these contracts at fair value. When readily available quoted market prices are unavailable, we must extrapolate or estimate a market
price from available observable market data.

Our
most significant estimates are approved by our CEO Forum, which is comprised of our most senior officers. For each financial reporting period, a review of these estimates is
presented to and discussed with the Audit Committee of our Board of Directors.

Understanding
our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical
Accounting Policies and our significant accounting policies are discussed in detail in our 2008 Form 10-K filed with the Securities and Exchange Commission (the SEC). Other than the
changes noted below, there have been no material changes to these critical accounting estimates during the first half of 2009.



We review our goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.

Significant
judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying
relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. Additionally, significant judgment is involved in determining if an
indicator of impairment has occurred. Such indicators may include: a significant decline in expected future cash flows, a significant adverse change in the business climate, unanticipated competition
and/or slower than expected growth rates.

The
annual goodwill impairment test as of January 1, 2009 was performed during the first quarter of 2009, and no impairment was recognized.

During
the second quarter of 2009, we changed the date of our annual goodwill impairment test from January 1 to April 1. The change was made to more closely align the
impairment testing date with the testing date used by BTMU, as we became a wholly owned subsidiary in the fourth quarter of 2008.

The
change in goodwill impairment testing date is deemed a change in accounting principle. Management believes that the change in accounting principle will not delay, accelerate, or
avoid a goodwill impairment

56

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Table of Contents

charge.
Management determined that the change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively.

In
order to transition to the new annual goodwill impairment test date and to ensure that no more than twelve months elapse before the next annual goodwill impairment test is performed,
goodwill impairment testing as of April 1, 2009 was performed during the second quarter of 2009. No impairment was recognized.

Due
to the current uncertainties in the recessionary economic environment, there can be no assurance that our recent estimates relating to our recent goodwill impairment testing will
prove to be accurate predictions of future circumstances. It is possible that we may be required to record charges relating to goodwill impairment losses in future periods either as a result of our
annual impairment testing or upon the occurrence of other triggering events. Any changes relating to any such future impairment losses could be material.



The Company adopted FASB Staff Position (FSP) on Statement of Financial Accounting Standards (SFAS) No. 115-2 and
SFAS No. 124-2 (FSP SFAS 115-2 and 124-2), "Recognition and Presentation of Other-Than-Temporary Impairments" on
April 1, 2009. The FSP establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in
earnings. At adoption, there was no impact on our financial position or results of operations.

Debt
securities available for sale and debt securities held to maturity are subject to quarterly impairment testing when a security's fair value is lower than its amortized cost. Debt
securities with unrealized losses are considered other-than-temporarily impaired if we intend to sell the security, if it is more likely than not that we will be required to
sell the security before recovery of its amortized cost basis, or we do not expect to recover the entire amortized cost basis of the security. Any impairment on securities we intend or is more likely
than not required to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities we do not intend or it is not more likely than
not required to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in
other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's effective interest rate, and the amortized
cost of the security.

57

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Table of Contents

Financial Performance

Summary of Financial Performance

Increase (Decrease)





Increase (Decrease)For the Three Months
Ended June 30,

For the Six Months
Ended June 30,2009 versus 2008

2009 versus 2008(Dollars in thousands)

2008

2009

Amount

Percent

2008

2009

Amount

PercentResults of OperationsNet interest income(1)

$
510,558

$
550,346

$
39,788


7.8
%
$
971,136

$
1,110,349

$
139,213


14.3
%Noninterest incomeService charges on deposit accounts


77,706


71,843


(5,863
)

(7.5
)

152,442


143,165


(9,277
)

(6.1
)Trust and investment management fees


43,802


34,130


(9,672
)

(22.1
)

87,190


68,037


(19,153
)

(22.0
)Trading account activities


16,687


16,251


(436
)

(2.6
)

27,699


38,943


11,244


40.6Merchant banking fees


11,085


19,924


8,839


79.7


22,878


33,756


10,878


47.5Gain on the VISA IPO redemption














14,211





(14,211
)

(100.0
)Other noninterest income


50,346


41,065


(9,281
)

(18.4
)

90,602


74,028


(16,574
)

(18.3
)Total noninterest income


199,626


183,213


(16,413
)

(8.2
)

395,022


357,929


(37,093
)

(9.4
)Total revenue


710,184


733,559


23,375


3.3


1,366,158


1,468,278


102,120


7.5Provision for loan losses


95,000


360,000


265,000


nm


167,000


609,000


442,000


nmNoninterest expenseSalaries and other compensation


204,077


191,104


(12,973
)

(6.4
)

396,089


379,327


(16,762
)

(4.2
)Employee benefits


39,222


41,953


2,731


7.0


88,880


97,293


8,413


9.5Salaries and employee benefits


243,299


233,057


(10,242
)

(4.2
)

484,969


476,620


(8,349
)

(1.7
)Net occupancy


38,232


43,222


4,990


13.1


74,434


85,143


10,709


14.4Intangible asset amortization


670


40,281


39,611


nm


1,340


81,168


79,828


nmRegulatory agencies


4,897


52,836


47,939


nm


7,506


70,774


63,268


nmProfessional services


15,931


19,489


3,558


22.3


30,528


35,427


4,899


16.0Foreclosed asset expense


83


3,282


3,199


nm


172


4,168


3,996


nmProvision for losses on off-balance sheet commitments


5,000


15,000


10,000


nm


13,000


41,000


28,000


nmPrivatization-related expense





7,433


7,433


nm





34,252


34,252


nmOther noninterest expense


111,200


117,458


6,258


5.6


210,569


224,889


14,320


6.8Total noninterest expense


419,312


532,058


112,746


26.9


822,518


1,053,441


230,923


28.1Income (loss) from continuing operations before income taxes


195,872


(158,499
)

(354,371
)

nm


376,640


(194,163
)

(570,803
)

nmIncome tax expense (benefit)


61,574


(78,492
)

(140,066
)

nm


119,944


(104,348
)

(224,292
)

nmIncome (loss) from continuing operations

$
134,298

$
(80,007
)
$
(214,305
)

nm
%
$
256,696

$
(89,815
)
$
(346,511
)

nm
%


---

The primary contributors to our financial performance for the second quarter of 2009 compared to the second quarter of
2008 are presented below.



The
decrease in our noninterest income was due to several factors:



58

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Table of Contents



The
increase in noninterest expense was due to several factors:



The primary contributors to our financial performance for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 are
presented below.



The
decrease in our noninterest income was due to several factors:



59

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Table of Contents



The
increase in noninterest expense was due to several factors:



60

---







Table of Contents

Net Interest Income

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

For the Three Months Ended

Increase (Decrease) inJune 30, 2008

June 30, 2009

Average
Balance

Interest
Income/
Expense(1)Average
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)(Dollars in thousands)

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
16,987,504

$
229,612


5.44
%
$
17,920,408

$
194,560


4.35
%
$
932,904


5
%
$
(35,052
)

(15
)%Construction


2,566,207


30,794


4.83


2,788,671


20,658


2.97


222,464


9


(10,136
)

(33
)MortgageResidential


14,495,754


199,756


5.51


16,089,739


230,269


5.72


1,593,985


11


30,513


15MortgageCommercial


7,822,056


111,722


5.71


8,254,595


91,689


4.44


432,539


6


(20,033
)

(18
)Consumer


2,977,852


44,453


6.00


3,841,202


44,116


4.61


863,350


29


(337
)

(1
)Lease financing


644,788


1,171


0.73


661,607


5,598


3.38


16,819


3


4,427


378Total Loans


45,494,161


617,508


5.44


49,556,222


586,890


4.74


4,062,061


9


(30,618
)

(5
)Securitiestaxable


8,293,036


97,233


4.69


8,564,355


97,738


4.56


271,319


3


505


1Securitiestax-exempt


52,742


1,105


8.38


48,176


1,016


8.44


(4,566
)

(9
)

(89
)

(8
)Interest bearing deposits in banks


67,553


228


1.36


5,594,318


3,550


0.25


5,526,765


nm


3,322


1457Federal funds sold and securities purchased under resale agreements


213,292


1,093


2.06


203,529


97


0.19


(9,763
)

(5
)

(996
)

(91
)Trading account assets


814,274


1,119


0.55


1,041,623


231


0.09


227,349


28


(888
)

(79
)Total earning assets


54,935,058


718,286


5.24


65,008,223


689,522


4.25


10,073,165


18


(28,764
)

(4
)Allowance for loan losses


(456,191
)







(839,115
)







(382,924
)

(84
)Cash and due from banks


1,662,638








1,285,449








(377,189
)

(23
)Premises and equipment, net


482,950








669,993








187,043


39Other assets


2,645,510








5,370,676








2,725,166


nmTotal assets

$
59,269,965







$
71,495,226







$
12,225,261


21
%LiabilitiesDeposits:Transaction accounts

$
15,550,970

$
59,513


1.54

$
29,514,913

$
66,549


0.90

$
13,963,943


90
%
$
7,036


12Savings and consumer time


3,846,404


13,918


1.46


4,328,326


13,546


1.26


481,922


13


(372
)

(3
)Large time


10,929,983


71,078


2.62


6,604,845


20,091


1.22


(4,325,138
)

(40
)

(50,987
)

(72
)Total interest bearing deposits


30,327,357


144,509


1.92


40,448,084


100,186


0.99


10,120,727


33


(44,323
)

(31
)Federal funds purchased and securities sold under repurchase agreements


2,428,357


12,697


2.10


163,381


19


0.05


(2,264,976
)

(93
)

(12,678
)

(100
)Net funding allocated from (to) discontinued operations(4)


64,945


360


2.23











(64,945
)

nm


(360
)

nmCommercial paper


1,487,032


8,279


2.24


569,337


954


0.67


(917,695
)

(62
)

(7,325
)

(88
)Other borrowed funds(5)


3,201,612


19,624


2.47


2,124,419


5,616


1.06


(1,077,193
)

(34
)

(14,008
)

(71
)Medium- and long-term debt


2,629,308


19,692


3.01


5,137,901


29,415


2.30


2,508,593


95


9,723


49Trust notes


14,261


238


6.68


13,809


238


6.90


(452
)

(3
)




Total borrowed funds


9,825,515


60,890


2.49


8,008,847


36,242


1.82


(1,816,668
)

(18
)

(24,648
)

(40
)Total interest bearing liabilities


40,152,872


205,399


2.06


48,456,931


136,428


1.13


8,304,059


21


(68,971
)

(34
)Noninterest bearing deposits


12,875,823








13,904,328








1,028,505


8Other liabilities


1,624,674








1,830,917








206,243


13Total liabilities


54,653,369








64,192,176








9,538,807


17Stockholder's EquityCommon equity


4,616,596








7,303,050








2,686,454


58Total stockholder's equity


4,616,596








7,303,050








2,686,454


58Total liabilities and stockholder's equity

$
59,269,965







$
71,495,226







$
12,225,261


21
%Net Interest Income/MarginNet interest income/margin (taxable-equivalent basis)





512,887


3.74
%




553,094


3.41
%







40,207


8Less: taxable-equivalent adjustment





2,329








2,748











419


18Net interest income




$
510,558







$
550,346










$
39,788


8
%Average Assets and Liabilities of
Discontinued Operations for the
Three Months Ended:

June 30, 2008

June 30, 2009Assets




$
95,415







$
Liabilities




$
160,360







$
Net assets (liabilities)




$
(64,945
)






$



---

nm = not meaningful

61

---



Table of Contents

For the Six Months Ended

Increase (Decrease) inJune 30, 2008

June 30, 2009

Average
Balance

Interest
Income/
Expense(1)Average
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)(Dollars in thousands)

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
16,317,333

$
467,915


5.77
%
$
18,210,574

$
388,347


4.30
%
$
1,893,241


12
%
$
(79,568
)

(17
)%Construction


2,520,265


67,411


5.38


2,761,302


39,919


2.92


241,037


10


(27,492
)

(41
)Residential mortgage


14,244,248


392,541


5.51


16,006,925


464,707


5.81


1,762,677


12


72,166


18Commercial mortgage


7,536,401


224,692


5.96


8,253,963


194,078


4.70


717,562


10


(30,614
)

(14
)Consumer


2,832,243


90,843


6.45


3,782,055


90,655


4.83


949,812


34


(188
)

(0
)Lease financing


647,315


7,468


2.31


657,170


13,251


4.03


9,855


2


5,783


77Total Loans


44,097,805


1,250,870


5.69


49,671,989


1,190,957


4.81


5,574,184


13


(59,913
)

(5
)Securitiestaxable


8,324,489


202,196


4.86


8,442,693


199,994


4.74


118,204


1


(2,202
)

(1
)Securitiestax-exempt


53,051


2,187


8.24


49,290


2,041


8.28


(3,761
)

(7
)

(146
)

(7
)Interest bearing deposits in banks


48,711


356


1.47


3,225,689


4,450


0.28


3,176,978


nm


4,094


nmFederal funds sold and securities purchased under resale agreements


270,718


3,786


2.81


200,067


238


0.24


(70,651
)

(26
)

(3,548
)

(94
)Trading account assets


766,795


3,923


1.03


1,153,293


389


0.07


386,498


50


(3,534
)

(90
)Total earning assets


53,561,569


1,463,318


5.48


62,743,021


1,398,069


4.47


9,181,452


17


(65,249
)

(4
)Allowance for loan losses


(427,801
)







(774,142
)







(346,341
)

(81
)Cash and due from banks


1,710,000








1,300,479








(409,521
)

(24
)Premises and equipment, net


483,383








671,995








188,612


39Other assets


2,623,959








5,354,830








2,730,871


nmTotal assets

$
57,951,110







$
69,296,183







$
11,345,073


20
%LiabilitiesDeposits:Transaction accounts

$
15,207,766

$
142,428


1.88

$
26,025,374

$
127,646


0.99

$
10,817,608


71
%
$
(14,782
)

(10
)Savings and consumer time


4,013,034


37,447


1.88


4,348,026


29,485


1.37


334,992


8


(7,962
)

(21
)Large time


11,446,331


185,294


3.26


6,917,071


48,093


1.40


(4,529,260
)

(40
)

(137,201
)

(74
)Total interest bearing deposits


30,667,131


365,169


2.39


37,290,471


205,224


1.11


6,623,340


22


(159,945
)

(44
)Federal funds purchased and securities sold under repurchase agreements


2,189,525


28,263


2.60


207,419


72


0.07


(1,982,106
)

(91
)

(28,191
)

(100
)Net funding allocated from (to) discontinued operations(4)


40,667


509


2.52











(40,667
)

nm


(509
)

nmCommercial paper


1,347,271


18,071


2.70


644,956


2,546


0.80


(702,315
)

(52
)

(15,525
)

(86
)Other borrowed funds(5)


2,383,954


35,690


3.01


3,595,580


17,093


0.96


1,211,626


51


(18,597
)

(52
)Medium- and long-term debt


2,238,097


39,149


3.52


4,941,716


56,944


2.32


2,703,619


nm


17,795


45Trust notes


14,318


476


6.66


13,865


476


6.87


(453
)

(3
)




Total borrowed funds


8,213,832


122,158


2.99


9,403,536


77,131


1.65


1,189,704


14


(45,027
)

(37
)Total interest bearing liabilities


38,880,963


487,327


2.52


46,694,007


282,355


1.22


7,813,044


20


(204,972
)

(42
)Noninterest bearing deposits


12,741,338








13,223,645








482,307


4Other liabilities


1,661,380








2,059,013








397,633


24Total liabilities


53,283,681








61,976,665








8,692,984


16Stockholder's EquityCommon equity


4,667,429








7,319,518








2,652,089


57Total stockholder's equity


4,667,429








7,319,518








2,652,089


57Total liabilities and stockholder's equity

$
57,951,110







$
69,296,183







$
11,345,073


20
%Net Interest Income/MarginNet interest income/margin (taxable-equivalent basis)





975,991


3.65
%




1,115,714


3.56
%







139,723


14Less: taxable-equivalent adjustment





4,855








5,365











510


11Net interest income




$
971,136







$
1,110,349










$
139,213


14
%Average Assets and Liabilities of
Discontinued Operations for the
Six Months Ended:

June 30, 2008

June 30, 2009Assets




$
109,594







$
Liabilities




$
150,261







$
Net liabilities




$
(40,667
)






$



---

nm = not meaningful

62

---



Table of Contents

Net interest income in the second quarter of 2009, on a taxable-equivalent basis, increased $40.2 million, or 8 percent, compared to
the second quarter of 2008. Our net interest margin decreased by 33 basis points to 3.41 percent. These results were primarily due to the following:



We
use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit and other time deposits (CDs) and LIBOR-indexed borrowings, and to
convert certain fixed-rate borrowings to floating rate. For loans, we had hedge income of $22.3 million and $27.9 million for the quarters ended June 30, 2008 and
2009, respectively. For long-term fixed rate borrowings and LIBOR- indexed borrowings, we had hedge income of $6.8 million and $10.9 million for the second quarters of 2008
and 2009, respectively. In the first quarter of 2009, we terminated all of our fair value swaps, which were used to hedge our long-term fixed rate borrowings. These swaps were not
replaced.

Net
interest income in the first half of 2009, on a taxable-equivalent basis, increased $139.7 million, or 14 percent, compared to the first half of 2008. Our net interest
margin decreased by 9 basis points to 3.56 percent. These results were primarily due to the following:



63

---



Table of Contents



We
use derivatives to hedge expected changes in the yields on our variable rate loans and term CDs and LIBOR-indexed borrowings, and to convert certain fixed-rate borrowings
to floating rate. For loans, we had hedge income of $28.1 million and $54.8 million for the first half of 2008 and 2009, respectively. For long-term fixed rate borrowings and
LIBOR-indexed borrowings, we had hedge income of $12.3 million and $21.0 million for the six months ended June 30, 2008 and 2009, respectively. In the first quarter of 2009, we
terminated all of our fair value swaps, which were used to hedge our long-term fixed rate borrowings. These swaps were not replaced.

Noninterest Income and Noninterest Expense

The following tables detail our noninterest income and noninterest expense that exceeded 1 percent of our total revenues for the
three and six months ended June 30, 2008 and 2009.

Noninterest Income

For the Three Months Ended

For the Six Months EndedIncrease (Decrease)





Increase (Decrease)June 30,
2008

June 30,
2009

June 30,
2008

June 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentService charges on deposit accounts

$
77,706

$
71,843

$
(5,863
)

(7.5
)%
$
152,442

$
143,165

$
(9,277
)

(6.1
)%Trust and investment management fees


43,802


34,130


(9,672
)

(22.1
)

87,190


68,037


(19,153
)

(22.0
)Trading account activities


16,687


16,251


(436
)

(2.6
)

27,699


38,943


11,244


40.6Merchant banking fees


11,085


19,924


8,839


79.7


22,878


33,756


10,878


47.5Brokerage commissions and fees


10,635


8,506


(2,129
)

(20.0
)

20,494


16,813


(3,681
)

(18.0
)Card processing fees, net


8,167


8,124


(43
)

(0.5
)

15,931


15,660


(271
)

(1.7
)Securities losses, net





(172
)

(172
)

nm


(2
)

(172
)

(170
)

nmGains (losses) on private capital investments, net


1,282


(1,123
)

(2,405
)

nm


2,352


(3,244
)

(5,596
)

nmGain on the VISA IPO redemption














14,211





(14,211
)

(100.0
)Other


30,262


25,730


(4,532
)

(15.0
)

51,827


44,971


(6,856
)

(13.2
)Total noninterest income

$
199,626

$
183,213

$
(16,413
)

(8.2
)%
$
395,022

$
357,929

$
(37,093
)

(9.4
)%


---

nm = not meaningful

64

---





Table of Contents

Noninterest Expense

For the Three Months Ended

For the Six Months EndedIncrease (Decrease)





Increase (Decrease)June 30,
2008

June 30,
2009

June 30,
2008

June 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentSalaries and other compensation

$
204,077

$
191,104

$
(12,973
)

(6.4
)%
$
396,089

$
379,327

$
(16,762
)

(4.2
)%Employee benefits


39,222


41,953


2,731


7.0


88,880


97,293


8,413


9.5Salaries and employee benefits


243,299


233,057


(10,242
)

(4.2
)

484,969


476,620


(8,349
)

(1.7
)Net occupancy


38,232


43,222


4,990


13.1


74,434


85,143


10,709


14.4Intangible asset amortization


670


40,281


39,611


nm


1,340


81,168


79,828


nmRegulatory agencies


4,897


52,836


47,939


nm


7,506


70,774


63,268


nmOutside services


20,295


22,948


2,653


13.1


37,304


41,782


4,478


12.0Professional services


15,931


19,489


3,558


22.3


30,528


35,427


4,899


16.0Equipment


15,141


16,602


1,461


9.6


30,488


32,015


1,527


5.0Software


14,409


14,205


(204
)

(1.4
)

29,204


29,243


39


0.1Advertising and public relations


12,857


11,349


(1,508
)

(11.7
)

20,956


21,970


1,014


4.8Low income housing credit investment amortization


8,493


11,026


2,533


29.8


17,632


21,192


3,560


20.2Communications


9,111


9,192


81


0.9


18,486


17,910


(576
)

(3.1
)Data processing


7,784


8,042


258


3.3


14,860


16,617


1,757


11.8Foreclosed asset expense


83


3,282


3,199


nm


172


4,168


3,996


nmProvision for losses on off-balance sheet commitments


5,000


15,000


10,000


nm


13,000


41,000


28,000


nmPrivatization-related expense





7,433


7,433


nm





34,252


34,252


nmOther


23,110


24,094


984


4.3


41,639


44,160


2,521


6.1Total noninterest expense

$
419,312

$
532,058

$
112,746


26.9
%
$
822,518

$
1,053,441

$
230,923


28.1
%


---

nm = not meaningful

Income Tax Expense

Our effective tax rate in the second quarter of 2009 was (49.5) percent, compared to 31.4 percent for the second quarter of
2008. Our effective tax rate in the six months ended June 30, 2009 was (53.7) percent, compared to 31.8 percent for the six months ended June 30, 2008. A negative effective tax
rate indicates a net income tax benefit. The change in the effective tax rate was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current
year, as well as the impact of tax credits and state income taxes. Our effective tax rate for the second quarter of 2009 may not be indicative of the effective tax rate for future quarters and the
full year. In addition, the quarterly effective tax rate in 2009 is being computed on an individual quarterly basis, as compared to our historical computation, which was based on an estimated average
effective tax rate for the year. During 2009, our effective tax rate, which will be impacted by our expected tax credits, is expected to vary from quarter to quarter in relation to changes in our
pre-tax income or loss.

In
2008, California enacted a new statute mandating a 20 percent penalty on corporate tax underpayments outstanding after May 31, 2009. During the second quarter of 2009,
we filed amended tax returns and made payments of $187.0 million of tax and $43.7 million of interest with respect to tax positions taken in prior year worldwide unitary tax returns,
which primarily involved the method of apportionment of worldwide income to California. The payments were made in order to protect us from potential penalties that may be asserted by the tax
authorities. We intend to file refund claims and to defend our positions through negotiations with the California Franchise Tax Board and through the California courts, if necessary. The payments did
not affect the recognition or measurement of unrecognized state tax benefits under FIN 48, and they had no impact on income tax expense.

For
further information regarding income tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsIncome Tax Expense" in our
2008 Form 10-K and Note 9 to the condensed consolidated financial statements in this Form 10-Q.

65

---



Table of Contents

Discontinued Operations

Our discontinued operations consist of two separate businesses: retirement recordkeeping business (RRB) and insurance brokerage
services (IBB). In the fourth quarter of 2007, we sold our RRB to Prudential Retirement, a subsidiary of Prudential Financial, Inc., for $103.0 million. We recorded a pre-tax
gain of $94.7 million, net of $2.1 million in transaction costs and a $6.2 million elimination of intangible assets, which included goodwill of $4.8 million attributed to
this business. The RRB was previously included in the Retail Banking reportable business segment.

In
June 2008, we sold our IBB subsidiary, UnionBanc Insurance Services, Inc., to a wholly-owned subsidiary of BB&T Corporation. We recorded a total pre-tax gain of
$10.0 million, net of $1.6 million in transaction costs, and an elimination of intangible assets consisting of goodwill of $74.7 million and other intangibles of
$11.0 million. The IBB was previously included in the Wholesale Banking reportable business segment.

These
transactions have been accounted for as discontinued operations. All prior period financial statements have been restated to reflect this accounting treatment. The assets and
liabilities of the discontinued operations have been separately identified on our condensed consolidated balance sheet and the assets are shown at the lower of cost or fair value less costs to
dispose. The average net assets or liabilities of our discontinued operations are reflected in our analysis of net interest margin.

Substantially
all of the assets and liabilities of the retirement recordkeeping and insurance brokerage businesses were liquidated by the end of the first quarter of 2009.

Securities

Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality, market risk and
liquidity. At June 30, 2009, approximately 98 percent of our securities, based upon carrying value, were investment grade. The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of securities are detailed in Note 4 to our condensed consolidated financial statements included in this Form 10-Q.

Our
securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. The largest component of our securities
available for sale is $7.2 billion for Asset and Liability Management (ALM) purposes. ALM securities are valued at fair value by a pricing service whose prices can be corroborated by recent
security trading activities.

Our
asset-backed securities primarily consist of collateralized loan obligations (CLO) securities, which are known as Cash Flow CLOs. A Cash Flow CLO is a structured finance product that
securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and
principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, we reassessed
the classification of our CLOs. On February 28, 2009, we reclassified $1.1 billion at fair value, from available for sale to held to maturity. The related unrealized pre-tax
loss of $589 million included in accumulated other comprehensive income (OCI) remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the CLOs.
However, there is no impact on earnings, as an equal fair value discount on the securities is being accreted through earnings over the remaining terms of the CLOs. No gain or loss was recognized at
the time of reclassification. We consider the held to maturity classification to be more appropriate because we have the ability and the intent to hold these securities to maturity.

At
June 30, 2009, the fair value of our CLO securities had declined by approximately $24.4 million from December 31, 2008, primarily due to widening credit spreads
and a general lack of liquidity in the marketplace. We estimate the fair value of our CLOs using an external pricing model, as well as broker quotes. The model is based on internally-developed
assumptions, utilizing market data derived from market

66

---



Table of Contents

participants
and credit rating agencies. These assumptions include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates. At June 30, 2009,
24 percent of our CLO securities were rated single-A or better by two of the three major rating agencies.

We
conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). During the second quarter of
2009, we recognized an insignificant amount of OTTI on one CLO security. Since no observable credit quality issues were present in the remaining CLO portfolio at June 30, 2009, the securities
were not other-than-temporarily impaired.

Analysis of Securities

The following table shows the remaining contractual maturities and expected yields of the securities based upon amortized cost at
June 30, 2009.

Included
in our securities available for sale portfolio at June 30, 2009 were securities used for ALM purposes of $7.2 billion. These securities had an expected weighted
average maturity of 3.9 years.

Securities Available For Sale

June 30, 2009MaturityOne Year
or Less

Over One Year
Through
Five Years

Over Five Years
Through
Ten Years

Over
Ten Years

Total
Amortized Cost(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldOther U.S. government

$
200,737


3.63
%
$
497,205


3.31
%
$




%
$




%
$
697,942


3.40
%Residential mortgage-backed securities(1)(2)


320


4.92


272,383


4.05


1,384,915


4.05


4,730,716


4.65


6,388,334


4.49State and municipal


1,931


7.43


10,236


7.04


13,675


3.34


22,511


5.17


48,353


5.14Asset-backed and debtsecurities








23,327


7.25


21,279


3.97


68,798


7.02


113,404


6.50Equity securities(3)


























100,157


Foreign securities


88


1.58




















88


1.58Total securities available for sale

$
203,076


3.67
%
$
803,151


3.72
%
$
1,419,869


4.04
%
$
4,822,025


4.69
%
$
7,348,278


4.36
%


Securities Held to Maturity

June 30, 2009MaturityOne Year
or Less

Over One Year
Through
Five Years

Over Five Years
Through
Ten Years

Over
Ten Years

Total
Amortized Cost(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldCollateralized loan obligations

$




%
$
7,628


5.35
%
$
1,196,858


1.75
%
$
531,694


1.67
%
$
1,736,180


1.74
%Total securities held to maturity

$




%
$
7,628


5.35
%
$
1,196,858


1.75
%
$
531,694


1.67
%
$
1,736,180


1.74
%


---

67

---



Table of Contents

Loans

The following table shows loans outstanding by loan type at the end of each period presented.

Increase (Decrease)
June 30, 2009 From:June 30,
2008

December 31,
2008(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
16,602,393

$
18,469,023

$
17,064,253

$
461,860


2.8
%
$
(1,404,770
)

(7.6
)%Construction


2,622,740


2,744,062


2,791,583


168,843


6.4


47,521


1.7Mortgage:Residential


14,852,058


15,880,835


16,216,264


1,364,206


9.2


335,429


2.1Commercial


7,912,592


8,186,388


8,255,659


343,067


4.3


69,271


0.8Total mortgage


22,764,650


24,067,223


24,471,923


1,707,273


7.5


404,700


1.7Consumer:Installment


1,957,379


2,201,602


2,353,090


395,711


20.2


151,488


6.9Revolving lines of credit


1,295,047


1,435,494


1,508,078


213,031


16.4


72,584


5.1Total consumer


3,252,426


3,637,096


3,861,168


608,742


18.7


224,072


6.2Lease financing


640,612


645,765


657,339


16,727


2.6


11,574


1.8Total loans held to maturity


45,882,821


49,563,169


48,846,266


2,963,445


6.5


(716,903
)

(1.4
)Total loans held for sale


158,537


22,381


50,254


(108,283
)

(68.3
)

27,873


nmTotal loans

$
46,041,358

$
49,585,550

$
48,896,520

$
2,855,162


6.2
%
$
(689,030
)

(1.4
)%


---

nm = not meaningful



Commercial, financial and industrial loans represent one of the largest categories in the loan portfolio. These loans are extended
principally to corporations, middle-market businesses and small businesses, with no industry concentration exceeding 10 percent of total loans.

Our
commercial market lending originates primarily through our commercial banking offices. These offices, which rely extensively on relationship-oriented banking, provide a variety of
services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a wide variety of financial services to major
corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer's specific industry. We are active in, among other sectors, the oil
and gas, communications, entertainment, retailing, power and utilities and financial services industries.

The
commercial, financial and industrial loan portfolio increased from June 30, 2008 to June 30, 2009 mainly due to increased loan demand and reduced competition primarily
in the power and utilities, oil and gas and national corporate customers.



We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust.

Construction
loans are extended primarily to commercial property developers and to residential builders. As of June 30, 2009, the construction loan portfolio consisted of
approximately 84 percent in the commercial income producing real estate industry and 16 percent with residential homebuilders. The construction loan portfolio increased from
June 30, 2008 to June 30, 2009 primarily due to loan advances for income property projects with apartment financing representing the largest component. During the same period, the
homebuilder portfolio fell by approximately 40 percent, or $283 million. Operating conditions continue to

68

---



Table of Contents

weaken
for our commercial property developers and residential homebuilders, and, as a result, we continue to experience negative risk grade trends in the overall portfolio.

Geographically,
the outstanding construction loan portfolio is concentrated 50 percent in California and 50 percent out of state. The California outstandings are
distributed as follows: 39 percent in the Los Angeles/Orange County region, including the Inland Empire, 25 percent in the San Francisco Bay Area, 18 percent from Sacramento and
Central Valley, 13 percent in San Diego, and 5 percent in the Central Coast region.

The
commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio increased from June 30,
2008 to June 30, 2009 due to increased demand and reduced competition in the California Middle Market sector for real estate related financing and a reduced rate of early loan repayments
associated with the tightening of the credit markets.



We originate residential mortgage loans, secured by one-to-four family residential properties, through our
multiple channel network (including branches, private bankers, mortgage brokers, and loan-by-phone) throughout California, Oregon and Washington, and we periodically purchase
loans in our market area.

At
June 30, 2009, 70 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had
relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 66 percent. The remainder of the portfolio consists of balloon or
regular amortizing loans.

We
do not have a program for originating or purchasing subprime loan products. However, we do have loan products that allow a customer to move more quickly through the loan origination
process by reducing the need to verify the income or assets of the customer. We refer to these as portfolio express loans. Portfolio express loans are only available to existing clients for
no-cash-out/rate and term refinance of existing residential mortgages with the Bank and eliminate the verification of both income and assets. "Low doc" and "no doc"
(discontinued in 2008) loans comprise less than half of our residential loan portfolio, and the delinquency rates relative to the outstanding balances at June 30, 2009 were nearly the same as
fully documented loans. At June 30, 2009, the total amount of "no doc" and "low doc" loans past due 30 days or more was $138.0 million, compared to $33.5 million at
June 30, 2008. The total amount of residential mortgages delinquent 30 days or more was $279.9 million at June 30, 2009, compared to $74.8 million at June 30,
2008. Although delinquencies have risen since June 30, 2008 as a result of the declining real estate market and downturn in the economy, the delinquency rate remains low compared to the
industry average for California prime loans. Our underwriting standards remain conservative and as described above, programs with higher risk have been suspended.

We
hold most of the loans we originate. However, we do sell our 30-year, fixed rate loans, except for CRA qualifying loans.



We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network and Private Banking
Offices. The increase in consumer loans from June 30, 2008 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to manage a line of
credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are classified as
installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs we offer. At
origination, these loans had relatively high credit scores and had weighted-average loan-to-value (LTV) ratios of approximately 60 percent. Our total home equity loans
and lines delinquent 30 days or more were $36.8 million at June 30, 2009, compared to $11.0 million at June 30, 2008. Our annual review program reviews all equity
secured lines with a commitment amount of

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Table of Contents

$200,000
or more and an origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. Action
is taken to reduce or freeze limits, as applicable, to minimize additional exposure in a declining market. In addition, to help mitigate the overall effect of the declining real estate market on new
originations, we reduced by 5 percent the maximum loan to value allowable for any owner or non owner occupied property valued over $250,000. The change was effective January 1, 2009.



We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional
financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At June 30, 2009, we had leveraged leases of
$549.8 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities
serve legal and tax purposes and do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by
law, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased
assets for repayment.

Cross-Border Outstandings

Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings.
These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of June 30 and
December 31, 2008 and June 30, 2009 for Canada, the only country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon
category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued
interest receivable, acceptances outstanding and investments with foreign entities. For the country shown in the table below, any significant local currency outstandings are funded by local currency
borrowings.

(Dollars in millions)

Financial
Institutions

Public
Sector
Entities

Corporations
and Other
Borrowers

Total
OutstandingsJune 30, 2008Canada

$
6

$


$
881

$
887December 31, 2008Canada

$
111

$


$
796

$
907June 30, 2009Canada

$
69

$


$
872

$
941


Provision for Credit Losses

We recorded a provision for loan losses of $95 million and $360 million in the second quarters of 2008 and 2009,
respectively. We recorded a provision for losses on off-balance sheet commitments of $5 million and $15 million in the second quarters of 2008 and 2009, respectively. The
provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management
based on the factors discussed under "Allowances for Credit Losses" below.

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Allowances for Credit Losses



We maintain allowances for credit losses (defined as both the allowance for loan losses and the allowance for off-balance
sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowances for credit
losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, our significant policies and methodology on the allowances for credit
losses are discussed in detail in Note 1 to our Consolidated Financial Statements and in the section "Allowances for Credit Losses" included in our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 2008 Form 10-K.



At June 30, 2009, our total allowances for credit losses were $1.2 billion, which consisted of $1,081.6 million
for loan losses and $166.4 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $1,165.8 million and $82.2 million of
allocated and unallocated allowance, respectively. At June 30, 2009, our allowances for credit loss coverage ratios were 2.55 percent of total loans and 113 percent of total
nonaccrual loans. At December 31, 2008, our total allowances for credit losses were $863 million, or 1.74 percent of the total loan portfolio, and 208 percent of total
nonaccrual loans.

In
addition, the allowances incorporate the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a LoanIncome Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans. At June 30, 2009 and December 31, 2008, total impaired loans were $1.1 billion and $416 million, respectively, and the associated
impairment allowances were $203 million and $107 million, respectively.

At
June 30, 2009 and December 31, 2008, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses was
$166 million and $125 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for
off-balance sheet commitment losses. Net charge offs were $152 million in the second quarter of 2009, compared to $32 million in the second quarter of 2008.

As
a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending
portfolios (especially our commercial real estate portfolio) and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $360 million in the second quarter
of 2009, compared to a provision for loan losses of $95 million in the second quarter of 2008. Overall, our loan portfolio experienced higher criticized assets, especially in the commercial
real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business portfolios, reflecting the continued deterioration in the economic
environment.

We
expect the elevated levels of quarterly provisions for credit losses, which we experienced in the first half of 2009, to continue during 2009. The factors driving the increase in our
projected provision during 2009 include management's belief that we are in a continued recessionary economic environment, which we believe will result in further deterioration in our loan portfolio.

During
the first quarter of 2009, the loss confirmation period (LCP) for residential mortgages and home equity loans and lines of credit products was updated to better reflect the impact
of recent economic conditions on losses within these portfolios. As a result of our analyses and peer surveys, the LCP for consumer home equity loans and residential mortgages was changed from between
1.5 years and 2 years, to 1 year, which

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resulted
in a lower provision for credit losses in the first quarter of 2009. In addition, during the second quarter of 2009, we reduced our commercial loan portfolio loss factors based on past charge
off experience over a slightly shorter economic time frame, further adjusted for an updated analysis of the severity of the economic cycle.

Other
than the above mentioned LCP change and change in our commercial loan portfolio loss factors, there were no other significant changes in estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the formula and specific or unallocated allowances for credit losses, except for the refinement in estimates and assumptions regarding the
effects of economic and business conditions on borrowers and other factors, which affected the assessment of the unallocated allowance.



At June 30, 2009, the formula allowance increased to $943 million, compared to $682 million at December 31,
2008. The net increase was primarily due to an increase in criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and higher loss factors for our consumer loan
and small business portfolios. At June 30, 2009, the specific allowance was $223 million, compared to $112 million at December 31, 2008.



At June 30, 2009, the unallocated allowance increased to $82 million, compared to $69 million at
December 31, 2008. Management believes that the current level of unallocated allowance is appropriate based on the weakening credit cycle and the level of uncertainty of the impact of the
current economic conditions on our principal portfolio segments. Additionally, the reasons for which we believe an unallocated allowance is warranted are detailed below.

In
our assessment as of June 30, 2009, management focused, in particular, on the factors and conditions set out below. There can be no assurance that the adverse impact of any of
these conditions on us will not be in excess of the ranges set forth.

Although
in certain instances the downgrading of a loan resulting from the effects of the conditions described below has been reflected in the formula allowance, management believes that
the impact of these events on the collectability of the applicable loans may not have been fully reflected in the level of nonperforming loans or in the internal risk grading process with respect to
such loans. In addition, our formula allowance does not take into consideration sector-specific changes in the severity of losses that are expected to arise from current economic conditions compared
with our historical losses. Accordingly, our evaluation of the probable losses related to the impact of these factors was reflected in the unallocated allowance. The evaluations of the inherent losses
with respect to these factors are subject to higher degrees of uncertainty because they are not identified with specific problem credits.

In
certain cases, we believe that credit migration is likely to be more severe than the long-run average, but a greater share of the inherent probable loss associated with
this credit migration is captured in the allocated allowance. The following describes the specific conditions we considered.



72

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73

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

For the Three Months
Ended June 30,

Increase (Decrease)

For the Six Months
Ended June 30,

Increase (Decrease)(Dollars in thousands)

2008

2009

Amount

Percent

2008

2009

Amount

PercentBalance, beginning of period

$
462,943

$
870,185

$
407,242


88.0
%
$
402,726

$
737,767

$
335,041


83.2
%Loans charged off:Commercial, financial and industrial


18,375


85,870


67,495


367.3


28,180


181,638


153,458


544.6Construction


9,550


23,153


13,603


142.4


9,550


25,469


15,919


166.7Commercial mortgage


497


23,533


23,036


4,635.0


497


27,869


27,372


5,507.4Residential mortgage


1,538


8,880


7,342


477.4


1,778


14,933


13,155


739.9Consumer


3,484


11,731


8,247


236.7


6,540


21,141


14,601


223.3Lease financing











nm











nmTotal loans charged off


33,444


153,167


119,723


358.0


46,545


271,050


224,505


482.3Recoveries of loans previously charged off:Commercial, financial and industrial


1,300


1,125


(175
)

(13.5
)

2,477


2,276


(201
)

(8.1
)Construction





150


150


nm





150


150


nmCommercial mortgage





18


18


nm





225


225


nmResidential mortgage





5


5


nm





20


20


nmConsumer


343


290


(53
)

(15.5
)

726


422


(304
)

(41.9
)Lease financing


193





(193
)

(100.0
)

208





(208
)

(100.0
)Total recoveries of loans previously charged off


1,836


1,588


(248
)

(13.5
)

3,411


3,093


(318
)

(9.3
)Net loans charged off


31,608


151,579


119,971


379.6


43,134


267,957


224,823


521.2Provision for loan losses


95,000


360,000


265,000


278.9


167,000


609,000


442,000


264.7Adjustments related to privatization





2,062


2,062


nm





2,062


2,062Foreign translation adjustment and other net additions


66


965


899


1,362.1


(191
)

761


952


(498.4
)Ending balance of allowance for loan losses

$
526,401

$
1,081,633

$
555,232


105.5
%
$
526,401

$
1,081,633

$
555,232


105.5
%Allowance for losses on off-balance sheet commitments


103,374


166,374


63,000


60.9


103,374


166,374


63,000


60.9Allowances for credit losses

$
629,775

$
1,248,007

$
618,232


98.2
%
$
629,775

$
1,248,007

$
618,232


98.2
%Allowance for loan losses to total loans(1)


1.14
%

2.21
%







1.14
%

2.21
%Allowances for credit losses to total loans(2)


1.37


2.55








1.37


2.55Provision for loan losses tonet loans charged off


300.56


237.50








387.17


227.28Net loans charged off to average loans outstanding for the period(3)


0.28


1.23








0.20


1.09


---

nm = not meaningful

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans and foreclosed assets. Nonaccrual loans are those for which
management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest. Effective on January 1, 2009, consumer home equity loans and one-to-four single family
residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However,
before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy
change, home equity and one-to-four family residential loans totaling $167.7 million ($5.7 million of which is restructured) have been placed on nonaccrual status
as of June 30, 2009. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to the Consolidated Financial Statements included in our 2008
Form 10-K.

Restructured
loans are loans in which the Bank has formally restructured all or a significant portion of the loan and provided a concession in the form of debt forgiveness, a
modification of interest rate and/or payment

74

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terms.
The impairment (the shortfall between the present value of the loan under modified terms and the carrying value) is normally recorded in noninterest expense at the date of restructuring.
Restructured loans are disclosed as nonperforming assets for the calendar year of restructuring, and, if performing under the modified terms for a sustained period, may be disclosed as performing
assets in the subsequent calendar year.

Foreclosed
assets include property where the Bank acquired title through foreclosure or "deed in lieu" of foreclosure.

The
following table sets forth an analysis of nonperforming assets.

Increase (Decrease)
June 30, 2009 From:June 30,
2008

December 31,
2008June 30,
2008

December 31,
2008

June 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
81,652

$
260,272

$
361,118

$
279,466


nm

$
100,846


38.7
%Construction


95,546


98,934


313,790


218,244


nm


214,856


nmCommercial mortgage


38,904


55,750


265,229


226,325


nm


209,479


nmResidential mortgage








142,354


142,354


nm


142,354


nmConsumer








19,635


19,635


nm


19,635


nmTotal nonaccrual loans


216,102


414,956


1,102,126


886,024


nm


687,170


nmRestructured loansCommercial, financial and industrial








300


300


nm


300


nmCommercial mortgage








3,511


3,511


nm


3,511


nmResidential mortgage


1,458


1,345


5,698


4,240


nm


4,353


nmTotal restructured loans


1,458


1,345


9,509


8,051


nm


8,164


nmForeclosed assets


7,384


20,214


32,967


25,583


nm


12,753


63.1Total nonperforming assets

$
224,944

$
436,515

$
1,144,602

$
919,658


nm

$
708,087


nmRestructured loans that continue to accrue interest

$


$


$
1,467

$
1,467


nm

$
1,467


nmAllowance for loan losses

$
526,401

$
737,767

$
1,081,633

$
555,232


nm

$
343,866


46.6
%Allowances for credit losses

$
629,775

$
863,141

$
1,248,007

$
618,232


98.2
%
$
384,866


44.6
%Nonaccrual loans to total loans


0.47
%

0.84
%

2.25
%Allowance for loan losses to nonaccrual loans(1)


243.59


177.79


98.14Allowances for credit losses to nonaccrual loans(2)


291.42


208.01


113.24Nonperforming assets to total loans and foreclosed assets


0.49


0.88


2.34Nonperforming assets to total assets


0.37


0.62


1.55


---

nm = not meaningful

The increase in nonaccrual loans from June 30, 2008 to June 30, 2009 was primarily due to an increase in commercial, construction
and commercial mortgage loans, primarily within the commercial real estate industry sector. Additionally, we had increases in residential and consumer home equity nonaccrual loans due to the change in
our nonaccrual accounting policy effective January 1, 2009. During the second quarters of 2008 and 2009, we had no sales and $23.1 million in sales of nonperforming loans, respectively.
Losses from these sales were reflected in charge offs.

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Table of Contents

Loans 90 Days or More Past Due and Still Accruing

Increase (Decrease)
June 30, 2009 From:June 30,
2008

December 31,
2008June 30,
2008

December 31,
2008

June 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
15,814

$
2,529

$
3,699

$
(12,115
)

(76.6
)%
$
1,170


46.3
%Construction




















Mortgage:Residential(1)


31,309


59,940





(31,309
)

(100.0
)

(59,940
)

(100.0
)Commercial





181











(181
)

(100.0
)Total mortgage


31,309


60,121





(31,309
)

(100.0
)

(60,121
)

(100.0
)Consumer and other(1)


4,109


8,097


307


(3,802
)

(92.5
)

(7,790
)

(96.2
)Total loans 90 days or more pastdue and still accruing

$
51,232

$
70,747

$
4,006

$
(47,226
)

(92.2
)
$
(66,741
)

(94.3
)


---

Fair Value of Financial Instruments

The following table reflects financial instruments measured at fair value on a recurring basis as of June 30, 2008,
December 31, 2008 and June 30, 2009. For additional information on the fair value of financial instruments, see Note 12 to these condensed consolidated financial statements.

June 30, 2008

December 31, 2008

June 30, 2009(Dollars in thousands)

Fair Value

Percentage
of Total

Fair Value

Percentage
of Total

Fair Value

Percentage
of TotalFinancial instruments recorded at fair value on a recurring basisAssets:Level 1

$
880,404


9
%
$
961,535


10
%
$
923,742


11
%Level 2


7,401,342


76


7,624,037


79


7,585,551


90Level 3


1,514,836


16


1,203,092


13


6,308


Netting Adjustment(1)


(71,964
)

(1
)

(153,377
)

(2
)

(117,153
)

(1
)Total

$
9,724,618


100
%
$
9,635,287


100
%
$
8,398,448


100
%As a percentage of total Company assets





16
%




14
%




11
%Liabilities:Level 1

$
1,560



%
$
56,470


6
%
$
50,592


7
%Level 2


2,123,932


104


1,131,570


109


757,265


110Level 3

















Netting Adjustment(1)


(71,964
)

(4
)

(153,377
)

(15
)

(117,153
)

(17
)Total

$
2,053,528


100
%
$
1,034,663


100
%
$
690,704


100
%As a percentage of total Company liabilities





4
%




2
%




1
%


---

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Table of Contents

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk primarily exists in interest rate risk in our non-trading balance sheet and, to a much lesser
degree, in price risk in our trading portfolio. The objective of market risk management is to mitigate any undue adverse impact on earnings and capital arising from changes in interest rates and other
market variables and to ensure the Bank has adequate sources of liquidity. This risk management objective supports our broad objective of enhancing shareholder value, which encompasses stable earnings
growth over time and capital stability.

The
Board of Directors, directly or through its appropriate sub-committee, approves our Asset and Liability Management, Investment and Derivatives Policy (ALM Policy), which
governs the management of market risk and guides our investment, derivatives and trading activities. The ALM Policy establishes the Bank's risk tolerance guidelines by outlining standards for
measuring market risk, creates
Board-level limits for specific market risks, establishes guidelines for reporting market risk and requires independent review and oversight of market risk activities.

In
an effort to ensure that the Bank has an effective process to identify, measure, monitor and manage market risk, the ALM Policy requires the Bank to establish an Asset Liability
Management Committee (ALCO), which is comprised of the members of the CEO Forum and the Treasurer. ALCO provides the broad and strategic guidance of market risk management by formulating
high-level strategies for market risk management and defining the risk/return direction for the Bank, and by approving the investment, derivatives and trading policies that govern the
Bank's activities. ALCO is also responsible for the ongoing management of market risk and approves specific risk management programs, including those related to interest rate hedging, investment
securities, wholesale funding and trading activities.

The
Treasurer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operational management of market risk through the funding, investment
and derivatives hedging activities of Corporate Treasury. The managers of the Global Markets Division and the Capital Markets Division are responsible for operational management of price risk through
the trading activities conducted in their respective divisions. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and MRM functions independently of all operating
and management units.

We
have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For
additional information about our market risk management, please see "Quantitative and Qualitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our 2008 Form 10-K.



During the first six months of 2009, our interest rate risk profile became more asset sensitive due to continued significant core
deposit growth which reduced Treasury funding levels while increasing cash and cash equivalent holdings.

At
June 30, 2009, Economic Net Interest Income (NII) sensitivity was asset sensitive to parallel rate shifts. A +200 basis point parallel shift would increase 12-month
Economic NII by 1.11 percent, while a similar downward shift would decrease it by 3.00 percent. At June 30, 2008, a +200 basis point parallel shift would reduce
12-month Economic NII by 2.84 percent, while a similar downward shift would increase it by 2.93 percent. We caution that significant low levels of current interest rates and
ongoing enhancements to our interest rate risk modeling may make prior-year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain
noninterest bearing deposit related fee and expense items. Those
adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.

77

---



Table of Contents

Economic NII

(Dollars in millions)

June 30,
2008

December 31,
2008

June 30,
2009+200 basis points

$
(64.1
)
$
0.2

$
27.6as a percentage of base case NII


(2.84
)%

0.01
%

1.11
%-200 basis points

$
66.1

$
(40.8
)
$
(74.5
)as a percentage of base case NII


2.93
%

(1.75
)%

(3.00
)%


The
above table is presented on a continuing operations basis, with all assets and liabilities associated with our discontinued operations eliminated. We believe that this approach
provides the best representation of our risk profiles.

In
the case of non-parallel yield curve changes, our Economic NII will benefit from curve steepening with short-term rates dropping and long-term
rates rising. Conversely, Economic NII will contract if the curve is inverted with short-term rates rising and long-term rates dropping.



During the first six months of 2009, the Bank moved towards an asset sensitive interest rate risk profile to position the Bank for
rising rates in the future. The termination of ALM fair value swaps, the unprecedented low level of interest rates, and strong core deposit growth continued to shift the interest rate risk profile
towards asset sensitive during the period. The remaining ALM derivatives portfolio continues to partially offset the risk of lower interest rates. In managing the interest rate sensitivity of our
balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary. During the first six months of
2009, the Bank purchased interest rate caps to mitigate the risk from rising rates.



At June 30, 2008 and 2009, our available for sale securities portfolio included $6.8 billion and $7.2 billion,
respectively, of securities for ALM purposes. At June 30, 2009, approximately $4.3 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as
required or permitted by law. During the second quarter of 2009, we purchased $450 million par value of securities, as part of our investment portfolio strategy, while approximately
$657 million par value of ALM securities matured or were called.

The
portfolio is expected to remain predominately comprised of agency securities as our non-agency securities continue to run-off during the remainder of 2009.
Based on current prepayment projections, the estimated ALM portfolio's effective duration was 2.4 at June 30, 2009, compared to 2.5 at June 30, 2008. Effective duration is a measure of
price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.4 suggests an expected price decrease of approximately 2.4 percent for an
immediate 1.0 percent parallel increase in interest rates.



During the first six months of 2009, the ALM derivatives portfolio increased by $850 million notional amount due to purchases of
$2.7 billion notional amount of LIBOR cap contracts, offset by maturities of $900 million and terminations of $950 million notional amount of receive fixed interest rate swaps and
floors.

The
fair value of the ALM derivative contracts decreased primarily due to maturities and terminations of interest rate swaps and floor option contracts, the market expectation of higher
future interest rates offset by the realization of income. For additional discussion of derivative instruments and our hedging strategies, see Note 13 to the condensed consolidated financial
statements in this Form 10-Q and Note 19 to our consolidated financial statements included in our 2008 Form 10-K.

78

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Table of Contents

The
following table provides the notional value and the fair value of our ALM derivatives portfolio as of June 30, 2008, December 31, 2008, and June 30, 2009 and the
change in fair value between December 31, 2008 and June 30, 2009.

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009

Increase (Decrease)
From December 31,
2008
to June 30,
2009Total gross notional amount of positions held for purposes other than trading:

$
9,250,000

$
5,400,000

$
6,250,000

$
850,000of which, interest rate swaps pay fixed rates of interest











Fair value of positions held for purposes other than trading:Gross positive fair value

$
163,065

$
317,569

$
139,765

$
(177,804
)Gross negative fair value











Positive (negative) fair value of positions, net

$
163,065

$
317,569

$
139,765

$
(177,804
)




We enter into trading account activities primarily as a financial intermediary for customers and, to some extent, for our own account.
By acting as a financial intermediary, we are able to provide our customers with access to a range of products supporting the securities, foreign exchange and derivatives markets. In acting for our
own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of
generating trading profits.

As
of June 30, 2009, we had $24.9 billion notional amount of interest rate derivative contracts. We enter into these agreements for customer accommodations and for our own
account, accepting risks up to management approved VaR levels.

We
market energy derivative contracts to existing energy industry customers, primarily oil and gas producers, in order to meet their hedging needs. All transactions are fully matched to
offsetting (mirror) derivative contracts with third parties to remove our exposure to market risk, with income earned on the credit spread. As of June 30, 2009, we had $3.5 billion
notional amount of energy derivative contracts with approximately half of these energy derivative contracts entered into as an accommodation for customers and the remaining half entered into as
matching contracts to remove our exposure to market risk on our customer accommodation transactions.

79

---



Table of Contents

The
following table provides the notional value and the fair value of our trading derivatives portfolio, net of credit reserve, as of June 30, 2008, December 31, 2008, and
June 30, 2009 and the change in fair value between December 31, 2008 and June 30, 2009.

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009

Increase (Decrease)
From December 31,
2008
to June 30,
2009Total gross notional amount of positions held for trading purposes:Interest rate

$
15,640,686

$
20,398,695

$
24,859,280

$
4,460,585Foreign exchange(1)


4,568,338


7,112,873


2,406,591


(4,706,282
)Equity





10,914


148,234


137,320Energy


5,618,740


3,757,674


3,501,515


(256,159
)Total

$
25,827,764

$
31,280,156

$
30,915,620

$
(364,536
)Fair value of positions held for trading purposes:Gross positive fair value

$
957,416

$
1,145,208

$
801,905

$
(343,303
)Gross negative fair value


946,122


1,137,724


761,488


(376,236
)Positive fair value of positions, net

$
11,294

$
7,484

$
40,417

$
32,933


---

Liquidity Risk

Liquidity risk is the undue risk to the Bank's earnings and capital, which would result from the Bank's inability to meet its
obligations as they come due without incurring unacceptable costs. The management of liquidity risk is governed by the ALM Policy under the oversight of ALCO. The Treasurer is responsible for
operational management of liquidity through the funding and investment functions of Corporate Treasury. ALCO also maintains a Liquidity Contingency Plan that identifies actions to be taken to ensure
adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding activities.

Liquidity
is managed using a total balance sheet perspective that analyzes both funding capacity available through increased liabilities and liquidation of assets relative to projected
demands for liquidity. The primary sources of liquidity are core deposits and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and
international. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank of San Francisco (FHLB). We maintain borrowing
capacity in excess of our wholesale funding requirements to meet our contingency funding needs.

Core
deposits provide us with a sizable source of relatively stable and low-cost funds. Our $47.7 billion in average core deposits, which includes demand deposits,
money market demand accounts, savings and consumer time deposits, combined with average stockholder's equity, funded 77.0 percent of average total assets of $71.5 billion in the second
quarter of 2009. Most of the remaining funding was provided by wholesale borrowings from secured and unsecured sources of varying maturities.

The
Bank has pledged collateral under secured borrowing facilities with the FHLB and the Federal Reserve Bank of San Francisco (FRB). Beginning in 2008, the Bank increased its reliance
on secured funding due to rate advantages compared to other financing sources. As of June 30, 2009, the Bank had $3.3 billion

80

---



Table of Contents

of
borrowings outstanding with the FHLB, of which $0.4 billion is short-term and included in Other Borrowed Funds. During the second quarter of 2009, outstanding borrowings under
the FRB Term Auction Facility program declined from $3.0 billion to zero. As of June 30, 2009, the Bank had a remaining combined unused borrowing capacity of $21.0 billion from
the FHLB and the FRB.

Our
securities portfolio provides liquidity through either securities sales or repurchase agreements. At June 30, 2009, we had capacity under repurchase agreements of
approximately $3.2 billion. In addition, cash and cash equivalents comprised a growing part of our liquidity position, which increased $6.1 billion from $3.9 billion at
March 31, 2009 to $10.0 billion at June 30, 2009. This was primarily due to increased balances in our due from FRB accounts.

The
Bank has a $4.0 billion unsecured Bank Note Program. As of June 30, 2009, the remaining available funding under the Bank Note Program was approximately
$2.6 billion. We do not have any firm commitments in place to sell securities under the Bank Note Program.

The
Temporary Liquidity Guarantee (TLG) Program was established by the Federal Deposit Insurance Corporation (FDIC) in October 2008. Under the TLG Program, as amended on June 3,
2009, the Bank's senior unsecured debt with a maturity date of more than 30 days and issued between October 14, 2008 and October 31, 2009 is guaranteed and backed by the full
faith and credit of the United States. The Bank is eligible to issue up to a maximum of $2.4 billion in senior unsecured debt under the TLG Program. At June 30, 2009, a total of
$1.1 billion of TLG Program guaranteed debt was outstanding, comprised of $1.0 billion in medium-term notes and the remainder of which are term fed funds. For debt issued
prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC
guarantee expires upon the earlier of either the maturity date of the debt or December 31, 2012.

In
addition to the funding provided by the Bank, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration with the SEC permitting ready
access to the public debt markets. As of June 30, 2009, $1.5 billion of debt or other securities were available for issuance under this shelf registration. We do not have firm
commitments in place to sell securities under this shelf registration.

We
believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. Management does not rely on any one source of liquidity and manages
availability in
response to changing balance sheet needs. The costs and ability to raise funds are influenced by our credit ratings. The following table provides our credit ratings as of June 30, 2009.

Union Bank, N.A.

UnionBanCal
CorporationStandard & Poor's

Long-term


A+


AShort-term


A-1


A-1Moody's

Long-term


A2


Short-term


P-1


Fitch

Long-term


A


AShort-term


F1


F1DBRS

Long-term


A (high)


AShort-term


R-1 (middle)


R-1 (low)


81

---



Table of Contents

Regulatory Capital

The following tables summarize our risk-based capital, risk-weighted assets, and risk-based capital
ratios.

UnionBanCal Corporation

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009

Minimum
Regulatory
RequirementCapital ComponentsTier 1 capital

$
4,774,046

$
5,466,713

$
5,409,445Tier 2 capital


1,726,816


1,773,391


1,780,922Total risk-based capital

$
6,500,862

$
7,240,104

$
7,190,367Risk-weighted assets

$
59,996,170

$
62,251,070

$
62,312,964Quarterly average assets

$
60,071,111

$
64,917,854

$
68,585,363




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
6,500,862


10.84
%
$
7,240,104


11.63
%
$
7,190,367


11.54
%
3$
4,985,037


8.0
%Tier 1 capital (to risk-weighted assets)


4,774,046


7.96


5,466,713


8.78


5,409,445


8.68

3
2,492,519


4.0Leverage(1)


4,774,046


7.95


5,466,713


8.42


5,409,445


7.89

3
2,743,415


4.0


---

Union Bank, N.A.

(Dollars in thousands)

June 30,
2008

December 31,
2008

June 30,
2009

Minimum
Regulatory
Requirement

"Well-Capitalized"
Regulatory
RequirementCapital ComponentsTier 1 capital

$
4,783,201

$
5,380,075

$
5,189,386Tier 2 capital


1,320,736


1,451,024


1,460,298Total risk-based capital

$
6,103,937

$
6,831,099

$
6,649,684Risk-weighted assets

$
59,763,156

$
62,025,970

$
62,228,803Quarterly average assets

$
59,610,458

$
64,737,767

$
68,782,111




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
6,103,937


10.21
%
$
6,831,099


11.01
%
$
6,649,684


10.69
%
3$
4,978,304


8.0
%
3$
6,221,880


10.0
%Tier 1 capital (to risk-weighted assets)


4,783,201


8.00


5,380,075


8.67


5,189,386


8.34

3
2,489,152


4.0

3
3,733,728


6.0Leverage(1)


4,783,201


8.02


5,380,075


8.31


5,189,386


7.54

3
2,751,284


4.0

3
3,439,106


5.0


---

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

As
of June 30, 2009, management believes the capital ratios of Union Bank met all regulatory requirements of "well-capitalized" institutions, which are
10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio.

Business Segments

The various operating segments reporting under our Chief Operating Officer and the Group Head of Pacific Rim Corporate Group have been
aggregated into two reportable business segments entitled "Retail Banking" and "Wholesale Banking" based upon the aggregation criteria prescribed in SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information."

82

---





Table of Contents

As part of our privatization transaction in 2008, goodwill of $980 million and $1,034 million was recorded in the reportable business segments
Retail Banking and Wholesale Banking, respectively. See Note 3 to the condensed consolidated financial statements in this Form 10-Q for more detail on our privatization
transaction.

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

The
tables that follows reflect the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of
our reportable business segments. The information presented does not necessarily represent the businesses' financial condition
and results of operations as if they were independent entities. We reflect a "market view" perspective in measuring our business segments. The market view is a measurement of our customer markets
aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues
and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management
accounting view are reflected in "Reconciling Items." The market view approach fosters cross-selling with a total profitability view of the products and services being managed. For example, the
Securities Trading and Sales unit within the Global Markets Division is a business unit that manages the fixed income securities activities for all retail and corporate customers throughout the Bank.
This unit retains and also allocates revenues and expenses to divisions responsible for such retail and commercial customer relationships.

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

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

However,
over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an
internal management reporting system used by management to measure the performance of the units and UnionBanCal as a whole. Our management reporting system identifies balance sheet and income
statement items for each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of
funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a
business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting
based on volume of usage. All other corporate expenses (overhead) are allocated to the business units based on a predetermined percentage of usage.

The
reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred,
our discontinued operations and the market view contribution. Our discontinued operations consist of two separate businesses: retirement

83

---



Table of Contents

recordkeeping
services and insurance brokerage business. For further information on discontinued operations, see Note 15 to the condensed consolidated financial statements in this
Form 10-Q.

Retail Banking





Wholesale BankingAs of and for the
Three Months Ended
June 30,

Increase/
(decrease)

As of and for the
Three Months Ended
June 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

Amount

PercentResults of operationsMarket View(dollars in thousands):Net interest income (expense)

$
233,006

$
280,147

$
47,141


20
%
$
283,017

$
414,070

$
131,053


46
%Noninterest income (expense)


126,085


110,139


(15,946
)

(13
)

88,111


100,539


12,428


14Total revenue


359,091


390,286


31,195


9


371,128


514,609


143,481


39Noninterest expense (income)


242,338


250,843


8,505


4


151,708


183,779


32,071


21Credit expense (income)


6,842


7,364


522


8


49,397


86,462


37,065


75Income (loss) from continuing operations before income taxes


109,911


132,079


22,168


20


170,023


244,368


74,345


44Income tax expense (benefit)


42,041


51,643


9,602


23


47,980


74,438


26,458


55Income (loss) from continuing operations


67,870


80,436


12,566


19


122,043


169,930


47,887


39Income from discontinued operations, net of income taxes











na











naNet income (loss)

$
67,870

$
80,436

$
12,566


19

$
122,043

$
169,930

$
47,887


39Average balancesMarket View (dollars in millions):Total loans

$
18,837

$
21,380

$
2,543


14

$
26,657

$
28,254

$
1,597


6Total assets


19,677


23,625


3,948


20


31,424


35,646


4,222


13Total deposits


18,487


25,572


7,085


38


18,378


28,199


9,821


53Financial ratiosMarket ViewRisk adjusted return on capital(1)


41
%

47
%







19
%

20
%Return on average assets(1)


1.39


1.37








1.56


1.91Efficiency ratio(2)


67.46


64.17








38.59


33.57




Other





Reconciling Items

UnionBanCal
CorporationAs of and for the
Three Months Ended
June 30,

Increase/
(decrease)

As of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

2008

2009

Amount

PercentResults of operationsMarket View
(dollars in thousands):Net interest income (expense)

$
(3,205
)
$
(134,905
)
$
(131,700
)

nm

$
(2,260
)
$
(8,966
)
$
510,558

$
550,346

$
39,788


8
%Noninterest income (expense)


6,198


(8,689
)

(14,887
)

nm


(20,768
)

(18,776
)

199,626


183,213


(16,413
)

(8
)Total revenue


2,993


(143,594
)

(146,587
)

nm


(23,028
)

(27,742
)

710,184


733,559


23,375


3Noninterest expense (income)


37,845


109,616


71,771


nm


(12,579
)

(12,180
)

419,312


532,058


112,746


27Credit expense (income)


38,779


266,192


227,413


nm


(18
)

(18
)

95,000


360,000


265,000


nmIncome (loss) from continuing operations before income taxes


(73,631
)

(519,402
)

(445,771
)

nm


(10,431
)

(15,544
)

195,872


(158,499
)

(354,371
)

nmIncome tax expense (benefit)


(24,457
)

(198,495
)

(174,038
)

nm


(3,990
)

(6,078
)

61,574


(78,492
)

(140,066
)

nmIncome (loss) from continuing operations


(49,174
)

(320,907
)

(271,733
)

nm


(6,441
)

(9,466
)

134,298


(80,007
)

(214,305
)

nmIncome from discontinued operations, net of income taxes


7,047





(7,047
)

(100
)%







7,047





(7,047
)

(100
)Net income (loss)

$
(42,127
)
$
(320,907
)
$
(278,780
)

nm

$
(6,441
)
$
(9,466
)
$
141,345

$
(80,007
)
$
(221,352
)

nmAverage balancesMarket View
(dollars in millions):Total loans

$
16

$
(87
)
$
(103
)

nm

$
(16
)
$
9

$
45,494

$
49,556

$
4,062


9Total assets


8,185


12,233


4,048


49


(16
)

(9
)

59,270


71,495


12,225


21Total deposits


6,852


2,029


(4,823
)

(70
)

(514
)

(1,448
)

43,203


54,352


11,149


26Financial ratiosMarket ViewRisk adjusted return on capital(1)


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


0.91
%

(0.45
)%Efficiency ratio(2)


na


na








na


na


56.94


68.28


---

na = not applicable

nm = not meaningful

84

---



Table of Contents

Retail Banking





Wholesale BankingAs of and for the
Six Months Ended
June 30,

Increase/
(decrease)

As of and for the
Six Months Ended
June 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

Amount

PercentResults of operationsMarket View
(dollars in thousands):Net interest income (expense)

$
454,031

$
528,849

$
74,818


16
%
$
539,471

$
756,442

$
216,971


40
%Noninterest income (expense)


246,747


215,391


(31,356
)

(13
)

165,770


185,211


19,441


12Total revenue


700,778


744,240


43,462


6


705,241


941,653


236,412


34Noninterest expense (income)


473,667


538,149


64,482


14


299,259


358,338


59,079


20Credit expense (income)


13,281


15,143


1,862


14


86,540


155,030


68,490


79Income (loss) from continuing operations before income taxes


213,830


190,948


(22,882
)

(11
)

319,442


428,285


108,843


34Income tax expense (benefit)


81,790


74,661


(7,129
)

(9
)

89,269


124,843


35,574


40Income (loss) from continuing operations


132,040


116,287


(15,753
)

(12
)

230,173


303,442


73,269


32Loss from discontinued operations, net of income taxes











na











naNet income (loss)

$
132,040

$
116,287

$
(15,753
)

(12
)
$
230,173

$
303,442

$
73,269


32Average balancesMarket View (dollars in millions):Total loans

$
18,412

$
21,241

$
2,829


15

$
25,689

$
28,524

$
2,835


11Total assets


19,230


23,491


4,261


22


30,458


35,554


5,096


17Total deposits


18,443


24,489


6,046


33


18,293


24,823


6,530


36Financial ratiosMarket ViewRisk adjusted return on capital(1)


42
%

33
%







19
%

19
%Return on average assets(1)


1.38


1.00








1.52


1.72Efficiency ratio(2)


67.57


72.20








39.93


35.80




Other





Reconciling Items

UnionBanCal
CorporationAs of and for the
Six Months Ended
June 30,

Increase/
(decrease)

As of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

2008

2009

Amount

PercentResults of operationsMarket View (dollars in thousands):Net interest income (expense)

$
(18,603
)
$
(164,384
)
$
(145,781
)

nm

$
(3,763
)
$
(10,558
)
$
971,136

$
1,110,349

$
139,213


14
%Noninterest income (expense)


20,543


(5,740
)

(26,283
)

(128
)%

(38,038
)

(36,933
)

395,022


357,929


(37,093
)

(9
)Total revenue


1,940


(170,124
)

(172,064
)

nm


(41,801
)

(47,491
)

1,366,158


1,468,278


102,120


7Noninterest expense (income)


72,284


180,184


107,900


149


(22,692
)

(23,230
)

822,518


1,053,441


230,923


28Credit expense (income)


67,212


438,874


371,662


nm


(33
)

(47
)

167,000


609,000


442,000


nmIncome (loss) from continuing operations before income taxes


(137,556
)

(789,182
)

(651,626
)

nm


(19,076
)

(24,214
)

376,640


(194,163
)

(570,803
)

nmIncome tax expense (benefit)


(43,818
)

(294,384
)

(250,566
)

nm


(7,297
)

(9,468
)

119,944


(104,348
)

(224,292
)

nmIncome (loss) from continuing operations


(93,738
)

(494,798
)

(401,060
)

nm


(11,779
)

(14,746
)

256,696


(89,815
)

(346,511
)

(135
)Loss from discontinued operations, net of income taxes


(6,761
)




6,761


(100
)







(6,761
)




6,761


100Net income (loss)

$
(100,499
)
$
(494,798
)
$
(394,299
)

nm

$
(11,779
)
$
(14,746
)
$
249,935

$
(89,815
)
$
(339,750
)

(136
)Average balancesMarket View
(dollars in millions):Total loans

$
12

$
(73
)
$
(85
)

nm

$
(15
)
$
(20
)
$
44,098

$
49,672

$
5,574


13Total assets


8,278


10,280


2,002


24


(15
)

(29
)

57,951


69,296


11,345


20Total deposits


7,186


2,229


(4,957
)

(69
)

(514
)

(1,027
)

43,408


50,514


7,106


16Financial ratiosMarket ViewRisk adjusted return on capital(1)


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


0.89
%

(0.26
)%Efficiency ratio(2)


na


na








na


na


57.75


66.98


---

na = not applicable

nm = not meaningful



Retail Banking provides financial products including credit, deposit, trust, investment management and risk management delivered
through our branches, relationship managers, private bankers and trust

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administrators,
to individuals, small businesses and institutional clients. Retail banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small
business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets. While the primary focus of Retail Banking's strategy is deposit
growth, an additional focus continues to be consumer and small business loan generation.

During
the six months ended June 30, 2009, net income of Retail Banking decreased compared to the same period in 2008, reflecting a 14 percent increase in noninterest
expense and a 13 percent decrease in noninterest income, partially offset by a 16 percent increase in net interest income.

Average
asset growth for the six months ended June 30, 2009 compared to the same period in 2008 was primarily driven by a 15 percent growth in average loans. The growth was
primarily driven by
increases of 12 percent in our average residential loan portfolio and 34 percent in our average consumer loan portfolio.

Average
deposits increased 33 percent during the six months ended June 30, 2009 compared to the same period in 2008. This increase was primarily due to the Retail Banking's
strategy which continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and
improving sales resources, establishing new locations and new products as well as deposit growth in balances held by our institutional clients. We expect that a larger branch network, along with this
Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.

Noninterest
income decreased during the six months ended June 30, 2009 compared to the same period in 2008 by 13 percent mainly as a result of lower trust and deposit fees.
Noninterest expense increased by 14 percent during the six months ended June 30, 2009, compared to the same period in 2008. This increase was primarily due to intangible asset
amortization related to our privatization, staff costs, FDIC deposit insurance assessment rate increase, and costs associated with an increasing deposit base.

Retail Bankingis comprised of the following major divisions: Retail Banking Branches, Consumer Asset Management, Wealth Management and
Institutional Services and Asset Management.



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



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

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Our
Retail Banking Branches and Consumer Asset Management divisions compete with larger banks by attempting to provide service quality superior to that of our major competitors. The
primary means of competing with community banks include our branch network and our technology to deliver banking services. We also offer convenient banking hours to consumers through our drive-through
banking locations and selected branches that are open seven days a week.

These
divisions compete with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as
investment brokerage companies, consumer finance companies, and residential real estate lenders.





Wholesale Banking offers financing, depository and cash management services to middle market and large corporate businesses primarily
headquartered in the western U.S. Wholesale Banking continues to focus on specific geographic markets and industry segments such as energy, entertainment and real estate. Relationship managers provide
credit services, including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade
financing and real estate financing. In addition to credit services, Wholesale Banking offers cash management services delivered through deposit managers with significant industry expertise and
experience in cash management solutions for businesses, U.S. correspondent banks and government entities, as well as investment and risk management products.

During
the six months ended June 30, 2009, net income of Wholesale Banking increased 32 percent, compared to the same period in 2008, due to higher net interest income and
higher noninterest income, partially offset by higher noninterest expense and higher credit expense. Net interest income increased by 40 percent during the six months ended June 30,
2009, compared to the same period in 2008, mainly due to higher loan volume in our commercial and industrial portfolio.

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For the six months ended June 30, 2009, average loans increased 11 percent compared to the same period in 2008. This increase was primarily in the
Energy Capital Services and National Banking divisions.

Wholesale
average deposit balances grew by 36 percent in the six months ended June 30, 2009 compared to the same period in 2008 due to deposit initiatives and higher government
agency balances.

Noninterest
income increased 12 percent during the six months ended June 30, 2009, compared to the same period in 2008, primarily due to higher trading portfolio income and
merchant banking fees reflected in the first quarter of 2008. Noninterest expense increased 20 percent in the six months ended June 30, 2009 compared to the same period in 2008 primarily
due to intangible asset amortization related to our privatization, and higher FDIC deposit insurance assessments.

Wholesale
Banking initiatives continue to include expanding deposit activities and loan strategies that include originating, underwriting and syndicating loans in core competency
markets, such as the California Middle Market, corporate banking, commercial real estate, energy, equipment leasing and commercial finance. Corporate Deposits and Global Treasury Management Division
provides processing services, including services such as Automated Clearing House (ACH), check processing and cash vault services.

Wholesale Bankingis comprised of the following main divisions:



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The
main strategy of our Wholesale Banking business units is to target industries and companies for which we can reasonably expect to be one of a customer's primary banks. Consistent
with this strategy, Wholesale Banking business units attempt to serve a large part of the targeted customers' credit and depository needs. The Wholesale Banking business units compete with other banks
primarily on the basis of the quality of our relationship managers, the level of industry expertise, the delivery of quality customer service, and our reputation as a "business bank." We also compete
with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks.
In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies.



The net loss increased by $394.3 million in the six months ended June 30, 2009, compared to the same period in 2008,
primarily due to a higher loan loss provision, higher noninterest expense and lower net interest income.

"Other"
includes the following items:



The
financial results for the six months ended June 30, 2009 were impacted by the following factors:



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The
financial results for the six months ended June 30, 2008 were impacted by the following factors:



Item 3.   Quantitative and Qualitative Disclosures About Market Risk

A discussion of our market risk exposure is incorporated by reference to Part I, Item 2 of this
Form 10-Q under the caption "Quantitative and Qualitative Disclosures About Market Risk" and to Part II, Item 1A of this Form 10-Q under the caption
"Risk Factors."

Item 4.   Controls and Procedures

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer)
have concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2009. This conclusion is based on an evaluation conducted under the
supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is
accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During
the quarter ended June 30, 2009, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain
reserves for losses from legal actions that are both probable and estimable. In addition, we believe the disposition of all claims currently pending will not have a material adverse effect on our
consolidated financial condition, operating results or liquidity.

Item 1A.   Risk Factors

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2008
Form 10-K, which is incorporated by reference herein, in addition to the following information.



Commencing
in 2007 and continuing throughout 2008 and into 2009, certain adverse financial developments have impacted the U.S. and global economies and financial markets and present
challenges for the banking and financial services industry and for UnionBanCal Corporation. These developments include a general recession both globally and in the U.S. and have contributed to
substantial volatility in the equity securities markets, as well as volatility and a tightening of liquidity in the credit markets. Weakened credit conditions and the contraction of the capital
markets have limited access to capital, reduced market liquidity and negatively impacted the value of securities and real property.

In
response, Congress adopted economic stimulus measures that former President Bush and President Obama signed into law at various times in 2008 and 2009, and the Federal Reserve Board
was prompted to decrease its discount rate and the federal funds rate numerous times during 2008. To help
mitigate deteriorating market conditions, on July 30, 2008, former President Bush signed into law a housing bill which grants the Treasury Department broad authority to safeguard Fannie Mae and
Freddie Mac and authorizes the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. In addition, commencing in 2008 and continuing into 2009, the Federal Reserve
Board implemented a variety of measures which seek to enhance market liquidity, including enhanced discount window lending, a term auction facility, term repurchase transactions, a term securities
lending facility and a primary dealer credit facility.

In
the third quarter of 2008, the volatility and disruption in the capital and credit markets reached unprecedented levels. On October 3, 2008, former President Bush signed into
law the Emergency Economic Stabilization Act of 2008 (the EESA) in response to the financial crises affecting the banking system and financial markets. The EESA was the result of a proposal by former
Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008, in response to the financial crises affecting the banking system and financial markets and going concern threats to
investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to the EESA, the maximum
deposit insurance amount was temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. On October 14, 2008, the FDIC announced the establishment of a
Temporary Liquidity Guarantee Program under which the FDIC will fully guarantee until December 31, 2009, all non-interest-bearing transaction accounts of insured depository
institutions that do not opt out of the program

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by
December 5, 2008. Pursuant to the Temporary Liquidity Guarantee Program, the FDIC will also guarantee newly issued senior unsecured debt of participating financial institutions and their
qualifying holding companies. All eligible institutions participated in the program without cost for the first 30 days of the program. After December 5, 2008, institutions are assessed
at the rate of ten basis points for transaction account balances in excess of $250,000 and at the rate, on an annualized basis, of 50 to 100 basis points of the amount of debt issued (on a sliding
scale, depending on length of maturity of the debt). Union Bank has elected to participate in the Temporary Liquidity Guarantee Program and during the first quarter of 2009, Union Bank issued
$1 billion principal amount of FDIC-guaranteed senior notes under this program. Further, pursuant to the EESA, on October 14, 2008, the U.S. Treasury announced a voluntary
Capital Purchase Program under its Troubled Asset Relief Program (TARP) pursuant to which the Treasury will purchase up to $250 billion in senior preferred stock of qualifying U.S. financial
institutions. Many banks and bank holding companies have participated in this program. UnionBanCal Corporation, as a wholly-owned subsidiary of a foreign bank, is not eligible to participate in the
Capital Purchase Program.

On
February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA) in an attempt to reverse the U.S. economic downturn. A large
portion of the ARRA is devoted to new federal spending programs designed to increase economic output, decrease unemployment and invest in national infrastructure. Of the $787 billion in federal
spending appropriated by the ARRA, $286 billion will be devoted to tax cuts, $120 billion will be used to fund infrastructure projects and $381 billion will be allocated for
social programs and other spending. A substantial portion of the appropriation funds will go directly to the states, which was a key element in the budget approved by the California Legislature and
signed by Governor Schwarzenegger on February 20, 2009.

On
March 31, 2009, the U.S. Treasury and the FDIC announced the Public-Private Investment Program (PPIP) that seeks to eliminate "toxic" real estate-backed assets from the balance
sheets of United States financial institutions through partnerships with private investors in an attempt to restore the normal functioning of secondary markets for securities backed by such assets,
encourage the extension of credit and restore investor confidence in financial institutions. The PPIP proposes to create Public-Private Investment Funds that will use private equity investment, equity
investment from the U.S. Treasury, U.S. Treasury debt financing, and FDIC- guaranteed debt to purchase "toxic" real estate assets and securities backed by such assets. The U.S. Treasury
has committed to furnish up to $100 billion of capital for the PPIP. As a foreign-owned bank holding company, we and Union Bank will not be authorized to participate in the "Legacy Loan"
portion of this program but are eligible to participate in the "Legacy Securities" portion of it.

On
June 17, 2009, the Treasury released a white paper entitled "Financial Regulatory ReformA New Foundation: Rebuilding Financial Supervision
and Regulation" (the Proposal) which outlined the Obama Administration's ambitious plan to extensively reform the U.S. financial regulatory system. If adopted in its entirety,
the Proposal will result in wide-ranging changes that will affect every aspect of the financial markets and the financial regulatory landscape. For example, the Proposal would alter or
eliminate several of the more significant recent legislative initiatives including the "functional regulation" regime of the Gramm-Leach-Bliley Act of 1999 and the interstate branching approval
process of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The Obama Administration hopes to sign legislation enacting the provisions of the Proposal by the end of
2009.

It
cannot be predicted whether these recent governmental actions will result in significant improvement in financial and economic conditions affecting the banking industry and the U.S.
economy. If, notwithstanding the federal government's recent fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present
additional significant challenges for the U.S. banking and financial services industry and for our company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not been eligible to
participate in some federal programs such as TARP and may not qualify for participation in future federal programs. While it is difficult to predict how long these conditions will exist and which
markets and businesses of our company may be affected, we have been experiencing adverse

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business
conditions and these factors could continue to present risks for some time for the industry and our company.



Dramatic declines in the housing market in the U.S. in general, and in California in particular, during 2008 and continuing in 2009,
with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of
asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative and cash securities and, more recently, commercial real estate loans, in turn, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an
increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic
pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. We cannot predict whether the difficult
conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and
others in the financial institutions industry. In particular, we may face the following risks in connection with these events:



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Deposits of Union Bank are insured up to statutory limits by the FDIC, and, accordingly, are subjected to deposit insurance assessments
to maintain the Deposit Insurance 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 what banks
pay for deposit insurance to the risks they pose and adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the insurance fund. This assessment
system resulted in annual assessments on deposits of Union Bank of approximately 5 basis points through 2008. Prior to this change, Union Bank was not paying any insurance assessments on deposits
under the FDIC's risk-related assessment system. An FDIC credit for prior contributions offset the assessment for 2007 and part of 2008. Since this credit was exceeded in the second
quarter of 2008, the deposit insurance assessments Union Bank pays have increased our costs.

As
a result of recent and significant bank failures, the FDIC determined that the reserve ratio for the Deposit Insurance Fund was 0.76 percent as of September 30, 2008 and
0.40 percent as of December 31, 2008, the lowest reserve ratio for the combined bank and thrift insurance fund since 1993. In accordance with the Reform Act, the FDIC must establish and
implement a plan within 90 days to restore the reserve ratio to 1.15 percent within five years (subject to extension due to extraordinary circumstances). For the quarter beginning
January 1, 2009, the FDIC has raised the base annual assessment rate for institutions in Risk Category I to between 12 to 14 basis points and in Risk Categories II, III and IV to
17, 35 and 50 basis points, respectively. An institution's assessment rate could be lowered by as much as two basis points based on the ratio of its long-term unsecured debt to deposits
or, for smaller institutions, by the ratio of its Tier 1 capital in excess of 15 percent to deposits. The assessment rate would be adjusted towards the maximum rate for Risk
Category I institutions that have a high level of brokered deposits or have experienced higher levels of asset growth (other than through acquisitions) and could be increased by as much as 10
basis points for institutions in Risk Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10 percent. An institution's base assessment rate would also be
increased if an institution's ratio of secured liabilities (including Federal Home Loan Bank advances) to deposits exceeds 15 percent. The maximum adjustment for secured liabilities for
institutions in Risk Categories I, II, III and IV would be 7, 10, 15 and 22.5 basis points, respectively.

On
February 27, 2009, the Board of Directors of the FDIC voted to amend the restoration plan for the Deposit Insurance Fund, adopt an interim rule (subject to comment) imposing an
emergency special assessment on insured institutions of 20 basis points on June 30, 2009 (to be collected on September 30, 2009), implement changes to the risk-based
assessment system, and set rates beginning the second quarter of 2009. The FDIC extended the restoration plan period to seven years, concluding that the problems facing the financial services sector
and the economy at large constitute extraordinary circumstances permitting such extension. The interim rule would also permit the FDIC to impose an emergency special assessment after

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June 30,
2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance or if the reserve ratio of the Deposit Insurance Fund falls to a level which
shall be zero or close to negative at the end of a calendar quarter. The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments designed to improve
how the assessment system differentiates for risk. Under the final rule, banks in Risk Category I will pay initial base assessment rates ranging from 12 to 16 basis points on an annual basis,
beginning on April 1, 2009, while the base annual assessment rates for institutions in Risk Categories II, III and IV will be adjusted to 22, 32 and 45 basis points, respectively. The
final rule provides incentives in the form of a reduction in assessment rates for institutions that hold long-term unsecured debt and provides for increases in the base assessment rates
for institutions that rely significantly on brokered deposits or secured liabilities.

In
addition, to the extent that assessments of participants in the Temporary Liquidity Guarantee Program (as described above) are
insufficient to cover the expenses or losses arising from the Temporary Liquidity Guarantee Program, the FDIC may impose one or more emergency special assessments on all FDIC-insured
depository institutions. Each such special assessment will be computed with reference to the amount by which an insured depository institution's average total assets exceed the sum of the
institution's average total tangible equity and average total subordinated debt.

On
May 22, 2009, the Board of Directors of the FDIC voted to levy a special assessment of 5 cents per $100, or 5 basis points, of each insured institution's total assets less
Tier 1 capital. The special assessmenta reduction from the original proposed assessment of 20 basis points on the regular assessment base of domestic depositsis part
of the FDIC's efforts to restore the Deposit Insurance Fund. The special assessment will be capped at 10 basis points of an institution's domestic deposits so that no institution will pay an amount
higher than it would have paid under the original proposal. The special assessment will be based on each institution's report of condition of June 30, 2009, collected on September 30,
2009, and booked as a second quarter expense for banks. The special assessment is in addition to the regular quarterly risk-based assessment.

Any
increases in the deposit insurance assessments Union Bank pays would further increase our costs.



We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our
customers and the Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will likely continue
in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also
change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches
to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or
fines. International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these
jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely
affect our activities and investments and those of our subsidiaries in the future.

On
June 29, 2009, the U.S. Supreme Court ruled that a state may enforce certain of its laws against national banks through judicial enforcement proceedings. This may increase
regulation and enforcement actions by states against national banks, including Union Bank.

We
maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil
penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent

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or
unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain
activities and damage to our reputation.

Additionally,
our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of
the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Under long-standing policy of the Federal Reserve Board, a bank holding company is expected to act as
a source of financial and managerial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances
where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve Board are (a) conducting open market operations in U.S. government securities,
(b) changing the discount rates on borrowings by
depository institutions and the federal funds rate, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the Federal Reserve Board
may have a material effect on our business, prospects, results of operations and financial condition.

Refer
to "Supervision and Regulation" in Item 1 of our 2008 Form 10-K for discussion of other laws and regulations that may affect our business.



In particular, there have been proposals made by President Obama, members of Congress and others that could reduce the amount
distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution's ability to foreclose on mortgage collateral. For example, on February 18,
2009, President Obama announced "The Homeowner Affordability and Stability Plan" as part of a plan designed to help up to 7 to 9 million families restructure or refinance their mortgages to
avoid foreclosure. On April 28, 2009, the Obama Administration announced additional details of the "Making Home Affordable Program", a comprehensive three-part plan intended to
stabilize the U.S. housing market that includes aggressive measures to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; a Home Affordable Refinance Program, which
will provide new access to refinancing for up to 4 to 5 million homeowners; and a Home Affordable Modification Program, which will reduce monthly payments on existing first lien mortgages for
up to 3 to 4 million at-risk homeowners. The Administration has also published detailed guidelines for the Home Affordable Modification Program and authorized servicers to begin
modifications under the plan immediately. A Second Lien Program coordinates with the first mortgage modification program to lower payments on second liens. Twelve servicers, including the five
largest, have now signed contracts and begun modifications under the program. Between loans covered by these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than
75 percent of all loans in the country are now covered by the Making Home Affordable Program. The implementation of these proposals, or other proposals limiting our rights as a creditor, could
increase our credit losses or increase our expense in pursuing our remedies as a creditor.



We are subject to certain industry-specific economic factors. For example, a significant and increasing portion of our total loan
portfolio is related to residential real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new
mortgage loan originations, and could negatively impact our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in
California could have an

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adverse
effect on our operations and the quality of our real estate loan portfolio. Although we do not engage in subprime or negative amortization lending, effects of recent subprime market
challenges, combined with the ongoing deterioration in the U.S. and California real estate markets, could result in further price reductions in single family home prices and a lack of liquidity in
refinancing markets. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the
collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.

We
provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors and are impacting the performance of our
commercial real estate and commercial and industrial portfolios. The commercial real estate industry in the U.S., and in California in particular, is being increasingly adversely impacted by the
recessionary environment and lack of liquidity in the financial markets. The home building industry in California has been especially adversely impacted by the deterioration in residential real estate
markets. Poor economic conditions and financial access for commercial real estate developers and homebuilders could continue to adversely affect commercial property values, resulting in higher
nonperforming assets and charge offs in this sector. Our commercial and industrial portfolio, and the communications/media industry, the retail industry, the energy industry and the technology
industry in particular, are also being impacted by recessionary market conditions. Continued volatility in fuel prices and energy costs could adversely affect businesses in several of these
industries. Conditions in the commercial real estate and commercial and industrial markets have lead us to take additional provisions against credit losses in these portfolios, as to which we expect a
higher level of charge offs during 2009. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans
or charge offs and a slowing of growth or reduction in our loan portfolio.



The State of California currently faces economic and fiscal challenges, the long-term impact of which on the State's
economy cannot be predicted with any certainty. A substantial majority of our assets, deposits and fee income are generated in California. As a result, poor economic conditions in California may cause
us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time,
including significant deterioration in the residential real estate sector, especially the subprime housing markets, and the California state government's budgetary and fiscal difficulties. Under the
budget plan approved by the California Legislature and signed by Governor Arnold Schwarzenegger on February 20, 2009, the State of California will reduce services, increase sales and income
taxes and other fees and take other expense reduction measures. In addition, California will fund a portion of the deficit through additional borrowings, which may include revenue anticipation
warrants, a relatively high-cost form of financing. However, California voters did not approve ballot measures required to enact the budget during a special election held on May 19,
2009. The measures would have set a cap on state spending and institute a "rainy day" fund for periods of fiscal difficulty for the State's budget, authorize the State to sell bonds based on future
lottery revenue, shift money from certain social programs, guarantee additional funds for schools and freeze lawmakers' pay when the State runs a deficit. The rejection of all of the revenue-related
ballot measures has resulted in budget deficits which would need to be addressed later in 2009.

On
June 25, 2009, the State Controller's Office announced that it would begin to issue IOUs in the form of registered warrants in July as the budget impasse has left the State
with insufficient cash. The registered warrants, with an annual interest rate for the IOUs at 3.75% for banks and other financial institutions willing to accept the warrants, are redeemable on
October 2, 2009 subject to the availability of funds. Union Bank announced that it would accept the registered warrants from customers until no later than July 10, 2009. On
July 24, 2009, the California legislature passed a new budget that Governor Schwarzenegger signed into law on July 28, 2009. This budget provides for significant spending cuts to
services, including education and healthcare. The financial and economic consequences of this situation cannot be predicted with any certainty

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at
this time. If the California state government's budgetary and fiscal difficulties continue or economic conditions in California decline further, we expect that our level of problem assets could
increase and our prospects for growth could be impaired.

Item 6.   Exhibits

| |      |  |                                                                                                                                                         
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 18.1 |  | Preferability Letter of Independent Registered Public Accounting Firm(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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

UNIONBANCAL CORPORATION (Registrant)Date:    August 14, 2009

By:

/s/ MASAAKI TANAKA Masaaki Tanaka President and Chief Executive Officer
(Principal Executive Officer)Date:    August 14, 2009

By:

/s/ DAVID I. MATSON David I. Matson Vice Chairman and Chief Financial Officer
(Principal Financial Officer)Date:    August 14, 2009

By:

/s/ DAVID A. ANDERSON David A. Anderson Executive Vice President and Controller
(Chief Accounting Officer)


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EXHIBIT INDEX

No.

Description18.1

Preferability Letter of Independent Registered Public Accounting Firm(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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100

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