**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

**For thequarterly period ended June 30, 2007**

**OR**

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

**For thetransition period from                 to                 **

**Commission file number 1-15081**

**UnionBanCal Corporation**

(Exact name of registrant asspecified in its charter)

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

 

**400 California StreetSan Francisco, California 94104-1302**

(Address and zip code ofprincipal executive offices)

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

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

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

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

Numberof shares of Common Stock outstanding at July 31, 2007: 138,399,605

 

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**UnionBanCal Corporationand Subsidiaries**

**TABLE OFCONTENTS**
|                                                                                                      | ** **                                                   | **Page  Number** |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|------------------|
| **PART I**                                                                                      | ** **                                                   | ** **       |
| **Financial Information**                                                                            | ** **                                                   | ** **       |
| Condensed Consolidated Financial Highlights                                                          |                                                         | 5                |
| ITEM 1. FINANCIAL STATEMENTS:                                                                        |                                                         |             |
| Condensed Consolidated  Statements of Income                                                         |                                                         | 7                |
| Condensed Consolidated Balance  Sheets                                                               |                                                         | 8                |
| Condensed Consolidated Statements of Changes in  Stockholders’ Equity                           |                                                         | 9                |
| Condensed Consolidated  Statements of Cash Flows                                                     |                                                         | 10               |
| Notes to Condensed Consolidated Financial Statements                                                 |                                                         | 11               |
| ITEM 2. MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: |                                                         |             |
| Introduction                                                                                         |                                                         | 31               |
| Executive Overview                                                                                   |                                                         | 31               |
| Discontinued Operations                                                                              |                                                         | 32               |
| Critical Accounting Estimates                                                                        |                                                         | 33               |
| Financial Performance                                                                                |                                                         | 34               |
| Net Interest Income                                                                                  |                                                         | 37               |
| Noninterest Income and  Noninterest Expense                                                          |                                                         | 40               |
| Income Tax Expense                                                                                   |                                                         | 41               |
| Loans                                                                                                |                                                         | 42               |
| Cross-Border Outstandings                                                                            |                                                         | 44               |
| Provision for Credit Losses                                                                          |                                                         | 44               |
| Allowances for Credit Losses                                                                         |                                                         | 44               |
| Nonperforming Assets                                                                                 |                                                         | 47               |
| Loans 90 Days or More Past  Due and Still Accruing                                                   |                                                         | 48               |
| Quantitative and Qualitative  Disclosures About Market Risk                                          |                                                         | 48               |
| Liquidity Risk                                                                                       |                                                         | 51               |
| Regulatory Capital                                                                                   |                                                         | 53               |
| Business Segments                                                                                    |                                                         | 54               |
| Regulatory Matters                                                                                   |                                                         | 61               |
| ITEM 3. QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  |                                                         | 62               |
| ITEM 4. CONTROLS AND PROCEDURES                                                                      |                                                         | 63               |
| **PART II**                                                                                     | ** **                                                   | ** **       |
| **Other Information**                                                                                | ** **                                                   | ** **       |
| ITEM 1.                                                                                              | LEGAL PROCEEDINGS                                            |             | 64 |
| ITEM 1A.                                                                                             | RISK FACTORS                                                 |             | 64 |
| ITEM 2.                                                                                              | UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS |             | 72 |
| ITEM 4.                                                                                              | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS         |             | 73 |
| ITEM 6.                                                                                              | EXHIBITS                                                     |             | 73 |
| SIGNATURES                                                                                           |                                                         | 74               |

 

2

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**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This report includes forward-looking statements, whichinclude forecasts of our financial results and condition, expectations for ouroperations and business, and our assumptions for those forecasts andexpectations. Do not rely unduly on forward-looking statements. Actual resultsmight differ significantly from our forecasts and expectations. For adiscussion of risk factors relating to the Company’s business, please refer toItem 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q(this Form 10-Q).

This document includes forward-looking statements,which are subject to the “safe harbor” created by section 27A of the SecuritiesAct of 1933, as amended, and section 21E of the Securities Exchange Act of1934, as amended. We may make forward-looking statements in our Securities andExchange Commission (SEC) filings, press releases, news articles, conferencecalls with analysts and stockholders and when we are speaking on behalf ofUnionBanCal Corporation. Forward-looking statements can be identified by thefact 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, orfuture or conditional verbs such as “will,” “would,” “should,” “could,” “might,”or “may.” These forward-looking statements are intended to provide investorswith additional information with which they may assess our future potential.All of these forward-looking statements are based on assumptions about anuncertain future and are based on information available to us at the date ofthese statements. We do not undertake to update forward-looking statements toreflect facts, circumstances, assumptions or events that occur after the datethe forward-looking statements are made.

In this document, forexample, we make forward-looking statements, which discuss our expectationsabout:

·       Our business objectives,strategies and initiatives, the growth of our business and our competitiveposition

·       Our assessment ofsignificant factors and developments that have affected and may affect ourresults

·       Pending legal andregulatory actions, and future legislative and regulatory developments,including the effects of changes to the Federal Deposit Insurance Corporation’sdeposit insurance assessment policies, the SEC and the Federal Reserve Board’sproposed Regulation R and the pending Basel II rule proposal

·       Regulatory controls and processesand supervisory, enforcement or other governmental actions currently pending orthreatened against us regarding Bank Secrecy Act and anti-money launderingmatters, and their impact on our business

·       The costs and effects oflegal actions, investigations, regulatory actions, criminal proceedings orsimilar matters, or adverse facts and developments related thereto

·       Our ability to meetregulatory requirements

·       Credit quality andprovision for credit losses, including the expected need to provide for creditlosses due to anticipated loan growth, and our belief that improvement incredit quality has peaked

·       Our allowances for creditlosses, including the conditions we consider in determining the unallocatedallowance

·       Net interest income and theeffects on net interest income

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

·       Loan growth rates,including growth in our residential mortgage loan portfolio

3

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·       Deposit pricing pressuresand our deposit base, including trends in customers transferring funds fromnoninterest bearing deposits to interest bearing deposits or other investmentalternatives and our belief that pricing has stabilized

·       Our relatively highproportion of average noninterest bearing deposits to total deposits

·       Deposit renewals

·       Our ability and intent tohold various securities

·       The formation of financialsubsidiaries

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

·       The composition and marketsensitivity of our securities portfolios, our trading and hedging strategiesand our management of the sensitivity of our balance sheet

·       Potential dividend restrictions

·       Tax rates and taxes,including the possible effect of changes in Mitsubishi UFJ Financial Group’staxable profits on our California State tax obligations

·       Critical accountingpolicies and estimates and the impact of recent accounting pronouncements

·       Our insurance coverage

·       Estimated pension andhealth care costs and contributions

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

·       The relationship betweenour business and that of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJFinancial Group, Inc. and actions that may or may not be taken by The Bankof Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group, Inc.

·       Our strategies andexpectations regarding capital levels and returning excess capital tostockholders

·       The impact of strategicinvestments or other acquisitions on our business and benefits of marketingalliances

There are numerous risks and uncertainties that couldand will cause actual results to differ materially from those discussed in ourforward-looking statements. Many of these factors are beyond our ability tocontrol or predict and could have a material adverse effect on our stock price,financial condition, and results of operations or prospects. Such risks anduncertainties include, but are not limited to those listed in Item 1A “RiskFactors” of Part II and in Item 2 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of Part I of this Form 10-Q.

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

4

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**PART I. FINANCIAL INFORMATION**

**UnionBanCal Corporationand SubsidiariesCondensed Consolidated Financial Highlights(Unaudited)**

| ** **                                                                      | ** ** | **As of and for the** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **Three Months Ended**          | ** ** | ** **        | ** ** |
| ** **                                                                      | ** ** | **June 30,**                         | ** ** | **June 30,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                  | ** ** | **2007**          | ** ** | **Change** | ** ** |
| **Results of operations:**                                            |       |                                      |       |              |       |   |   |
| Net interest income(1)                                                          |       | $                                         | 469,000    |              | $          | 431,124 |   | (8.08 | )% |
| (Reversal of) provision for loan losses                                         |       | (1,000                                    | )          | 5,000             |       | nm |   |
| Noninterest income                                                              |       | 219,228                                   |       | 229,845           |       | 4.84 |   |
| Noninterest expense                                                             |       | 413,030                                   |       | 411,865           |       | (0.28 | ) |
| Income before income taxes(1)                                                   |       | 276,198                                   |       | 244,104           |       | (11.62 | ) |
| Taxable-equivalent adjustment                                                   |       | 1,358                                     |       | 2,251             |       | 65.76 |   |
| Income tax expense                                                              |       | 92,203                                    |       | 76,499            |       | (17.03 | ) |
| Income from continuing operations                                               |       | 182,637                                   |       | 165,354           |       | (9.46 | ) |
| Income from discontinued operations, net of taxes                               |       | 274                                       |       | —            |       | (100.00 | ) |
| Net income                                                                      |       | $                                         | 182,911    |              | $          | 165,354 |   | (9.60 | ) |
| **Per common share:**                                                           |       |                                      |       |              |       |   |   |
| Basic  earnings:                                                                |       |                                      |       |              |       |   |   |
| From continuing operations                                                      |       | $                                         | 1.28       |              | $          | 1.20 |   | (6.25 | )% |
| Net income                                                                      |       | 1.28                                      |       | 1.20              |       | (6.25 | ) |
| Diluted  earnings:                                                              |       |                                      |       |              |       |   |   |
| From continuing operations                                                      |       | 1.26                                      |       | 1.19              |       | (5.56 | ) |
| Net income                                                                      |       | 1.26                                      |       | 1.19              |       | (5.56 | ) |
| Dividends(2)                                                                    |       | 0.47                                      |       | 0.52              |       | 10.64 |   |
| Book value (end of period)                                                      |       | 32.34                                     |       | 33.45             |       | 3.43 |   |
| Common shares outstanding (end of period)(3)                                    |       | 142,533,794                               |       | 138,314,564       |       | (2.96 | ) |
| Weighted average common shares outstanding—basic(3)                        |       | 142,723,271                               |       | 137,476,765       |       | (3.68 | ) |
| Weighted average common shares outstanding—diluted(3)                      |       | 144,878,447                               |       | 139,137,955       |       | (3.96 | ) |
| **Balance sheet (end of period):**                                              |       |                                      |       |              |       |   |   |
| Total assets(4)                                                                 |       | $                                         | 50,800,136 |              | $          | 53,173,833 |   | 4.67 | % |
| Total loans                                                                     |       | 34,747,833                                |       | 37,743,222        |       | 8.62 |   |
| Nonperforming assets                                                            |       | 36,351                                    |       | 29,826            |       | (17.95 | ) |
| Total deposits                                                                  |       | 40,544,251                                |       | 42,090,306        |       | 3.81 |   |
| Stockholders’ equity                                                       |       | 4,608,908                                 |       | 4,627,147         |       | 0.40 |   |
| **Balance sheet (period average):**                                             |       |                                      |       |              |       |   |   |
| Total assets                                                                    |       | $                                         | 49,329,374 |              | $          | 53,116,454 |   | 7.68 | % |
| Total loans                                                                     |       | 35,146,976                                |       | 38,839,769        |       | 10.51 |   |
| Earning assets                                                                  |       | 44,358,594                                |       | 48,443,246        |       | 9.21 |   |
| Total deposits                                                                  |       | 39,692,052                                |       | 42,684,022        |       | 7.54 |   |
| Stockholders’ equity                                                       |       | 4,539,476                                 |       | 4,588,061         |       | 1.07 |   |
| **Financial ratios****(5)****:**                                                |       |                                      |       |              |       |   |   |
| Return on  average assets(6):                                                   |       |                                      |       |              |       |   |   |
| From continuing operations                                                      |       | 1.49                                      | %          | 1.25              | %          |   |   |
| Net income                                                                      |       | 1.49                                      |       | 1.25              |       |   |   |
| Return on  average stockholders’ equity(6):                                |       |                                      |       |              |       |   |   |
| From continuing operations                                                      |       | 16.14                                     |       | 14.46             |       |   |   |
| Net income                                                                      |       | 16.16                                     |       | 14.46             |       |   |   |
| Efficiency ratio(7)                                                             |       | 61.73                                     |       | 62.31             |       |   |   |
| Net interest margin(1)                                                          |       | 4.23                                      |       | 3.56              |       |   |   |
| Dividend payout ratio                                                           |       | 36.72                                     |       | 43.33             |       |   |   |
| Tangible common equity ratio                                                    |       | 8.19                                      |       | 7.87              |       |   |   |
| Tier 1 risk-based capital ratio(4)                                              |       | 8.92                                      |       | 8.59              |       |   |   |
| Total risk-based capital ratio(4)                                               |       | 12.05                                     |       | 11.54             |       |   |   |
| Leverage ratio(4)                                                               |       | 8.74                                      |       | 8.30              |       |   |   |
| Allowances for credit losses to total loans(8)                                  |       | 1.17                                      |       | 1.11              |       |   |   |
| Allowances for credit losses to nonaccrual loans(8)                             |       | 1,130.05                                  |       | 1,456.97          |       |   |   |
| Net loans charged off to average total loans(6)                                 |       | 0.12                                      |       | 0.02              |       |   |   |
| Nonperforming assets to total loans and foreclosed  assets                      |       | 0.10                                      |       | 0.08              |       |   |   |
| Nonperforming assets  to total assets(4)                                        |       | 0.07                                      |       | 0.06              |       |   |   |

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

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

(3)                   Common shares outstanding reflect commonshares issued less treasury shares. Weighted average common shares outstanding—basic excludes nonvestedrestricted shares but includes the impact of those shares in the calculation ofdiluted shares.

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

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

(6)                   Annualized.

(7)                   The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the (reversal of)provision for losses on off-balance sheet commitments, as apercentage of net interest income (taxable-equivalent basis) and noninterestincome and is calculated for continuing operations only.

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

nm = not meaningful

5

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

| ** **                                                                      | ** ** | **As of and for the** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **Six Months Ended**            | ** ** | ** **        | ** ** |
| ** **                                                                      | ** ** | **June 30,**                         | ** ** | **June 30,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                  | ** ** | **2007**          | ** ** | **Change** | ** ** |
| **Results of operations:**                                                      |       |                                      |       |              |       |   |   |   |   |
| Net interest income(1)                                                          |       | $                                         | 935,341    |              | $          | 861,751 |   |   | (7.87 | )% |   |
| (Reversal of) provision for loan losses                                         |       | (8,000                                    | )          | 9,000             |       |   | nm |   |   |
| Noninterest income                                                              |       | 437,138                                   |       | 452,403           |       |   | 3.49 |   |   |
| Noninterest expense                                                             |       | 827,574                                   |       | 833,956           |       |   | 0.77 |   |   |
| Income before income taxes(1)                                                   |       | 552,905                                   |       | 471,198           |       |   | (14.78 | ) |   |
| Taxable-equivalent adjustment                                                   |       | 2,606                                     |       | 4,366             |       |   | 67.54 |   |   |
| Income tax expense                                                              |       | 186,207                                   |       | 151,867           |       |   | (18.44 | ) |   |
| Income from continuing operations                                               |       | 364,092                                   |       | 314,965           |       |   | (13.49 | ) |   |
| Loss from discontinued operations, net of taxes                                 |       | (8,236                                    | )          | —            |       |   | 100.00 |   |   |
| Net income                                                                      |       | $                                         | 355,856    |              | 314,965    |   |   | (11.49 | ) |   |
| **Per common share:**                                                           |       |                                      |       |              |       |   |   |   |   |
| Basic  earnings:                                                                |       |                                      |       |              |       |   |   |   |   |
| From continuing operations                                                      |       | $                                         | 2.54       |              | $          | 2.29 |   |   | (9.84 | )% |   |
| Net income                                                                      |       | 2.49                                      |       | 2.29              |       |   | (8.03 | ) |   |
| Diluted  earnings:                                                              |       |                                      |       |              |       |   |   |   |   |
| From continuing operations                                                      |       | 2.51                                      |       | 2.26              |       |   | (9.96 | ) |   |
| Net income                                                                      |       | 2.45                                      |       | 2.26              |       |   | (7.76 | ) |   |
| Dividends(2)                                                                    |       | 0.88                                      |       | 0.99              |       |   | 12.50 |   |   |
| Book value (end of period)                                                      |       | 32.34                                     |       | 33.45             |       |   | 3.43 |   |   |
| Common shares outstanding (end of period)(3)                                    |       | 142,533,794                               |       | 138,314,564       |       |   | (2.96 | ) |   |
| Weighted average common shares outstanding—basic(3)                        |       | 143,098,104                               |       | 137,708,257       |       |   | (3.77 | ) |   |
| Weighted average common shares outstanding—diluted(3)                      |       | 145,293,781                               |       | 139,360,012       |       |   | (4.08 | ) |   |
| **Balance sheet (end of period):**                                              |       |                                      |       |              |       |   |   |   |   |
| Total assets(4)                                                                 |       | $                                         | 50,800,136 |              | $          | 53,173,833 |   |   | 4.67 | % |   |
| Total loans                                                                     |       | 34,747,833                                |       | 37,743,222        |       |   | 8.62 |   |   |
| Nonperforming assets                                                            |       | 36,351                                    |       | 29,826            |       |   | (17.95 | ) |   |
| Total deposits                                                                  |       | 40,544,251                                |       | 42,090,306        |       |   | 3.81 |   |   |
| Stockholders’ equity                                                       |       | 4,608,908                                 |       | 4,627,147         |       |   | 0.40 |   |   |
| **Balance sheet (period average):**                                             |       |                                      |       |              |       |   |   |   |   |
| Total assets                                                                    |       | $                                         | 48,676,618 |              | $          | 53,045,236 |   |   | 8.97 | % |   |
| Total loans                                                                     |       | 34,602,546                                |       | 38,649,947        |       |   | 11.70 |   |   |
| Earning assets                                                                  |       | 43,724,990                                |       | 48,399,343        |       |   | 10.69 |   |   |
| Total deposits                                                                  |       | 39,276,352                                |       | 42,086,858        |       |   | 7.16 |   |   |
| Stockholders’ equity                                                       |       | 4,539,080                                 |       | 4,549,348         |       |   | 0.23 |   |   |
| **Financial ratios****(5)****:**                                                |       |                                      |       |              |       |   |   |   |   |
| Return on  average assets(6):                                                   |       |                                      |       |              |       |   |   |   |   |
| From continuing operations                                                      |       | 1.51                                      | %          | 1.20              | %          |   |   |   |   |
| Net income                                                                      |       | 1.47                                      |       | 1.20              |       |   |   |   |   |
| Return on  average stockholders’ equity(6):                                |       |                                      |       |              |       |   |   |   |   |
| From continuing operations                                                      |       | 16.18                                     |       | 13.96             |       |   |   |   |   |
| Net income                                                                      |       | 15.81                                     |       | 13.96             |       |   |   |   |   |
| Efficiency ratio(7)                                                             |       | 61.91                                     |       | 63.38             |       |   |   |   |   |
| Net interest margin(1)                                                          |       | 4.29                                      |       | 3.57              |       |   |   |   |   |
| Dividend payout ratio                                                           |       | 34.65                                     |       | 43.23             |       |   |   |   |   |
| Tangible common equity ratio                                                    |       | 8.19                                      |       | 7.87              |       |   |   |   |   |
| Tier 1 risk-based capital ratio(4)                                              |       | 8.92                                      |       | 8.59              |       |   |   |   |   |
| Total risk-based capital ratio4)                                                |       | 12.05                                     |       | 11.54             |       |   |   |   |   |
| Leverage ratio(4)                                                               |       | 8.74                                      |       | 8.30              |       |   |   |   |   |
| Allowances for credit losses to total loans(8)                                  |       | 1.17                                      |       | 1.11              |       |   |   |   |   |
| Allowances for credit losses to nonaccrual loans(8)                             |       | 1,130.05                                  |       | 1,456.97          |       |   |   |   |   |
| Net loans charged off to average total loans(6)                                 |       | 0.09                                      |       | 0.02              |       |   |   |   |   |
| Nonperforming assets to total loans and foreclosed  assets                      |       | 0.10                                      |       | 0.08              |       |   |   |   |   |
| Nonperforming assets to total assets(4)                                         |       | 0.07                                      |       | 0.06              |       |   |   |   |   |

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

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

(3)                   Common shares outstanding reflect commonshares issued less treasury shares. Weighted average common shares outstanding—basicexcludes nonvested restricted shares but includes the impact of those shares inthe calculation of diluted shares.

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

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

(6)                   Annualized.

(7)                   The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the (reversal of)provision for losses on off-balance sheet commitments, as apercentage of net interest income (taxable-equivalent basis) and noninterestincome and is calculated for continuing operations only.

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

nm = not meaningful

6

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**Item 1.**            Financial Statements

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

| ** **                                                                      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                                          | ** ** | **2007**                                                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Interest Income**                                                             |       |                                                              |       |                                                            |       |   |   |   |   |
| Loans                                                                           |       | $                                                                 | 547,256    |                                                            | $          | 616,558 |   | $ | 1,059,578 |   | $ | 1,218,491 |   |
| Securities                                                                      |       | 103,542                                                           |       | 109,418                                                         |       | 200,409 |   | 217,408 |   |
| Interest bearing deposits in banks                                              |       | 423                                                               |       | 1,295                                                           |       | 1,159 |   | 2,404 |   |
| Federal funds sold and securities purchased under  resale agreements            |       | 4,725                                                             |       | 7,809                                                           |       | 8,570 |   | 18,961 |   |
| Trading account assets                                                          |       | 1,554                                                             |       | 1,417                                                           |       | 2,986 |   | 3,004 |   |
| Total interest income                                                           |       | 657,500                                                           |       | 736,497                                                         |       | 1,272,702 |   | 1,460,268 |   |
| **Interest Expense**                                                            |       |                                                              |       |                                                            |       |   |   |   |   |
| Deposits                                                                        |       | 143,677                                                           |       | 246,175                                                         |       | 258,986 |   | 468,432 |   |
| Federal funds purchased and securities sold under  repurchase agreements        |       | 8,455                                                             |       | 10,120                                                          |       | 17,257 |   | 23,644 |   |
| Commercial paper                                                                |       | 19,137                                                            |       | 17,429                                                          |       | 31,585 |   | 39,693 |   |
| Medium and long-term debt                                                       |       | 16,875                                                            |       | 28,973                                                          |       | 27,272 |   | 48,668 |   |
| Trust notes                                                                     |       | 238                                                               |       | 238                                                             |       | 476 |   | 476 |   |
| Other borrowed funds                                                            |       | 1,476                                                             |       | 4,689                                                           |       | 4,391 |   | 21,970 |   |
| Total interest expense                                                          |       | 189,858                                                           |       | 307,624                                                         |       | 339,967 |   | 602,883 |   |
| **Net Interest Income**                                                         |       | 467,642                                                           |       | 428,873                                                         |       | 932,735 |   | 857,385 |   |
| (Reversal of) provision for loan losses                                         |       | (1,000                                                            | )          | 5,000                                                           |       | (8,000 | ) | 9,000 |   |
| Net interest income after (reversal of) provision for  loan losses              |       | 468,642                                                           |       | 423,873                                                         |       | 940,735 |   | 848,385 |   |
| **Noninterest Income**                                                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Service charges on deposit accounts                                             |       | 81,837                                                            |       | 77,218                                                          |       | 163,472 |   | 152,163 |   |
| Trust and investment management fees                                            |       | 48,380                                                            |       | 51,585                                                          |       | 98,495 |   | 100,145 |   |
| Insurance commissions                                                           |       | 17,752                                                            |       | 16,501                                                          |       | 37,270 |   | 36,751 |   |
| Brokerage commissions and fees                                                  |       | 10,330                                                            |       | 9,533                                                           |       | 18,125 |   | 19,193 |   |
| Merchant banking fees                                                           |       | 8,396                                                             |       | 8,809                                                           |       | 16,625 |   | 17,886 |   |
| Foreign exchange gains, net                                                     |       | 8,307                                                             |       | 9,288                                                           |       | 16,125 |   | 16,882 |   |
| Card processing fees, net                                                       |       | 7,206                                                             |       | 7,824                                                           |       | 13,903 |   | 14,951 |   |
| Securities gains, net                                                           |       | 1,993                                                             |       | 230                                                             |       | 1,779 |   | 1,450 |   |
| Other                                                                           |       | 35,027                                                            |       | 48,857                                                          |       | 71,344 |   | 92,982 |   |
| Total noninterest income                                                        |       | 219,228                                                           |       | 229,845                                                         |       | 437,138 |   | 452,403 |   |
| **Noninterest Expense**                                                         |       |                                                              |       |                                                            |       |   |   |   |   |
| Salaries and employee benefits                                                  |       | 248,637                                                           |       | 251,430                                                         |       | 501,132 |   | 509,945 |   |
| Net occupancy                                                                   |       | 34,519                                                            |       | 35,244                                                          |       | 67,356 |   | 70,381 |   |
| Outside services                                                                |       | 30,704                                                            |       | 18,851                                                          |       | 59,313 |   | 38,687 |   |
| Equipment                                                                       |       | 16,846                                                            |       | 16,367                                                          |       | 34,768 |   | 32,921 |   |
| Software                                                                        |       | 15,323                                                            |       | 15,136                                                          |       | 31,667 |   | 29,332 |   |
| Professional services                                                           |       | 17,038                                                            |       | 11,970                                                          |       | 31,585 |   | 29,057 |   |
| Communications                                                                  |       | 10,061                                                            |       | 8,855                                                           |       | 20,613 |   | 18,646 |   |
| Foreclosed asset expense (income)                                               |       | (7,782                                                            | )          | 9                                                               |       | (15,149 | ) | 18 |   |
| (Reversal of) provision for losses on off-balance  sheet commitments            |       | (4,000                                                            | )          | —                                                          |       | (7,000 | ) | 1,000 |   |
| Other                                                                           |       | 51,684                                                            |       | 54,003                                                          |       | 103,289 |   | 103,969 |   |
| Total noninterest expense                                                       |       | 413,030                                                           |       | 411,865                                                         |       | 827,574 |   | 833,956 |   |
| Income from continuing operations before income taxes                           |       | 274,840                                                           |       | 241,853                                                         |       | 550,299 |   | 466,832 |   |
| Income tax expense                                                              |       | 92,203                                                            |       | 76,499                                                          |       | 186,207 |   | 151,867 |   |
| **Income from Continuing Operations**                                           |       | 182,637                                                           |       | 165,354                                                         |       | 364,092 |   | 314,965 |   |
| Income (loss) from discontinued operations before  income taxes                 |       | 431                                                               |       | —                                                          |       | (13,172 | ) | — |   |
| Income tax expense (benefit)                                                    |       | 157                                                               |       | —                                                          |       | (4,936 | ) | — |   |
| **Income (loss) from Discontinued Operations**                                  |       | 274                                                               |       | —                                                          |       | (8,236 | ) | — |   |
| **Net Income**                                                                  |       | $                                                                 | 182,911    |                                                            | $          | 165,354 |   | $ | 355,856 |   | $ | 314,965 |   |
| **Income from continuing operations per common  share—basic**              |       | $                                                                 | 1.28       |                                                            | $          | 1.20 |   | $ | 2.54 |   | $ | 2.29 |   |
| **Net Income per common share—basic**                                      |       | $                                                                 | 1.28       |                                                            | $          | 1.20 |   | $ | 2.49 |   | $ | 2.29 |   |
| **Income from continuing operations per common  share—diluted**            |       | $                                                                 | 1.26       |                                                            | $          | 1.19 |   | $ | 2.51 |   | $ | 2.26 |   |
| **Net Income per common share—diluted**                                    |       | $                                                                 | 1.26       |                                                            | $          | 1.19 |   | $ | 2.45 |   | $ | 2.26 |   |
| **Weighted average common shares outstanding—basic**                       |       | 142,723                                                           |       | 137,477                                                         |       | 143,098 |   | 137,708 |   |
| **Weighted  average common shares outstanding—diluted**                    |       | 144,878                                                           |       | 139,138                                                         |       | 145,294 |   | 139,360 |   |

 

See accompanying notes to condensed consolidated financial statements.

7

----

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                           | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** | **(Unaudited)**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                                 | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| **Assets**                                                                                                                                                                           |       |              |       |                  |       |              |       |   |   |
| Cash and due from banks                                                                                                                                                              |       | $                 | 2,192,483  |                  |       | $                 | 2,213,782  |   |   | $ | 1,863,482 |   |
| Interest bearing deposits in banks                                                                                                                                                   |       | 31,691            |       |                  | 824,456    |              |       | 100,800 |   |
| Federal funds sold and securities purchased under  resale agreements                                                                                                                 |       | 1,252,514         |       |                  | 943,200    |              |       | 1,400,875 |   |
| Total cash and cash equivalents                                                                                                                                                      |       | 3,476,688         |       |                  | 3,981,438  |              |       | 3,365,157 |   |
| Trading account assets                                                                                                                                                               |       | 405,728           |       |                  | 376,321    |              |       | 307,012 |   |
| Securities available for  sale:                                                                                                                                                      |       |              |       |                  |       |              |       |   |   |
| Securities pledged as collateral                                                                                                                                                     |       | 83,229            |       |                  | 89,184     |              |       | 112,974 |   |
| Held in portfolio                                                                                                                                                                    |       | 8,573,909         |       |                  | 8,667,038  |              |       | 8,742,740 |   |
| Loans (net of allowance for loan losses:  June 30, 2006, $328,338; December 31, 2006, $331,077; June 30,  2007, $335,952)                                             |       | 34,419,495        |       |                  | 36,340,646 |              |       | 37,407,270 |   |
| Due from customers on acceptances                                                                                                                                                    |       | 21,850            |       |                  | 17,834     |              |       | 18,969 |   |
| Premises and equipment, net                                                                                                                                                          |       | 498,555           |       |                  | 495,302    |              |       | 488,719 |   |
| Intangible assets                                                                                                                                                                    |       | 35,759            |       |                  | 28,930     |              |       | 24,444 |   |
| Goodwill                                                                                                                                                                             |       | 453,489           |       |                  | 453,489    |              |       | 453,489 |   |
| Other assets                                                                                                                                                                         |       | 2,787,288         |       |                  | 2,148,954  |              |       | 2,253,059 |   |
| Assets of discontinued operations to be disposed or  sold                                                                                                                            |       | 44,146            |       |                  | 20,440     |              |       | — |   |
| Total assets                                                                                                                                                                         |       | $                 | 50,800,136 |                  |       | $                 | 52,619,576 |   |   | $ | 53,173,833 |   |
| **Liabilities**                                                                                                                                                                      |       |              |       |                  |       |              |       |   |   |
| Noninterest bearing                                                                                                                                                                  |       | $                 | 18,154,751 |                  |       | $                 | 17,113,890 |   |   | $ | 14,938,233 |   |
| Interest bearing                                                                                                                                                                     |       | 22,389,500        |       |                  | 24,855,478 |              |       | 27,152,073 |   |
| Total deposits                                                                                                                                                                       |       | 40,544,251        |       |                  | 41,969,368 |              |       | 42,090,306 |   |
| Federal funds purchased and securities sold under  repurchase  agreements                                                                                                            |       | 281,593           |       |                  | 1,083,927  |              |       | 1,281,162 |   |
| Commercial paper                                                                                                                                                                     |       | 1,645,107         |       |                  | 1,661,163  |              |       | 1,167,437 |   |
| Other borrowed funds                                                                                                                                                                 |       | 320,837           |       |                  | 432,401    |              |       | 606,896 |   |
| Acceptances outstanding                                                                                                                                                              |       | 21,850            |       |                  | 17,834     |              |       | 18,969 |   |
| Other liabilities                                                                                                                                                                    |       | 1,876,307         |       |                  | 1,545,165  |              |       | 1,531,762 |   |
| Medium and long-term debt                                                                                                                                                            |       | 1,473,924         |       |                  | 1,318,847  |              |       | 1,835,495 |   |
| Junior subordinated debt payable to subsidiary  grantor trust                                                                                                                        |       | 15,111            |       |                  | 14,885     |              |       | 14,659 |   |
| Liabilities of discontinued operations to be  extinguished or assumed                                                                                                                |       | 12,248            |       |                  | 4,585      |              |       | — |   |
| Total liabilities                                                                                                                                                                    |       | 46,191,228        |       |                  | 48,048,175 |              |       | 48,546,686 |   |
| Commitments,  contingencies and guarantees—See Note 9                                                                                                                           |       |              |       |                  |       |              |       |   |   |
| **Stockholders’  Equity**                                                                                                                                                       |       |              |       |                  |       |              |       |   |   |
| Preferred stock:                                                                                                                                                                     |       |              |       |                  |       |              |       |   |   |
| Authorized 5,000,000 shares; no shares issued or  outstanding as of June 30, 2006, December 31, 2006 and  June 30, 2007                                               |       | —            |       |                  | —     |              |       | — |   |
| Common stock, par value $1  per share:                                                                                                                                               |       |              |       |                  |       |              |       |   |   |
| Authorized 300,000,000 shares; issued 155,719,517  shares as of June 30, 2006, 156,460,057 shares as of December 31,  2006 and 157,060,102 shares as of June 30, 2007 |       | 155,720           |       |                  | 156,460    |              |       | 157,060 |   |
| Additional paid-in capital                                                                                                                                                           |       | 1,048,419         |       |                  | 1,083,649  |              |       | 1,127,607 |   |
| Treasury stock—13,185,723 shares as of June 30,  2006, 17,352,803 shares as of December 31, 2006 and 18,745,538 shares as  of June 30, 2007                 |       | (813,571          | )          |                  | (1,064,606 | )                 |       | (1,151,985 | ) |
| Retained earnings                                                                                                                                                                    |       | 4,390,188         |       |                  | 4,655,272  |              |       | 4,763,031 |   |
| Accumulated other comprehensive loss                                                                                                                                                 |       | (171,848          | )          |                  | (259,374   | )                 |       | (268,566 | ) |
| Total stockholders’ equity                                                                                                                                                      |       | 4,608,908         |       |                  | 4,571,401  |              |       | 4,627,147 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                     |       | $                 | 50,800,136 |                  |       | $                 | 52,619,576 |   |   | $ | 53,173,833 |   |

 

See accompanying notes to condensed consolidated financial statements.

8

----

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

| ** **                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | **Total**         | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | **other**         | ** ** | **stock-**        | ** ** |
| ** **                                                                                                    | ** ** | **Number**         | ** ** | **Common** | ** ** | **paid-in**    | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **holders’** | ** ** |
| **(In thousands, except shares)**                                                              | ** ** | **of shares** | ** ** | **stock**  | ** ** | **capital**    | ** ** | **stock**    | ** ** | **earnings** | ** ** | **loss**          | ** ** | **equity**        | ** ** |
| **BALANCE—DECEMBER 31, 2005**                                                                            |       | 154,469,215        |       | $          | 154,469    |           | $          | 994,956      |       | $            | (612,732   | )                 | $          | 4,141,400         |       |   | $ | (118,393 | ) |   | $ | 4,559,700 |   |
| Comprehensive income                                                                                          |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       |   |   |
| Net income—For the six months ended June 30,  2006                                                  |       |               |       |       |       |           |       |         |       | 355,856      |       |              |       |              |       | 355,856 |   |
| Other  comprehensive income, net of tax:                                                                      |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       |   |   |
| Net change in unrealized losses on cash flow hedges                                                           |       |               |       |       |       |           |       |         |       |         |       |              | (15,457    | )                 |       | (15,457 | ) |
| Net change in unrealized losses on securities  available for sale                                             |       |               |       |       |       |           |       |         |       |         |       |              | (38,060    | )                 |       | (38,060 | ) |
| Foreign currency translation adjustment                                                                       |       |               |       |       |       |           |       |         |       |         |       |              | 62         |              |       | 62 |   |
| Total comprehensive income                                                                                    |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       | 302,401 |   |
| Reclassifications due to  adoption of SFAS                                                                    |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       |   |   |
| No. 123(R) implementation(1)                                                                        |       |               |       |       |       | (19,035        | )          |         |       | 19,035       |       |              |       |              |       | — |   |
| Stock options exercised                                                                                       |       | 1,053,833          |       | 1,054      |       | 41,574         |       |         |       |         |       |              |       |              |       | 42,628 |   |
| Restricted stock granted, net of forfeitures                                                                  |       | 196,469            |       | 197        |       | (197           | )          |         |       |         |       |              |       |              |       | — |   |
| Excess tax benefit—stock-based compensation                                                              |       |               |       |       |       | 10,745         |       |         |       |         |       |              |       |              |       | 10,745 |   |
| Compensation expense—stock options                                                                       |       |               |       |       |       | 11,629         |       |         |       |         |       |              |       |              |       | 11,629 |   |
| Compensation expense—restricted stock                                                                    |       |               |       |       |       | 7,063          |       |         |       |         |       |              |       |              |       | 7,063 |   |
| Compensation expense—performance share units                                                             |       |               |       |       |       | 1,684          |       |         |       |         |       |              |       |              |       | 1,684 |   |
| Common stock repurchased(2)                                                                                   |       |               |       |       |       |           |       | (200,839     | )          |         |       |              |       |              |       | (200,839 | ) |
| Dividends declared on common stock, $0.88 per share(3)                                                        |       |               |       |       |       |           |       |         |       | (126,103     | )          |              |       |              |       | (126,103 | ) |
| Net change                                                                                                    |       |               |       | 1,251      |       | 53,463         |       | (200,839     | )          | 248,788      |       |              | (53,455    | )                 |       | 49,208 |   |
| **BALANCE—JUNE 30, 2006**                                                                                |       | 155,719,517        |       | $          | 155,720    |           | $          | 1,048,419    |       | $            | (813,571   | )                 | $          | 4,390,188         |       |   | $ | (171,848 | ) |   | $ | 4,608,908 |   |
| **BALANCE—DECEMBER 31, 2006**                                                                            |       | 156,460,057        |       | $          | 156,460    |           | $          | 1,083,649    |       | $            | (1,064,606 | )                 | $          | 4,655,272         |       |   | $ | (259,374 | ) |   | $ | 4,571,401 |   |
| Comprehensive income                                                                                          |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       |   |   |
| Net income—For the six months ended June 30,  2007                                                  |       |               |       |       |       |           |       |         |       | 314,965      |       |              |       |              |       | 314,965 |   |
| Other  comprehensive income, net of tax:                                                                      |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       |   |   |
| Net change in unrealized losses on cash flow hedges                                                           |       |               |       |       |       |           |       |         |       |         |       |              | 2,383      |              |       | 2,383 |   |
| Net change in unrealized losses on securities  available for sale                                             |       |               |       |       |       |           |       |         |       |         |       |              | (18,856    | )                 |       | (18,856 | ) |
| Foreign currency translation adjustment                                                                       |       |               |       |       |       |           |       |         |       |         |       |              | 303        |              |       | 303 |   |
| Pension and other benefits adjustment                                                                         |       |               |       |       |       |           |       |         |       |         |       |              | 6,978      |              |       | 6,978 |   |
| Total comprehensive income                                                                                    |       |               |       |       |       |           |       |         |       |         |       |              |       |              |       | 305,773 |   |
| FIN No. 48 adjustment(4)                                                                                 |       |               |       |       |       |           |       |         |       | (49,300      | )          |              |       |              |       | (49,300 | ) |
| FSP FAS 13-2 adjustment(5)                                                                                    |       |               |       |       |       |           |       |         |       | (20,803      | )          |              |       |              |       | (20,803 | ) |
| Stock options exercised                                                                                       |       | 577,828            |       | 578        |       | 23,150         |       |         |       |         |       |              |       |              |       | 23,728 |   |
| Restricted stock granted, net of forfeitures                                                                  |       | 17,005             |       | 17         |       | (17            | )          |         |       |         |       |              |       |              |       | — |   |
| Restricted stock and performance share units vested                                                           |       | 5,212              |       | 5          |       | (5             | )          |         |       |         |       |              |       |              |       | — |   |
| Excess tax benefit—stock-based compensation                                                              |       |               |       |       |       | 3,970          |       |         |       |         |       |              |       |              |       | 3,970 |   |
| Compensation expense—stock options                                                                       |       |               |       |       |       | 7,460          |       |         |       |         |       |              |       |              |       | 7,460 |   |
| Compensation expense—restricted stock                                                                    |       |               |       |       |       | 7,318          |       |         |       |         |       |              |       |              |       | 7,318 |   |
| Compensation expense—restricted stock units,  performance share units and other share-based compensation |       |               |       |       |       | 2,082          |       |         |       |         |       |              |       |              |       | 2,082 |   |
| Common stock repurchased(2)                                                                                   |       |               |       |       |       |           |       | (87,379      | )          |         |       |              |       |              |       | (87,379 | ) |
| Dividends declared on common stock, $0.99 per share(3)                                                        |       |               |       |       |       |           |       |         |       | (137,103     | )          |              |       |              |       | (137,103 | ) |
| Net change                                                                                                    |       |               |       | 600        |       | 43,958         |       | (87,379      | )          | 107,759      |       |              | (9,192     | )                 |       | 55,746 |   |
| **BALANCE—JUNE  30, 2007**                                                                               |       | 157,060,102        |       | $          | 157,060    |           | $          | 1,127,607    |       | $            | (1,151,985 | )                 | $          | 4,763,031         |       |   | $ | (268,566 | ) |   | $ | 4,627,147 |   |

----

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

(2)                   Common stock repurchased includescommission costs.

(3)                   Dividends are based on UnionBanCalCorporation’s shares outstanding as of the declaration date.

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

(5)                   See Note 2 of these condensed consolidatedfinancial statements for a description of the adoption of FASB Staff Position(FSP) FAS 13-2, “Accounting for a Change or Projected Change in theTiming of Cash Flows Relating to Income Taxes Generated by a Leveraged LeaseTransaction.”

See accompanying notes to condensed consolidated financial statements.

9

----

**UnionBanCalCorporation and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                          | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                                | ** ** | **2006**                                                        | ** ** | **2007** | ** ** |
| **Cash Flows from Operating  Activities:**                                                          |       |                                                            |       |   |   |
| Net income                                                                                          |       | $                                                               | 355,856    |   | $ | 314,965 |   |
| Loss from discontinued operations, net of taxes                                                     |       | (8,236                                                          | )          | — |   |
| Income from continuing operations, net of taxes                                                     |       | 364,092                                                         |       | 314,965 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                  |       |                                                            |       |   |   |
| (Reversal of) provision for loan losses                                                             |       | (8,000                                                          | )          | 9,000 |   |
| (Reversal of) provision for losses on off-balance  sheet commitments                                |       | (7,000                                                          | )          | 1,000 |   |
| Depreciation, amortization and accretion                                                            |       | 70,988                                                          |       | 60,666 |   |
| Stock-based compensation—stock options and other  share-based compensation                     |       | 20,376                                                          |       | 16,860 |   |
| Provision for deferred income taxes                                                                 |       | 53,787                                                          |       | 18,496 |   |
| Gains on sales of securities available for sale, net                                                |       | (1,779                                                          | )          | (1,450 | ) |
| Net (increase) decrease in trading account assets                                                   |       | (93,073                                                         | )          | 69,309 |   |
| Net increase in fees and other charges receivable                                                   |       | (93,122                                                         | )          | (101,099 | ) |
| Net increase in other liabilities                                                                   |       | 373,822                                                         |       | 22,011 |   |
| Net increase in other assets                                                                        |       | (619,200                                                        | )          | (120,893 | ) |
| Loans originated for resale                                                                         |       | (230,874                                                        | )          | (263,982 | ) |
| Net proceeds from sales of loans originated for  resale                                             |       | 168,122                                                         |       | 311,166 |   |
| Excess tax benefit—stock-based compensation                                                    |       | (10,745                                                         | )          | (3,970 | ) |
| Other, net                                                                                          |       | (14,944                                                         | )          | (13,134 | ) |
| Discontinued operations, net                                                                        |       | 197,538                                                         |       | 14,518 |   |
| Total adjustments                                                                                   |       | (194,104                                                        | )          | 18,498 |   |
| Net cash provided by operating activities                                                           |       | 169,988                                                         |       | 333,463 |   |
| **Cash  Flows from Investing Activities:**                                                          |       |                                                            |       |   |   |
| Proceeds from sales of securities available for sale                                                |       | 33,073                                                          |       | 296,375 |   |
| Proceeds from matured and called securities available  for sale                                     |       | 801,731                                                         |       | 775,608 |   |
| Purchases of securities available for sale                                                          |       | (1,387,817                                                      | )          | (1,200,525 | ) |
| Net purchases of premises and equipment                                                             |       | (22,277                                                         | )          | (43,853 | ) |
| Net increase in loans                                                                               |       | (1,590,712                                                      | )          | (1,137,454 | ) |
| Other, net                                                                                          |       | 15,477                                                          |       | 21 |   |
| Discontinued operations, net                                                                        |       | 719,130                                                         |       | 1,337 |   |
| Net cash used in investing activities                                                               |       | (1,431,395                                                      | )          | (1,308,491 | ) |
| **Cash  Flows from Financing Activities:**                                                          |       |                                                            |       |   |   |
| Net increase in deposits                                                                            |       | 462,012                                                         |       | 120,938 |   |
| Net increase (decrease) in federal funds purchased  and securities sold under repurchase agreements |       | (369,936                                                        | )          | 197,235 |   |
| Net increase (decrease) in commercial paper and other  borrowed funds                               |       | 1,151,432                                                       |       | (319,231 | ) |
| Proceeds from issuance of medium-term debt                                                          |       | 693,742                                                         |       | 749,250 |   |
| Payment of medium-term debt                                                                         |       | —                                                          |       | (200,000 | ) |
| Common stock repurchased                                                                            |       | (200,839                                                        | )          | (87,379 | ) |
| Payments of cash dividends                                                                          |       | (118,020                                                        | )          | (131,049 | ) |
| Stock-based compensation exercised                                                                  |       | 53,373                                                          |       | 27,698 |   |
| Other, net                                                                                          |       | 3,562                                                           |       | 1,053 |   |
| Discontinued operations, net                                                                        |       | (908,067                                                        | )          | — |   |
| Net cash provided by financing activities                                                           |       | 767,259                                                         |       | 358,515 |   |
| Net decrease in cash  and cash equivalents                                                          |       | (494,148                                                        | )          | (616,513 | ) |
| Cash and cash  equivalents at beginning of period                                                   |       | 3,969,876                                                       |       | 3,981,438 |   |
| Effect of exchange  rate changes on cash and cash equivalents                                       |       | 960                                                             |       | 232 |   |
| Cash and cash  equivalents at end of period                                                         |       | $                                                               | 3,476,688  |   | $ | 3,365,157 |   |
| **Cash  Paid During the Period For:**                                                               |       |                                                            |       |   |   |
| Interest                                                                                            |       | $                                                               | 306,562    |   | $ | 655,124 |   |
| Income taxes                                                                                        |       | 189,822                                                         |       | 144,903 |   |
| **Supplemental  Schedule of Noncash Investing and Financing Activities:**                           |       |                                                            |       |   |   |
| Loans transferred to  foreclosed assets (OREO)                                                      |       | $                                                               | 15         |   | $ | 1,114 |   |

 

See accompanying notes to condensed consolidated financial statements.

10

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**UnionBanCal Corporation and Subsidiaries**

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

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

The unaudited condensed consolidated financialstatements of UnionBanCal Corporation and subsidiaries have been prepared inaccordance with accounting principles generally accepted in the United States ofAmerica (US GAAP) for interim financial reporting and the instructions to Form 10-Qand Rule 10-01 of Regulation S-X of the Rules and Regulations of theSecurities and Exchange Commission (SEC). However, they do not include all ofthe disclosures necessary for annual financial statements in conformity with USGAAP. The results of operations for the period ended June 30, 2007 are notnecessarily indicative of the operating results anticipated for the full year. Accordingly,these unaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements included inUnionBanCal Corporation’s Annual Report on Form 10-K for the year ended December 31,2006 (2006 Form 10-K). The preparation of financial statements inconformity with US GAAP also requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod. Actual results could differ from those estimates.

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

Under a previously announced stock repurchase program,the Company was authorized to repurchase $62.2 million of the Company’s commonstock as of June 30, 2007. The Company repurchased $1.9 million ofcommon stock in the second quarter of 2007, compared to $120.8 million in thesecond quarter of 2006. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which isa wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., ownedapproximately 65 percent of the Company’s outstanding common stock at June 30,2007.

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

**Note 2—Recently IssuedAccounting Pronouncements**

*Accounting forUncertainty in Income Taxes*

In July 2006, the FASB issued FIN No. 48 “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”(FIN No. 48), which clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes.” The Interpretationestablishes a “more-likely-than-not” recognition threshold that must be metbefore a tax benefit can be recognized in the financial statements. For taxpositions that meet the more-likely-than-not threshold, an enterprise shouldrecognize the largest amount of tax benefit that is greater than 50 percentlikely of being realized upon ultimate settlement with the taxing authority. OnJanuary 1, 2007, the Company adopted FIN No. 48 and recognized a$49.3 million reduction to the beginning balance of retained earnings.

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

11

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**UnionBanCal Corporation and Subsidiaries**

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

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

other income tax accounts,primarily deferred taxes. The amount of unrecognized tax benefits that wouldaffect the effective tax rate, if recognized, was $53.9 million.

Interest and penalties pertaining to unrecognized taxbenefits are recognized in income tax expense. The Company had accrued $9.0million of interest expense and no penalties related to unrecognized taxbenefits as of the date of adoption. For the six months ended June 30,2007, the Company accrued $1.6 million of interest expense for itsuncertain tax positions. The Company does not accrue interest income on incometax refunds until they are realized.

During the second quarter of 2007, the statute oflimitations lapsed with respect to certain positions taken by the Company inprior year state tax returns. As a result, the total amount of unrecognized taxbenefits decreased by $10.7 million, with a net impact to income tax expense(including interest) of $8.4 million.

During the next 12 months, itis reasonably possible that the statute of limitations pertaining to positionstaken by the Company with respect to certain affiliates in prior year state taxreturns may lapse. As a result, the total amount of unrecognized tax benefitsmay decrease by zero up to $10 million, with a net impact to income taxexpense (including interest) of up to $8 million. The Company’s years open toexamination by major jurisdictions are 2003 and forward for federal and 2002and forward for state.

*Accounting for Changes in the Timing of Cash FlowsRelating to Income Taxes in Leveraged Leases*

In July 2006, the FASBissued Staff Position (FSP) FAS 13-2, “Accounting for a Change orProjected Change in the Timing of Cash Flows Relating to Income Taxes Generatedby a Leveraged Lease Transaction.” The FSP requires that if, during the leaseterm, the projected timing of the income tax cash flows generated by aleveraged lease is revised, the rate of return and the allocation of incomemust be recalculated from the inception of the lease. At adoption, the changein the net investment balance resulting from the calculation would berecognized as an adjustment to the beginning balance of retained earnings.Following adoption, a change in the net investment balance resulting from arecalculation would be recognized as a gain or a loss in the period in whichthe assumption is changed. The FSP is effective for all leveraged leases on January 1,2007. The Company invests in lease-in/lease-out (LILO) transactions that havebeen challenged by the Internal Revenue Service (IRS). The Company has paid theIRS the income tax associated with the LILO transactions. However, theCompany is defending the initial filing position as to the timing of the taxbenefits associated with these transactions. The Company adopted FSP FAS13-2 on January 1, 2007 and recalculated these leases to reflect thepotential change in the timing of income tax cash flows in accordance with thisFSP. At adoption, the Company’s beginning balance of retained earnings wasreduced by $20.8 million. The reduction to beginning retained earnings will berecognized in interest income over the remaining term of the affected leases.

*The Fair Value Optionfor Financial Assets and Financial Liabilities*

In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities, Including anamendment of FASB Statement No. 115.” The Statement permits entities tochoose to measure many financial instruments and certain other assets andliabilities at fair value on an instrument-by-instrument basis, withchanges in fair value recognized in earnings each 

12

----

**UnionBanCal Corporation and Subsidiaries**

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

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

reporting period. An entitycan elect the fair value option for existing assets and liabilities at the dateof initial adoption and when first recognizing eligible instruments. TheStatement is effective January 1, 2008. Management is currently evaluatingthe potential impact of this Statement on the Company’s financial position andresults of operations.

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

**Note 3—Discontinued Operations**

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

The Company accounted for this transaction as adiscontinued operation and restated its prior period financial statements. Theassets of the discontinued operations were reclassified as “held for sale” and accountedfor at the lower of cost or fair value less the costs to sell. 

Substantiallyall assets and liabilities of the discontinued operations were liquidated as ofMarch 31, 2007. At June 30, 2006 and December 31, 2006 theassets and liabilities identified as discontinued operations were comprised ofthe following:

| ** **                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **2006**          | ** ** | **2006**              | ** ** |
| **Assets**                                                            |       |              |       |                  |       |   |   |
| Cash and due from  banks                                              |       | $                 | 31,343     |                  |       | $ | 18,422 |   |   |
| Loans                                                                 |       | 10,286            |       |                  | 1,337      |   |   |
| Due from customers on  acceptances                                    |       | 911               |       |                  | 377        |   |   |
| Premises and  equipment                                               |       | 1                 |       |                  | —     |   |   |
| Other assets                                                          |       | 1,605             |       |                  | 304        |   |   |
| Assets of  discontinued operations to be disposed or sold             |       | $            | 44,146     |                  |       | $  | 20,440 |   |   |
| **Liabilities**                                                       |       |              |       |                  |       |   |   |
| Noninterest bearing  deposits                                         |       | $                 | 9          |                  |       | $ | — |   |   |
| Interest bearing  deposits                                            |       | 594               |       |                  | —     |   |   |
| Other liabilities                                                     |       | 11,645            |       |                  | 4,585      |   |   |
| Liabilities of discontinued  operations to be extinguished or assumed |       | $            | 12,248     |                  |       | $  | 4,585 |   |   |

 

13

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note3—Discontinued Operations (Continued)**

The components of income(loss) from discontinued operations for the three and six months ended June 30,2006 were:

| ** **                                                      | ** ** | **For the Three** | ** ** | **For the Six** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                      | ** ** | **Months Ended**       | ** ** | **Months Ended**     | ** ** |
| ** **                                                      | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| **(Dollars in thousands)**                            | ** ** | **2006**                    | ** ** | **2006**                  | ** ** |
| Net interest (expense)  income                                  |       |                        | $          | (86                       | )          |   |   | $ | 1,639 |   |   |
| Noninterest income                                              |       |                        | 7,105      |                      |       |   | 12,916 |   |   |
| Noninterest expense                                             |       |                        | 6,588      |                      |       |   | 27,727 |   |   |
| Income (loss) from  discontinued operations before income taxes |       |                        | 431        |                      |       |   | (13,172 | ) |   |
| Income tax expense (benefit)                                    |       |                        | 157        |                      |       |   | (4,936 | ) |   |
| Income (loss) from  discontinued operations                     |       |                        | $          | 274                       |       |   |   | $ | (8,236 | ) |   |

 

For the three and six monthsended June 30, 2006, net interest income included the allocation ofinterest expense from continuing operations to discontinued operations ofapproximately $0.4 million and $1.1 million, respectively. Interest expenseallocated to discontinued operations is calculated based on its average netassets and the corresponding cost of funds rate equivalent to the averagefederal funds purchased rate for the period. Noninterest income for the threeand six months ended June 30, 2006 included a $4.0 million payment fromWachovia Bank, N.A., reflecting the final settlement upon the conversion of theinternational correspondent banking customer base to Wachovia Bank, N.A. Includedin noninterest expense was compliance related expenses of $1.8 million and $7.1 million,for the three and six months ended June 30, 2006, respectively. Additionally,the Company recorded $1.4 million of expenses related to the termination oflease contracts in the second quarter 2006.

**Note 4—Earnings Per Share**

Basic earnings per share (EPS) ratio is computed bydividing net income by the weighted average number of common shares outstandingduring the period. Diluted EPS incorporates the dilutive effect of common stockequivalents outstanding on an average basis during the period. Stock options,nonvested restricted stock, nonvested restricted stock units and nonvestedperformance shares are common stock equivalents.

14

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**UnionBanCal Corporation and Subsidiaries**

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

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

The following table presents areconciliation of basic and diluted EPS for the three and six months ended June 30,2006 and 2007.

| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands,  except**              | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| **per share data)**                             | ** ** | **Basic**                                           | ** ** | **Diluted**                                       | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Income from continuing operations                         |       | $                                                   | 182,637    |                                              | $          | 182,637 |   | $ | 165,354 |   | $ | 165,354 |   | $ | 364,092 |   | $ | 364,092 |   | $ | 314,965 |   | $ | 314,965 |   |
| Income (loss) from discontinued  operations               |       | 274                                                 |       | 274                                               |       | — |   | — |   | (8,236 | ) | (8,236 | ) | — |   | — |   |
| Net income                                                |       | $                                                   | 182,911    |                                              | $          | 182,911 |   | $ | 165,354 |   | $ | 165,354 |   | $ | 355,856 |   | $ | 355,856 |   | $ | 314,965 |   | $ | 314,965 |   |
| Weighted average common shares  outstanding               |       | 142,723                                             |       | 142,723                                           |       | 137,477 |   | 137,477 |   | 143,098 |   | 143,098 |   | 137,708 |   | 137,708 |   |
| Additional shares due  to:                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed conversion of dilutive share-based  compensation  |       | —                                              |       | 2,155                                             |       | — |   | 1,661 |   | — |   | 2,196 |   | — |   | 1,652 |   |
| Adjusted weighted average common shares outstanding  |       | 142,723                                             |       | 144,878                                           |       | 137,477 |   | 139,138 |   | 143,098 |   | 145,294 |   | 137,708 |   | 139,360 |   |
| Income from continuing operations per  share              |       | $                                                   | 1.28       |                                              | $          | 1.26 |   | $ | 1.20 |   | $ | 1.19 |   | $ | 2.54 |   | $ | 2.51 |   | $ | 2.29 |   | $ | 2.26 |   |
| Income (loss) from discontinued operations per share |       | —                                              |       | —                                            |       | — |   | — |   | (0.05 | ) | (0.06 | ) | — |   | — |   |
| Net income per share                                      |       | $                                                   | 1.28       |                                              | $          | 1.26 |   | $ | 1.20 |   | $ | 1.19 |   | $ | 2.49 |   | $ | 2.45 |   | $ | 2.29 |   | $ | 2.26 |   |

 

Thefollowing table provides the number of options and the corresponding exerciseprices for those options, which were not included in the computation of dilutedearnings per share for the three and six months ended June 30, 2006 and2007 because they were anti-dilutive.

| ** **                     | ** ** | **For the Three Months Ended June 30,** | ** **     | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------|----------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                              | ** **     | **2007**                                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Options outstanding            |       | 1,088,725                                                             |           | 1,817,495                                                           |       | 1,088,725 |   | 1,817,495 |   |
| Exercise price of options |       | $                                                                     | 68.95 - $71.23 |                                                                | $          | 62.19 - $71.23 |   | $ | 68.95 - $71.23 |   | $ | 62.19 - $71.23 |   |
|                                |            |                                                                       |                |                                                                     |            |  |  |  |  |  |  |  |  |

 

15

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 5—Accumulated OtherComprehensive Loss**

Thefollowing table presents the change in each of the components of othercomprehensive loss and the related tax effect of the change allocated to eachcomponent.

| ** **                                                                                         | ** ** | **Before** | ** ** | ** ** | ** ** | ** **      | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                         | ** ** | **Tax**    | ** ** | **Tax**    | ** ** | **Net of** | ** ** |
| **(Dollars in thousands)**                                                               | ** ** | **Amount** | ** ** | **Effect** | ** ** | **Tax**         | ** ** |
| **For the Six Months Ended  June 30, 2006:**                                                  |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                        |       |       |       |       |       |            |       |
| Unrealized net losses on hedges arising during the period                                          |       | $          | (42,215    | )          | $          | 16,147          |       | $ | (26,068 | ) |
| Reclassification adjustment for net losses on hedges included in  net income                  |       | 17,184     |       | (6,573     | )          | 10,611          |       |
| Net change in  unrealized losses on hedges                                                         |       | (25,031    | )          | 9,574      |       | (15,457         | )          |
| Securities available for  sale:                                                                    |       |       |       |       |       |            |       |
| Unrealized holding losses arising during the period on securities  available for sale              |       | (59,856    | )          | 22,895     |       | (36,961         | )          |
| Reclassification adjustment for net gains on securities available for  sale included in net income |       | (1,779     | )          | 680        |       | (1,099          | )          |
| Net change in  unrealized losses on securities available for  sale                                 |       | (61,635    | )          | 23,575     |       | (38,060         | )          |
| Foreign currency  translation adjustment                                                           |       | 101        |       | (39        | )          | 62              |       |
| Net change in  accumulated other comprehensive loss                                                |       | $          | (86,565    | )          | $          | 33,110          |       | $ | (53,455 | ) |
| **For the Six Months Ended  June 30, 2007:**                                                  |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                        |       |       |       |       |       |            |       |
| Unrealized net losses on hedges arising during the period                                          |       | $          | (14,406    | )          | $          | 5,510           |       | $ | (8,896 | ) |
| Reclassification adjustment for net losses on hedges included in  net income                  |       | 18,265     |       | (6,986     | )          | 11,279          |       |
| Net change in  unrealized losses on hedges                                                         |       | 3,859      |       | (1,476     | )          | 2,383           |       |
| Securities available for  sale:                                                                    |       |       |       |       |       |            |       |
| Unrealized holding losses arising during the period on securities  available for sale              |       | (29,087    | )          | 11,126     |       | (17,961         | )          |
| Reclassification adjustment for net gains on securities available for  sale included in net income |       | (1,450     | )          | 555        |       | (895            | )          |
| Net change in  unrealized losses on securities available for  sale                                 |       | (30,537    | )          | 11,681     |       | (18,856         | )          |
| Foreign currency  translation adjustment                                                           |       | 491        |       | (188       | )          | 303             |       |
| Reclassification adjustment  for pension and other benefits included in net income:                |       |       |       |       |       |            |       |
| Amortization of prior service costs                                                                |       | 80         |       | (31        | )          | 49              |       |
| Amortization of transition amount                                                                  |       | 1,018      |       | (389       | )          | 629             |       |
| Recognized net actuarial loss                                                                      |       | 10,202     |       | (3,902     | )          | 6,300           |       |
| Net change in pension  and other benefits                                                          |       | 11,300     |       | (4,322     | )          | 6,978           |       |
| Net change in accumulated  other comprehensive loss                                                |       | $          | (14,887    | )          | $          | 5,695           |       | $ | (9,192 | ) |

 

16

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**UnionBanCal Corporation and Subsidiaries**

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

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

The following table presentsaccumulated other comprehensive loss balances.

| ** **                           | ** ** | **Net**          | ** ** | **Net**               | ** ** | ** **      | ** ** | ** **         | ** ** | ** **        | ** ** |
|--------------------------------------|------------|------------------|------------|-----------------------|------------|-----------------|------------|--------------------|------------|-------------------|------------|
| ** **                           | ** ** | **Unrealized**   | ** ** | **Unrealized**        | ** ** | ** **      | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                           | ** ** | **Losses**       | ** ** | **Losses**            | ** ** | **Foreign**     | ** ** | **Pension**        | ** ** | **Accumulated**   | ** ** |
| ** **                           | ** ** | **on Cash** | ** ** | **on Securites** | ** ** | **Currency**    | ** ** | **and Other** | ** ** | **Other**         | ** ** |
| ** **                           | ** ** | **Flow**         | ** ** | **Available**         | ** ** | **Translation** | ** ** | **Benefits**       | ** ** | **Comprehensive** | ** ** |
| **(Dollars in thousands)** | ** ** | **Hedges**       | ** ** | **For Sale**     | ** ** | **Adjustment**  | ** ** | **Adjustment**(1)  | ** ** | **Loss**          | ** ** |
| **Balance,  December 31, 2005** |       | $                | (34,308    | )                     | $          | (74,099         | )          |               | $          | 264               |       |   | $ | (10,250 | ) |   | $ | (118,393 | ) |   |
| Change during the  period            |       | (15,457          | )          | (38,060               | )          |            | 62         |               |       | —            |       |   | (53,455 | ) |   |
| **Balance,  June 30, 2006**     |       | $                | (49,765    | )                     | $          | (112,159        | )          |               | $          | 326               |       |   | $ | (10,250 | ) |   | $ | (171,848 | ) |   |
| **Balance,  December 31, 2006** |       | $                | (27,405    | )                     | $          | (57,878         | )          |               | $          | 223               |       |   | $ | (174,314 | ) |   | $ | (259,374 | ) |   |
| Change during the  period            |       | 2,383            |       | (18,856               | )          |            | 303        |               |       | 6,978             |       |   | (9,192 | ) |   |
| **Balance, June 30, 2007**      |       | $                | (25,022    | )                     | $          | (76,734         | )          |               | $          | 526               |       |   | $ | (167,336 | ) |   | $ | (268,566 | ) |   |

----

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

**Note 6—Goodwill and IntangibleAssets**

The tablebelow reflects the Company’s identifiable intangible assets and accumulatedamortization at June 30, 2006 and 2007.

| ** **                           | ** ** | **June 30, 2006** | ** ** | **June 30, 2007**   | ** ** |                      |
|--------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|
| **(Dollars in thousands)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |   |
| Core Deposit  Intangibles            |       | $                           | 67,237     |                          |       | $                         | (49,760 | ) |   | $ | 17,477 |   | $ | 58,956 |   |   | $ | (48,999 | ) |   | $ | 9,957 |   |
| Rights-to-Expiration                 |       | 36,608                      |       |                          | (19,470    | )                         |   | 17,138 |   | 36,608 |   |   | (22,921 | ) |   | 13,687 |   |
| Other                                |       | 2,100                       |       |                          | (956       | )                         |   | 1,144 |   | 2,100 |   |   | (1,300 | ) |   | 800 |   |
| Total                                |       | $                           | 105,945    |                          |       | $                         | (70,186 | ) |   | $ | 35,759 |   | $ | 97,664 |   |   | $ | (73,220 | ) |   | $ | 24,444 |   |

 

Totalamortization expense for the three months ended June 30, 2006 and 2007 was$3.4 million and $2.2 million, respectively. For the six months ended June 30,2006 and 2007, the expense was $6.9 million and $4.5 million,respectively.

| **(Dollars in thousands)**                  | ** ** | **Core Deposit  Intangibles** | ** ** | **Rights-to-  Expiration** | ** ** | **Other**  | ** ** | **Total Identifiable  Intangibles** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|------------|------------|------------------------------------------|------------|
| Estimated  amortization expense for the years ending: | ** ** |                               | ** ** | ** **                 |       | ** ** | ** ** | ** **                               | ** ** |   | ** ** | ** ** |   |
| Remaining 2007                                        |       |                               | $          | 2,736                      | ** ** |       | $          | 1,577                                    |       | $ | 149 |   |   | $ | 4,462 | ** ** |   |
| 2008                                                  |       |                               | 3,245      | ** **                 |       | 2,687      |       | 230                                      |       |   | 6,162 | ** ** |   |
| 2009                                                  |       |                               | 1,764      | ** **                 |       | 2,254      |       | 177                                      |       |   | 4,195 | ** ** |   |
| 2010                                                  |       |                               | 807        | ** **                 |       | 1,870      |       | 137                                      |       |   | 2,814 | ** ** |   |
| 2011                                                  |       |                               | 443        | ** **                 |       | 1,531      |       | 107                                      |       |   | 2,081 | ** ** |   |
| 2012                                                  |       |                               | 336        | ** **                 |       | 1,229      |       | —                                   |       |   | 1,565 | ** ** |   |
| thereafter                                            |       |                               | 626        | ** **                 |       | 2,539      |       | —                                   |       |   | 3,165 | ** ** |   |
| Total amortization expense  after June 30, 2007  |       |                               | $          | 9,957                      | ** ** |       | $          | 13,687                                   |       | $ | 800 |   |   | $ | 24,444 | ** ** |   |

 

17

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 6—Goodwilland Intangible Assets (Continued)**

The changes in the carryingamount of goodwill during the six months ended June 30, 2006 and 2007 areshown below. 

| **(Dollars in thousands)**     | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Balance,  January 1,                |       | $        | 454,015    |     | $          | 453,489 |   |
| Adjustment for contingent  consideration |       | (526     | )          | —   |       |
| Balance, June 30,                   |       | $        | 453,489    |     | $          | 453,489 |   |

 

**Note 7—Business Segments**

During 2006, theCompany formally reorganized its operating segments by disaggregating thebusinesses that were formerly managed and reported under the Community Bankingand Investment Services Group or the Commercial Financial Services Group.Management believes that this organizational structure has enhanced the Company’sfocus on target markets and enterprise wide sales and service. The various operatingsegments reporting under the Chief Operating Officer and the Group Head ofPacific Rim Corporate Group are aggregated into two reportable businesssegments entitled “Retail Banking” and “Wholesale Banking” based upon theaggregation criteria prescribed in SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.”

·       RetailBanking aggregates those operating segments that offer a range of bankingservices, primarily to individuals and small businesses, delivered generallythrough a network of branches and ATMs located in the western United States.These services include mortgages, home equity lines of credit, consumer andcommercial loans, deposit services and cash management, as well as fiduciary,private banking, investment and asset management services for individuals andinstitutions and risk management for small businesses and individuals. At June 30,2006 and 2007, Retail Banking had $222.2 million of goodwill assigned to theoperating segments.

·       WholesaleBanking aggregates those operating segments that provide credit, depository andcash management services, insurance, investment and risk management products tobusinesses, individuals and target specialty niches. Services includecommercial and project loans, real estate financing, asset-based financing,trade finance and letters of credit, lease financing, customized cashmanagement services and capital markets products. At June 30, 2006 and2007, Wholesale Banking had $231.3 million of goodwill assigned to the operatingsegments.

The information, set forth in the tables that follow,reflects selected income statement and balance sheet items by reportablebusiness segment. The information presented does not necessarily represent thebusiness units’ financial condition and results of operations were theyindependent entities. Unlike financial accounting, there is no authoritativebody of guidance for management accounting equivalent to US GAAP. Consequently,reported results are not necessarily comparable with those presented by othercompanies. Included in the tables, within total assets, are the amounts ofgoodwill for each reportable business segment as of June 30, 2006 and2007.

The information in the tables is derived from the internal managementreporting system used by management to measure the performance of theindividual segments and the Company overall. The management reporting systemassigns balance sheet and income statement items to each operating segmentbased on internal management accounting policies. Net interest income isdetermined by the 

18

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**UnionBanCal Corporation and Subsidiaries**

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

**Note7—Business Segments (Continued)**

Company’s internal fundstransfer pricing system, which assigns a cost of funds or a credit for funds toassets or liabilities based on their type, maturity or repricing characteristics.Noninterest income and expense directly attributable to an operating segmentare assigned to that operating segment. Certain indirect costs, such asoperations and technology expense, are allocated to the segments based onstudies of billable unit costs for product or data processing. Other indirectcosts, such as corporate overhead, are allocated to the operating segment basedon a predetermined percentage of usage. Under the Company’s risk-adjustedreturn on capital (RAROC) methodology, credit expense is charged to anoperating segment based upon expected losses arising from credit risk. Inaddition, the attribution of economic capital is related to unexpected lossesarising from credit, market and operational risks.

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

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

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

19

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 7—BusinessSegments (Continued)**

| ** **                                                               | ** ** | **Retail Banking**                         | ** ** | **Wholesale Banking**                      | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                               | ** ** | **As of and for the**       | ** ** | **As of and for the**       | ** ** |
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
| ** **                                                               | ** ** | **2006**                                        | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Results of operations—Market  View (dollars in thousands):**      |       |                                            |       |                                            |       |   |   |   |   |
| Net interest income (expense)                                            |       | $                                               | 237,613    |                                            | $          | 226,010 |   | $ | 262,781 |   | $ | 242,891 |   |
| Noninterest income (expense)                                             |       | 136,072                                         |       | 132,638                                         |       | 101,413 |   | 114,888 |   |
| Total revenue                                                            |       | 373,685                                         |       | 358,648                                         |       | 364,194 |   | 357,779 |   |
| Noninterest expense (income)                                             |       | 244,521                                         |       | 240,632                                         |       | 165,646 |   | 161,650 |   |
| Credit expense (income)                                                  |       | 6,406                                           |       | 6,262                                           |       | 23,032 |   | 26,862 |   |
| Income (loss) from continuing operations before  income taxes            |       | 122,758                                         |       | 111,754                                         |       | 175,516 |   | 169,267 |   |
| Income tax expense (income)                                              |       | 46,955                                          |       | 42,746                                          |       | 60,354 |   | 52,425 |   |
| Income (loss) from continuing operations                                 |       | 75,803                                          |       | 69,008                                          |       | 115,162 |   | 116,842 |   |
| Income from discontinued operations, net of income  taxes                |       | —                                          |       | —                                          |       | — |   | — |   |
| Net income (loss)                                                        |       | $                                               | 75,803     |                                            | $          | 69,008 |   | $ | 115,162 |   | $ | 116,842 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                               | 16,840     |                                            | $          | 17,726 |   | $ | 24,110 |   | $ | 25,746 |   |

 

| ** **                                                                    | ** ** | ** **                                               | ** ** | ** **                                               | ** ** | ** **                                               | ** ** | ** **                                               | ** ** | **UnionBanCal** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                    | ** ** | **Other**                                                | ** ** | **Reconciling Items**                               | ** ** | **Corporation**                                          | ** ** |
| ** **                                                                    | ** ** | **As of and for the**                | ** ** | **As of and for the**                | ** ** | **As of and for the**                | ** ** |
| ** **                                                                    | ** ** | **Three Months Ended  June 30,**          | ** ** | **Three Months Ended  June 30,**          | ** ** | **Three Months Ended  June 30,**          | ** ** |
| ** **                                                                    | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **2006**        | ** ** | **2007** | ** ** |
| **Results of operations—Market  View (dollars in thousands):**           | ** ** |                                                     | ** ** | ** **                                               |       |                                                     | ** ** | ** **                                               |       |            | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Net interest income (expense)                                                 |       |                                                     | $          | (30,314                                                  | )          |                                                     |       | $                                                        | (37,805    | )               |       |   | $ | (2,438 | ) |   |   | $ | (2,223 | ) |   | $ | 467,642 |   | $ | 428,873 |   |
| Noninterest income (expense)                                                  |       |                                                     | 2,614      |                                                     |       |                                                     | 1,807      |                                                     |       |            | (20,871    | ) |   |   | (19,488 | ) |   | 219,228 |   | 229,845 |   |
| Total revenue                                                                 |       |                                                     | (27,700    | )                                                        |       |                                                     | (35,998    | )                                                        |       |            | (23,309    | ) |   |   | (21,711 | ) |   | 686,870 |   | 658,718 |   |
| Noninterest expense (income)                                                  |       |                                                     | 15,862     |                                                     |       |                                                     | 21,549     |                                                     |       |            | (12,999    | ) |   |   | (11,966 | ) |   | 413,030 |   | 411,865 |   |
| Credit expense (income)                                                       |       |                                                     | (30,419    | )                                                        |       |                                                     | (28,097    | )                                                        |       |            | (19        | ) |   |   | (27 | ) |   | (1,000 | ) | 5,000 |   |
| Income (loss) from continuing operations before  income taxes                 |       |                                                     | (13,143    | )                                                        |       |                                                     | (29,450    | )                                                        |       |            | (10,291    | ) |   |   | (9,718 | ) |   | 274,840 |   | 241,853 |   |
| Income tax expense (income)                                                   |       |                                                     | (11,170    | )                                                        |       |                                                     | (14,955    | )                                                        |       |            | (3,936     | ) |   |   | (3,717 | ) |   | 92,203 |   | 76,499 |   |
| Income (loss) from continuing operations                                      |       |                                                     | (1,973     | )                                                        |       |                                                     | (14,495    | )                                                        |       |            | (6,355     | ) |   |   | (6,001 | ) |   | 182,637 |   | 165,354 |   |
| Income from discontinued operations, net of income  taxes                     |       |                                                     | 274        |                                                     |       |                                                     | —     |                                                     |       |            | —     |   |   |   | — |   |   | 274 |   | — |   |
| Net income (loss)                                                             |       |                                                     | $          | (1,699                                                   | )          |                                                     |       | $                                                        | (14,495    | )               |       |   | $ | (6,355 | ) |   |   | $ | (6,001 | ) |   | $ | 182,911 |   | $ | 165,354 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       |                                                     | $          | 9,873                                                    |       |                                                     |       | $                                                        | 9,727      |            |       |   | $ | (23 | ) |   |   | $ | (25 | ) |   | $ | 50,800 |   | $ | 53,174 |   |

 

20

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 7—Business Segments (Continued)**

| ** **                                                               | ** ** | **Retail Banking**                       | ** ** | **Wholesale Banking**                    | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **As of and for the**     | ** ** | **As of and for the**     | ** ** |
| ** **                                                               | ** ** | **Six Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                               | ** ** | **2006**                                      | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Results  of operations—Market View (dollars in thousands):**      | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income (expense)                                            |       | $                                             | 467,804    |                                          | $          | 455,842 |   | $ | 515,316 |   | $ | 484,466 |   |
| Noninterest income (expense)                                             |       | 265,974                                       |       | 258,270                                       |       | 204,536 |   | 224,910 |   |
| Total revenue                                                            |       | 733,778                                       |       | 714,112                                       |       | 719,852 |   | 709,376 |   |
| Noninterest expense (income)                                             |       | 481,305                                       |       | 483,987                                       |       | 333,225 |   | 327,490 |   |
| Credit expense (income)                                                  |       | 12,972                                        |       | 12,535                                        |       | 48,353 |   | 51,933 |   |
| Income (loss) from continuing operations before  income taxes            |       | 239,501                                       |       | 217,590                                       |       | 338,274 |   | 329,953 |   |
| Income tax expense (income)                                              |       | 91,609                                        |       | 83,228                                        |       | 114,836 |   | 101,561 |   |
| Income (loss) from continuing operations                                 |       | 147,892                                       |       | 134,362                                       |       | 223,438 |   | 228,392 |   |
| Loss from discontinued operations, net of income  taxes                  |       | —                                        |       | —                                        |       | — |   | — |   |
| Net income (loss)                                                        |       | $                                             | 147,892    |                                          | $          | 134,362 |   | $ | 223,438 |   | $ | 228,392 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                             | 16,840     |                                          | $          | 17,726 |   | $ | 24,110 |   | $ | 25,746 |   |

 

| ** **                                                               | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | **UnionBanCal** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Other**                                     | ** ** | **Reconciling Items**                    | ** ** | **Corporation**                               | ** ** |
| ** **                                                               | ** ** | **As of and for the**     | ** ** | **As of and for the**     | ** ** | **As of and for the**     | ** ** |
| ** **                                                               | ** ** | **Six Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                               | ** ** | **2006**                                      | ** ** | **2007**                                      | ** ** | **2006**                                      | ** ** | **2007**   | ** ** | **2006**        | ** ** | **2007** | ** ** |
| **Results  of operations—Market View (dollars in thousands):**      | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** |
| Net interest income (expense)                                            |       | $                                             | (45,548    | )                                             | $          | (78,613                                       | )          | $          | (4,837     | )               | $          | (4,310 | ) | $ | 932,735 |   | $ | 857,385 |   |
| Noninterest income (expense)                                             |       | 5,469                                         |       | 7,738                                         |       | (38,841                                       | )          | (38,515    | )          | 437,138         |       | 452,403 |   |
| Total revenue                                                            |       | (40,079                                       | )          | (70,875                                       | )          | (43,678                                       | )          | (42,825    | )          | 1,369,873       |       | 1,309,788 |   |
| Noninterest expense (income)                                             |       | 36,980                                        |       | 46,216                                        |       | (23,936                                       | )          | (23,737    | )          | 827,574         |       | 833,956 |   |
| Credit expense (income)                                                  |       | (69,280                                       | )          | (55,413                                       | )          | (45                                           | )          | (55        | )          | (8,000          | )          | 9,000 |   |
| Income (loss) from continuing operations before  income taxes            |       | (7,779                                        | )          | (61,678                                       | )          | (19,697                                       | )          | (19,033    | )          | 550,299         |       | 466,832 |   |
| Income tax expense (income)                                              |       | (12,704                                       | )          | (25,642                                       | )          | (7,534                                        | )          | (7,280     | )          | 186,207         |       | 151,867 |   |
| Income (loss) from continuing operations                                 |       | 4,925                                         |       | (36,036                                       | )          | (12,163                                       | )          | (11,753    | )          | 364,092         |       | 314,965 |   |
| Loss from discontinued operations, net of income  taxes                  |       | (8,236                                        | )          | —                                        |       | —                                        |       | —     |       | (8,236          | )          | — |   |
| Net income (loss)                                                        |       | $                                             | (3,311     | )                                             | $          | (36,036                                       | )          | $          | (12,163    | )               | $          | (11,753 | ) | $ | 355,856 |   | $ | 314,965 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                             | 9,873      |                                          | $          | 9,727                                         |       | $          | (23        | )               | $          | (25 | ) | $ | 50,800 |   | $ | 53,174 |   |

 

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

Derivative positions areintegral components of the Company’s designated ALM activities. The Companyuses interest rate derivatives to manage the sensitivity of the Company’s netinterest income to changes in interest rates. These instruments are used tomanage interest rate risk relating to specified groups of assets andliabilities, primarily London Interbank Offered Rate (LIBOR) indexed commercialloans, certificates of deposit and other time deposits (CDs) and subordinateddebt. The following describes the significant hedging strategies of theCompany.

21

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 8—DerivativeInstruments and Other Financial Instruments Used For Hedging (Continued)**

*Cash Flow Hedges*

*Hedging Strategies for Variable Rate Loans andCertificates of Deposit and Other Time Deposits*

The Company engages in severaltypes of cash flow hedging strategies for which the hedged transactions areforecasted future loan interest payments, and the hedged risk is thevariability in those payments due to changes in the designated benchmark rate,i.e. U.S. dollar LIBOR. In these strategies, the hedging instruments arematched with groups of variable rate loans such that the tenor of the variablerate loans and that of the hedging instrument are identical. Cash flow hedgingstrategies include the utilization of purchased floor, cap and corridor optionsand interest rate swaps. At June 30, 2007, the weighted average remaininglife of the currently active (excluding any forward positions) cash flow hedgeswas approximately 1.7 years.

The Company uses purchasedinterest rate floors to hedge the variable cash flows associated with 1-monthLIBOR or 3-month LIBOR indexed loans. Payments received under the floorcontract offset the decline in loan interest income caused by the relevantLIBOR index falling below the floor’s strike rate.

The Company uses interest ratefloor corridors to hedge the variable cash flows associated with 1-monthLIBOR or 3-month LIBOR indexed loans. Net payments to be received underthe floor corridor contracts offset the decline in loan interest income causedby the relevant LIBOR index falling below the corridor’s upper strike rate, butonly to the extent the index falls to the lower strike rate. The corridor willnot provide protection from declines in the relevant LIBOR index to the extentit falls below the corridor’s lower strike rate.

The Company uses interest ratecollars to hedge the variable cash flows associated with 1-month LIBOR or3-month LIBOR indexed loans. Net payments to be received under the collarcontract offset the decline in loan interest income caused by the relevantLIBOR index falling below the collar’s floor strike rate while net payments tobe paid will reduce the increase in loan interest income caused by the LIBORindex rising above the collar’s cap strike rate.

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

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

The Company uses interest rate cap corridors to hedge the variable cashflows associated with the forecasted issuance and rollover of short-term, fixedrate CDs. In these hedging relationships, the Company hedges the LIBORcomponent of the CD rates, either 1-month LIBOR, 3-month LIBOR, or6-month LIBOR, based on the original term to maturity of the CDs, whichreflects their repricing frequency. Net payments to be received under the capcorridor contract offset the increase in deposit interest expense caused by therelevant LIBOR index rising above the corridor’s lower strike rate, but only tothe extent the index rises to 

22

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**UnionBanCal Corporation and Subsidiaries**

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

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

the upper strike rate. Thecorridor will not provide protection from increases in the relevant LIBOR indexto the extent it rises above the corridor’s upper strike rate.

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

*Fair Value Hedges*

*Hedging Strategy forMedium-Term Notes*

In December 2006, the Company’s medium-term debtmatured. Prior to the maturity, the Company engaged in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s five-year, medium-term debtissuance, in order to convert the liability from a fixed rate to a floatingrate instrument. This strategy mitigated the changes in fair value of thehedged liability caused by changes in the designated benchmark interest rate,U.S. dollar LIBOR.

The fair value hedgingtransaction for the medium-term notes, was structured at inception to mirrorall of the provisions of the medium-term notes, and allowed the Company toassume that no ineffectiveness exists.

*Hedging Strategy forSubordinated Debt*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s ten-year, subordinated debtissuance, and in a separate transaction, Union Bank of California, N.A.’sten-year, subordinated debt issuance, in order to convert these liabilitiesfrom fixed rate to floating rate instruments. This strategy mitigates thechanges in fair value of the hedged liability caused by changes in thedesignated benchmark interest rate, U.S. dollar LIBOR.

The fair value hedgingtransaction for the subordinated debt was structured at inception to mirror allof the provisions of the subordinated debt, which allows the Company to assumethat no ineffectiveness exists.

*Other*

The Company usesTo-Be-Announced (TBA) contracts to fix the price and yield of anticipatedpurchases or sales of mortgage-backed securities that will be delivered at anagreed upon date. This strategy hedges the risk of variability in the cashflows to be paid or received upon settlement of the TBA contract.

23

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**UnionBanCal Corporation and Subsidiaries**

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

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

Commitments to extend credit are legally bindingagreements to lend to a customer provided there are no violations of any conditionestablished in the contract. Commitments have fixed expiration dates or othertermination clauses and may require maintenance of compensatory balances. Sincemany of the commitments to extend credit may expire without being drawn, thetotal commitment amounts do not necessarily represent future cash-flowrequirements. At June 30, 2007, the Company had total commitments toextend credit under legally binding agreements of $23.3 billion. Exposure toloss related to these commitments is covered by the allowance for losses onoff-balance sheet commitments.

Standby and commercial letters of credit areconditional commitments issued to guarantee the performance of a customer to athird party. Standby letters of credit generally are contingent upon the failureof the customer to perform according to the terms of the underlying contractwith the third party, while commercial letters of credit are issuedspecifically to facilitate foreign or domestic trade transactions. The majorityof these types of commitments have terms of one year or less. As of June 30,2007, the Company’s maximum exposure to loss for standby and commercial lettersof credit was $3.6 billion and $71.7 million, respectively. At June 30,2007, the carrying value of the Company’s standby and commercial letters ofcredit totaled $5.6 million. Exposure to loss related to these commitments iscovered by the allowance for losses on off-balance sheet commitments. Thecarrying value of the standby and commercial letters of credit and theallowance for losses on off-balance sheet commitments are included in otherliabilities on the condensed consolidated balance sheet.

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

Principal investments include direct investments inprivate and public companies and indirect investments in private equity funds. TheCompany issues commitments to provide equity and mezzanine capital financing toprivate and public companies through either direct investments in specificcompanies or through investment funds and partnerships. The timing of futurecash requirements to fund such commitments is generally dependent on theinvestment cycle. This cycle, the period over which privately-held companiesare funded by private equity investors and ultimately sold, merged, or takenpublic through an initial offering, can vary based on overall market conditionsas well as the nature and type of industry in which the companies operate. At June 30,2007, the Company had commitments to fund principal investments of $107.2million.

The Company is fund manager for limited liabilitycompanies issuing low-income housing credit (LIHC) investments. LIHCinvestments provide tax benefits to investors in the form of tax deductionsfrom operating losses and tax credits. To facilitate the sale of these LIHCinvestments, the Company guarantees the timely completion of projects anddelivery of tax benefits throughout the investment term. Guarantees may includea minimum rate of return, the availability of tax credits and operating deficitthresholds over an eleven-year weighted average period. Additionally, theCompany receives project completion and tax credit guarantees from the limitedliability companies issuing the LIHC investments that reduce the Company’sultimate exposure to loss. As of June 30, 2007, the Company’s maximumexposure to loss under these guarantees is limited to a return of investorcapital and minimum investment yield, or $141.7 million. The Company maintainsa reserve of $5.9 million for these guarantees.

24

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 9—Commitments,Contingencies and Guarantees (Continued)**

The Company has guarantees that obligate it to performif its affiliates are unable to discharge their obligations. These obligationsinclude guarantees of commercial paper obligations and leveraged leasetransactions. The guarantee issued by the Bank for an affiliate’s commercialpaper program is done in order to facilitate the sale of the commercial paper. Asof June 30, 2007, the Bank had a maximum exposure to loss under thecommercial paper program guarantee of $1.2 billion. The Bank’s guarantee has anaverage term of less than nine months and is fully collateralized by a pledgeddeposit. The Company guarantees its subsidiaries’ leveraged lease transactionswith terms ranging from fifteen to thirty years. Following the original fundingof these leveraged lease transactions, the Company has no material obligationto be satisfied. As of June 30, 2007, the Company had no exposure to lossfor these agreements.

The Company conducts securities lending transactionsfor institutional customers as a fully disclosed agent. At times, securitieslending indemnifications are issued to guarantee that a security lendingcustomer will be made whole in the event the borrower does not return thesecurity subject to the lending agreement and collateral held is insufficientto cover the market value of the security. All lending transactions arecollateralized, primarily by cash. The amount of securities lent withindemnifications was $2.9 billion at June 30, 2007. The market value ofthe associated collateral was $3.0 billion at June 30, 2007.

The Company occasionally enters into financialguarantee contracts where a premium is received from another financialinstitution counterparty to guarantee a portion of the credit risk on interestrate swap contracts entered into between the financial institution and itscustomer. The Company becomes liable to pay the financial institution only ifthe financial institution is unable to collect amounts owed to them by theircustomer. As of June 30, 2007, the maximum exposure to loss under thesecontracts totaled $2.5 million. At June 30, 2007, the Company maintained areserve of $0.2 million for losses related to these guarantees.

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

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

25

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**UnionBanCal Corporation and Subsidiaries**

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

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

Thefollowing tables summarize the components of net periodic benefit cost for thethree and six months ended June 30, 2006 and 2007.

| ** **                                   | ** ** | **Pension Benefits**                                         | ** ** | **Other Benefits**                                           | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Three Months  Ended June 30,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2006**                                                          | ** ** | **2007**                                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Components of net periodic  benefit cost** |       |                                                              |       |                                                              |       |   | ** ** | ** ** | ** ** |
| Service cost                                 |       | $                                                                 | 13,379     |                                                              | $          | 12,931 |   | $ | 1,785 |   | $ | 2,108 |   |
| Interest cost                                |       | 16,524                                                            |       | 18,080                                                            |       | 2,240 |   | 2,895 |   |
| Expected return on  plan assets              |       | (28,364                                                           | )          | (31,594                                                           | )          | (2,842 | ) | (3,486 | ) |
| Amortization of prior  service cost          |       | 267                                                               |       | 64                                                                |       | (22 | ) | (24 | ) |
| Amortization of  transition amount           |       | —                                                            |       | —                                                            |       | 507 |   | 509 |   |
| Recognized net  actuarial loss               |       | 8,618                                                             |       | 4,498                                                             |       | 1,065 |   | 1,204 |   |
| Total net periodic  benefit cost             |       | $                                                                 | 10,424     |                                                              | $          | 3,979 |   | $ | 2,733 |   | $ | 3,206 |   |

 

| ** **                                   | ** ** | **Pension Benefits**                                       | ** ** | **Other Benefits**                                         | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Six Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2006**                                                        | ** ** | **2007**                                                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Components of net periodic  benefit cost** |       |                                                            |       |                                                            |       |   | ** ** | ** ** | ** ** |
| Service cost                                 |       | $                                                               | 27,004     |                                                            | $          | 25,117 |   | $ | 3,570 |   | $ | 4,166 |   |
| Interest cost                                |       | 32,573                                                          |       | 35,596                                                          |       | 4,480 |   | 5,682 |   |
| Expected return on  plan assets              |       | (56,720                                                         | )          | (63,173                                                         | )          | (5,685 | ) | (6,956 | ) |
| Amortization of prior  service cost          |       | 534                                                             |       | 128                                                             |       | (45 | ) | (48 | ) |
| Amortization of  transition amount           |       | —                                                          |       | —                                                          |       | 1,015 |   | 1,018 |   |
| Recognized net  actuarial loss               |       | 16,181                                                          |       | 8,004                                                           |       | 2,130 |   | 2,198 |   |
| Total net periodic  benefit cost             |       | $                                                               | 19,572     |                                                            | $          | 5,672 |   | $ | 5,465 |   | $ | 6,060 |   |

 

During 2007, the Company plans to make $20 million incontributions to the Other Benefits Plans for postretirement benefits.

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

**Note 11—Medium and Long-TermDebt**

On March 23, 2007, the Bank issued $750 millionof Floating Rate Senior Bank Notes due on March 23, 2009. The Senior Noteswere issued at 100 percent of their face value, and bear a floating interestrate of 3-Month LIBOR plus 2 basis points. Interest is payable and resetquarterly on the 23rd of March, June, September and December ofeach year, with the first interest payment and interest reset date on June 23,2007. The Senior Notes are not redeemable at the option of the Bank prior tomaturity or subject to repayment at the option of the holders prior tomaturity.

On June 25, 2007, theCompany retired $200 million of floating rate subordinated debt, payable toBTMU. This note had an interest rate of 0.325% above the 3-month LIBOR. Thedebt was retired at par plus accrued interest.

26

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 12—Management Stock Plans**

The Company has two management stock plans, the Year2000 UnionBanCal Corporation Management Stock Plan, as amended (the 2000 StockPlan), and the UnionBanCal Corporation Management Stock Plan, restatedeffective June 1, 1997 (the 1997 Stock Plan). Under these plans, theCompany’s common stock is authorized to be awarded to key employees, outsidedirectors and consultants of the Company at the discretion of the ExecutiveCompensation & Benefits Committee of the Board of Directors (theCommittee). Employees on rotational assignment from BTMU are not eligible forstock awards. For further discussion of the Company’s stock plans, see Note 16to the Consolidated Financial Statements in the Company’s 2006 Form 10-K.

The Committee determines the term of each stock optiongrant, up to a maximum of ten years from the date of grant. The exercise priceof the options issued under the stock plans may not be less than the fairmarket value on the date the option is granted.

Under the 2000 Stock Plan, theCompany grants stock options and restricted stock and issues shares of commonstock upon vesting of performance shares and restricted stock units that aresettled in common stock. The Company issues new shares of common stock uponexercise of outstanding stock options, granting of restricted stock awards andsettlement of other awards under the stock plans. At June 30, 2007, atotal of 3,196,990 shares were available for future grants under the 2000 StockPlan as stock options, restricted stock or shares of common stock issued uponvesting of performance shares and restricted stock units settled in commonstock. The remaining shares under the 1997 Stock Plan are not available forfuture grants.

*Stock Options*

The followingis a summary of stock option transactions under the stock plans for the sixmonths ended June 30, 2007.

| ** **                                       | ** ** | **For the Six Months Ended June 30, 2007** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Number of  Shares**                                                    | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                       | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Options outstanding,  beginning of the period(1) |       | 8,326,241                                                                     |       |   | $ | 49.24 |   |   |   |   |   |   |   |   |   |   |
| Granted                                          |       | 627,548                                                                       |       |   | 63.42 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                        |       | (577,838                                                                      | )          |   | 41.06 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                        |       | (20,820                                                                       | )          |   | 67.80 |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of the period(1)        |       | 8,355,131                                                                     |       |   | $ | 50.82 |   |   |   | 5.04 |   |   |   | $ | 89,167 |   |   |
| Options exercisable,  end of the period          |       | 6,675,629                                                                     |       |   | $ | 47.11 |   |   |   | 4.82 |   |   |   | $ | 89,125 |   |   |

----

(1)                   Options not expected to vest are includedin options outstanding. Amounts are not material.

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model that uses theassumptions noted in the following table. The Black-Scholes option pricingmodel uses tranches based on expected terms that result in ranges of inputassumptions, such ranges are disclosed below. Expected volatilities are basedon historical data and implied volatilities from trade options on the Company’sstock and other factors. The Company uses historical data to estimate option 

27

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**UnionBanCal Corporation and Subsidiaries**

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

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

exercise andemployee terminations within the valuation model. The expected term of anoption granted is derived from the output of the option valuation model, whichis based on historical data and represents the period of time that the optiongranted is expected to be outstanding. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant based on the expected term.

| ** **                                  | ** ** | **For the Six Months Ended  June 30, 2007** | ** **  |
|---------------------------------------------|------------|---------------------------------------------------------------------------|-------------|
| Weighted-average fair  value—per share |       |                                                                      | $           | 8.78 |   |   |
| Risk-free interest  rate                    |       |                                                                      | 4.5         | % |   |
| Expected volatility                         |       |                                                                      | 16.9 - 17.8 | % |   |
| Weighted-average  expected volatility       |       |                                                                      | 17.4        | % |   |
| Expected term (in  years)                   |       |                                                                      | 3.8 - 4.4   |   |   |
| Expected dividend yield                     |       |                                                                      | 3.5         | % |   |

 

The weighted-average fair value of options grantedduring the six months ended June 30, 2006 and 2007 was $12.30 and $8.78per share, respectively. The total intrinsic value of options exercised duringthe six months ended June 30, 2006 and 2007 was $30.5 million and $12.4million, respectively. The total fair value of options vested during the sixmonths ended June 30, 2006 and 2007 was $25.7 million and $19.2 million,respectively.

The Company recognized $7.5million of compensation cost for share-based payment arrangements related tostock option awards with $2.8 million of corresponding tax benefit for the sixmonths ended June 30, 2007. As of June 30, 2007, the totalunrecognized compensation cost related to nonvested stock option awards was$13.5 million and the weighted-average period over which it is expected to berecognized was one year.

*Restricted Stock*

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

28

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 12—ManagementStock Plans (Continued)**

The following is a summary ofthe Company’s nonvested restricted stock awards as of June 30, 2007 andchanges during the period ended June 30, 2007.

| ** **                                            | ** ** | **For the Six Months Ended  June 30, 2007** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Number of  Shares**                                                | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
| Nonvested restricted  awards, beginning of the period |       | 840,003                                                                   |       |   | $ | 62.59 |   |   |
| Granted                                               |       | 40,461                                                                    |       |   | 63.14 |   |   |
| Vested                                                |       | (96,655                                                                   | )          |   | 65.86 |   |   |
| Forfeited                                             |       | (23,456                                                                   | )          |   | 61.68 |   |   |
| Nonvested restricted  awards, end of the period       |       | 760,353                                                                   |       |   | $ | 62.26 |   |   |

 

The total fair value of the restricted stock awardsthat vested during the six months ended June 30, 2006 and 2007 was $3.3million and $6.4 million, respectively.

The Company recognized $7.3million of compensation cost for share-based payment arrangements related torestricted stock awards with $2.8 million of corresponding tax benefit for thesix months ended June 30, 2007. As of June 30, 2007, the totalunrecognized compensation cost related to nonvested restricted awards was $34.3million and the weighted-average period over which it is expected to berecognized was 1.6 years.

*Restricted Stock Units*

Starting in July 2006, the Company grantedrestricted stock units to non-employee directors. These restricted stock unitsconsist of an annual grant, and in the case of new non-employee directors, anannual grant and an initial grant. In general, the annual grant vests in fullon the first anniversary of the grant date, and the initial grant vests inthree equal installments on each of the first three anniversaries of the grantdate. During the six months ended June 30, 2007, the Company granted 900restricted stock units with a weighted-average grant date fair value of $61.17per unit. There were no restricted stock units forfeited during the six monthsended June 30, 2007. The total fair value of the restricted stock unitsthat vested during the six months ended June 30, 2007 was $0.1 million. Forthe six months ended June 30, 2007, the Company recognized $0.4 million ofcompensation cost with a corresponding $0.2 million in tax benefits related tothese grants. As of June 30, 2007, the total unrecognized compensationcost related to restricted stock units was $0.2 million and theweighted-average period over which it is expected to be recognized was 1.2years.

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

29

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**UnionBanCal Corporation and Subsidiaries**

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

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

*Performance Share Plan*

Effective January 1, 1997, the Companyestablished a Performance Share Plan. At the discretion of the Committee,eligible participants may earn performance share awards to be redeemed in cashand/or shares three years after the date of grant. Performance shares arelinked to stockholder value in two ways: (1) the market price of theCompany’s common stock; and (2) return on equity, a performance measureclosely linked to value creation. Eligible participants generally receivegrants of performance shares annually. The plan was amended in 2004, increasingthe total number of shares that can be granted under the plan to 2.6 millionshares. There were 2,063,656 performance shares remaining for future awards asof June 30, 2007.

All performance shares granted prior to 2006 areredeemable in cash and are therefore being accounted for as liabilities. Thevalue of a performance share under the liability method is equal to the averagemonth-end closing price of the Company’s common stock for the final six monthsof the performance period. All cancelled or forfeited performance shares becomeavailable for future grants. The total fair value of the performance sharesthat vested during the six months ended June 30, 2006 and 2007 was $3.9million and $7.2 million, respectively. These amounts were paid in cash duringthe respective quarters, except for $0.3 million, which was deferred during thesix months ended June 30, 2006. There were no performance shares forfeitedduring the six months ended June 30, 2007. At June 30, 2006 and 2007,the Company’s liability for the cash settlement of the performance shares was$13.3 million and $5.3 million, respectively. The Company recognized $0.8million of compensation cost related to these grants with $0.3 million ofcorresponding tax benefit for the six months ended June 30, 2007. As of June 30,2007, the total unrecognized compensation cost related to these grants that areredeemable in cash was $0.7 million and the weighted-average period over whichit is expected to be recognized was 5 months.

During the six months ended June 30,2007, the Company granted 68,677 performance shares that are redeemable inshares, with a weighted-average grant date fair value of $63.42 per unit. Therewere no forfeitures of performance shares that are redeemable in shares duringthe six months ended June 30, 2007. The total fair value of theseperformance shares which vested was $0.3 million during the six monthsended June 30, 2007. For the six months ended June 30, 2007, theCompany recognized $1.6 million of compensation cost with a corresponding $0.6million in tax benefits related to these grants. As of June 30, 2007, thetotal unrecognized compensation cost related to grants that are redeemable inshares was $5.4 million and the weighted-average period over which it isexpected to be recognized was 1 year. The Company issues new shares underthe 2000 Stock Plan upon vesting of these grants that are redeemable in shares.

**Note 13—Subsequent Events**

On July 25, 2007, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.52 per share of common stock.The dividend will be paid on October 5, 2007 to stockholders of record asof September 7, 2007.

On July 25, 2007, the Company’s Board ofDirectors authorized the repurchase of an additional $500 million of theCompany’s common stock. When combined with the $62 million remaining on itsprevious repurchase authorizations, the Company had authorization to repurchase$562 million of the Company’s common stock at that date.

30

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

*This report includesforward-looking statements, which include forecasts of our financial resultsand condition, expectations for our operations and business, and ourassumptions for those forecasts and expectations. Do not rely unduly onforward-looking statements. Actual results might differ significantly from ourforecasts and expectations. Please refer to Part II Item 1A “Risk Factors”of our Quarterly Report on Form 10-Q (this Form 10-Q) fora discussion of some factors that may cause results to differ.*

You should read the following discussion and analysisof our condensed consolidated financial condition and results of operations forthe period ended June 30, 2007 in this Form 10-Q together withour Consolidated Financial Statements and the Notes to Consolidated FinancialStatements included in our Annual Report on Form 10-K for the yearended December 31, 2006 (2006 Form 10-K). Averages, aspresented in the following tables, are substantially all based upon dailyaverage balances.

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

**Introduction**

We are a California-based,bank holding company whose major subsidiary, Union Bank of California, N.A.(the Bank), is a commercial bank. We had consolidated assets of $53 billion at June 30,2007. At June 30, 2007, The Bank of Tokyo-Mitsubishi UFJ, Ltd., ourmajority owner, owned approximately 65 percent of our outstanding commonstock.

**Executive Overview**

We are providing you with an overview of what webelieve are the most significant factors and developments that impacted oursecond quarter 2007 results and that could impact our future results. Furtherdetailed information will be found in other portions of this Form 10-Qthat will assist your understanding of trends, events and uncertainties thatwill impact us.

Average loans grew 11 percent over the second quarterof 2006, with much of that growth coming from commercial, residential mortgageand construction lending. Although residential mortgage lending growth hasslowed, growth in that portfolio was still a solid 7 percent over the secondquarter of 2006.

Our overall credit quality continues to be strong. Ournonperforming assets were $30 million, down 18 percent compared to secondquarter 2006. Our net charge offs were $2 million in the second quarter of 2007compared to $10 million in the second quarter of 2006. We provided $5 millionfor credit losses in the second quarter of 2007, compared with a reversal of $5million in the second quarter of 2006. As our credit portfolio continues togrow and as we believe that we have passed the turning point in credit qualitytrends, we anticipate that we will continue to provide for credit lossesthroughout 2007.

Offsetting our strong loan growth and credit qualitywas the decline in our noninterest bearing deposits. Compared to second quarter2006, average noninterest bearing deposits declined by $2.6 billion as ourcustomers shifted their balances to interest bearing deposits or otherinvestment alternatives. In addition, the average cost of interest bearingdeposits rose from 2.60 percent to 3.57 percent from second quarter 2006 tosecond quarter 2007. However, we believe that pricing has stabilized asindicated by the more modest sequential quarter increase in our average cost ofinterest bearing deposits, which rose 15 basis points from 3.42 percent infirst quarter 2007. Although our noninterest bearing deposits have declined, wecontinue to enjoy a relatively high proportion of average noninterest bearingdeposits to total deposits compared to our peers. Based on the most recentstatistics available, our percentage of average noninterest bearing deposits toaverage total deposits ranked us second among the 50 largest U.S. banks.

31

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In the second quarter of 2007, our net interest incomewas $429 million, a decline of $39 million over the second quarter of 2006,continuing the trend experienced throughout 2006 as our higher funding costsoutstripped interest income earned on our loan growth.

Noninterest income grew 4.8 percent in the secondquarter of 2007 over the second quarter of 2006 as gains on private capitalinvestments and higher trust and investment management fees offset reductionsin our service charges on deposits.

Noninterest expense declined slightly in the secondquarter of 2007 compared to the second quarter of 2006 primarily due to thedecreased cost for outside services stemming from lower cost of servicesrelated to title and escrow deposit balances, a decline in compliance-relatedprofessional services expense and the favorable outcome of a lawsuit settlement.Although salary and employee benefits rose by 1.1 percent, employeebenefits were lower as a result of the increase in the discount rate used todetermine our pension obligations.

In the second quarter of 2007, we recorded a reserve of$10 million for the expected imposition of civil money penalties by the Officeof the Comptroller of the Currency (OCC) and the Financial Crimes EnforcementNetwork (FinCEN) of the U.S. Treasury Department related to compliance withBank Secrecy Act and anti-money laundering regulations (BSA/AML). In addition,the OCC has indicated that it will institute a procedure for a cease and desistorder against us with regard to our BSA/AML controls and processes. Foradditional information, see “Regulatory Matters.”

Our effective tax rate declined to 31.6 percentcompared to 33.5 percent in the second quarter of 2006. The lower effective taxrate in 2007 resulted from the expiration of the statute of limitations onuncertain tax positions, partially offset by the nondeductible BSA/AML penalty.

In the second quarter of 2007,we repurchased 30 thousand shares of common stock for a total of $2 million. AtJune 30, 2007, we were authorized to repurchase an additional $62 million.

**Discontinued Operations**

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

This transaction has been accounted for as adiscontinued operation and all prior periods, except where specificallymentioned, have been restated to reflect this accounting treatment. All of theassets and liabilities of the discontinued operations have been separately identifiedon our condensed consolidated balance sheet and the assets are shown at thelower of cost or fair value less costs to dispose. The average net assets orliabilities of our discontinued operations are reflected in our analysis of netinterest margin. All of our offices designated for disposal were closed as of June 30,2006. For the detailed components of our assets and liabilities fromdiscontinued operations at June 30, 2006 and December 31, 2006, seeNote 3 to the Condensed Consolidated Financial Statements of this Form 10-Q.Substantially all assets and liabilities of the discontinued operations wereliquidated as of March 31, 2007.

32

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For thethree and six months ended June 30, 2006, income (loss) from discontinuedoperations included the following:

| ** **                                  | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| **(Dollars in thousands)**        | ** ** | **2006**                                | ** ** | **2006**                              | ** ** |
| Net interest  (expense) income              |       |                                    | $          | (86                                   | )          |   |   | $ | 1,639 |   |   |
| Noninterest income                          |       |                                    | 7,105      |                                  |       |   | 12,916 |   |   |
| Noninterest expense                         |       |                                    | 6,588      |                                  |       |   | 27,727 |   |   |
| Income (loss) from  discontinued operations |       |                                    |       |                                  |       |   |   |   |   |
| before income taxes                         |       |                                    | 431        |                                  |       |   | (13,172 | ) |   |
| Income tax expense  (benefit)               |       |                                    | 157        |                                  |       |   | (4,936 | ) |   |
| Income (loss) from  discontinued operations |       |                                    | $          | 274                                   |       |   |   | $ | (8,236 | ) |   |

 

For the three and six months ended June 30, 2006,net interest income included the allocation of interest expense from continuingoperations to discontinued operations of approximately $0.4 million and $1.1million, respectively. Interest expense allocated to discontinued operations iscalculated based on its average net assets and the corresponding cost of fundsrate equivalent to the average federal funds purchased rate for the period.Noninterest income for the three and six months ended June 30, 2006included a $4.0 million payment from Wachovia Bank, N.A., reflecting the finalsettlement upon the conversion of the international correspondent bankingcustomer base to Wachovia Bank, N.A. Included in noninterest expense wascompliance related expenses of $1.8 million and $7.1 million, for the three andsix months ended June 30, 2006, respectively. Additionally, we recorded$1.4 million of expenses related to the termination of lease contracts in thesecond quarter 2006.

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

**Critical AccountingEstimates**

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

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

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

**Financial Performance**

**Summary of Financial Performance**

| ** **                                                           | ** ** | **For the Three Months** | ** ** | ** ** | ** ** | **Increase (Decrease)**   | ** ** | **For the Six Months** | ** ** | ** **  | ** ** | **Increase (Decrease)**   | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------------|------------|-------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **Ended June 30,**            | ** ** | ** ** | ** ** | **2007 versus 2006** | ** ** | **Ended June 30,**          | ** ** | ** **  | ** ** | **2007 versus 2006** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2006**                                | ** ** | **2007**   | ** ** | ** **                     | ** ** | **Amount**                            | ** ** | **Percent** | ** ** | **2006**                       | ** ** | **2007** | ** ** | ** ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results  of Operations**                                           |       |                                    |       |       |       |                           |       |                                  |       |        |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income(1)                                               |       | $                                       | 467,642    |       | $          | 428,873                        |       |                                  |       | $           | (38,769    | )                              |       | (8.3 | )% |   | $ | 932,735 |   | $ | 857,385 |   |   |   | $ | (75,350 | ) |   | (8.1 | )% |   |
| Noninterest income                                                   |       |                                    |       |       |       |                           |       |                                  |       |        |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                  |       | 81,837                                  |       | 77,218     |       |                           |       | (4,619                                | )          |        | (5.6       | )                              |       | 163,472 |   | 152,163 |   |   |   | (11,309 | ) |   | (6.9 | ) |   |
| Trust and investment management  fees                                |       | 48,380                                  |       | 51,585     |       |                           |       | 3,205                                 |       |        | 6.6        |                           |       | 98,495 |   | 100,145 |   |   |   | 1,650 |   |   | 1.7 |   |   |
| Gain on private capital investments,  net                            |       | 3,702                                   |       | 20,171     |       |                           |       | 16,469                                |       |        | nm         |                           |       | 6,529 |   | 29,266 |   |   |   | 22,737 |   |   | nm |   |   |
| Other noninterest income                                             |       | 85,309                                  |       | 80,871     |       |                           |       | (4,438                                | )          |        | (5.2       | )                              |       | 168,642 |   | 170,829 |   |   |   | 2,187 |   |   | 1.3 |   |   |
| Total noninterest income                                             |       | 219,228                                 |       | 229,845    |       |                           |       | 10,617                                |       |        | 4.8        |                           |       | 437,138 |   | 452,403 |   |   |   | 15,265 |   |   | 3.5 |   |   |
| Total revenue                                                        |       | 686,870                                 |       | 658,718    |       |                           |       | (28,152                               | )          |        | (4.1       | )                              |       | 1,369,873 |   | 1,309,788 |   |   |   | (60,085 | ) |   | (4.4 | ) |   |
| (Reversal of) provision for loan losses                              |       | (1,000                                  | )          | 5,000      |       |                           |       | 6,000                                 |       |        | nm         |                           |       | (8,000 | ) | 9,000 |   |   |   | 17,000 |   |   | nm |   |   |
| Noninterest expense                                                  |       |                                    |       |       |       |                           |       |                                  |       |        |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                       |       | 248,637                                 |       | 251,430    |       |                           |       | 2,793                                 |       |        | 1.1        |                           |       | 501,132 |   | 509,945 |   |   |   | 8,813 |   |   | 1.8 |   |   |
| Outside services                                                     |       | 30,704                                  |       | 18,851     |       |                           |       | (11,853                               | )          |        | (38.6      | )                              |       | 59,313 |   | 38,687 |   |   |   | (20,626 | ) |   | (34.8 | ) |   |
| Professional services                                                |       | 17,038                                  |       | 11,970     |       |                           |       | (5,068                                | )          |        | (29.7      | )                              |       | 31,585 |   | 29,057 |   |   |   | (2,528 | ) |   | (8.0 | ) |   |
| Foreclosed asset expense (income)                                    |       | (7,782                                  | )          | 9          |       |                           |       | 7,791                                 |       |        | nm         |                           |       | (15,149 | ) | 18 |   |   |   | 15,167 |   |   | nm |   |   |
| (Reversal of) provision for losses on off-balance  sheet commitments |       | (4,000                                  | )          | —     |       |                           |       | 4,000                                 |       |        | 100.0      |                           |       | (7,000 | ) | 1,000 |   |   |   | 8,000 |   |   | nm |   |   |
| Other noninterest expense                                            |       | 128,433                                 |       | 129,605    |       |                           |       | 1,172                                 |       |        | 0.9        |                           |       | 257,693 |   | 255,249 |   |   |   | (2,444 | ) |   | (0.9 | ) |   |
| Total noninterest expense                                            |       | 413,030                                 |       | 411,865    |       |                           |       | (1,165                                | )          |        | (0.3       | )                              |       | 827,574 |   | 833,956 |   |   |   | 6,382 |   |   | 0.8 |   |   |
| Income from continuing operations before income  taxes          |       | 274,840                                 |       | 241,853    |       |                           |       | (32,987                               | )          |        | (12.0      | )                              |       | 550,299 |   | 466,832 |   |   |   | (83,467 | ) |   | (15.2 | ) |   |
| Income tax expense                                                   |       | 92,203                                  |       | 76,499     |       |                           |       | (15,704                               | )          |        | (17.0      | )                              |       | 186,207 |   | 151,867 |   |   |   | (34,340 | ) |   | (18.4 | ) |   |
| Income from continuing  operations                                   |       | $                                       | 182,637    |       | $          | 165,354                        |       |                                  |       | $           | (17,283    | )                              |       | (9.5 | )% |   | $ | 364,092 |   | $ | 314,965 |   |   |   | $ | (49,127 | ) |   | (13.5 | )% |   |

----

(1)                   Net interest income does not include any adjustmentsfor fully taxable equivalence.

nm = not meaningful

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

·       Overallcredit quality remained excellent. However, we believe that the trend ofimproving credit quality is beyond its peak. (See our discussion under “Allowancesfor Credit Losses.”) After several years of reducing the level of ourallowances for credit losses, we provided a total of $5 million for creditlosses in the second quarter of 2007 primarily due to a shift in risk-grademix, increased concern about certain economic conditions and a decline in ourloss factors.

·       Ournet interest income was unfavorably influenced by lower noninterest bearingdeposit volumes and higher rates on interest bearing liabilities. Offsettingthese negative influences to our net interest income were higher earning assetvolumes (including higher volumes for commercial, financial and industrialloans, residential mortgages, construction loans and commercial mortgages) andhigher average yields on our earning assets. (See our discussion under “NetInterest Income.”)

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The increase in ournoninterest income was due to several factors:

—              Servicecharges on deposits decreased primarily due to lower account analysis fees;

—              Trust andinvestment management fees were higher primarily due to an increase in thetotal assets under administration on which fees are based. Managed assetsincreased by approximately 7 percent, while non-managed assets increasedby approximately 13 percent from June 30, 2006 to June 30, 2007.Total assets under administration increased by approximately 12 percent, to$243.4 billion, for the same period;

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

                 Other noninterest income included lower gainon sale of other assets due to a prior year quarter gain of $1.8 million thatresulted from the share redemption by MasterCard Incorporated as part of its May 2006initial public offering, lower securities gains due to a $1.2 million reversalof impairment on a called security in the prior year quarter and lowerinsurance commissions.

Our lower noninterestexpense was due to several factors:

—              Salaries andemployee benefits increased primarily as a result of:

·       annualmerit increases; partially offset by

·       lowerpension expenses related to a change in the discount rate used to estimatefuture liabilities, which increased from 5.5% to 6.0%;

—              Outside servicesexpense decreased mainly due to lower cost of services related to a 19 percentdecline in title and escrow deposits and a shift by our customers to anincreased utilization of lower yielding title and escrow loans;

—              Professionalservices expense decreased mainly due to lower compliance-related activities;

—              Foreclosed assetincome reflected a gain on the sale of a foreclosed property in the secondquarter of 2006;

—              There was noprovision for losses on off-balance sheet commitments in the current quartercompared to a $4.0 million reversal of that provision in the prior yearquarter; and

—              Other noninterestexpense included a reserve accrual of $10.0 million for the expected impositionof civil money penalties by the OCC and FinCEN relating to BSA/AML compliance,partially offset by a favorable outcome of a lawsuit settlement.

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

·       Overallcredit quality remained excellent. However, we believe that the trend ofimproving credit quality is beyond its peak. (See our discussion under “Allowancesfor Credit Losses.”) After several years of reducing the level of ourallowances for credit losses, we provided a total of $10 million for creditlosses in the first six months of 2007 primarily due to a shift in risk-grademix, loan growth, net charge offs, increased concern about certain economicconditions and a decline in our loss factors.

·       Ournet interest income was unfavorably influenced by lower noninterest bearingdeposit volumes and higher rates on interest bearing liabilities. Offsettingthese negative influences to our net interest income were higher earning assetvolumes (including higher volumes for commercial, financial and 

35

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industrial loans, residentialmortgages and construction loans) and higher average yields on our earningassets. (See our discussion under “Net Interest Income.”)

The increase in ournoninterest income was due to several factors:

—              Service charges ondeposits decreased primarily due to lower account analysis fees;

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

—              Other noninterestincome included higher brokerage commissions, merchant banking fees and cardprocessing fees.

Our higher noninterestexpense was due to several factors:

—              Salaries andemployee benefits increased primarily as a result of:

·       annualmerit increases; and

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

·       lowerpension expenses related to a change in the discount rate used to estimatefuture liabilities, which increased from 5.5% to 6.0%;

—              Outside servicesexpense decreased mainly due to lower cost of services related to the 16percent decline in title and escrow deposits and a shift by our customers to anincreased utilization of lower yielding title and escrow loans;

—              Foreclosed assetincome reflected higher gains on the sale of foreclosed properties in 2006; and

—              Provision for losseson off-balance sheet commitments increased from a $7.0 million reversal in theprior year to a $1.0 million provision in the current year.

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**Net Interest Income**

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

| ** **                                                               | ** ** | **For the Three Months Ended** | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **June 30, 2006**              | ** ** | **June 30, 2007**     | ** ** | **Increase (Decrease) in** | ** ** |
| ** **                                                               | ** ** | **Average**                    | ** ** | **Interest  Income/** | ** ** | **Average  Yield/** | ** ** | **Average** | ** ** | **Interest  Income/** | ** ** | **Average  Yield/** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** (1) | ** ** |
| **(Dollars in thousands)**                                     | ** ** | **Balance**                    | ** ** | **Expense**(1)        | ** ** | **Rate**(1)(2) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                               |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:(3)                                                                |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                     |       | $                              | 12,957,301 |                  | $          | 214,068 |   |   | 6.63 | % |   | $ | 14,610,728 |   | $ | 238,175 |   |   | 6.54 | % |   | $ | 1,653,427 |   |   | 13 | % |   | $ | 24,107 |   |   | 11 | % |   |
| Construction                                                             |       | 1,723,868                      |       | 33,061                |       |   | 7.69 |   |   | 2,296,098 |   | 44,047 |   |   | 7.69 |   |   | 572,230 |   |   | 33 |   |   | 10,986 |   |   | 33 |   |   |
| Residential mortgage                                                     |       | 11,734,930                     |       | 149,869               |       |   | 5.11 |   |   | 12,594,065 |   | 167,342 |   |   | 5.31 |   |   | 859,135 |   |   | 7 |   |   | 17,473 |   |   | 12 |   |   |
| Commercial mortgage                                                      |       | 5,661,541                      |       | 100,238               |       |   | 7.10 |   |   | 6,213,092 |   | 111,720 |   |   | 7.21 |   |   | 551,551 |   |   | 10 |   |   | 11,482 |   |   | 11 |   |   |
| Consumer                                                                 |       | 2,505,651                      |       | 47,576                |       |   | 7.62 |   |   | 2,557,085 |   | 49,579 |   |   | 7.78 |   |   | 51,434 |   |   | 2 |   |   | 2,003 |   |   | 4 |   |   |
| Lease financing                                                          |       | 563,685                        |       | 3,205                 |       |   | 2.27 |   |   | 568,701 |   | 7,341 |   |   | 5.16 |   |   | 5,016 |   |   | 1 |   |   | 4,136 |   |   | 129 |   |   |
| Total Loans                                                              |       | 35,146,976                     |       | 548,017               |       |   | 6.25 |   |   | 38,839,769 |   | 618,204 |   |   | 6.38 |   |   | 3,692,793 |   |   | 11 |   |   | 70,187 |   |   | 13 |   |   |
| Securities—taxable                                                  |       | 8,349,759                      |       | 102,733               |       |   | 4.92 |   |   | 8,548,063 |   | 108,675 |   |   | 5.09 |   |   | 198,304 |   |   | 2 |   |   | 5,942 |   |   | 6 |   |   |
| Securities—tax-exempt                                               |       | 63,222                         |       | 1,275                 |       |   | 8.06 |   |   | 56,084 |   | 1,164 |   |   | 8.30 |   |   | (7,138 | ) |   | (11 | ) |   | (111 | ) |   | (9 | ) |   |
| Interest bearing deposits in banks                                       |       | 34,462                         |       | 423                   |       |   | 4.92 |   |   | 88,592 |   | 1,295 |   |   | 5.86 |   |   | 54,130 |   |   | 157 |   |   | 872 |   |   | 206 |   |   |
| Federal funds sold and securities purchased under  resale agreements     |       | 379,412                        |       | 4,725                 |       |   | 4.99 |   |   | 593,718 |   | 7,809 |   |   | 5.28 |   |   | 214,306 |   |   | 56 |   |   | 3,084 |   |   | 65 |   |   |
| Trading account assets                                                   |       | 384,763                        |       | 1,685                 |       |   | 1.76 |   |   | 317,020 |   | 1,601 |   |   | 2.03 |   |   | (67,743 | ) |   | (18 | ) |   | (84 | ) |   | (5 | ) |   |
| Total earning assets                                                     |       | 44,358,594                     |       | 658,858               |       |   | 5.95 |   |   | 48,443,246 |   | 738,748 |   |   | 6.11 |   |   | 4,084,652 |   |   | 9 |   |   | 79,890 |   |   | 12 |   |   |
| Allowance for loan losses                                                |       | (334,556                       | )          |                  |       |   |   |   |   | (331,820 | ) |   |   |   |   |   |   | (2,736 | ) |   | (1 | ) |   |   |   |   |   |   |   |
| Cash and due from banks                                                  |       | 2,107,846                      |       |                  |       |   |   |   |   | 2,000,691 |   |   |   |   |   |   |   | (107,155 | ) |   | (5 | ) |   |   |   |   |   |   |   |
| Premises and equipment, net                                              |       | 506,607                        |       |                  |       |   |   |   |   | 486,776 |   |   |   |   |   |   |   | (19,831 | ) |   | (4 | ) |   |   |   |   |   |   |   |
| Other assets                                                             |       | 2,690,883                      |       |                  |       |   |   |   |   | 2,517,561 |   |   |   |   |   |   |   | (173,322 | ) |   | (6 | ) |   |   |   |   |   |   |   |
| Total assets                                                             |       | $                              | 49,329,374 |                  |       |   |   |   |   |   | $ | 53,116,454 |   |   |   |   |   |   |   | $ | 3,787,080 |   |   | 8 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                          |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                                     |       | $                              | 12,614,869 |                  | $          | 65,457 |   |   | 2.08 |   |   | $ | 14,075,542 |   | $ | 102,833 |   |   | 2.93 |   |   | $ | 1,460,673 |   |   | 12 | % |   | $ | 37,376 |   |   | 57 |   |   |
| Savings and consumer time                                                |       | 4,470,764                      |       | 21,502                |       |   | 1.93 |   |   | 4,445,326 |   | 28,962 |   |   | 2.61 |   |   | (25,438 | ) |   | (1 | ) |   | 7,460 |   |   | 35 |   |   |
| Large time                                                               |       | 5,062,473                      |       | 56,718                |       |   | 4.49 |   |   | 9,173,928 |   | 114,380 |   |   | 5.00 |   |   | 4,111,455 |   |   | 81 |   |   | 57,662 |   |   | 102 |   |   |
| Total interest bearing deposits                                          |       | 22,148,106                     |       | 143,677               |       |   | 2.60 |   |   | 27,694,796 |   | 246,175 |   |   | 3.57 |   |   | 5,546,690 |   |   | 25 |   |   | 102,498 |   |   | 71 |   |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 748,050                        |       | 8,902                 |       |   | 4.77 |   |   | 782,000 |   | 10,120 |   |   | 5.19 |   |   | 33,950 |   |   | 5 |   |   | 1,218 |   |   | 14 |   |   |
| Net funding allocated from (to) discontinued  operations(4)              |       | (36,123                        | )          | (447                  | )          |   | 4.97 |   |   | — |   | — |   |   | — |   |   | 36,123 |   |   | 100 |   |   | 447 |   |   | 100 |   |   |
| Commercial paper                                                         |       | 1,650,266                      |       | 19,137                |       |   | 4.65 |   |   | 1,389,847 |   | 17,429 |   |   | 5.03 |   |   | (260,419 | ) |   | (16 | ) |   | (1,708 | ) |   | (9 | ) |   |
| Other borrowed funds                                                     |       | 108,095                        |       | 1,476                 |       |   | 5.47 |   |   | 333,252 |   | 4,689 |   |   | 5.64 |   |   | 225,157 |   |   | 208 |   |   | 3,213 |   |   | 218 |   |   |
| Medium and long-term debt                                                |       | 1,179,432                      |       | 16,875                |       |   | 5.74 |   |   | 2,033,377 |   | 28,973 |   |   | 5.72 |   |   | 853,945 |   |   | 72 |   |   | 12,098 |   |   | 72 |   |   |
| Trust notes                                                              |       | 15,167                         |       | 238                   |       |   | 6.28 |   |   | 14,714 |   | 238 |   |   | 6.48 |   |   | (453 | ) |   | (3 | ) |   | — |   |   | 0 |   |   |
| Total borrowed funds                                                     |       | 3,664,887                      |       | 46,181                |       |   | 5.05 |   |   | 4,553,190 |   | 61,449 |   |   | 5.41 |   |   | 888,303 |   |   | 24 |   |   | 15,268 |   |   | 33 |   |   |
| Total interest bearing liabilities                                       |       | 25,812,993                     |       | 189,858               |       |   | 2.95 |   |   | 32,247,986 |   | 307,624 |   |   | 3.83 |   |   | 6,434,993 |   |   | 25 |   |   | 117,766 |   |   | 62 |   |   |
| Noninterest bearing deposits                                             |       | 17,543,946                     |       |                  |       |   |   |   |   | 14,989,226 |   |   |   |   |   |   |   | (2,554,720 | ) |   | (15 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                        |       | 1,432,959                      |       |                  |       |   |   |   |   | 1,291,181 |   |   |   |   |   |   |   | (141,778 | ) |   | (10 | ) |   |   |   |   |   |   |   |
| Total liabilities                                                        |       | 44,789,898                     |       |                  |       |   |   |   |   | 48,528,393 |   |   |   |   |   |   |   | 3,738,495 |   |   | 8 |   |   |   |   |   |   |   |   |
| **Stockholders’  Equity**                                           |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                            |       | 4,539,476                      |       |                  |       |   |   |   |   | 4,588,061 |   |   |   |   |   |   |   | 48,585 |   |   | 1 |   |   |   |   |   |   |   |   |
| Total stockholders’ equity                                          |       | 4,539,476                      |       |                  |       |   |   |   |   | 4,588,061 |   |   |   |   |   |   |   | 48,585 |   |   | 1 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                          |       | $                              | 49,329,374 |                  |       |   |   |   |   |   | $ | 53,116,454 |   |   |   |   |   |   |   | $ | 3,787,080 |   |   | 8 | % |   |   |   |   |   |   |   |
| **Net  Interest Income/Margin**                                          |       |                           |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent basis)                    |       |                           |       | 469,000               |       |   | 4.23 | % |   |   |   | 431,124 |   |   | 3.56 | % |   |   |   |   |   |   |   | (37,876 | ) |   | (8 | ) |   |
| Less: taxable-equivalent adjustment                                      |       |                           |       | 1,358                 |       |   |   |   |   |   |   | 2,251 |   |   |   |   |   |   |   |   |   |   |   | 893 |   |   | 66 |   |   |
| Net interest income                                                      |       |                           |       | $                     | 467,642    |   |   |   |   |   |   |   | $ | 428,873 |   |   |   |   |   |   |   |   |   |   |   | $ | (38,769 | ) |   | (8 | )% |   |

 

|            | **Average Assets and Liabilities of  Discontinued Operations for the  Three Months Ended:** | ** ** | ** ** | ** ** | **June 30,  2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|            | **Assets**                                                                                                                               | ** ** | ** ** | ** ** | $                  | 79,188     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | **Liabilities**                                                                                                                          | ** ** | ** ** | ** ** | $                  | 43,065     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|            | **Net  assets**                                                                                                                          | ** ** | ** ** | ** ** | $                  | 36,123     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

----

(1)                   Yields and interest income are presentedon a taxable-equivalent basis using the federal statutory tax rate of 35percent.

(2)                   Annualized.

(3)                   Average balances on loans outstandinginclude all nonperforming loans and loans held for sale. The amortized portionof net loan origination fees (costs) is included in interest income on loans, representingan adjustment to the yield.

(4)                   Net funding allocated from (to)discontinued operations represents the shortage (excess) of assets overliabilities of discontinued operations. The expense (earning) on funds allocatedfrom (to) discontinued operations is calculated by taking the net balance andapplying an earnings rate or a cost of funds equivalent to the correspondingperiod’s Federal funds purchased rate.

37

----

| ** **                                                               | ** ** | **For the Six Months Ended** | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **June 30, 2006**            | ** ** | **June 30, 2007**     | ** ** | **Increase (Decrease) in** | ** ** |
| ** **                                                               | ** ** | **Average**                  | ** ** | **Interest  Income/** | ** ** | **Average  Yield/** | ** ** | **Average** | ** ** | **Interest  Income/** | ** ** | **Average  Yield/** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense**(1) | ** ** |
| **(Dollars in thousands)**                                     | ** ** | **Balance**                  | ** ** | **Expense**(1)        | ** ** | **Rate**(1)(2) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                               |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:(3)                                                                |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                     |       | $                            | 12,666,066 |                  | $          | 410,020 |   |   | 6.53 | % |   | $ | 14,647,210 |   | $ | 475,453 |   |   | 6.55 | % |   | $ | 1,981,144 |   |   | 16 | % |   | $ | 65,433 |   |   | 16 | % |   |
| Construction                                                             |       | 1,624,123                    |       | 60,019                |       |   | 7.45 |   |   | 2,264,789 |   | 86,822 |   |   | 7.73 |   |   | 640,666 |   |   | 39 |   |   | 26,803 |   |   | 45 |   |   |
| Residential mortgage                                                     |       | 11,591,676                   |       | 293,209               |       |   | 5.06 |   |   | 12,490,760 |   | 331,108 |   |   | 5.30 |   |   | 899,084 |   |   | 8 |   |   | 37,899 |   |   | 13 |   |   |
| Commercial mortgage                                                      |       | 5,657,018                    |       | 197,539               |       |   | 7.04 |   |   | 6,139,042 |   | 218,686 |   |   | 7.18 |   |   | 482,024 |   |   | 9 |   |   | 21,147 |   |   | 11 |   |   |
| Consumer                                                                 |       | 2,497,519                    |       | 92,671                |       |   | 7.48 |   |   | 2,549,836 |   | 98,558 |   |   | 7.79 |   |   | 52,317 |   |   | 2 |   |   | 5,887 |   |   | 6 |   |   |
| Lease financing                                                          |       | 566,144                      |       | 7,547                 |       |   | 2.67 |   |   | 558,310 |   | 11,079 |   |   | 3.97 |   |   | (7,834 | ) |   | (1 | ) |   | 3,532 |   |   | 47 |   |   |
| Total Loans                                                              |       | 34,602,546                   |       | 1,061,005             |       |   | 6.17 |   |   | 38,649,947 |   | 1,221,706 |   |   | 6.36 |   |   | 4,047,401 |   |   | 12 |   |   | 160,701 |   |   | 15 |   |   |
| Securities—taxable                                                  |       | 8,292,126                    |       | 198,787               |       |   | 4.79 |   |   | 8,564,100 |   | 215,943 |   |   | 5.04 |   |   | 271,974 |   |   | 3 |   |   | 17,156 |   |   | 9 |   |   |
| Securities—tax-exempt                                               |       | 64,207                       |       | 2,572                 |       |   | 8.01 |   |   | 56,865 |   | 2,318 |   |   | 8.15 |   |   | (7,342 | ) |   | (11 | ) |   | (254 | ) |   | (10 | ) |   |
| Interest bearing deposits in banks                                       |       | 47,084                       |       | 1,159                 |       |   | 4.96 |   |   | 84,102 |   | 2,404 |   |   | 5.76 |   |   | 37,018 |   |   | 79 |   |   | 1,245 |   |   | nm |   |   |
| Federal funds sold and securities purchased under  resale agreements     |       | 362,471                      |       | 8,570                 |       |   | 4.77 |   |   | 719,183 |   | 18,961 |   |   | 5.32 |   |   | 356,712 |   |   | 98 |   |   | 10,391 |   |   | nm |   |   |
| Trading account assets                                                   |       | 356,556                      |       | 3,215                 |       |   | 1.82 |   |   | 325,146 |   | 3,302 |   |   | 2.05 |   |   | (31,410 | ) |   | (9 | ) |   | 87 |   |   | 3 |   |   |
| Total earning assets                                                     |       | 43,724,990                   |       | 1,275,308             |       |   | 5.86 |   |   | 48,399,343 |   | 1,464,634 |   |   | 6.08 |   |   | 4,674,353 |   |   | 11 |   |   | 189,326 |   |   | 15 |   |   |
| Allowance for loan losses                                                |       | (341,568                     | )          |                  |       |   |   |   |   | (331,042 | ) |   |   |   |   |   |   | (10,526 | ) |   | (3 | ) |   |   |   |   |   |   |   |
| Cash and due from banks                                                  |       | 2,113,853                    |       |                  |       |   |   |   |   | 1,975,104 |   |   |   |   |   |   |   | (138,749 | ) |   | (7 | ) |   |   |   |   |   |   |   |
| Premises and equipment, net                                              |       | 516,748                      |       |                  |       |   |   |   |   | 489,898 |   |   |   |   |   |   |   | (26,850 | ) |   | (5 | ) |   |   |   |   |   |   |   |
| Other assets                                                             |       | 2,662,595                    |       |                  |       |   |   |   |   | 2,511,933 |   |   |   |   |   |   |   | (150,662 | ) |   | (6 | ) |   |   |   |   |   |   |   |
| Total assets                                                             |       | $                            | 48,676,618 |                  |       |   |   |   |   |   | $ | 53,045,236 |   |   |   |   |   |   |   | $ | 4,368,618 |   |   | 9 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                          |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                                     |       | $                            | 12,936,591 |                  | $          | 127,815 |   |   | 1.99 |   |   | $ | 13,806,452 |   | $ | 194,338 |   |   | 2.84 |   |   | $ | 869,861 |   |   | 7 | % |   | $ | 66,523 |   |   | 52 |   |   |
| Savings and consumer time                                                |       | 4,469,204                    |       | 39,990                |       |   | 1.80 |   |   | 4,430,376 |   | 55,919 |   |   | 2.55 |   |   | (38,828 | ) |   | (1 | ) |   | 15,929 |   |   | 40 |   |   |
| Large time                                                               |       | 4,339,551                    |       | 91,181                |       |   | 4.24 |   |   | 8,806,573 |   | 218,175 |   |   | 5.00 |   |   | 4,467,022 |   |   | nm |   |   | 126,994 |   |   | nm |   |   |
| Total interest bearing  deposits                                         |       | 21,745,346                   |       | 258,986               |       |   | 2.40 |   |   | 27,043,401 |   | 468,432 |   |   | 3.49 |   |   | 5,298,055 |   |   | 24 |   |   | 209,446 |   |   | 81 |   |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 810,704                      |       | 18,312                |       |   | 4.55 |   |   | 913,489 |   | 23,644 |   |   | 5.22 |   |   | 102,785 |   |   | 13 |   |   | 5,332 |   |   | 29 |   |   |
| Net funding allocated from (to) discontinued  operations(4)              |       | (46,548                      | )          | (1,055                | )          |   | 4.57 |   |   | — |   | — |   |   | — |   |   | 46,548 |   |   | nm |   |   | 1,055 |   |   | nm |   |   |
| Commercial paper                                                         |       | 1,447,492                    |       | 31,585                |       |   | 4.40 |   |   | 1,585,714 |   | 39,693 |   |   | 5.05 |   |   | 138,222 |   |   | 10 |   |   | 8,108 |   |   | 26 |   |   |
| Other borrowed funds                                                     |       | 187,736                      |       | 4,391                 |       |   | 4.72 |   |   | 818,481 |   | 21,970 |   |   | 5.41 |   |   | 630,745 |   |   | nm |   |   | 17,579 |   |   | nm |   |   |
| Medium and long-term debt                                                |       | 990,771                      |       | 27,272                |       |   | 5.55 |   |   | 1,704,240 |   | 48,668 |   |   | 5.76 |   |   | 713,469 |   |   | 72 |   |   | 21,396 |   |   | 78 |   |   |
| Trust notes                                                              |       | 15,223                       |       | 476                   |       |   | 6.26 |   |   | 14,770 |   | 476 |   |   | 6.45 |   |   | (453 | ) |   | (3 | ) |   | — |   |   | — |   |   |
| Total borrowed funds                                                     |       | 3,405,378                    |       | 80,981                |       |   | 4.80 |   |   | 5,036,694 |   | 134,451 |   |   | 5.38 |   |   | 1,631,316 |   |   | 48 |   |   | 53,470 |   |   | 66 |   |   |
| Total interest bearing  liabilities                                      |       | 25,150,724                   |       | 339,967               |       |   | 2.73 |   |   | 32,080,095 |   | 602,883 |   |   | 3.79 |   |   | 6,929,371 |   |   | 28 |   |   | 262,916 |   |   | 77 |   |   |
| Noninterest bearing deposits                                             |       | 17,531,006                   |       |                  |       |   |   |   |   | 15,043,457 |   |   |   |   |   |   |   | (2,487,549 | ) |   | (14 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                        |       | 1,455,808                    |       |                  |       |   |   |   |   | 1,372,336 |   |   |   |   |   |   |   | (83,472 | ) |   | (6 | ) |   |   |   |   |   |   |   |
| Total liabilities                                                        |       | 44,137,538                   |       |                  |       |   |   |   |   | 48,495,888 |   |   |   |   |   |   |   | 4,358,350 |   |   | 10 |   |   |   |   |   |   |   |   |
| **Stockholders’ Equity**                                            |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                            |       | 4,539,080                    |       |                  |       |   |   |   |   | 4,549,348 |   |   |   |   |   |   |   | 10,268 |   |   | 0 |   |   |   |   |   |   |   |   |
| Total stockholders’ equity                                          |       | 4,539,080                    |       |                  |       |   |   |   |   | 4,549,348 |   |   |   |   |   |   |   | 10,268 |   |   | 0 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                          |       | $                            | 48,676,618 |                  |       |   |   |   |   |   | $ | 53,045,236 |   |   |   |   |   |   |   | $ | 4,368,618 |   |   | 9 | % |   |   |   |   |   |   |   |
| **Net Interest Income/Margin**                                           |       |                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent  basis)                   |       |                         |       | 935,341               |       |   | 4.29 | % |   |   |   | 861,751 |   |   | 3.57 | % |   |   |   |   |   |   |   | (73,590 | ) |   | (8 | ) |   |
| Less: taxable-equivalent  adjustment                                     |       |                         |       | 2,606                 |       |   |   |   |   |   |   | 4,366 |   |   |   |   |   |   |   |   |   |   |   | 1,760 |   |   | 68 |   |   |
| Net interest income                                                      |       |                         |       | $                     | 932,735    |   |   |   |   |   |   |   | $ | 857,385 |   |   |   |   |   |   |   |   |   |   |   | $ | (75,350 | ) |   | (8 | )% |   |

 

|            | **Average Assets and Liabilities of  Discontinued Operations for the  Six Months Ended:** | ** ** | ** ** | ** ** | **June 30,  2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|            | **Assets**                                                                                                                             | ** ** | ** ** | ** ** | $                  | 347,431    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | **Liabilities**                                                                                                                        | ** ** | ** ** | ** ** | $                  | 300,883    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|            | **Net  assets**                                                                                                                        | ** ** | ** ** | ** ** | $                  | 46,548     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

----

(1)                   Yields and interest income are presentedon a taxable-equivalent basis using the federal statutory tax rate of 35percent.

(2)                   Annualized.

(3)                   Average balances on loans outstandinginclude all nonperforming loans. The amortized portion of net loan originationfees (costs) is included in interest income on loans, representing anadjustment to the yield.

(4)                   Net funding allocated from (to) discontinued operationsrepresents the shortage (excess) of assets over liabilities of discontinuedoperations. The expense (earning) on funds allocated from(to) discontinued operations is calculated by taking the net balance andapplying an earnings rate or a cost of funds equivalent to the correspondingperiod’s Federal funds purchased rate. The year-to-date expense (earnings) amount is the sumof the quarterly amounts.

nm = not meaningful

38

----

Net interest income inthe second quarter of 2007, on a taxable-equivalent basis, decreased 8percent from the second quarter of 2006. Our net interest margin decreased by67 basis points. These results were primarily due to the following:

·       Averageearning assets increased $4.1 billion, or 9 percent, primarily due to anincrease in average loans. The increase in average loans was largely due to a$1.6 billion increase in average commercial loans, including a $0.6 billionincrease in lower yielding loans related to title and escrow customers, a $0.9billion increase in average residential mortgages, a $0.6 billion increase inaverage construction loans and a $0.6 billion increase in average commercialmortgages;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 16basis points, which includes the favorable impact of $2.0 million in lowerhedge expense;

·       Averagenoninterest bearing deposits decreased $2.6 billion, or 15 percent. Averagecommercial noninterest bearing deposits, excluding title and escrow deposits,declined $1.6 billion, or 14 percent, primarily due to changes in customerbehavior in response to rising short-term interest rates. Consumer demanddeposits decreased $0.4 billion, or 13 percent. Average noninterest bearingdeposits represented 35 percent of average total deposits in the second quarterof 2007 compared to 44 percent in the second quarter of 2006; and

·       Inthe second quarter of 2007, the annualized average all-in cost of funds was2.61 percent, reflecting an average deposit-to-loan ratio of 110 percent and arelatively high proportion of average noninterest bearing deposits to totaldeposits compared to our peers. In the second quarter of 2006, the annualizedall-in cost of funds was 1.76 percent and our average deposit-to-loan ratio was113 percent.

We use derivatives to hedge expected changes in theyields on our variable rate loans and term certificates of deposit and othertime deposits (CDs), and to convert our long-term, fixed-rate borrowings tofloating rate. For loans, we had hedge expense of $12.0 million and $10.0million for the quarters ended June 30, 2006 and 2007, respectively. Fordeposits and long-term fixed rate borrowings, we had hedge expense of less than$0.1 million for both quarters ended June 30, 2006 and 2007.

Net interest income inthe first six months of 2007, on a taxable-equivalent basis, decreased 8percent from the first six months of 2006. Our net interest margin decreased by72 basis points. These results were primarily due to the following:

·       Averageearning assets increased $4.7 billion, or 11 percent, primarily due to anincrease in average loans. The increase in average loans was largely due to a$2.0 billion increase in average commercial loans, including a $0.6 billionincrease in lower yielding loans related to title and escrow customers, a $0.9billion increase in average residential mortgages, a $0.6 billion increase inaverage construction loans and a $0.5 billion increase in average commercialmortgages;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 22basis points;

·       Averagenoninterest bearing deposits decreased $2.5 billion, or 14 percent. Averagecommercial noninterest bearing deposits, excluding title and escrow deposits,declined $1.7 billion, or 14 percent, primarily due to changes in customerbehavior in response to rising short-term interest rates. Consumer demanddeposits decreased $0.4 billion, or 13 percent. Average noninterest bearingdeposits represented 36 percent of average total deposits in the first sixmonths of 2007 compared to 45 percent in the first six months of 2006; and

39

----

·       Inthe first six months of 2007, the annualized average all-in cost of funds was2.58 percent, reflecting an average deposit-to-loan ratio of 109 percent and arelatively high proportion of average noninterest bearing deposits to totaldeposits compared to our peers. In the first six months of 2006, the annualizedall-in cost of funds was 1.61 percent and our average deposit-to-loan ratio was114 percent.

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term certificatesof deposit and CDs, and to convert our long-term, fixed-rate borrowings tofloating rate. For loans, we had hedge expense of $19.8 million and $20.3million for the first six months of 2006 and 2007, respectively. For deposits andlong-term fixed rate borrowings, we had hedge income of $0.8 million and lessthan $0.1 million for the first six months of 2006 and 2007, respectively.

**Noninterest Income andNoninterest Expense**

The following tables detailour noninterest income and noninterest expense that exceeded 1percent of ourtotal revenues for the three and six months ended June 30, 2006 and 2007.

**Noninterest Income**

| ** **                               | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** | **Increase (Decrease)** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**     | ** ** | **2006**                                           | ** ** | **2007**                                         | ** ** | **Amount** | ** ** | **Percent** | ** ** | **2006** | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Service charges on deposit accounts      |       | $                                                  | 81,837     |                                             | $          | 77,218 |   | $ | (4,619 | ) |   | (5.6 | )% |   | $ | 163,472 |   | $ | 152,163 |   | $ | (11,309 | ) |   | (6.9 | )% |   |
| Trust and investment management fees     |       | 48,380                                             |       | 51,585                                           |       | 3,205 |   |   | 6.6 |   |   | 98,495 |   | 100,145 |   | 1,650 |   |   | 1.7 |   |   |
| Insurance commissions                    |       | 17,752                                             |       | 16,501                                           |       | (1,251 | ) |   | (7.0 | ) |   | 37,270 |   | 36,751 |   | (519 | ) |   | (1.4 | ) |   |
| Brokerage commissions and  fees          |       | 10,330                                             |       | 9,533                                            |       | (797 | ) |   | (7.7 | ) |   | 18,125 |   | 19,193 |   | 1,068 |   |   | 5.9 |   |   |
| Merchant banking fees                    |       | 8,396                                              |       | 8,809                                            |       | 413 |   |   | 4.9 |   |   | 16,625 |   | 17,886 |   | 1,261 |   |   | 7.6 |   |   |
| Foreign exchange gains, net              |       | 8,307                                              |       | 9,288                                            |       | 981 |   |   | 11.8 |   |   | 16,125 |   | 16,882 |   | 757 |   |   | 4.7 |   |   |
| Card processing fees, net                |       | 7,206                                              |       | 7,824                                            |       | 618 |   |   | 8.6 |   |   | 13,903 |   | 14,951 |   | 1,048 |   |   | 7.5 |   |   |
| Securities gains, net                    |       | 1,993                                              |       | 230                                              |       | (1,763 | ) |   | (88.5 | ) |   | 1,779 |   | 1,450 |   | (329 | ) |   | (18.5 | ) |   |
| Gain on private capital investments, net |       | 3,702                                              |       | 20,171                                           |       | 16,469 |   |   | nm |   |   | 6,529 |   | 29,266 |   | 22,737 |   |   | nm |   |   |
| Other                                    |       | 31,325                                             |       | 28,686                                           |       | (2,639 | ) |   | (8.4 | ) |   | 64,815 |   | 63,716 |   | (1,099 | ) |   | (1.7 | ) |   |
| Total noninterest  income                |       | $                                                  | 219,228    |                                             | $          | 229,845 |   | $ | 10,617 |   |   | 4.8 | % |   | $ | 437,138 |   | $ | 452,403 |   | $ | 15,265 |   |   | 3.5 | % |   |

----

nm= not meaningful

40

----

**Noninterest Expense**

| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** | **Increase (Decrease)** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2006**                                           | ** ** | **2007**                                         | ** ** | **Amount** | ** ** | **Percent** | ** ** | **2006** | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries and other  compensation                                     |       | $                                                  | 201,689    |                                             | $          | 206,110 |   | $ | 4,421 |   |   | 2.2 | % |   | $ | 395,948 |   | $ | 413,767 |   | $ | 17,819 |   |   | 4.5 | % |   |
| Employee benefits                                                    |       | 46,948                                             |       | 45,320                                           |       | (1,628 | ) |   | (3.5 | ) |   | 105,184 |   | 96,178 |   | (9,006 | ) |   | (8.6 | ) |   |
| Salaries and employee  benefits                                      |       | 248,637                                            |       | 251,430                                          |       | 2,793 |   |   | 1.1 |   |   | 501,132 |   | 509,945 |   | 8,813 |   |   | 1.8 |   |   |
| Net occupancy                                                        |       | 34,519                                             |       | 35,244                                           |       | 725 |   |   | 2.1 |   |   | 67,356 |   | 70,381 |   | 3,025 |   |   | 4.5 |   |   |
| Outside services                                                     |       | 30,704                                             |       | 18,851                                           |       | (11,853 | ) |   | (38.6 | ) |   | 59,313 |   | 38,687 |   | (20,626 | ) |   | (34.8 | ) |   |
| Equipment                                                            |       | 16,846                                             |       | 16,367                                           |       | (479 | ) |   | (2.8 | ) |   | 34,768 |   | 32,921 |   | (1,847 | ) |   | (5.3 | ) |   |
| Software                                                             |       | 15,323                                             |       | 15,136                                           |       | (187 | ) |   | (1.2 | ) |   | 31,667 |   | 29,332 |   | (2,335 | ) |   | (7.4 | ) |   |
| Professional services                                                |       | 17,038                                             |       | 11,970                                           |       | (5,068 | ) |   | (29.7 | ) |   | 31,585 |   | 29,057 |   | (2,528 | ) |   | (8.0 | ) |   |
| Advertising and public  relations                                    |       | 11,270                                             |       | 10,476                                           |       | (794 | ) |   | (7.0 | ) |   | 21,501 |   | 18,865 |   | (2,636 | ) |   | (12.3 | ) |   |
| Communications                                                       |       | 10,061                                             |       | 8,855                                            |       | (1,206 | ) |   | (12.0 | ) |   | 20,613 |   | 18,646 |   | (1,967 | ) |   | (9.5 | ) |   |
| Data processing                                                      |       | 7,845                                              |       | 8,626                                            |       | 781 |   |   | 10.0 |   |   | 15,243 |   | 16,867 |   | 1,624 |   |   | 10.7 |   |   |
| Intangible asset amortization                                        |       | 3,427                                              |       | 2,243                                            |       | (1,184 | ) |   | (34.5 | ) |   | 6,857 |   | 4,486 |   | (2,371 | ) |   | (34.6 | ) |   |
| Foreclosed asset expense (income)                                    |       | (7,782                                             | )          | 9                                                |       | 7,791 |   |   | nm |   |   | (15,149 | ) | 18 |   | 15,167 |   |   | nm |   |   |
| (Reversal of) provision for losses on off-balance  sheet commitments |       | (4,000                                             | )          | —                                           |       | 4,000 |   |   | 100.0 |   |   | (7,000 | ) | 1,000 |   | 8,000 |   |   | nm |   |   |
| Other                                                                |       | 29,142                                             |       | 32,658                                           |       | 3,516 |   |   | 12.1 |   |   | 59,688 |   | 63,751 |   | 4,063 |   |   | 6.8 |   |   |
| Total noninterest  expense                                           |       | $                                                  | 413,030    |                                             | $          | 411,865 |   | $ | (1,165 | ) |   | (0.3 | )% |   | $ | 827,574 |   | $ | 833,956 |   | $ | 6,382 |   |   | 0.8 | % |   |

----

nm= not meaningful

**Income Tax Expense**

Our effective tax rate in the second quarter of 2007was 31.6 percent compared to 33.5 percent for the second quarter of 2006. The lowereffective tax rate was primarily due to the recognition of $8.4 million of taxbenefits resulting from the expiration of the statute of limitations onuncertain tax positions during the second quarter of 2007, partially offset by$3.8 million in additional taxes due to the non-deductibility of the reservefor pending regulatory actions.

Our effective tax rate in the first six months of 2007declined to 32.5 percent from 33.8 percent for the first six months of 2006primarily due to the same reasons identified above.

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

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**Loans**

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

| ** **                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Increase (Decrease)  June 30, 2007 from:** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------------------------------------------------------------|------------|
| ** **                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **June 30,**                                                | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **2006**                                                         | ** ** | **2006** | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **Amount**                                                       | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial |       | $                 | 12,218,058 |                  |       | $                 | 12,944,771 |                                                             |       | $ | 13,052,803 |   | $ | 834,745 |   |   | 6.8 | % |   | $ | 108,032 |   |   | 0.8 | % |   |
| Construction                         |       | 1,849,236         |       |                  | 2,175,545  |              |       | 2,303,089                                                        |       | 453,853 |   |   | 24.5 |   |   | 127,544 |   |   | 5.9 |   |   |
| Mortgage:                            |       |              |       |                  |       |              |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                          |       | 11,844,946        |       |                  | 12,343,792 |              |       | 12,936,691                                                       |       | 1,091,745 |   |   | 9.2 |   |   | 592,899 |   |   | 4.8 |   |   |
| Commercial                           |       | 5,649,504         |       |                  | 6,028,242  |              |       | 6,292,157                                                        |       | 642,653 |   |   | 11.4 |   |   | 263,915 |   |   | 4.4 |   |   |
| Total mortgage                       |       | 17,494,450        |       |                  | 18,372,034 |              |       | 19,228,848                                                       |       | 1,734,398 |   |   | 9.9 |   |   | 856,814 |   |   | 4.7 |   |   |
| Consumer:                            |       |              |       |                  |       |              |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Installment                          |       | 1,021,542         |       |                  | 1,137,401  |              |       | 1,230,021                                                        |       | 208,479 |   |   | 20.4 |   |   | 92,620 |   |   | 8.1 |   |   |
| Revolving lines of credit            |       | 1,488,533         |       |                  | 1,401,173  |              |       | 1,335,117                                                        |       | (153,416 | ) |   | (10.3 | ) |   | (66,056 | ) |   | (4.7 | ) |   |
| Total consumer                       |       | 2,510,075         |       |                  | 2,538,574  |              |       | 2,565,138                                                        |       | 55,063 |   |   | 2.2 |   |   | 26,564 |   |   | 1.0 |   |   |
| Lease financing                      |       | 568,914           |       |                  | 581,203    |              |       | 581,297                                                          |       | 12,383 |   |   | 2.2 |   |   | 94 |   |   | 0.0 |   |   |
| Total loans held to  maturity        |       | 34,640,733        |       |                  | 36,612,127 |              |       | 37,731,175                                                       |       | 3,090,442 |   |   | 8.9 |   |   | 1,119,048 |   |   | 3.1 |   |   |
| Total loans held for   sale          |       | 107,100           |       |                  | 59,596     |              |       | 12,047                                                           |       | (95,053 | ) |   | (88.8 | ) |   | (47,549 | ) |   | (79.8 | ) |   |
| Total loans                          |       | $                 | 34,747,833 |                  |       | $                 | 36,671,723 |                                                             |       | $ | 37,743,222 |   | $ | 2,995,389 |   |   | 8.6 | % |   | $ | 1,071,499 |   |   | 2.9 | % |   |

 

*Commercial, Financialand Industrial Loans*

The commercial, financial and industrial loanportfolio continues to represent the largest category in our loan portfolio. Theseloans are extended principally to corporations, middle-market businesses andsmall businesses, with no industry concentration exceeding 10 percent of totalloans. Although many of our customers are located in California, the portfoliohas a high degree of geographic diversification based upon our customers’revenue bases, which we believe lowers our vulnerability to changes in theeconomic outlook of any particular region of the U.S.

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

The commercial, financial andindustrial loan portfolio increased from June 30, 2006 to June 30,2007 due to increased loan demand primarily in the oil and gas, nationalcorporate and California middle market segments.

*Construction andCommercial Mortgage Loans*

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

The construction loan portfolio increase from June 30,2006 to June 30, 2007 was primarily due to increased demand for incomeproperty projects with apartment financing representing the largest component.

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The commercial mortgage loanportfolio consists of loans on commercial income properties primarily inCalifornia. The increase in commercial mortgages from June 30, 2006 to June 30,2007 was mainly due to increased demand in the California middle market forreal estate related financing.

*Residential MortgageLoans*

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

At June 30, 2007, 66 percent of our residentialmortgage loans were interest only, of which none are negative amortizing. Atorigination, these interest only loans had relatively high credit scores andhad weighted average loan-to-value (LTV) ratios of approximately 66 percent. Theremainder of the portfolio consists of balloon or regular amortizing loans.

We do not offer subprime loan products. However, we dohave several loan products that allow a customer to move more quickly throughthe loan origination process by reducing or eliminating the need to verify theincome or assets of the customer. We refer to these loans as “no doc” or “lowdoc” loans. “No doc” loans are only available for owner-occupied properties andeliminate the verification of both income and assets, while “low doc” loans requirethe verification of assets. In both cases, these loans require lower LTV ratiosand higher FICO®credit scores than for fully documented residential loans. Although these loanscomprise nearly half of our residential loan portfolio, the delinquency ratesrelative to the outstanding balances at June 30, 2007 were lower thanfully documented loans. The total amount of “no doc” and “low doc” loans pastdue 30 days or more was $12.6 million at June 30, 2007 comparedto $5.7 million at December 31, 2006.

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

*Consumer Loans*

We originate consumer loans,such as auto loans and home equity loans and lines, through our branch network.The increase in consumer loans from June 30, 2006 was primarily in our “FlexEquity Line/Loan” product. The “Flex Equity Line/Loan” allows our customers theflexibility to manage a line of credit with as many as four fixed rate loansunder a single product. When customers convert their “Flex Equity Lines/Loans”to fixed rate loans, these new loans are classified as installment loans. Inaddition, we offer a “Flex Equity High LTV” product, which allows our customersto draw up to 100 percent of the value of their real estate or $150 thousand,whichever is less. At June 30, 2007, the total amount outstanding of “FlexEquity High LTV” loans was $5.4 million with no delinquencies. Our total homeequity loans and lines delinquent 30 days or more were $3.3 million at June 30,2007 compared to $4.6 million at December 31, 2006.

*Lease Financing*

We offer two types of leases to our customers:  direct financing leases, where the assetsleased are acquired without additional financing from other sources; andleveraged leases, where a substantial portion of the financing is provided bydebt with no recourse to us. Included in our lease portfolio are leveragedleases of $512 million, which are net of non-recourse debt of approximately$1.1 billion. We utilize a number of special purpose entities for our leveragedleases. These entities serve legal and tax purposes and do not function asvehicles to shift liabilities to other parties or to deconsolidate affiliatesfor financial reporting purposes. As allowed by US GAAP and by law, the grosslease receivable is offset by the qualifying non-recourse debt. In leveragedlease transactions, the third-party lender may only look to the collateralvalue of the leased assets for repayment.

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

**Cross-BorderOutstandings**

Our cross-borderoutstandings reflect certain additional economic and political risks that arenot reflected in domestic outstandings. These risks include those arising fromexchange rate fluctuations and restrictions on the transfer of funds. Thefollowing table sets forth our cross-border outstandings as of June 30,2007 for one country where such outstandings exceeded 1 percent of total assets.For the periods ended June 30, 2006 and December 31, 2006 there wereno countries where such cross-border outstandings exceeded 1 percent of totalassets. The cross-border outstandings were compiled based upon category anddomicile of ultimate risk and are comprised of balances with banks, tradingaccount assets, securities available for sale, securities purchased underresale agreements, loans, accrued interest receivable, acceptances outstandingand investments with foreign entities. For the country shown in the tablebelow, any significant local currency outstandings are either hedged or fundedby local currency borrowings.

| ** **                          | ** ** | ** **       | ** ** | **Public**   | ** ** | **Corporations**   | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|--------------|------------|--------------------|------------|------------------|------------|
| ** **                          | ** ** | **Financial**    | ** ** | **Sector**   | ** ** | **and Other** | ** ** | **Total**        | ** ** |
| **(Dollars in millions)** | ** ** | **Institutions** | ** ** | **Entities** | ** ** | **Borrowers**      | ** ** | **Outstandings** | ** ** |
| June 30, 2007                  |       |             |       |         |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Canada                              |       |             | $          | 13           |       |               |       | $                | —     |   |   |   | $ | 664 |   |   |   | $ | 677 |   |   |
|                                     |            |                  |            |              |            |                    |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Provision for CreditLosses**

We recorded a provision forloan losses of $5 million in the second quarter of 2007, compared with areversal of the allowance for loan losses of $1 million in the second quarterof 2006. There was no provision for losses related to the allowance for losseson off-balance sheet commitments in the second quarter of 2007 compared to a $4million reversal of allowance for losses on off-balance sheet commitments inthe second quarter of 2006. The provisions for loan losses and for losses onoff-balance sheet commitments are charged to income to bring our totalallowances for credit losses to a level deemed appropriate by management basedon the factors discussed under “Allowances for Credit Losses” below.

**Allowances for CreditLosses**

*Allowance Policy andMethodology*

We maintain allowances forcredit losses (defined as both the allowance for loan losses and the allowancefor off-balance sheet commitment losses) to absorb losses inherent in the loanportfolio as well as for leases and off-balance sheet commitments. Understandingour policies on the allowances for credit losses is fundamental tounderstanding our consolidated financial condition and consolidated results ofoperations. Accordingly, our significant policies and methodology on theallowances for credit losses are discussed in detail in Note 1 to ourConsolidated Financial Statements and in the section “Allowances for CreditLosses” included in our “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in our 2006 Form 10-K.

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

At June 30, 2007, our total allowances for creditlosses were $418 million, which consisted of $336 million related to loans and$82 million related to off-balance sheet commitments. The allowances for creditlosses consisted of $356 million and $62 million of allocated and unallocatedallowance, 

44

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respectively. At June 30,2007, our allowances for credit loss coverage ratios were 1.11 percent of totalloans and 1,457 percent of total nonaccrual loans. At December 31, 2006,our total allowances for credit losses were $412 million, or 1.12 percent ofthe total loan portfolio and 987 percent of total nonaccrual loans.

In addition, the allowances incorporate the results ofmeasuring impaired loans as provided in SFAS No. 114, “Accounting byCreditors for Impairment of a Loan” as amended by SFAS No. 118, “Accountingby Creditors for Impairment of a Loan—Income Recognition and Disclosures.”  These accounting standards prescribe themeasurement methods, income recognition and disclosures related to impairedloans. At June 30, 2007, our total impaired loans were $28 million and theassociated impairment allowance was $6 million compared to total impaired loansof $27 million and an associated impairment allowance of $3 million on December 31,2006.

At June 30, 2007 and December 31, 2006, theallowance for losses related to off-balance sheet commitments included withinour total allowances for credit losses, was $82 million and $81 million,respectively. In determining the adequacy of our allowances for credit losses,we consider both the allowance for loan losses and for off-balance sheetcommitment losses.

We recorded a provision for credit losses of $5million in the second quarter of 2007, as a result of management’s assessmentof factors, including the credit quality of our credit portfolio, slower futuregrowth in the U.S. economy (including a continued slow down in the housingmarket and the potential adverse impact of higher fuel prices on the economy),growth and changes in the composition of our credit portfolio, the amount ofnet charge offs and changes in loss factors.

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

*Changes in theAllocated (Formula and Specific) Allowance*

At June 30, 2007, theformula allowance changed slightly to $348 million from $347 million at December 31,2006. The net increase included a shift in the risk-grade mix of loans andgrowth in our loan portfolio, offset by declines in certain loss factors. At June 30,2007, the specific allowance was $8 million compared to $6 million at December 31,2006.

*Changes in theUnallocated Allowance*

At June 30, 2007, the unallocated allowanceincreased to $62 million from $59 million at December 31, 2006, reflectingmanagement’s belief that maintaining the unallocated allowance near our December 31,2006 assessment is appropriate based on continuing uncertainty associated withour principal portfolio segments, as we believe we have passed the turningpoint in credit quality trends. Additionally, the primary reasons for which webelieve an unallocated allowance is warranted are detailed below.

In our assessment as of June 30, 2007, managementfocused, in particular, on the factors and conditions set out below. There canbe no assurance that the adverse impact of any of these conditions on us willnot be in excess of the ranges set forth.

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

45

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allowance. The evaluations ofthe inherent losses with respect to these factors are subject to higher degreesof uncertainty because they are not identified with specific problem credits.

The following describessome of the specific conditions we considered.

·       Withrespect to commercial real estate, we considered the substantial weakness inthe residential construction market, partly offset by continued strength in thecommercial real estate construction sector, which could be in the range of $10million to $25 million.

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

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

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

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

Accordingly, our evaluation of the probable lossesrelated to the impact of these factors was reflected in the unallocatedallowance.

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*Change in the TotalAllowances for Credit Losses*

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

| ** **                                                            | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Increase (Decrease)** | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase (Decrease)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **2006**                                                          | ** ** | **2007**                     | ** ** | **Amount**                                                      | ** ** | **Percent**                  | ** ** | **2006** | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Balance, beginning of period                                          |       | $                                                                 | 339,443    |                         | $          | 332,679                                                         |       | $                            | (6,764     | ) |   | (2.0 | )% |   | $ | 351,532 |   | $ | 331,077 |   | $ | (20,455 | ) |   | (5.8 | )% |   |
| Loans charged off:                                                    |       |                                                              |       |                         |       |                                                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                  |       | 18,425                                                            |       | 2,762                        |       | (15,663                                                         | )          |                         | (85.0      | ) |   | 29,169 |   | 5,840 |   | (23,329 | ) |   | (80.0 | ) |   |
| Mortgage                                                              |       | 336                                                               |       | 5                            |       | (331                                                            | )          |                         | (98.5      | ) |   | 336 |   | 5 |   | (331 | ) |   | (98.5 | ) |   |
| Consumer                                                              |       | 876                                                               |       | 1,379                        |       | 503                                                             |       |                         | 57.4       |   |   | 1,794 |   | 2,720 |   | 926 |   |   | 51.6 |   |   |
| Lease financing                                                       |       | 3                                                                 |       | —                       |       | (3                                                              | )          |                         | (100.0     | ) |   | 22 |   | — |   | (22 | ) |   | (100.0 | ) |   |
| Total loans charged off                                               |       | 19,640                                                            |       | 4,146                        |       | (15,494                                                         | )          |                         | (78.9      | ) |   | 31,321 |   | 8,565 |   | (22,756 | ) |   | (72.7 | ) |   |
| Recoveries  of loans previously charged off:                          |       |                                                              |       |                         |       |                                                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                  |       | 8,937                                                             |       | 1,758                        |       | (7,179                                                          | )          |                         | (80.3      | ) |   | 10,846 |   | 3,452 |   | (7,394 | ) |   | (68.2 | ) |   |
| Mortgage                                                              |       | —                                                            |       | —                       |       | —                                                          |       |                         | nm         |   |   | 2 |   | — |   | (2 | ) |   | (100.0 | ) |   |
| Consumer                                                              |       | 436                                                               |       | 230                          |       | (206                                                            | )          |                         | (47.2      | ) |   | 876 |   | 511 |   | (365 | ) |   | (41.7 | ) |   |
| Lease financing                                                       |       | 10                                                                |       | 79                           |       | 69                                                              |       |                         | nm         |   |   | 4,238 |   | 87 |   | (4,151 | ) |   | (97.9 | ) |   |
| Total recoveries of loans previously charged off                      |       | 9,383                                                             |       | 2,067                        |       | (7,316                                                          | )          |                         | (78.0      | ) |   | 15,962 |   | 4,050 |   | (11,912 | ) |   | (74.6 | ) |   |
| Net loans charged off                                                 |       | 10,257                                                            |       | 2,079                        |       | (8,178                                                          | )          |                         | (79.7      | ) |   | 15,359 |   | 4,515 |   | (10,844 | ) |   | (70.6 | ) |   |
| (Reversal of) provision for loan losses                               |       | (1,000                                                            | )          | 5,000                        |       | 6,000                                                           |       |                         | nm         |   |   | (8,000 | ) | 9,000 |   | 17,000 |   |   | nm |   |   |
| Foreign translation adjustment  and other net additions               |       | 152                                                               |       | 352                          |       | 200                                                             |       |                         | nm         |   |   | 165 |   | 390 |   | 225 |   |   | nm |   |   |
| Ending balance of allowance for loan losses                           |       | 328,338                                                           |       | 335,952                      |       | 7,614                                                           |       |                         | 2.3        | % |   | 328,338 |   | 335,952 |   | 7,614 |   |   | 2.3 | % |   |
| Allowance for losses on  off-balance sheet  commitments               |       | 79,374                                                            |       | 82,374                       |       | 3,000                                                           |       |                         | 3.8        |   |   | 79,374 |   | 82,374 |   | 3,000 |   |   | 3.8 |   |   |
| Allowances for credit losses                                          |       | $                                                                 | 407,712    |                         | $          | 418,326                                                         |       | $                            | 10,614     |   |   | 2.6 | % |   | $ | 407,712 |   | $ | 418,326 |   | $ | 10,614 |   |   | 2.6 | % |   |
| Allowances for credit losses to  total loans                          |       | 1.17                                                              | %          | 1.11                         | %          |                                                            |       |                         |       |   |   | 1.17 | % | 1.11 | % |   |   |   |   |   |   |
| (Reversal of) provision for loan losses to net loans  charged off     |       | (9.75                                                             | )          | 240.50                       |       |                                                            |       |                         |       |   |   | (52.09 | ) | 199.34 |   |   |   |   |   |   |   |
| Net loans charged off  to average loans outstanding for the period(1) |       | 0.12                                                              |       | 0.02                         |       |                                                            |       |                         |       |   |   | 0.09 |   | 0.02 |   |   |   |   |   |   |   |

----

(1)                   Annualized.

nm = not meaningful

Totalloans charged off in the second quarter of 2007 decreased from the secondquarter of 2006, primarily due to the charge off of two commercialloans, one of which was in excess of $11 million, in the second quarter of 2006.Charge offs reflect the realization oflosses in the portfolio that were recognized previously through provision forcredit losses. In addition, second quarter 2007 recoveries of loans previouslycharged off decreased from the second quarter of 2006 primarily as result ofthe higher levels of loans charged off in periods prior to June 30, 2006. Suchfluctuations in loan recoveries from year-to-year are due to variability intiming of recoveries and tend to trail the periods in which charge offs arerecorded.

**Nonperforming Assets**

Nonperforming assets consist of nonaccrual loans andforeclosed assets. Nonaccrual loans are those for which management hasdiscontinued accrual of interest because there exists significant uncertainty asto the full and timely collection of either principal or interest or such loanshave become contractually past due 90 days with respect to principal orinterest. For a more detailed discussion of the accounting for nonaccrualloans, see Note 1 to the Consolidated Financial Statements included in our 2006Form 10-K.

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

47

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Thefollowing table sets forth an analysis of nonperforming assets.

| ** **                                                      | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Increase (Decrease)  June 30, 2007 from:** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **June 30, 2006**                                      | ** ** | **December 31, 2006** | ** ** |
| **(Dollars in thousands)**                            | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **Amount**                                                       | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial                            |       | $                 | 4,021      |                  |       | $                 | 7,552      |                                                             |       | $ | 18,691 |   | $ | 14,670 |   |   | nm | % |   | $ | 11,139 |   |   | nm | % |   |
| Commercial mortgage                                             |       | 16,918            |       |                  | 19,187     |              |       | 9,565                                                            |       | (7,353 | ) |   | (43.5 | ) |   | (9,622 | ) |   | (50.1 | ) |   |
| Lease financing                                                 |       | 15,140            |       |                  | 15,047     |              |       | 456                                                              |       | (14,684 | ) |   | (97.0 | ) |   | (14,591 | ) |   | (97.0 | ) |   |
| Total nonaccrual loans                                          |       | 36,079            |       |                  | 41,786     |              |       | 28,712                                                           |       | (7,367 | ) |   | (20.4 | ) |   | (13,074 | ) |   | (31.3 | ) |   |
| Foreclosed assets                                               |       | 272               |       |                  | 579        |              |       | 1,114                                                            |       | 842 |   |   | nm |   |   | 535 |   |   | 92.4 |   |   |
| Total nonperforming assets                                      |       | $                 | 36,351     |                  |       | $                 | 42,365     |                                                             |       | $ | 29,826 |   | $ | (6,525 | ) |   | (17.9 | )% |   | $ | (12,539 | ) |   | (29.6 | )% |   |
| Allowances for credit losses (1)                                |       | $                 | 407,712    |                  |       | $                 | 412,451    |                                                             |       | $ | 418,326 |   | $ | 10,614 |   |   | 2.6 | % |   | $ | 5,875 |   |   | 1.4 | % |   |
| Nonaccrual loans to total loans                                 |       | 0.10              | %          |                  | 0.11       | %                 |       | 0.08                                                             | %          |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowances for credit losses to nonaccrual loans           |       | 1,130.05          |       |                  | 987.06     |              |       | 1,456.97                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets to total loans and foreclosed  assets |       | 0.10              |       |                  | 0.12       |              |       | 0.08                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets  to total assets                           |       | 0.07              |       |                  | 0.08       |              |       | 0.06                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |

----

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

nm = not meaningful

During the second quarter of2007, we had no sales of nonperforming loans compared to approximately $9million in sales in the second quarter of 2006. Losses and recoveries thatresult when the sale decision is made are reflected in our net charge offs.

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

| ** **                                                    | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Increase (Decrease)**           | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **June 30, 2007 from:** | ** ** |
| ** **                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **June 30, 2006**            | ** ** | **December 31, 2006** | ** ** |
| **(Dollars in thousands)**                          | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **Amount**                             | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial  and industrial                         |       |              | $          | 426                   |       |              |       | $                                      | 3,085      |   |   |   | $ | 918 |   |   |   | $ | 492 |   |   |   | nm |   |   | $ | (2,167 | ) |   | (70.2 | )% |   |
| Mortgage:                                                     |       |              |       |                  |       |              |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                   |       |              | 1,480      |                  |       |              | 2,359      |                                   |       |   | 5,217 |   |   |   | 3,737 |   |   |   | nm |   |   | 2,858 |   |   | nm |   |   |
| Commercial                                                    |       |              | 568        |                  |       |              | 2,155      |                                   |       |   | 2,544 |   |   |   | 1,976 |   |   |   | nm |   |   | 389 |   |   | 18.1 |   |   |
| Total mortgage                                                |       |              | 2,048      |                  |       |              | 4,514      |                                   |       |   | 7,761 |   |   |   | 5,713 |   |   |   | nm |   |   | 3,247 |   |   | 71.9 |   |   |
| Consumer and other                                            |       |              | 976        |                  |       |              | 1,706      |                                   |       |   | 995 |   |   |   | 19 |   |   |   | 1.9 | % |   | (711 | ) |   | (41.7 | ) |   |
| Total loans 90 days or  more past due and still accruing |       |              | $          | 3,450                 |       |              |       | $                                      | 9,305      |   |   |   | $ | 9,674 |   |   |   | $ | 6,224 |   |   |   | nm |   |   | $ | 369 |   |   | 4.0 | % |   |

----

nm = not meaningful

**Quantitative andQualitative Disclosures About Market Risk**

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

The Board of Directors, through its Finance and CapitalCommittee, approves our Asset Liability Management, Investment and DerivativesPolicy (ALM Policy), which governs the management of market risk and guides ourinvestment and derivatives activities. The ALM Policy establishes the Bank’srisk tolerance guidelines by outlining standards for measuring market risk,creates Board-level limits for specific 

48

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market risks, establishesguidelines for reporting market risk and requires independent review andoversight of market risk activities.

In an effort to ensure that the Bank has an effectiveprocess to identify, measure, monitor and manage market risk, the ALM Policyrequires the Bank to establish an Asset Liability Management Committee (ALCO),which is comprised of the members of the CEO Forum and the Treasurer. ALCOprovides the broad and strategic guidance of market risk management byformulating high-level strategies for market risk management and defining therisk/return stance for the Bank and by approving the investment, derivativesand trading policies that govern the Bank’s activities. ALCO is alsoresponsible for ongoing management of market risk and approves specific riskmanagement programs, including those related to interest rate hedging,investment securities and wholesale funding.

The Treasurer is primarily responsible for theimplementation of Asset Liability risk management strategies approved by ALCOand for operating management of market risk through the funding, investment andderivatives hedging activities of Corporate Treasury. The manager of the GlobalMarkets Division is responsible for operating management of price risk throughthe trading activities conducted in that division. The Market Risk Monitoringunit is responsible for the monitoring of market risk and functions independentlyof all operating and management units.

We have separate and distinctmethods for managing the market risk associated with our asset and liabilitymanagement activities and our trading activities, as described below. Foradditional information about our market risk management, please see “Quantitativeand Qualitative Disclosures about Market Risk” in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in our 2006 Form 10-K.

*Interest Rate RiskManagement (Other Than Trading)*

During the first six months of 2007, our interest raterisk profile remained neutral to slightly liability-sensitive primarily as aresult of trends in our unhedged, core balance sheet including wholesalefunding replacing declining noninterest bearing deposit balances. In February andApril 2007, we added $500 million and $900 million, respectively, of newfloor hedges to maintain our downside neutral to liability sensitivity (see ourdiscussion of “ALM Derivatives” below).

At June 30, 2007,Economic Net Interest Income (NII) sensitivity was neutral to slightlyliability-sensitive to parallel rate shifts. A +200 basis point parallel shiftwould reduce 12-month Economic NII by 0.57 percent, while a similardownward shift would increase it by 1.41 percent. At June 30, 2006, a +200basis point parallel shift would reduce the 12-month Economic NII by 0.36percent, while a -200 basis point shift would reduce it by 0.13 percent. Wecaution that ongoing enhancements to our interest rate risk modeling may makeprior year comparisons of Economic NII less meaningful. Economic NII adjustsour reported NII for the effect of certain noninterest bearing deposit relatedfee and expense items. Those adjustment items are innately liability-sensitive,meaning that reported NII is more asset-sensitive or less liability-sensitivethan Economic NII.

**EconomicNII**

| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| **(Dollars in millions)** | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| +200 basis points                   |       |              | $          | (7.3                  | )          |              |       | $ | (7.0 | ) |   |   | $ | (10.6 | ) |   |
| as a percentage of  base case NII   |       |              | (0.36      | )%                    |       |              | (0.37      | )% |   |   | (0.57 | )% |   |
| -200  basis points                  |       |              | $          | (2.6                  | )          |              |       | $ | 20.5 |   |   |   | $ | 26.0 |   |   |
| as a percentage of base case  NII   |       |              | (0.13      | )%                    |       |              | 1.09       | % |   |   | 1.41 | % |   |

 

49

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

In the case of non-parallelyield curve changes, our Economic NII is liability-sensitive to changes inshort-term rates (with long-term rates held constant) and asset-sensitive tochanges in long-term rates (with short-term rates held constant). In otherwords, our Economic NII will benefit from curve steepening with short (long)rates dropping (rising) and will contract from the curve further inverting withlong (short) rates dropping (rising).

*ALM Activities*

During the first six months of2007, our unhedged, core balance sheet became less asset-sensitive compared tothe first six months of 2006. The change in the risk profile of the corebalance sheet resulted primarily from a decline in core deposit balances and anincreased asset growth funded by proportionally more short-term wholesaleliabilities. At June 30, 2007, the core balance sheet continues to beslightly asset-sensitive, meaning that the current mix of assets repricesslightly faster than our current mix of liabilities. In managing the interestrate sensitivity of our balance sheet, we use the ALM investment securitiesportfolio and derivatives positions as the primary tools to adjust our interestrate risk profile, if necessary. During the first six months of 2007, wereinvested proceeds from maturing ALM securities into securities with liketerms and asset allocation. New derivative hedges were also added during theyear as described below.

*ALM Securities*

At June 30, 2006 and 2007, our available for salesecurities portfolio included $6.7 billion and $6.8 billion, respectively, ofsecurities for ALM purposes. At June 30, 2007, approximately $3.0 billionof the portfolio was pledged to secure trust and public deposits and for otherpurposes as required or permitted by law. During the first six months of 2007,we purchased approximately $942 million of securities, while approximately $767million of securities matured or were called during the same period. Thecomposition of the portfolio is expected to remain relatively stable in 2007.Based on current prepayment projections, the estimated ALM portfolio effectiveduration was 2.3 at June 30, 2007, compared to 2.2 at June 30, 2006.

Effective duration is ameasure of price sensitivity of a bond portfolio to immediate parallel shiftsin interest rates. An effective duration of 2.3 suggests an expected pricechange of approximately minus 2.3 percent for an immediate 1.0 percent increasein interest rates*.*

*ALM Derivatives*

During the first six months of 2007, the ALMderivatives portfolio increased by a net $600 million notional amount, as $1.4billion of notional amount of LIBOR floor contracts were purchased to maintainthe downside neutral to liability sensitivity of our overall risk position,offset partially by maturities of $800 million notional amount of receive fixedinterest rate swaps.

The fair value of the ALM derivative contractsdecreased during the first six months of 2007 as the value of our receive fixedinterest rate swaps and floor option contracts declined with the increase inexpected future interest rates. For additional discussion of derivativeinstruments and our hedging strategies, see Note 8 to the CondensedConsolidated Financial Statements included in this Form 10-Q andNote 19 to the Consolidated Financial Statements included in our 2006 Form 10-K.

50

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Thefollowing table provides the notional value and the fair value of our ALMderivatives portfolio as of June 30, 2006, December 31, 2006 and June 30,2007 and the change in fair value between December 31, 2006 and June 30,2007.

| ** **                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Increase / (Decrease)**       | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------------------------------|------------|
| ** **                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **From December 31, 2006** | ** ** |
| **(Dollars in thousands)**                                                 | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **to June 30, 2007**       | ** ** |
| Total gross notional  amount of positions held for purposes other than trading: |       | $                 | 7,300,000  |                  | $          | 8,250,000         |       | $                                         | 8,850,000  |   |   | $ | 600,000 |   |   |
| Of which, interest  rate swaps pay fixed rates of interest:                     |       | $                 | —     |                  | $          | —            |       | $                                         | —     |   |   | $ | — |   |   |
| Fair value of  positions held for purposes other than trading:                       |       |              |       |                  |       |              |       |                                      |       |   |   |
| Gross positive fair value                                                            |       | $                 | 1,757      |                  | $          | 44,720            |       | $                                         | 10,453     |   |   | $ | (34,267 | ) |   |
| Gross negative fair value                                                            |       | $                 | 96,832     |                  | $          | 37,682            |       | $                                         | 33,665     |   |   | $ | (4,017 | ) |   |
| Positive (Negative)  Fair value of positions, net                               |       | $                 | (95,075    | )                     | $          | 7,038             |       | $                                         | (23,212    | ) |   | $ | (30,250 | ) |   |

 

*Trading Activities*

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

As of June 30, 2007, we had $9.8 billion notionalamount of interest rate derivative contracts, which included approximately $5.0billion notional amount of derivative contracts entered into as anaccommodation for customers. We act as an intermediary and entered intoapproximately $4.8 billion notional amount of offsetting contracts with majordealers, at a credit spread, thus neutralizing the related market risk on all ourcustomer accommodation transactions.

We market energy derivativecontracts to existing energy industry customers, primarily oil and gas producers,in order to meet their hedging needs. All transactions are fully matched toremove our exposure to market risk, with income earned on the credit spread. Asof June 30, 2007, we had $3.3 billion notional amount of energy derivativecontracts with half of these energy derivative contracts entered into as anaccommodation for customers and the remaining half entered into as matching contractsto remove our exposure to market risk on our customer accommodationtransactions.

**Liquidity Risk**

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

51

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actions to be taken to ensureadequate liquidity if an event should occur that disrupts or adversely affectsthe Bank’s normal funding activities.

Core deposits provide us with a sizable source ofrelatively stable and low-cost funds. Our $33.5 billion in average coredeposits (which consists of demand deposits, money market demand accounts,savings and consumer time deposits), combined with average common stockholders’equity, funded 72 percent of average total assets of approximately $53 billionin the second quarter of 2007. Most of the remaining funding was provided byshort-term borrowings in the form of certificates of deposit, large timedeposits, federal funds purchased, securities sold under repurchase agreements,commercial paper and other borrowings. During the first six months of 2007, weextended the weighted average maturity of our wholesale borrowing position toenhance our overall liquidity profile.

Our securities portfolio provides additionalenhancement to our liquidity position, which may be created through eithersecurities sales or repurchase agreements. At June 30, 2007, we could havesold or transferred under repurchase agreements approximately $4.5 billion ofour available for sale securities including excess pledged securities availablefor withdrawal on short notice. Liquidity may also be provided by the sale ormaturity of other assets such as interest-bearing deposits in banks, federalfunds sold and trading account securities. The aggregate balance of these assetsaveraged $1.0 billion in the second quarter of 2007. Additional liquidity maybe provided through loan maturities and sales.

On March 23, 2007, the Bank issued $750 millionof two-year floating rate senior notes under the $4 billion Bank Note Programinitiated in 2006. Combined with the $700 million, ten-year, fixed ratesubordinated note issuance in 2006, the remaining available funding from theBank Note Program is $2.6 billion. In the first quarter 2007, the Bankcompleted the process to become an active member of the Federal Home Loan Bankof San Francisco. Membership will give the Bank an additional back-up source ofliquidity.

In addition to the funding provided by our banksubsidiary, we raise funds at the holding company level. UnionBanCal Corporationhas in place a shelf registration statement with the SEC permitting readyaccess to the public debt markets. As of June 30, 2007, $600 million ofdebt or other securities were available for issuance under this shelfregistration. Although we do not have firm commitments in place to sellsecurities under the Bank Note Program or the shelf registration statement,these sources, in addition to our core deposit and equity capital, provide astable funding base. Management does not rely on any single source of liquidityand manages availability in response to changing balance sheet needs.

Effective May 2007,Moody’s upgraded the long-term rating of Union Bank of California, N.A. andUnionBanCal Corporation as shown in the table below. The following table reflectsour risk ratings as of June 30, 2007.

| ** **                       | ** ** | ** **            | ** ** | **Union Bank of** | ** **             | **UnionBanCal** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------------|------------------------|-----------------|------------|
| ** **                       | ** ** | ** **            | ** ** | **California, N.A.**   | ** **             | **Corporation** | ** ** |
| Standard &  Poor’s |       | Long-term  Short-term |       |                        | A+  A-1                |            |       |   | A  A-1 |   |   |
| Moody’s                     |       | Long-term  Short-term |       |                        | Aa3  P-1               |            |       |   | A1  P-1 |   |   |
| Fitch                            |       | Long-term  Short-term |       |                        | A+  F1                 |            |       |   | A+  F1 |   |   |
| DBRS                             |       | Long-term  Short-term |       |                        | A (high)  R-1 (middle) |            |       |   | A  R-1 (low) |   |   |

 

52

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**Regulatory Capital**

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

**UnionBanCal Corporation**

| ** **                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Minimum**     | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-----------------|------------|
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **Regulatory**  | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **Requirement** | ** ** |
| **Capital Components**               | ** ** | ** **        | ** ** |                  | ** ** | ** **        |       | ** **      | ** ** | ** ** | ** ** |
| Tier 1 capital                       |       | $                 | 4,281,005  |                  |       | $                 | 4,333,865  | ** **      |       | $ | 4,401,490 |   |   |   |
| Tier 2 capital                       |       | 1,503,898         |       |                  | 1,509,338  | ** **        |       | 1,515,243       |       |   |   |
| Total risk-based  capital            |       | $                 | 5,784,903  |                  |       | $                 | 5,843,203  | ** **      |       | $ | 5,916,733 |   |   |   |
| Risk-weighted assets                 |       | $                 | 48,001,100 |                  |       | $                 | 49,904,203 | ** **      |       | $ | 51,254,273 |   |   |   |
| Quarterly average  assets            |       | $                 | 48,983,260 |                  |       | $                 | 51,353,681 | ** **      |       | $ | 53,027,348 |   |   |   |

 

| **Capital Ratios**                    | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**                   | ** ** | **Ratio** | ** **             |
|--------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------------------------|------------|-----------|------------------------|
| Total capital (to  risk-weighted  assets)  |       | $          | 5,784,903  |      | 12.05      | %          | $          | 5,843,203 |       | 11.71      | %          | $         | 5,916,733  |                         | 11.54      | %         | 3$ 4,100,342 |   |   | 8.0 | % |   |
| Tier 1 capital (to  risk-weighted  assets) |       | 4,281,005  |       | 8.92      |       | 4,333,865  |       | 8.68      |       | 4,401,490  |       | 8.59      |       | 3   2,050,171 |       |      | 4.0                    |   |   |
| Leverage(1)                                |       | 4,281,005  |       | 8.74      |       | 4,333,865  |       | 8.44      |       | 4,401,490  |       | 8.30      |       | 3   2,121,094 |       |      | 4.0                    |   |   |
|                                            |            |            |            |           |            |            |            |           |            |            |            |           |            |                              |            |           |                        |  |  |  |  |  |

----

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

**Union Bank of California, N.A.**

| ** **                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | **Minimum**     | ** ** | **“Well-Capitalized”** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-----------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **Regulatory**  | ** ** | **Regulatory**                   | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**          | ** ** | **2006**              | ** ** | **2007**          | ** ** | **Requirement** | ** ** | **Requirement**                  | ** ** |
| **Capital Components**               | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                       | ** ** |
| Tier 1 capital                       |       | $                 | 4,404,052  |                  | $          | 4,179,359         | ** ** | $               | 4,301,020  |                             |       |   |   |   |
| Tier 2 capital                       |       | 1,093,836         |       | 1,100,287             | ** ** | 1,105,663         |       |            |       |                             |       |
| Total risk-based  capital            |       | $                 | 5,497,888  |                  | $          | 5,279,646         | ** ** | $               | 5,406,683  |                             |       |   |   |   |
| Risk-weighted assets                 |       | $                 | 47,398,029 |                  | $          | 49,385,397        | ** ** | $               | 50,805,715 |                             |       |   |   |   |
| Quarterly average  assets            |       | $                 | 48,341,174 |                  | $          | 50,686,185        | ** ** | $               | 52,417,908 |                             |       |   |   |   |

 

| **Capital Ratios**                  | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**                  | ** ** | **Ratio** | ** **             | **Amount** | ** ** | **Ratio**                   | ** ** |
|------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------------------|------------|-----------|------------------------|------------|------------|-----------------------------|------------|
| Total capital (to risk-weighted assets)  |       | $          | 5,497,888  |      | 11.60      | %          | $          | 5,279,646 |       | 10.69      | %          | $         | 5,406,683  |                        | 10.64      | %         | 3$ 4,064,457 |       |       | 8.0                         | %          |   | 3$ 5,080,572 |   |   | 10.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 4,404,052  |       | 9.29      |       | 4,179,359  |       | 8.46      |       | 4,301,020  |       | 8.47      |       | 3  2,032,229 |       |      | 4.0                    |       |       | 3  3,048,343 |       |   | 6.0 |   |   |
| Leverage(1)                              |       | 4,404,052  |       | 9.11      |       | 4,179,359  |       | 8.25      |       | 4,301,020  |       | 8.21      |       | 3  2,096,716 |       |      | 4.0                    |       |       | 3  2,620,895 |       |   | 5.0 |   |   |
|                                          |            |            |            |           |            |            |            |           |            |            |            |           |            |                             |            |           |                        |            |            |                             |            |  |  |  |  |  |  |  |

----

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

We and Union Bank of California are subject to variousregulations of the federal banking agencies, including minimum capitalrequirements. We both are required to maintain minimum ratios of Total and Tier1 capital to risk-weighted assets and of Tier 1 capital to quarterlyaverage assets (the Leverage ratio).

The decrease in UnionBanCal Corporation’s Tier 1 andTotal capital ratios from June 30, 2006 and December 31, 2006 wasprimarily due to an increase in risk-weighted assets stemming from growth inour loan portfolio. The decrease in capital from June 30, 2006 resultedfrom the adoption of FIN No. 48 and FSP FAS 13-2. For additionalinformation on the impact of adoption of these accounting pronouncements, seeNote 2 to the Condensed Consolidated Financial Statements in this Form 10-Q.The decrease in our Leverage ratios from December 31, 2006 was primarilydue to the increase in our quarterly average assets resulting from the growthin our loan portfolio.

53

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*As ofJune 30, 2007, management believes the capital ratios of Union Bank ofCalifornia met all regulatory requirements of “well-capitalized”institutions, which are 10 percent for the Total risk-based capital ratio, 6percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverageratio.*

**Business Segments**

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

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

The tables that follow reflectthe condensed income statements, selected average balance sheet items andselected financial ratios, including changes from the prior year, for each ofour reportable business segments. The information presented does notnecessarily represent the businesses’ financial condition and results ofoperations as if they were independent entities. In 2006, we changed ourreporting to reflect a “market view” perspective in measuring our operatingsegments. The market view is a measurement of our customer markets aggregatedto show all revenues generated and expenses incurred from all products andservices sold to those customers regardless of where product areasorganizationally report. Therefore, revenues and expenses are included in boththe operating segment that provides the service and the operating segment thatmanages the customer relationship. The duplicative results from this internalmanagement accounting view are reflected in “Reconciling Items.” Themarket view approach fosters cross-selling with a total profitabilityview of the products and services being managed. For example, the SecuritiesTrading and Sales unit within the Global Markets Division is a business unitthat manages the fixed income securities activities for all retail andcorporate customers throughout the Bank. This unit retains and also allocatesrevenues and expenses to divisions responsible for such retail and commercialcustomer relationships.

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

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

However, over an economiccycle, the cumulative provision for credit losses and credit expense forexpected losses should be substantially the same. Business unit results arebased on an internal management reporting system used by management to measurethe performance of the units and UnionBanCal Corporation as a whole. Ourmanagement reporting system identifies balance sheet and income statement itemsfor each business unit based on internal management accounting policies. Netinterest income is determined using our internal funds transfer pricing system,which assigns a cost of 

54

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funds toassets or a credit for funds to liabilities and capital, based on their type,maturity or repricing characteristics. Noninterest income and expense directlyor indirectly attributable to a business unit are assigned to that business. Thebusiness units are assigned the costs of products and services directlyattributable to their business activity through standard unit cost accountingbased on volume of usage. All other corporate expenses (overhead) are allocatedto the business units based on a predetermined percentage of usage.

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

| ** **                                                          | ** ** | **Retail Banking**                                      | ** ** | ** **              | ** ** | ** **                   | ** ** | **Wholesale Banking**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the  Three Months** | ** ** | ** **              | ** ** | ** **                   | ** ** | **As of and for the  Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Ended June 30,**                                 | ** ** | **Increase/(decrease)** | ** ** | **Ended June 30,** | ** ** | **Increase/(decrease)**                                      | ** ** |
| ** **                                                          | ** ** | **2006**                                                     | ** ** | **2007**                | ** ** | **Amount**                   | ** ** | **Percent**                                                  | ** ** | **2006**   | ** ** | **2007**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                   | ** ** |                                                         | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                      |       | $                                                            | 237,613    |                    | $          | 226,010                      |       | $                                                            | (11,603    | )          |       | (5         | )%         |   | $ | 262,781 |   | $ | 242,891 |   | $ | (19,890 | ) |   | (8 | )% |   |
| Noninterest income (expense)                                        |       | 136,072                                                      |       | 132,638                 |       | (3,434                       | )          |                                                         | (3         | )          |       | 101,413    |       | 114,888 |   | 13,475 |   |   | 13 |   |   |
| Total revenue                                                       |       | 373,685                                                      |       | 358,648                 |       | (15,037                      | )          |                                                         | (4         | )          |       | 364,194    |       | 357,779 |   | (6,415 | ) |   | (2 | ) |   |
| Noninterest expense  (income)                                       |       | 244,521                                                      |       | 240,632                 |       | (3,889                       | )          |                                                         | (2         | )          |       | 165,646    |       | 161,650 |   | (3,996 | ) |   | (2 | ) |   |
| Credit expense  (income)                                            |       | 6,406                                                        |       | 6,262                   |       | (144                         | )          |                                                         | (2         | )          |       | 23,032     |       | 26,862 |   | 3,830 |   |   | 17 |   |   |
| Income (loss) from  continuing operations before income  taxes      |       | 122,758                                                      |       | 111,754                 |       | (11,004                      | )          |                                                         | (9         | )          |       | 175,516    |       | 169,267 |   | (6,249 | ) |   | (4 | ) |   |
| Income tax expense  (income)                                        |       | 46,955                                                       |       | 42,746                  |       | (4,209                       | )          |                                                         | (9         | )          |       | 60,354     |       | 52,425 |   | (7,929 | ) |   | (13 | ) |   |
| Income (loss) from  continuing operations                           |       | 75,803                                                       |       | 69,008                  |       | (6,795                       | )          |                                                         | (9         | )          |       | 115,162    |       | 116,842 |   | 1,680 |   |   | 1 |   |   |
| Income from  discontinued operations, net of income taxes           |       | —                                                       |       | —                  |       | —                       |       |                                                         | na         |       |       | —     |       | — |   | — |   |   | na |   |   |
| Net income (loss)                                                   |       | $                                                            | 75,803     |                    | $          | 69,008                       |       | $                                                            | (6,795     | )          |       | (9         | )          |   | $ | 115,162 |   | $ | 116,842 |   | $ | 1,680 |   |   | 1 |   |   |
| **Average  balances—Market View (dollars in millions):**       | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                   | ** ** |                                                         | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                            | 15,597     |                    | $          | 16,462                       |       | $                                                            | 865        |       |       | 6          |       |   | $ | 19,621 |   | $ | 22,372 |   | $ | 2,751 |   |   | 14 |   |   |
| Total assets                                                        |       | 16,468                                                       |       | 17,290                  |       | 822                          |       |                                                         | 5          |       |       | 24,391     |       | 27,297 |   | 2,906 |   |   | 12 |   |   |
| Total deposits                                                      |       | 19,025                                                       |       | 19,069                  |       | 44                           |       |                                                         | 0          |       |       | 18,127     |       | 18,814 |   | 687 |   |   | 4 |   |   |
| **Financial  ratios—Market View**                              | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                   | ** ** |                                                         | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return  on capital(1)                                 |       | 47                                                           | %          | 42                      | %          |                         |       |                                                         |       |       |       | 22         | %          | 21 | % |   |   |   |   |   |   |
| Return on average  assets(1)                                        |       | 1.85                                                         |       | 1.60                    |       |                         |       |                                                         |       |       |       | 1.89       |       | 1.72 |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                 |       | 65.44                                                        |       | 67.09                   |       |                         |       |                                                         |       |       |       | 47.62      |       | 45.18 |   |   |   |   |   |   |   |

 

| ** **                                                          | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                                                   | ** ** | **UnionBanCal**                                              | ** ** | ** **              | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **Other**                                                    | ** ** | ** **              | ** ** | **Reconciling Items**                                   | ** ** | **Corporation**                                              | ** ** | ** **              | ** ** |
| ** **                                                          | ** ** | **As of and for the  Three Months** | ** ** | ** **              | ** ** | **As of and for the  Three Months** | ** ** | **As of and for the  Three Months** | ** ** | ** **              | ** ** |
| ** **                                                          | ** ** | **Ended June 30,**                                 | ** ** | **Increase/(decrease)** | ** ** | **Ended June 30,**                                 | ** ** | **Ended June 30,**                                 | ** ** | **Increase/(decrease)** | ** ** |
| ** **                                                          | ** ** | **2006**                                                     | ** ** | **2007**                | ** ** | **Amount**                                                   | ** ** | **Percent**                                                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market View  (dollars in thousands):** | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                                                   | ** ** |                                                         | ** ** | ** **              |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                      |       | $                                                            | (30,314    | )                       | $          | (37,805                                                      | )          | $                                                            | (7,491     | )                       |       | (25 | )% |   | $ | (2,438 | ) | $ | (2,223 | ) | $ | 467,642 |   | $ | 428,873 |   | $ | (38,769 | ) |   | (8 | )% |   |
| Noninterest income  (expense)                                       |       | 2,614                                                        |       | 1,807                   |       | (807                                                         | )          |                                                         | (31        | )                       |       | (20,871 | ) | (19,488 | ) | 219,228 |   | 229,845 |   | 10,617 |   |   | 5 |   |   |
| Total revenue                                                       |       | (27,700                                                      | )          | (35,998                 | )          | (8,298                                                       | )          |                                                         | (30        | )                       |       | (23,309 | ) | (21,711 | ) | 686,870 |   | 658,718 |   | (28,152 | ) |   | (4 | ) |   |
| Noninterest expense  (income)                                       |       | 15,862                                                       |       | 21,549                  |       | 5,687                                                        |       |                                                         | 36         |                    |       | (12,999 | ) | (11,966 | ) | 413,030 |   | 411,865 |   | (1,165 | ) |   | 0 |   |   |
| Credit expense  (income)                                            |       | (30,419                                                      | )          | (28,097                 | )          | 2,322                                                        |       |                                                         | 8          |                    |       | (19 | ) | (27 | ) | (1,000 | ) | 5,000 |   | 6,000 |   |   | 600 |   |   |
| Income (loss) from  continuing operations before income taxes       |       | (13,143                                                      | )          | (29,450                 | )          | (16,307                                                      | )          |                                                         | (124       | )                       |       | (10,291 | ) | (9,718 | ) | 274,840 |   | 241,853 |   | (32,987 | ) |   | (12 | ) |   |
| Income tax expense  (income)                                        |       | (11,170                                                      | )          | (14,955                 | )          | (3,785                                                       | )          |                                                         | (34        | )                       |       | (3,936 | ) | (3,717 | ) | 92,203 |   | 76,499 |   | (15,704 | ) |   | (17 | ) |   |
| Income (loss) from  continuing operations                           |       | (1,973                                                       | )          | (14,495                 | )          | (12,522                                                      | )          |                                                         | (635       | )                       |       | (6,355 | ) | (6,001 | ) | 182,637 |   | 165,354 |   | (17,283 | ) |   | (9 | ) |   |
| Income from  discontinued operations, net of income taxes           |       | 274                                                          |       | —                  |       | (274                                                         | )          |                                                         | (100       | )                       |       | — |   | — |   | 274 |   | — |   | (274 | ) |   | (100 | ) |   |
| Net income (loss)                                                   |       | $                                                            | (1,699     | )                       | $          | (14,495                                                      | )          | $                                                            | (12,796    | )                       |       | (753 | ) |   | $ | (6,355 | ) | $ | (6,001 | ) | $ | 182,911 |   | $ | 165,354 |   | $ | (17,557 | ) |   | (10 | ) |   |
| **Average balances—Market View  (dollars in millions):**       | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                                                   | ** ** |                                                         | ** ** | ** **              |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                            | (53        | )                       | $          | 31                                                           |       | $                                                            | 84         |                    |       | 158 |   |   | $ | (18 | ) | $ | (25 | ) | $ | 35,147 |   | $ | 38,840 |   | $ | 3,693 |   |   | 11 |   |   |
| Total assets                                                        |       | 8,493                                                        |       | 8,558                   |       | 65                                                           |       |                                                         | 1          |                    |       | (23 | ) | (29 | ) | 49,329 |   | 53,116 |   | 3,787 |   |   | 8 |   |   |
| Total deposits                                                      |       | 5,413                                                        |       | 5,635                   |       | 222                                                          |       |                                                         | 4          |                    |       | (2,873 | ) | (834 | ) | 39,692 |   | 42,684 |   | 2,992 |   |   | 8 |   |   |
| **Financial ratios—Market View**                               | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **                                                   | ** ** |                                                         | ** ** | ** **              |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return  on capital(1)                                 |       | na                                                           |       | na                      |       |                                                         |       |                                                         |       |                    |       | na |   | na |   | na |   | na |   |   |   |   |   |   |   |
| Return on average  assets(1)                                        |       | na                                                           |       | na                      |       |                                                         |       |                                                         |       |                    |       | na |   | na |   | 1.49 | % | 1.25 | % |   |   |   |   |   |   |
| Efficiency ratio(2)                                                 |       | na                                                           |       | na                      |       |                                                         |       |                                                         |       |                    |       | na |   | na |   | 61.73 |   | 62.31 |   |   |   |   |   |   |   |

----

(1)                   Annualized.

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

na = not applicable

55

----

| ** **                                                          | ** ** | **Retail Banking**                                                                    | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** | **Wholesale Banking** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the  Six Months   Ended June 30,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Six Months   Ended June 30,** | ** ** | **Increase/(decrease)**    | ** ** |
| ** **                                                          | ** ** | **2006**                                                                                   | ** ** | **2007**                | ** ** | **Amount**                                                                                 | ** ** | **Percent**                | ** ** | **2006**   | ** ** | **2007**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                                                 | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income (expense)                                       |       | $                                                                                          | 467,804    |                    | $          | 455,842                                                                                    |       | $                          | (11,962    | )          |       | (3         | )%         |   | $ | 515,316 |   | $ | 484,466 |   | $ | (30,850 | ) |   | (6 | )% |   |
| Noninterest income (expense)                                        |       | 265,974                                                                                    |       | 258,270                 |       | (7,704                                                                                     | )          |                       | (3         | )          |       | 204,536    |       | 224,910 |   | 20,374 |   |   | 10 |   |   |
| Total revenue                                                       |       | 733,778                                                                                    |       | 714,112                 |       | (19,666                                                                                    | )          |                       | (3         | )          |       | 719,852    |       | 709,376 |   | (10,476 | ) |   | (1 | ) |   |
| Noninterest expense (income)                                        |       | 481,305                                                                                    |       | 483,987                 |       | 2,682                                                                                      |       |                       | 1          |       |       | 333,225    |       | 327,490 |   | (5,735 | ) |   | (2 | ) |   |
| Credit expense (income)                                             |       | 12,972                                                                                     |       | 12,535                  |       | (437                                                                                       | )          |                       | (3         | )          |       | 48,353     |       | 51,933 |   | 3,580 |   |   | 7 |   |   |
| Income  (loss) from continuing operations                           |       |                                                                                       |       |                    |       |                                                                                       |       |                       |       |       |       |       |       |   |   |   |   |   |   |   |   |
| before income taxes                                                 |       | 239,501                                                                                    |       | 217,590                 |       | (21,911                                                                                    | )          |                       | (9         | )          |       | 338,274    |       | 329,953 |   | (8,321 | ) |   | (2 | ) |   |
| Income tax expense (income)                                         |       | 91,609                                                                                     |       | 83,228                  |       | (8,381                                                                                     | )          |                       | (9         | )          |       | 114,836    |       | 101,561 |   | (13,275 | ) |   | (12 | ) |   |
| Income (loss) from continuing operations                            |       | 147,892                                                                                    |       | 134,362                 |       | (13,530                                                                                    | )          |                       | (9         | )          |       | 223,438    |       | 228,392 |   | 4,954 |   |   | 2 |   |   |
| Loss from discontinued operations, net of income   taxes            |       | —                                                                                     |       | —                  |       | —                                                                                     |       |                       | na         |       |       | —     |       | — |   | — |   |   | na |   |   |
| Net income (loss)                                                   |       | $                                                                                          | 147,892    |                    | $          | 134,362                                                                                    |       | $                          | (13,530    | )          |       | (9         | )          |   | $ | 223,438 |   | $ | 228,392 |   | $ | 4,954 |   |   | 2 |   |   |
| **Average  balances—Market View  (dollars in millions):**      | ** ** | ** **                                                                                 | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                                                          | 15,432     |                    | $          | 16,356                                                                                     |       | $                          | 924        |       |       | 6          |       |   | $ | 19,218 |   | $ | 22,288 |   | $ | 3,070 |   |   | 16 |   |   |
| Total assets                                                        |       | 16,306                                                                                     |       | 17,191                  |       | 885                                                                                        |       |                       | 5          |       |       | 23,921     |       | 27,214 |   | 3,293 |   |   | 14 |   |   |
| Total deposits                                                      |       | 19,091                                                                                     |       | 18,832                  |       | (259                                                                                       | )          |                       | (1         | )          |       | 18,283     |       | 18,536 |   | 253 |   |   | 1 |   |   |
| **Financial  ratios—Market View**                              |       |                                                                                       |       |                    |       |                                                                                       |       |                       |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Risk adjusted return on capital(1)                                  |       | 46                                                                                         | %          | 41                      | %          |                                                                                       |       |                       |       |       |       | 22         | %          | 21 | % |   |   |   |   |   |   |
| Return on average assets  (1)                                       |       | 1.83                                                                                       |       | 1.58                    |       |                                                                                       |       |                       |       |       |       | 1.88       |       | 1.69 |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                 |       | 65.59                                                                                      |       | 67.77                   |       |                                                                                       |       |                       |       |       |       | 48.40      |       | 46.17 |   |   |   |   |   |   |   |

 

| ** **                                                           | ** ** | **Other**                                                                                  | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** | **Reconciling Items**                                                                 | ** ** | **UnionBanCal  Corporation** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | **As 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)**      | ** ** |
| ** **                                                           | ** ** | **2006**                                                                                   | ** ** | **2007**                | ** ** | **Amount**                                                                                 | ** ** | **Percent**                                                                                | ** ** | **2006**                     | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2007** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—  Market View (dollars in thousands):** | ** ** | ** **                                                                                 | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** |                                                                                       | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                       |       | $                                                                                          | (45,548    | )                       | $          | (78,613                                                                                    | )          | $                                                                                          | (33,065    | )                            |       | (73        | )%         |       | $          | (4,837 | ) | $ | (4,310 | ) | $ | 932,735 |   | $ | 857,385 |   | $ | (75,350 | ) |   | (8 | )% |   |
| Noninterest income  (expense)                                        |       | 5,469                                                                                      |       | 7,738                   |       | 2,269                                                                                      |       |                                                                                       | 41         |                         |       | (38,841    | )          | (38,515    | )          | 437,138 |   | 452,403 |   | 15,265 |   |   | 3 |   |   |
| Total revenue                                                        |       | (40,079                                                                                    | )          | (70,875                 | )          | (30,796                                                                                    | )          |                                                                                       | (77        | )                            |       | (43,678    | )          | (42,825    | )          | 1,369,873 |   | 1,309,788 |   | (60,085 | ) |   | (4 | ) |   |
| Noninterest expense  (income)                                        |       | 36,980                                                                                     |       | 46,216                  |       | 9,236                                                                                      |       |                                                                                       | 25         |                         |       | (23,936    | )          | (23,737    | )          | 827,574 |   | 833,956 |   | 6,382 |   |   | 1 |   |   |
| Credit expense (income)                                              |       | (69,280                                                                                    | )          | (55,413                 | )          | 13,867                                                                                     |       |                                                                                       | 20         |                         |       | (45        | )          | (55        | )          | (8,000 | ) | 9,000 |   | 17,000 |   |   | 213 |   |   |
| Income (loss) from continuing operations  before income taxes   |       | (7,779                                                                                     | )          | (61,678                 | )          | (53,899                                                                                    | )          |                                                                                       | (693       | )                            |       | (19,697    | )          | (19,033    | )          | 550,299 |   | 466,832 |   | (83,467 | ) |   | (15 | ) |   |
| Income tax expense  (income)                                         |       | (12,704                                                                                    | )          | (25,642                 | )          | (12,938                                                                                    | )          |                                                                                       | (102       | )                            |       | (7,534     | )          | (7,280     | )          | 186,207 |   | 151,867 |   | (34,340 | ) |   | (18 | ) |   |
| Income (loss) from continuing operations                        |       | 4,925                                                                                      |       | (36,036                 | )          | (40,961                                                                                    | )          |                                                                                       | (832       | )                            |       | (12,163    | )          | (11,753    | )          | 364,092 |   | 314,965 |   | (49,127 | ) |   | (13 | ) |   |
| Loss from discontinued operations, net of income  taxes              |       | (8,236                                                                                     | )          | —                  |       | 8,236                                                                                      |       |                                                                                       | 100        |                         |       | —     |       | —     |       | (8,236 | ) | — |   | 8,236 |   |   | 100 |   |   |
| Net income (loss)                                                    |       | $                                                                                          | (3,311     | )                       | $          | (36,036                                                                                    | )          | $                                                                                          | (32,725    | )                            |       | (988       | )          |       | $          | (12,163 | ) | $ | (11,753 | ) | $ | 355,856 |   | $ | 314,965 |   | $ | (40,891 | ) |   | (11 | ) |   |
| **Average  balances—Market View (dollars in millions):**        | ** ** | ** **                                                                                 | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** |                                                                                       | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                          |       | $                                                                                          | (29        | )                       | $          | 31                                                                                         |       | $                                                                                          | 60         |                         |       | 207        |       |       | $          | (18 | ) | $ | (25 | ) | $ | 34,603 |   | $ | 38,650 |   | $ | 4,047 |   |   | 12 |   |   |
| Total assets                                                         |       | 8,472                                                                                      |       | 8,669                   |       | 197                                                                                        |       |                                                                                       | 2          |                         |       | (22        | )          | (29        | )          | 48,677 |   | 53,045 |   | 4,368 |   |   | 9 |   |   |
| Total deposits                                                       |       | 2,489                                                                                      |       | 5,413                   |       | 2,924                                                                                      |       |                                                                                       | 117        |                         |       | (587       | )          | (694       | )          | 39,276 |   | 42,087 |   | 2,811 |   |   | 7 |   |   |
| **Financial ratios—Market View**                                | ** ** | ** **                                                                                 | ** ** | ** **              | ** ** | ** **                                                                                 | ** ** |                                                                                       | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return on  capital(1)                                  |       | na                                                                                         |       | na                      |       |                                                                                       |       |                                                                                       |       |                         |       | na         |       | na         |       | na |   | na |   |   |   |   |   |   |   |
| Return on average  assets(1)                                         |       | na                                                                                         |       | na                      |       |                                                                                       |       |                                                                                       |       |                         |       | na         |       | na         |       | 1.51 | % | 1.20 | % |   |   |   |   |   |   |
| Efficiency ratio(2)                                                  |       | na                                                                                         |       | na                      |       |                                                                                       |       |                                                                                       |       |                         |       | na         |       | na         |       | 61.91 |   | 63.38 |   |   |   |   |   |   |   |

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(1)                    Annualized.

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

na = not applicable

*Retail Banking*

Retail Banking provides financial products includingcredit, deposit, trust, investment management and risk management deliveredthrough our branches, relationship managers, private bankers and trustadministrators, to individuals, small businesses and institutional clients.Retail Banking is focused on 

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executing a segment basedstrategy that will identify targeted opportunities within the consumer andsmall business markets, and develop product, marketing and sales strategies toretain customers and attract new customers in these identified target markets.While the primary focus of Retail Banking’s segment based strategy is depositgrowth, an additional focus continues to be consumer and small business loangeneration.

During the six months ended June 30, 2007, RetailBanking net income decreased 9 percent over the same period in 2006, primarilydue to lower net interest income and lower non-interest income. Net interestincome was down 3 percent as a result of lower noninterest bearing deposits andhigher interest expense.

Average total deposits were essentially flat duringthe six months ended June 30, 2007, compared to the same period in 2006. RetailBanking’s customer segmentation strategy continues to focus on retaining andattracting consumer and small business deposits through marketing activities,increasing customer cross-sell, relationship management, increasing andimproving sales resources, establishing new locations and new products.

Noninterest income was 3 percent lower for the sixmonths ended June 30, 2007 compared to the same period in 2006. Depositfees contributed the single biggest decrease, $3.5 million of the $7.7 million,due primarily to lower overdraft fees. Offsetting some of the decrease, was anincrease in trust fees of $1.1 million.

Noninterest expense increased one percent in the sixmonths ended June 30, 2007 compared to the prior year primarily fromhigher corporate overhead expenses.

*Retail Banking*iscomprised of the following major divisions: Retail Banking Branches, ConsumerAsset Management, Wealth Management and Institutional Services and AssetManagement.

·       *Retail Banking Branches* serves itscustomers through 319 full-service branches in California, 4 full-servicebranches in Oregon and Washington and 2 international offices. We own propertyoccupied by 116 of the domestic offices and lease the remaining properties forperiods of five to twenty years. Customers also access our services 24 hours aday by telephone or through our website at www.unionbank.com. In addition, thebranches offer automated teller and point-of-sale merchant services.

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

—              through convenientlylocated banking branches, which serve consumers and businesses with checkingand deposit services, as well as various types of consumer financing andinvestment services;

—              through our internetbanking services, which augment our physical delivery channels by providing anarray of customer transaction, bill payment and loan payment services;

—              through businessbanking centers, which serve small businesses;

—              through in-storebranches; and

—              throughour network of over 600 ATM machines.

·       *Consumer Asset Management* provides thecentralized origination, underwriting, processing, servicing, collection andadministration for consumer assets including residential mortgages.

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

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Our Retail Banking Branches and Consumer AssetManagement divisions operate in a highly competitive environment includingtraditional banking institutions as well as non-traditional competitors such asinvestment brokerage companies, consumer finance companies and residential realestate lenders.

We have an extensivebranch network that provides convenient banking hours and a full menu ofproducts and services to meet the needs of consumers and small businesses.

·       *Wealth Management* provides comprehensiveprivate banking services to our affluent clientele. The Private Bank focusesprimarily on delivering financial services to high net worth individuals withsophisticated financial needs as well as to professional service firms.Specific products and services include trust and estate services, investmentaccount management services and deposit and credit products. A key strategy ofThe Private Bank is to expand its business by leveraging existing Bank clientrelationships. Through 15 existing locations, The Private Bank relationshipmanagers offer all of our available products and services.

·       *Institutional Services and Asset Management* providesinvestment management and administration services for a broad range ofindividuals and institutions.

—              HighMark CapitalManagement, Inc., a registered investment advisor, provides investmentmanagement and advisory services to institutional clients as well as investmentadvisory, administration and support services to our proprietary mutual funds,the affiliated HighMark Funds. It also provides investment management servicesto Union Bank of California, N.A. with respect to most of its trust and agencyclients, including corporations, pension funds and individuals. HighMarkCapital Management, Inc.’s strategy is to broaden its client base and toincrease the assets of the HighMark Funds.

—              InstitutionalServices provides custody, corporate trust and retirement plan services.Custody Services provides both domestic and internationalsafekeeping/settlement services in addition to securities lending. CorporateTrust acts as trustee for corporate and municipal debt issues, provides escrowservices and trustee services for project finance. Retirement Services providesa full range of defined benefit and defined contribution administrativeservices, including trustee services, administration, investment management and401(k) valuation services. The client base of Institutional Servicesincludes financial institutions, corporations, government agencies, unions,insurance companies, mutual funds, investment managers and non-profitorganizations. Institutional Services’ strategy is to continue to leverage andexpand its position in our target markets.

*Wholesale Banking*

Wholesale Banking offers financing, depository, cashmanagement and insurance services to middle market and large corporatebusinesses primarily headquartered in the western United States. WholesaleBanking continues to focus on specific geographic markets and industry segmentssuch as energy, entertainment and real estate. Relationship managers providecredit services, including commercial loans, accounts receivable and inventoryfinancing, project financing, lease financing, trade financing and real estatefinancing. In addition to credit services, Wholesale Banking offers cashmanagement services delivered through deposit managers with significantindustry expertise and experience in cash management solutions for businesses,U.S. correspondent banks and government entities, as well as investment andrisk management products.

During the six months ended June 30, 2007,Wholesale Banking net income increased 2 percent from the same period in 2006,due to higher noninterest income, lower noninterest expense and higher taxcredits associated with the financing of low income housing projects, partlyoffset by lower net interest income.

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For the six months ended June 30, 2007, netinterest income decreased 6 percent compared to the same period in 2006. Thedecrease in net interest income was primarily due to an increase in the titleand escrow loan portfolio, which is highly rate-advantaged compared to othercommercial loans. Excluding title and escrow loans, average loans increased byapproximately 13 percent, compared to the same period in 2006. This wasprimarily due to an increase in commercial loan demand in the oil and gas andnational corporate segments, as well as the California middle market. Theconstruction loan portfolio also increased due to increased demand for incomeproperty construction projects with apartment financing representing thelargest component. Additionally, the margin on deposits was essentially flat asa higher credit for deposits offset the shift in customer balances fromnoninterest bearing to interest bearing accounts.

Noninterest income was 10 percent higher in the sixmonths ended June 30, 2007 compared to the prior year due to higher netgains on private capital investments, partially offset by lower accountanalysis fees.

Noninterest expense for the six months endedJune 30, 2007 decreased 2 percent from prior year primarily as a result oflower deposit balances of title and escrow customers along with their increasedusage of title and escrow loans, which when combined resulted in lower vendorbilling expense incurred on behalf of these customers. Offsetting this decreasein noninterest expense were foreclosed asset recoveries in the six months endedJune 30, 2006, which did not occur in the same period in 2007.

Wholesale Banking initiatives continue to includeexpanding deposit activities and loan strategies that include originating,underwriting and syndicating loans in core competency markets, such as theCalifornia middle-market, corporate banking, commercial real estate, energy,equipment leasing and commercial finance.

*Wholesale Banking*iscomprised of the following main divisions:

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

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

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

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

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

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

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

·       the*Global Markets Division*, whichserves our customers’ insurance, foreign exchange, interest rate riskmanagement and investment needs. The Global Markets Division offers energyderivative contracts, on a limited basis, to serve our energy sector clientbase. The division takes market risk when buying and selling securities andforeign exchange contracts for its own account, but takes no 

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

·       the*Insurance Services Division*products are sold through UnionBanc Insurance Services, Inc., theinsurance agency subsidiary of UBOC Insurance, Inc., which is a subsidiaryof Union Bank of California; and

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

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

*Other*

Net loss for “Other” increased by $32.7 million in thesix months ended June 30, 2007 compared to the same period in 2006 due tohigher net interest expense primarily due to the impact of higher market rateson transfer pricing results, higher credit expense on expected loan and leaselosses than calculated under our RAROC method (which is used to determinecredit expenses at the business unit level) and higher noninterest expense,partly offset by higher noninterest income, a higher income tax creditadjustment and an $8.2 million loss on our discontinued operations.

“Other” includes thefollowing items:

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

·       CorporateTreasury, which is responsible for our ALM, wholesale funding and the ALMinvestment and derivatives hedging portfolios. These treasury management activitiesare carried out to counter-balance the residual risk positions of ourbalance sheet and to manage those risks within the guidelines established byALCO. (For additional discussion regarding these risk management activities,see “Quantitative and Qualitative Disclosures About Market Risk”);

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

·       theresidual costs of support groups;

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

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

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

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The financial resultsfor the six months ended June 30, 2007 were impacted by the followingfactors:

·       netinterest income (expense) of ($78.6) million is the result of differencesbetween the net interest income earned by UnionBanCal and transfer pricingresults, which include the credit for equity for the reportable segments underRAROC. Net interest expense increased by $33.1 million compared to 2006primarily due to the impact of higher market rates on transfer pricing results;

·       creditexpense (income) of ($55.4) million was due to the difference between the $9.0million provision for loan losses calculated under our US GAAP methodology andthe $64.4 million in expected losses for the reportable business segments,which utilizes the RAROC methodology;

·       noninterestincome of $7.7 million;

·       noninterestexpense of $46.2 million, which includes the residual costs of support groupsand corporate activities not directly related to either of the two businesssegments, and $10.0 million for the expected imposition of a civil penalty bythe Office of the Comptroller of the Currency and the Financial CrimesEnforcement Network;

·       incometax expense (income) of ($25.6) million, was primarily due to the calculatedtax on reported pretax loss and the difference between the 32.5 percenteffective tax rate for our consolidated results and the actual tax expensecalculated for reportable segments using the RAROC effective rate of 38.25percent. The lower effective tax rate was due to $8.4 million of tax benefits resultingfrom the expiration of the statute of limitations on uncertain tax positions inthe second quarter of 2007, partially offset by $3.8 million in additionaltaxes due to the non-deductibility of the reserve for pending regulatoryactions.

The financial resultsfor the six months ended June 30, 2006 were impacted by the followingfactors:

·       netinterest income (expense) of ($45.5) million;

·       creditexpense (income) of ($69.3) million was due to the difference between the $8.0million reversal of provision for loan losses calculated under our US GAAPmethodology and the $61.3 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       noninterestincome of $5.5 million;

·       noninterestexpense of $37.0 million related to residual costs of support groups andcorporate activities not directly related to either of the two businesssegments;

·       incometax expense (income) of ($12.7) million was due to the calculated tax onreported pretax income and the difference between the 33.8 percent effectivetax rate for our consolidated results and the actual tax expense calculated forreportable segments using the RAROC effective rate of 38.25 percent; and

·       lossfrom discontinued operations, net of taxes, of $8.2 million.

**Regulatory Matters**

In recent years, a number of banks and bank holdingcompanies have been subject to regulatory actions, including cease and desistorders, formal written agreements and the assessment of significant civil moneypenalties, and criminal sanctions, including the imposition of significantfines, as a result of failures to comply with the Bank Secrecy Act and otheranti-money laundering laws and regulations.

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In October 2004, Union Bank of California International enteredinto a written agreement with the Federal Reserve Bank of New York relating toUnion Bank of California International’s BSA/AML controls and processes. Withthe liquidation of Union Bank of California International in March 2007,the written agreement is no longer effective. In March 2005, Union Bank ofCalifornia entered into a memorandum of understanding with the OCC, whichrequires Union Bank of California to strengthen its BSA/AML controls andprocesses. The memorandum of understanding remains in effect at the time offiling this Form 10-Q.

Management is committed to resolving the issues raisedby the regulators and continues to take actions it believes to be appropriateto achieve this objective. We have committed significant resources tostrengthen our BSA/AML controls and processes. Among other actions to enhanceour controls and procedures, we engaged independent consultants to provide acomprehensive review of our suspicious activity monitoring and reporting,acquired new and upgraded our existing compliance systems, added numerous wellqualified staff, enhanced training, and put in place an enhanced internal auditprogram. Notwithstanding these efforts, we have been advised by the OCC thatthe OCC will institute a procedure for a cease and desist order against us withrespect to our BSA/AML controls and processes and will assess civil moneypenalties with respect to BSA/AML matters. We also have received notice fromFinCEN that it will assess civil money penalties with respect to BSA/AMLmatters. We cannot be certain what final terms, conditions, or monetarypenalties will be imposed by the agencies. Based on discussions with the OCCand FinCEN, a reserve of $10 million has been established and is included inour financial statements in this report on Form 10-Q. We have alsobeen advised that the U.S. Department of Justice (DOJ) is conducting aninvestigation pertaining to certain past activities involving our nowdiscontinued international banking business. We have been cooperating and willcontinue to cooperate with the DOJ in this matter and we remain committed toresolving all of our BSA/AML issues as soon as practicable.

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

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

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

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

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

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**Item 4.**            Controls andProcedures

Our Chief Executive Officer (principal executive officer) and ChiefFinancial Officer (principal financial officer) have concluded that the designand operation of our disclosure controls and procedures are effective as of June 30,2007. This conclusion is based on an evaluation conducted under the supervisionand with the participation of management. Disclosure controls and proceduresare those controls and procedures which ensure that information required to bedisclosed in this filing is accumulated and communicated to management and isrecorded, processed, summarized and reported in a timely manner and inaccordance with Securities and Exchange Commission rules and regulations.

During the quarter ended June 30, 2007, therewere no changes in our internal controls over financial reporting thatmaterially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1.**            Legal Proceedings

For a discussion of the action filed against us byDataTreasury Corporation, refer to Item 3 of Part I of our 2006 Form 10-K.

For information relating to BSA/AML matters, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RegulatoryMatters” in this Form 10-Q.

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

**Item 1A.**  Risk Factors

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

***Industry Factors***

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

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

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

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

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

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

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

Deposits of Union Bank of California, N.A. are insuredup to statutory limits by the Federal Deposit Insurance Corporation (FDIC),and, accordingly, are subjected to deposit insurance assessments to maintainthe Deposit Insurance Fund. In November 2006, the FDIC issued a finalrule, effective January 1, 2007, that created a new assessment systemdesigned to more closely tie what banks pay for deposit insurance to the risksthey pose and adopted a new base schedule of rates that the FDIC can adjust upor down, depending on the revenue needs of the insurance fund. This newassessment system is expected to result in annual assessments on deposits ofUnion Bank of California of 5 to 7 basis points. Prior to this change, UnionBank of California was not paying any insurance assessments on deposits underthe FDIC’s risk-related assessment system. An FDIC credit for priorcontributions is expected to offset the assessment for 2007. Once the credit isexceeded, the deposit insurance assessments Union Bank of California pays willincrease our costs. Any future increases in the deposit insurance assessmentsUnion Bank of California pays would further increase our costs.

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

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

*Substantial competitioncould adversely affect us*

Banking is a highly competitive business. We competeactively for loan, deposit, and other financial services business inCalifornia, Oregon and Washington, as well as nationally and internationally.Our competitors include a large number of state and national banks, thriftinstitutions, credit unions and major foreign-affiliated or foreign banks, as wellas many financial and nonfinancial firms that offer services similar to thoseoffered by us, including many large securities firms. Some of our competitorsare community or regional banks that have strong local market positions. Othercompetitors include large financial institutions that have substantial capital,technology and marketing resources that are well in excess of ours. Such largefinancial institutions may have greater access to capital at a lower cost thanus, which may adversely affect our ability to compete effectively. We alsoexperience competition, especially for deposits, from internet-based bankinginstitutions, which have grown rapidly in recent years.

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

We are subject to significant federal and stateregulation and supervision, which is primarily for the benefit and protectionof our customers and the Deposit Insurance Fund and not for the benefit ofinvestors in our stock or other securities. In the past, our business has beenmaterially affected by these regulations. This will likely continue in thefuture. Laws, regulations or policies, including accounting standards and interpretations,currently affecting us and our subsidiaries may change at any time. Regulatoryauthorities may also change their interpretation of these statutes andregulations. Therefore, our business may be adversely affected by changes inlaws, regulations, policies or interpretations or regulatory approaches tocompliance and enforcement, as well as by supervisory action or criminalproceedings taken as a result of noncompliance which could result in theimposition of significant civil money penalties or fines. International laws,regulations and policies affecting us, our subsidiaries and the business weconduct may change at any time and affect our business opportunities andcompetitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi UFJcontrolling ownership of us, laws, regulations, policies, fines and othersupervisory actions adopted or enforced by the Government of Japan and theFederal Reserve Board may adversely affect our activities and investments andthose of our subsidiaries in the future.

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

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

Refer to “Supervision and Regulation” in our 2006 Form 10-Kand Management’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A)—Regulatory Matters” in this Form 10-Q for discussionof other laws and regulations that may affect our business, and certain pendingor threatened regulatory or other governmentalmatters, including those relating to the Bank Secrecy Act and other anti-moneylaundering laws and regulations. Such matters include a decision by the OCC toinstitute a procedure for a cease and desist order against us with respect toour BSA/AML controls and processes and to assess civil money penalties withrespect to BSA/AML matters, and a decision by the Financial Crimes EnforcementNetwork (FinCEN) to assess civil money penalties against us with respect toBSA/AML matters.

*Changes in accountingstandards could materially impact our financial statements*

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

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

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

***Company Factors***

*Adverse California economicconditions could adversely affect our business*

A substantial majority of our assets, deposits and feeincome are generated in California, and a substantial majority of ourresidential real estate loans are in California. As a result, poor economicconditions in California may cause us to incur losses associated with higherdefault rates and decreased 

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collateral values in our loanportfolio. Economic conditions in California are subject to variousuncertainties at this time, including the softening in the California realestate market and housing industry. If economic conditions in Californiadecline, our level of problem assets could increase and our prospects forgrowth could be impaired.

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

We are subject to certain industry-specific economicfactors. For example, a significant and increasing portion of our total loanportfolio is related to residential real estate, especially in California.Increases in residential mortgage loan interest rates could have an adverseeffect on our operations by depressing new mortgage loan originations.Additionally, a downturn in the residential real estate and housing industriesin California could have an adverse effect on our operations and the quality ofour real estate loan portfolio. Although we do not engage in subprime ornegative amortization lending, effects of recent subprime market challenges,combined with the ongoing correction in the U.S. and California real estatemarkets, could result in further price reductions in single family home pricesand a lack of liquidity in refinancing markets. These factors could adverselyimpact the quality of our residential construction and residential mortgageportfolio in various ways, including by decreasing the value of the collateralfor our mortgage loans. These factors could also negatively affect the economyin general and thereby our overall loan portfolio.

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

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

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

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

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

Banks, securities firms, and insurance companies cannow combine as a “financial holding company.” Financial holding companies canoffer virtually any type of financial service, including banking, securitiesunderwriting, insurance (both agency and underwriting), and merchant banking.Many of our competitors have elected to become financial holding companies. Anumber of foreign banks have acquired financial holding companies in the U.S.,further increasing competition in the U.S. market. Under current regulatory 

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interpretations, MitsubishiUFJ Financial Group, Inc. would be required to make a financial holdingcompany election in order for us to have the benefits of this status.Mitsubishi UFJ Financial Group is not presently a financial holding company.

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

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

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

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

The Bank of Tokyo-Mitsubishi UFJ may sell shares ofour common stock. By virtue of The Bank of Tokyo-Mitsubishi UFJ’s currentcontrol of us, The Bank of Tokyo-Mitsubishi UFJ could sell large amounts ofshares of our common stock by causing us to file a registration statement thatwould allow it to sell shares more easily. In addition, The Bank ofTokyo-Mitsubishi UFJ could sell shares of our common stock without registrationunder certain circumstances, such as in a private transaction. Although we canmake no prediction as to the effect, if any, that such sales would have on themarket price of our common stock, sales of substantial amounts of our commonstock, or the perception that such sales could occur, could adversely affectthe market price of our common stock. If The Bank of Tokyo-Mitsubishi UFJ sellsor transfers shares of our common stock as a block, another person or entitycould become our controlling stockholder.

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

We fund our operations independently of The Bank ofTokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group and believe ourbusiness is not necessarily closely related to the business or outlook of TheBank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. However, TheBank of Tokyo-Mitsubishi UFJ’s and Mitsubishi UFJ Financial Group’s creditratings may affect our credit ratings.

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

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

The views of The Bank of Tokyo-Mitsubishi UFJ andMitsubishi UFJ Financial Group regarding possible new businesses, strategies,acquisitions, divestitures or other initiatives, including compliance and riskmanagement processes, may differ from ours. This may delay or hinder us frompursuing individual initiatives or cause us to incur additional costs andsubject us to additional oversight.

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

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

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

As a holding company, a substantial portion of ourcash flow typically comes from dividends our bank and non-bank subsidiaries payto us. Various statutory provisions restrict the amount of dividends oursubsidiaries can pay to us without regulatory approval. In addition, if any ofour subsidiaries were to liquidate, that subsidiary’s creditors will beentitled to receive distributions from the assets of that subsidiary to satisfytheir claims against it before we, as a holder of an equity interest in thesubsidiary, will be entitled to receive any of the assets of the subsidiary.

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

Our ability to obtain regulatory approval ofacquisitions is subject to constraints related to the Bank Secrecy Act and theCRA, as described in “Business—Supervision and Regulation” in our 2006 Form 10-Kand in “MD&A—Regulatory Matters” in this Form 10-Q. Subject to ourability to address successfully these regulatory concerns, we may seek toacquire or invest in financial and non-financial companies that complement ourbusiness.

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

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

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*Privacy restrictionscould adversely affect our business*

Our business model relies, in part, uponcross-marketing the products and services offered by us and our subsidiaries toour customers. Laws that restrict our ability to share information aboutcustomers within our corporate organization could adversely affect ourbusiness, results of operations and financial condition.

*We rely on thirdparties for important products and services*

Third-party vendors provide key components of ourbusiness infrastructure such as internet connections, network access and mutualfund distribution and we do not control their actions. Any problems caused bythese third parties, including as a result of their not providing us theirservices for any reason or their performing their services poorly, couldadversely affect our ability to deliver products and services to our customersand otherwise to conduct our business. Replacing these third-party vendorscould also entail significant delay and expense.

*Our business couldsuffer if we fail to attract and retain skilled personnel*

Our success depends, in large part, on our ability toattract and retain key personnel, including executives. Any of our currentemployees, including our senior management, may terminate their employment withus at any time. Competition for qualified personnel in our industry can beintense. We may not be successful in attracting and retaining sufficientqualified personnel. We may also incur increased expenses and be required todivert the attention of other senior executives to recruit replacements for theloss of any key personnel.

*Significant legalproceedings could subject us to substantial uninsured liabilities*

We are from time to time subject to claims andproceedings related to our present or previous operations. These claims, whichcould include supervisory or enforcement actions by bank regulatoryauthorities, or criminal proceedings by prosecutorial authorities, couldinvolve demands for large monetary amounts, including civil money penalties orfines imposed by government authorities, and significant defense costs. Tomitigate the cost of some of these claims, we maintain insurance coverage inamounts and with deductibles that we believe are appropriate for ouroperations. However, our insurance coverage would not cover any civil moneypenalties or fines imposed by government authorities and may not cover allother claims against us or continue to be available to us at a reasonable cost.As a result, we may be exposed to substantial uninsured liabilities, whichcould adversely affect our business, prospects, results of operations and financialcondition.

*Changes in our taxrates could affect our future results*

The State of California requires us to file ourfranchise tax returns as a member of a unitary group that includes MitsubishiUFJ Financial Group and either all worldwide affiliates or only U.S.affiliates. Our future effective tax rates could be favorably or unfavorablyaffected by increases or decreases in Mitsubishi UFJ Financial Group’s taxableprofits, which in turn are affected by changes in the worldwide economy,especially in Japan, and decisions that they may make about the timing of therecognition of credit losses or other matters. Our effective tax rates couldalso be affected by changes in the valuation of our deferred tax assets andliabilities, changes in tax laws or their interpretation, or by the outcomes ofexaminations of our income tax returns by the Internal Revenue Service andother tax authorities.

*We are subject to operationalrisks*

We are subject to many types of operational risksthroughout our organization. Operational risk is the potential loss from ouroperations due to factors, such as failures in internal control, systemsfailures or external events, that do not fall into the market risk or creditrisk categories described in “MD&A—Business Segments.” Operational riskincludes reputational risk, legal and compliance risk, the risk of fraud ortheft by employees, customers or outsiders, unauthorized transactions byemployees or operational errors, including clerical or record-keeping errors orthose resulting from faulty or disabled computer or 

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telecommunications systems. Adiscussion of risks associated with regulatory compliance appears above underthe caption “*The effects of, changes in orsupervisory enforcement of, banking or other laws and regulations orgovernmental fiscal or monetary policies could adversely affect us*.”

We depend on the continued efficacy of our technicalsystems, operational infrastructure, relationships with third parties and ourcolleagues in our day-to-day and ongoing operations. Our dependence uponautomated systems to record and process transactions may further increase therisk that technical system flaws or employee tampering or manipulation of thosesystems will result in losses that are difficult to detect. Failures in ourinternal control or operational systems could impair our ability to operate ourbusiness and result in potential liability to customers, reputational damageand regulatory intervention, any of which could harm our operating results andfinancial condition.

We may also be subject to disruptions of our operatingsystems arising from events that are wholly or partially beyond our control,such as computer hacking or viruses or electrical or telecommunicationsoutages, which may give rise to disruption of service to customers and tofinancial loss or liability. Our business recovery plan may not work asintended or may not prevent significant interruptions of our operations.

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

As a financial institution, our earnings and capitalare subject to risks associated with negative public opinion. Negative publicopinion could result from our actual or alleged conduct in any number ofactivities, including lending practices, the failure of any product or servicesold by us to meet our customers’ expectations or applicable regulatoryrequirements, corporate governance and acquisitions, or from actions taken byregulators and community organizations in response to those activities. We fundour operations independently of The Bank of Tokyo-Mitsubishi UFJ and MitsubishiUFJ Financial Group and believe our business is not necessarily closely relatedto the business or outlook of The Bank of Tokyo-Mitsubishi UFJ or MitsubishiUFJ Financial Group. However, negative public opinion could also result fromregulatory concerns regarding, or supervisory or other governmental actions in the U.S. or Japan against, us or UnionBank of California, or The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJFinancial Group. Negative public opinion can adversely affect our ability tokeep and attract and/or retain customers and can expose us to litigation andregulatory action. Actual or alleged conduct by one of our businesses canresult in negative public opinion about our other businesses. Negative publicopinion could also affect our credit ratings, which are important to our accessto unsecured wholesale or other borrowings; significant changes in theseratings could change the cost and availability of these sources of funding.

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

Our risk management framework is made up of variousprocesses and strategies to manage our risk exposure. Types of risk to which weare subject include liquidity risk, credit risk, market risk, interest raterisk, operational risk, legal risk, compliance risk, reputation risk, fiduciaryrisk and private equity risk, among others. Our framework to manage risk,including the framework’s underlying assumptions, may not be effective underall conditions and circumstances. If our risk management framework provesineffective, we could suffer unexpected losses and could be materiallyadversely affected.

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*Our disclosure controls andprocedures may not prevent or detect all errors or acts of fraud*

Our disclosure controls and procedures are designed toprovide reasonable assurance that information required to be disclosed by us inreports we file or submit under the Exchange Act is accumulated andcommunicated to management, and recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. Anydisclosure controls and procedures or internal controls and procedures, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.

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

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

*Repurchases of EquitySecurities*

Thefollowing table presents repurchases by us of our equity securities during thesecond quarter 2007.

| ** **                                | ** ** | ** **                    | ** ** | ** **                       | ** ** | ** **                             | ** ** | **Approximate**                         | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | ** **                    | ** ** | ** **                       | ** ** | ** **                             | ** ** | **Dollar**                              | ** ** |
| ** **                                | ** ** | ** **                    | ** ** | ** **                       | ** ** | **Total Number **            | ** ** | **Value of Shares that** | ** ** |
| ** **                                | ** ** | ** **                    | ** ** | ** **                       | ** ** | **of Shares Purchased**      | ** ** | **May Yet Be**                | ** ** |
| ** **                                | ** ** | **Total Number of** | ** ** | **Average Price Paid** | ** ** | **as Part of Publicly** | ** ** | **Purchased**                           | ** ** |
| **Period**                                | ** ** | **Shares Purchased**(1)  | ** ** | **per Share**               | ** ** | **Announced Programs**            | ** ** | **under the Programs**        | ** ** |
| **April 2007**(April 1-6, 2007) |       |                          | 27,628     |                             |       |                                   | $          | 63.38                                   |       |   |   | — |   |   |   | $ | 62,372,715 |   |   |
| **May 2007**(May 3-30, 2007)    |       |                          | 1,819      |                             |       |                                   | $          | 61.50                                   |       |   |   | — |   |   |   | $ | 62,260,838 |   |   |
| **June 2007**(June 3-19, 2007)  |       |                          | 505        |                             |       |                                   | $          | 62.57                                   |       |   |   |   | — |   |   |   |   | $ | 62,229,239 | (2) |   |
| **Total**                                 |       |                          | 29,952     |                             |       |                                   | $          | 63.26                                   |       |   |   |   | — |   |   |   |   |   |   |   |

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(1)                   All common stock repurchased during April,May and June 2007 were from employees for required personal incometax withholdings on the vesting of restricted stock issued under the Year 2000UnionBanCal Corporation Management Stock Plan.

(2)                   In the second quarter of 2007, UnionBanCal Corporationused $1.9 million from the $500 million repurchase program announced onApril 26, 2006.

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**Item 4.**            Submission of Mattersto a Vote of Security Holders

Set forth below is information concerning each matter submitted to avote at the Annual Meeting of Stockholders on May 24, 2007:

*Electionof Directors:  **Each of the following persons was elected as adirector to hold office until the 2008 Annual Meeting of Stockholders or untilearlier retirement, resignation or removal.*

| **NOMINEE**                 | ** ** | **FOR**     | ** ** | **WITHHELD** | ** ** |
|-----------------------------|------------|-------------|------------|--------------|------------|
| Aida M. Alvarez             |       | 133,922,944 |       | 392,889      |       |
| David R. Andrews            |       | 133,926,427 |       | 389,406      |       |
| Nicholas B. Binkley         |       | 133,945,641 |       | 370,192      |       |
| L. Dale Crandall            |       | 133,160,779 |       | 1,155,054    |       |
| Murray H. Dashe             |       | 133,961,176 |       | 354,657      |       |
| Richard D. Farman           |       | 133,254,558 |       | 1,061,275    |       |
| Philip B. Flynn             |       | 133,080,560 |       | 1,235,273    |       |
| Michael J. Gillfillan       |       | 133,968,303 |       | 347,530      |       |
| Mohan S. Gyani              |       | 133,891,488 |       | 424,345      |       |
| Ronald L.  Havner, Jr. |       | 133,672,803 |       | 643,030      |       |
| Norimichi Kanari            |       | 111,284,153 |       | 23,031,680   |       |
| Mary S. Metz                |       | 132,852,357 |       | 1,463,476    |       |
| Shigemitsu Miki             |       | 110,978,643 |       | 23,337,190   |       |
| J. Fernando Niebla          |       | 133,176,921 |       | 1,138,912    |       |
| Masashi Oka                 |       | 132,898,333 |       | 1,417,500    |       |
| Kyoto Omori                 |       | 132,893,457 |       | 1,422,376    |       |
| Masaaki Tanaka              |       | 133,106,661 |       | 1,209,172    |       |

 

*Proposal No. 2:*   Toratify the selection of Deloitte & Touche, LLP as independentregistered public accounting firm of UnionBanCal Corporation for 2007 receivedthe following votes:

| **FOR**     | ** ** | **133,202,052** | ** ** |
|-------------|------------|-----------------|------------|
| **AGAINST** | ** ** | **1,023,823**   | ** ** |
| **ABSTAIN** | ** ** | **89,958**      | ** ** |

 

**Item 6. Exhibits**

| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Forms of 2007 Restricted Stock Unit Agreements for  Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management  Stock Plan(1)                     |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 31.2 |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 32.1 |       | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
| 32.2 |       | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |

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(1)                   Filed herewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                           |   | UNIONBANCAL CORPORATION (Registrant) |
|---------------------------|--------|--------------------------------------|
| Date: August 6, 2007 |   | By:                                  | /s/ MASAAKI TANAKA |
|                      |   |                                 | Masaaki Tanaka |
|                      |   | * *                             | *President  and Chief Executive Officer* |
|                      |   |                                 | *(Principal  Executive Officer)* |
| Date: August 6, 2007 |   | By:                                  | /s/ DAVID I. MATSON |
|                      |   |                                 | David I. Matson |
|                      |   | * *                             | *Vice  Chairman and Chief Financial Officer* |
|                      |   | * *                             | *(Principal  Financial Officer)* |
| Date: August 6, 2007 |   | By:                                  | /s/ DAVID A. ANDERSON |
|                      |   |                                 | David A. Anderson |
|                      |   | * *                             | *Executive  Vice President and Controller* |
|                      |   |                                 | *(Chief  Accounting Officer)* |

 

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**EXHIBITINDEX**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Forms of Restricted Stock Unit Agreements for  Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management  Stock Plan(1)                          |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 31.2 |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 32.1 |       | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
| 32.2 |       | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |

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(1)                   Filed herewith.

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