**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

 

**For thequarterly period ended March 31, 2006**

**Commission file number 1-15081**

**UnionBanCalCorporation**

(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 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes  þ   No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act.

Largeaccelerated filer  þ*       *Accelerated filer  o             Non-acceleratedfiler  o

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

Number ofshares of Common Stock outstanding at April 28, 2006: 143,864,056

 

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**UnionBanCal Corporationand Subsidiaries**

**TABLE OFCONTENTS**
|                                                                                                           | Page  Number |
|-----------------------------------------------------------------------------------------------------------|--------------|
| **PART I**                                                                                           | ** **   | ** ** |
| **Financial Information**                                                                                 | ** **   | ** ** |
| Consolidated Financial  Highlights                                                                        |         | 5 |   |
| ITEM 1. FINANCIAL STATEMENTS:                                                                             |         |   |   |
| Condensed Consolidated  Statements of Income                                                              |         | 6 |   |
| Condensed Consolidated  Balance Sheets                                                                    |         | 7 |   |
| Condensed Consolidated  Statements of Changes in Stockholders’ Equity                                |         | 8 |   |
| Condensed Consolidated  Statements of Cash Flows                                                          |         | 9 |   |
| Notes to Condensed  Consolidated Financial Statements                                                     |         | 10 |   |
| ITEM 2. MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: |         |   |   |
| Introduction                                                                                              |         | 30 |   |
| Executive Overview                                                                                        |         | 30 |   |
| Discontinued Operations                                                                                   |         | 31 |   |
| Critical Accounting Policies                                                                              |         | 32 |   |
| Financial Performance                                                                                     |         | 33 |   |
| Net Interest Income                                                                                       |         | 35 |   |
| Noninterest Income                                                                                        |         | 36 |   |
| Noninterest Expense                                                                                       |         | 37 |   |
| Income Tax Expense                                                                                        |         | 37 |   |
| Loans                                                                                                     |         | 38 |   |
| Cross-Border Outstandings                                                                                 |         | 39 |   |
| Provision for Loan Losses                                                                                 |         | 40 |   |
| Allowances for Credit Losses                                                                              |         | 40 |   |
| Nonperforming Assets                                                                                      |         | 43 |   |
| Loans 90 Days or More Past  Due and Still Accruing                                                        |         | 44 |   |
| Quantitative and Qualitative  Disclosures About Market Risk                                               |         | 44 |   |
| Liquidity Risk                                                                                            |         | 46 |   |
| Regulatory Capital                                                                                        |         | 47 |   |
| Business Segments                                                                                         |         | 48 |   |
| Regulatory Matters                                                                                        |         | 55 |   |
| ITEM 3. QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                      |         | 56 |   |
| ITEM 4. CONTROLS AND PROCEDURES                                                                           |         | 56 |   |
| **PART II**                                                                                          | ** **   | ** ** |   |
| **Other Information**                                                                                     | ** **   | ** ** |   |
| ITEM 1.   LEGAL PROCEEDINGS                                                                     |         | 57 |   |
| ITEM 1A. RISK FACTORS                                                                                     |         | 57 |   |
| ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                          |         | 57 |   |
| ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |         | 58 |   |
| ITEM 5.   OTHER INFORMATION                                                                     |         | 59 |   |
| ITEM 6.   EXHIBITS                                                                              |         | 59 |   |
| SIGNATURES                                                                                                |         | 60 |   |

 

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 I of our Annual Report on Form 10-Kfor the year ended December 31, 2005 which is incorporated by referenceherein and Item 1A “Risk Factors” of Part II of this Quarterly Reporton Form 10-Q.

This document includes forward-looking information,which is 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 ourSEC filings, press releases, news articles, conference calls with analysts andstockholders and when we are speaking on behalf of UnionBanCal Corporation. Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts. Often, they include the words “believe,” “expect,”“target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,”or words of similar meaning, or future or conditional verbs such as “will,” “would,”“should,” “could,” “might,” or “may.” These forward-looking statements areintended to provide investors with additional information with which they mayassess our future potential. All of these forward-looking statements are basedon assumptions about an uncertain future and are based on information availableto us at the date of these statements. We do not undertake to updateforward-looking statements to reflect facts, circumstances, assumptions orevents that occur after the date the forward-looking statements are made.

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

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

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

·       Pending legal and regulatory actions, and future legislative andregulatory developments

·       Increased regulatory controls and processes regarding Bank Secrecy Actand anti-money laundering matters, and their costs and impact on our business

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

·       Our ability to meet regulatory requirements

·       Credit quality and provision for credit losses, including the need toprovide for credit losses due to anticipated loan growth

·       The unallocated portion of our allowances for credit losses

·       Net interest income and effects on net interest income, includingexpense from derivative hedges

·       The impact of increases in interest rates and growth in our commercialloan portfolio on our net interest margin

·       Loan growth rates, including residential mortgage loans

·       Disintermediation of noninterest bearing deposits to interest bearingdeposits or other investment alternatives

·       Deposit renewals

3

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·       Our ability and intent to hold various assets

·       The formation of financial subsidiaries

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

·       The composition and market sensitivity of our securities portfolios,our hedging strategies and the asset sensitivity of our balance sheet

·       Potential dividend restrictions

·       Taxes, including the possible effect of the level of earnings at TheBank of Tokyo-Mitsubishi UFJ, Ltd. on our California State tax obligations

·       Off-balance sheet arrangements

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

·       Our insurance coverage

·       Estimated pension and health costs and the investment objectives andasset allocation strategy of our pension plan and health plan

·       Decisions to downsize, sell or close units or otherwise reorganize orchange our business mix

·       Our strategies and expectations regarding capital levels, returningexcess capital to stockholders and strategic or other acquisitions

·       The relationship between our business and that of The Bank ofTokyo-Mitsubishi UFJ, Ltd.

·       The impact of strategic investments on our business and benefits ofmarketing alliances

·       The impact of the sale of our international correspondent bankingbusiness and the timing and transition of the business and customers

There are numerousrisks and uncertainties that could and will cause actual results to differmaterially from those discussed in our forward-looking statements. Many ofthese factors are beyond our ability to control or predict and could have amaterial adverse effect on our stock price, financial condition, and results ofoperations or prospects. Such risks and uncertainties include, but are notlimited to those listed in Item 1A “Risk Factors” of Part II of thisQuarterly Report on Form 10-Q and in Item 1A “Risk Factors” of Part Iof our Annual Report on Form 10-K for the year ended December 31,2005.

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

4

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**PART I.FINANCIAL INFORMATIONUnionBanCal Corporation and SubsidiariesCondensed Consolidated Financial Highlights**(1)(Unaudited)

| ** **                                                                      | ** ** | **As of and for the** | ** ** | ** **         | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| ** **                                                                      | ** ** | **Three Months Ended**          | ** ** | ** **         | ** ** |
| ** **                                                                      | ** ** | **March 31,**                        | ** ** | **March 31,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2005**                                  | ** ** | **2006**           | ** ** | **Change** | ** ** |
| **Results of operations:**                                                      |       |                                      |       |               |       |   |   |   |   |
| Net interest income(2)                                                          |       | $                                         | 436,717    |               | $          | 466,341 |   |   | 6.78 | % |   |
| Reversal of allowance  for loan losses                                          |       | (12,119                                   | )          | (7,000             | )          |   | (42.24 | ) |   |
| Noninterest income                                                              |       | 205,625                                   |       | 217,910            |       |   | 5.97 |   |   |
| Noninterest expense                                                             |       | 392,952                                   |       | 414,544            |       |   | 5.49 |   |   |
| Income before income  taxes(2)                                                  |       | 261,509                                   |       | 276,707            |       |   | 5.81 |   |   |
| Taxable-equivalent  adjustment                                                  |       | 1,055                                     |       | 1,248              |       |   | 18.29 |   |   |
| Income tax expense                                                              |       | 80,703                                    |       | 94,004             |       |   | 16.48 |   |   |
| Income from continuing  operations                                              |       | 179,751                                   |       | 181,455            |       |   | 0.95 |   |   |
| Income (loss) from  discontinued operations, net of taxes                       |       | 2,226                                     |       | (8,510             | )          |   | nm |   |   |
| Net income                                                                      |       | $                                         | 181,977    |               | $          | 172,945 |   |   | (4.96 | ) |   |
| **Per  common share:**                                                          | ** ** | ** **                                | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings:                                                                 |       |                                      |       |               |       |   |   |   |   |
| From continuing  operations                                                     |       | $                                         | 1.22       |               | $          | 1.26 |   |   | 3.28 | % |   |
| Net income                                                                      |       | 1.24                                      |       | 1.20               |       |   | (3.23 | ) |   |
| Diluted earnings:                                                               |       |                                      |       |               |       |   |   |   |   |
| From continuing  operations                                                     |       | 1.20                                      |       | 1.24               |       |   | 3.33 |   |   |
| Net income                                                                      |       | 1.21                                      |       | 1.18               |       |   | (2.48 | ) |   |
| Dividends(3)                                                                    |       | 0.36                                      |       | 0.41               |       |   | 13.89 |   |   |
| Book value (end of  period)                                                     |       | 28.41                                     |       | 31.94              |       |   | 12.43 |   |   |
| Common shares  outstanding (end of period)(4)                                   |       | 144,575,615                               |       | 143,402,332        |       |   | (0.81 | ) |   |
| Weighted average  common shares outstanding—basic(4)                       |       | 146,997,649                               |       | 143,878,106        |       |   | (2.12 | ) |   |
| Weighted average  common shares outstanding—diluted(4)                     |       | 149,915,503                               |       | 146,026,188        |       |   | (2.59 | ) |   |
| **Balance sheet (end of period):**                                              | ** ** | ** **                                | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets(5)                                                                 |       | $                                         | 49,432,871 |               | $          | 48,800,945 |   |   | (1.28 | )% |   |
| Total loans                                                                     |       | 29,778,461                                |       | 33,528,868         |       |   | 12.59 |   |   |
| Nonperforming assets                                                            |       | 101,226                                   |       | 42,392             |       |   | (58.12 | ) |   |
| Total deposits                                                                  |       | 40,414,979                                |       | 39,155,904         |       |   | (3.12 | ) |   |
| Stockholders’ equity                                                       |       | 4,107,223                                 |       | 4,579,878          |       |   | 11.51 |   |   |
| **Balance sheet (period average):**                                             | ** ** | ** **                                | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                    |       | $                                         | 46,313,053 |               | $          | 48,016,643 |   |   | 3.68 | % |   |
| Total loans                                                                     |       | 29,714,206                                |       | 34,052,067         |       |   | 14.60 |   |   |
| Earning assets                                                                  |       | 41,667,831                                |       | 43,084,349         |       |   | 3.40 |   |   |
| Total deposits                                                                  |       | 38,199,718                                |       | 38,856,033         |       |   | 1.72 |   |   |
| Stockholders’ equity                                                       |       | 4,208,650                                 |       | 4,538,679          |       |   | 7.84 |   |   |
| **Financial ratios**(6)**:**                                                    | ** ** | ** **                                | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on average assets(7):                                                    |       |                                      |       |               |       |   |   |   |   |
| From continuing  operations                                                     |       | 1.57                                      | %          | 1.53               | %          |   |   |   |   |
| Net income                                                                      |       | 1.59                                      |       | 1.46               |       |   |   |   |   |
| Return on average  stockholders’ equity(7):                                |       |                                      |       |               |       |   |   |   |   |
| From continuing  operations                                                     |       | 17.32                                     |       | 16.21              |       |   |   |   |   |
| Net income                                                                      |       | 17.54                                     |       | 15.45              |       |   |   |   |   |
| Efficiency ratio(8)                                                             |       | 60.64                                     |       | 62.10              |       |   |   |   |   |
| Net interest margin(2)                                                          |       | 4.22                                      |       | 4.36               |       |   |   |   |   |
| Dividend payout ratio                                                           |       | 29.51                                     |       | 32.54              |       |   |   |   |   |
| Tangible equity ratio                                                           |       | 7.36                                      |       | 8.46               |       |   |   |   |   |
| Tier 1 risk-based  capital ratio(5)                                             |       | 9.06                                      |       | 9.09               |       |   |   |   |   |
| Total risk-based  capital ratio(5)                                              |       | 11.41                                     |       | 10.94              |       |   |   |   |   |
| Leverage ratio(5)                                                               |       | 7.79                                      |       | 8.80               |       |   |   |   |   |
| Allowances for credit  losses to total loans(9)                                 |       | 1.63                                      |       | 1.26               |       |   |   |   |   |
| Allowances for credit  losses to nonaccrual loans(9)                            |       | 506.96                                    |       | 1,003.48           |       |   |   |   |   |
| Net loans charged off  (recovered) to average total loans(7)                    |       | (0.19                                     | )          | 0.06               |       |   |   |   |   |
| Nonperforming assets  to total loans and foreclosed assets                      |       | 0.34                                      |       | 0.13               |       |   |   |   |   |
| Nonperforming assets  to total assets(5)                                        |       | 0.20                                      |       | 0.09               |       |   |   |   |   |

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(1)                   In September 2005, Union Bank ofCalifornia, N.A. committed to a plan for disposal of its internationalcorrespondent banking business. All periods presented have been restated toreflect discontinued operations.

(2)                   Taxable-equivalent basis.

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

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

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

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

(7)                   Annualized.

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

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

nm = not meaningful

5

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**Item 1.   Financial Statements**

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Statements of Income**(1)(Unaudited)

| ** **                                                                      | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31,**           | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2005**                                | ** ** | **2006** | ** ** |
| **Interest Income**                                                             |       |                                    |       |   |   |
| Loans                                                                           |       | $                                       | 404,630    |   | $ | 512,323 |   |
| Securities                                                                      |       | 100,769                                 |       | 96,867 |   |
| Interest bearing  deposits in banks                                             |       | 733                                     |       | 736 |   |
| Federal funds sold and  securities purchased under resale agreements            |       | 2,373                                   |       | 3,845 |   |
| Trading account assets                                                          |       | 842                                     |       | 1,431 |   |
| Total interest income                                                           |       | 509,347                                 |       | 615,202 |   |
| **Interest Expense**                                                            |       |                                    |       |   |   |
| Deposits                                                                        |       | 55,828                                  |       | 115,309 |   |
| Federal funds  purchased and securities sold under repurchase agreements        |       | 4,998                                   |       | 8,802 |   |
| Commercial paper                                                                |       | 4,560                                   |       | 12,448 |   |
| Medium and long-term  debt                                                      |       | 6,532                                   |       | 10,397 |   |
| Trust notes                                                                     |       | 238                                     |       | 238 |   |
| Other borrowed funds                                                            |       | 1,529                                   |       | 2,915 |   |
| Total interest expense                                                          |       | 73,685                                  |       | 150,109 |   |
| **Net  Interest Income**                                                        |       | 435,662                                 |       | 465,093 |   |
| Reversal of allowance  for loan losses                                          |       | (12,119                                 | )          | (7,000 | ) |
| Net interest income  after reversal of allowance for loan losses                |       | 447,781                                 |       | 472,093 |   |
| **Noninterest Income**                                                          |       |                                    |       |   |   |
| Service charges on  deposit accounts                                            |       | 79,267                                  |       | 81,635 |   |
| Trust and investment  management fees                                           |       | 41,963                                  |       | 50,115 |   |
| Insurance commissions                                                           |       | 22,017                                  |       | 19,518 |   |
| Merchant banking fees                                                           |       | 6,266                                   |       | 8,229 |   |
| Foreign exchange gains,  net                                                    |       | 8,170                                   |       | 7,818 |   |
| Brokerage commissions  and fees                                                 |       | 8,972                                   |       | 7,795 |   |
| Card processing fees,  net                                                      |       | 5,607                                   |       | 6,697 |   |
| Securities gains  (losses), net                                                 |       | 344                                     |       | (214 | ) |
| Other                                                                           |       | 33,019                                  |       | 36,317 |   |
| Total noninterest  income                                                       |       | 205,625                                 |       | 217,910 |   |
| **Noninterest Expense**                                                         |       |                                    |       |   |   |
| Salaries and employee  benefits                                                 |       | 231,758                                 |       | 252,495 |   |
| Net occupancy                                                                   |       | 32,362                                  |       | 32,837 |   |
| Outside services                                                                |       | 21,247                                  |       | 28,609 |   |
| Equipment                                                                       |       | 17,403                                  |       | 17,922 |   |
| Software                                                                        |       | 13,975                                  |       | 16,344 |   |
| Professional services                                                           |       | 11,741                                  |       | 14,547 |   |
| Communications                                                                  |       | 10,380                                  |       | 10,552 |   |
| Foreclosed asset  expense (income)                                              |       | 406                                     |       | (7,367 | ) |
| (Reversal of)  provision for losses on off-balance sheet commitments            |       | 3,000                                   |       | (3,000 | ) |
| Other                                                                           |       | 50,680                                  |       | 51,605 |   |
| Total noninterest  expense                                                      |       | 392,952                                 |       | 414,544 |   |
| Income from continuing  operations before income taxes                          |       | 260,454                                 |       | 275,459 |   |
| Income tax expense                                                              |       | 80,703                                  |       | 94,004 |   |
| **Income  from Continuing Operations**                                          |       | 179,751                                 |       | 181,455 |   |
| Income (loss) from  discontinued operations before income taxes                 |       | 3,639                                   |       | (13,603 | ) |
| Income tax expense  (benefit)                                                   |       | 1,413                                   |       | (5,093 | ) |
| **Income  (Loss) from Discontinued Operations**                                 |       | 2,226                                   |       | (8,510 | ) |
| **Net  Income**                                                                 |       | $                                       | 181,977    |   | $ | 172,945 |   |
| **Income  from continuing operations per common share—basic**              |       | $                                       | 1.22       |   | $ | 1.26 |   |
| **Net  Income per common share—basic**                                     |       | $                                       | 1.24       |   | $ | 1.20 |   |
| **Income  from continuing operations per common share—diluted**            |       | $                                       | 1.20       |   | $ | 1.24 |   |
| **Net  income per common share—diluted**                                   |       | $                                       | 1.21       |   | $ | 1.18 |   |
| **Weighted  average common shares outstanding—basic**                      |       | 146,998                                 |       | 143,878 |   |
| **Weighted  average common shares outstanding—diluted**                    |       | 149,916                                 |       | 146,026 |   |

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(1)                   In September 2005, Union Bank of California, N.A.committed to a plan for disposal of its international correspondent bankingbusiness. All periods presented have been restated to reflect the discontinuedoperations.

**See accompanying notes to condensedconsolidated financial statements.**

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**UnionBanCal Corporationand SubsidiariesCondensed Consolidated Balance Sheets**(1)

| ** **                                                                                                                                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                                                    | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** |
| **Assets**                                                                                                                                                                                              | ** ** | ** **         | ** ** |                  | ** ** | ** **         |       | ** ** | ** ** |
| Cash and due from  banks                                                                                                                                                                                |       | $                  | 1,870,367  |                  |       | $                  | 2,402,212  |   |   | $ | 2,035,544 |   |
| Interest bearing  deposits in banks                                                                                                                                                                     |       | 73,667             |       |                  | 771,164    |               |       | 170,187 |   |
| Federal funds sold and  securities purchased under resale agreements                                                                                                                               |       | 1,695,835          |       |                  | 796,500    |               |       | 513,777 |   |
| Total cash and cash  equivalents                                                                                                                                                                        |       | 3,639,869          |       |                  | 3,969,876  |               |       | 2,719,508 |   |
| Trading account assets                                                                                                                                                                                  |       | 234,791            |       |                  | 312,655    |               |       | 329,703 |   |
| Securities available for sale:                                                                                                                                                                          |       |               |       |                  |       |               |       |   |   |
| Securities pledged as  collateral                                                                                                                                                                       |       | 251,657            |       |                  | 96,994     |               |       | 88,152 |   |
| Held in portfolio                                                                                                                                                                                       |       | 10,975,242         |       |                  | 8,072,286  |               |       | 8,394,318 |   |
| Loans (net of  allowance for loan losses: March 31, 2005, $401,275; December 31,  2005, $351,532; March 31, 2006, $339,443)                                                         |       | 29,377,186         |       |                  | 32,744,063 |               |       | 33,189,425 |   |
| Due from customers on  acceptances                                                                                                                                                                      |       | 21,158             |       |                  | 19,252     |               |       | 20,541 |   |
| Premises and  equipment, net                                                                                                                                                                            |       | 520,286            |       |                  | 536,074    |               |       | 511,095 |   |
| Intangible assets                                                                                                                                                                                       |       | 56,751             |       |                  | 42,616     |               |       | 39,186 |   |
| Goodwill                                                                                                                                                                                                |       | 450,125            |       |                  | 454,015    |               |       | 453,489 |   |
| Other assets                                                                                                                                                                                            |       | 1,929,837          |       |                  | 2,113,577  |               |       | 2,814,603 |   |
| Assets of discontinued  operations to be disposed or sold(1)                                                                                                                                            |       | 1,975,969          |       |                  | 1,054,594  |               |       | 240,925 |   |
| Total assets                                                                                                                                                                                            |       | $                  | 49,432,871 |                  |       | $                  | 49,416,002 |   |   | $ | 48,800,945 |   |
| **Liabilities**                                                                                                                                                                                         | ** ** | ** **         | ** ** |                  | ** ** | ** **         |       | ** ** | ** ** |
| Noninterest bearing                                                                                                                                                                                     |       | $                  | 20,421,830 |                  |       | $                  | 19,489,377 |   |   | $ | 18,118,506 |   |
| Interest bearing                                                                                                                                                                                        |       | 19,993,149         |       |                  | 20,592,862 |               |       | 21,037,398 |   |
| Total deposits                                                                                                                                                                                          |       | 40,414,979         |       |                  | 40,082,239 |               |       | 39,155,904 |   |
| Federal funds purchased  and securities sold under repurchase agreements                                                                                                                                |       | 400,570            |       |                  | 651,529    |               |       | 292,758 |   |
| Commercial paper                                                                                                                                                                                        |       | 1,042,795          |       |                  | 680,027    |               |       | 1,420,276 |   |
| Other borrowed funds                                                                                                                                                                                    |       | 126,662            |       |                  | 134,485    |               |       | 66,472 |   |
| Acceptances  outstanding                                                                                                                                                                                |       | 21,158             |       |                  | 19,252     |               |       | 20,541 |   |
| Other liabilities                                                                                                                                                                                       |       | 1,128,383          |       |                  | 1,466,478  |               |       | 2,259,464 |   |
| Medium and long-term  debt                                                                                                                                                                              |       | 803,233            |       |                  | 801,095    |               |       | 788,763 |   |
| Junior subordinated  debt payable to subsidiary grantor trust                                                                                                                                           |       | 15,677             |       |                  | 15,338     |               |       | 15,225 |   |
| Liabilities of  discontinued operations to be extinguished or assumed(1)                                                                                                                                |       | 1,372,191          |       |                  | 1,005,859  |               |       | 201,664 |   |
| Total liabilities                                                                                                                                                                                       |       | 45,325,648         |       |                  | 44,856,302 |               |       | 44,221,067 |   |
| Commitments and contingencies—See Note 9                                                                                                                                                           |       |               |       |                  |       |               |       |   |   |
| **Stockholders’ Equity**                                                                                                                                                                           | ** ** | ** **         | ** ** |                  | ** ** | ** **         |       | ** ** | ** ** |
| Preferred stock:                                                                                                                                                                                        |       |               |       |                  |       |               |       |   |   |
| Authorized 5,000,000  shares; no shares issued or outstanding as of March 31, 2005,  December 31, 2005, and March 31, 2006                                                          |       | —             |       |                  | —     |               |       | — |   |
| Common stock, par value $1  per share at March 31, 2005, December 31, 2005 and March 31,  2006:                                                                                          |       |               |       |                  |       |               |       |   |   |
| Authorized 300,000,000  shares; issued 152,530,458 shares as of March 31, 2005, 154,469,215  shares as of December 31, 2005, and 154,832,175 shares as  of March 31, 2006 |       | 152,530            |       |                  | 154,469    |               |       | 154,832 |   |
| Additional paid-in  capital                                                                                                                                                                             |       | 896,855            |       |                  | 994,956    |               |       | 1,018,943 |   |
| Treasury stock—7,954,843  shares as of March 31, 2005, 10,262,143  shares as of December 31, 2005 and 11,429,843 shares as of  March 31, 2006                             |       | (463,527           | )          |                  | (612,732   | )                  |       | (692,783 | ) |
| Retained earnings                                                                                                                                                                                       |       | 3,656,187          |       |                  | 4,141,400  |               |       | 4,258,533 |   |
| Accumulated other  comprehensive loss                                                                                                                                                                   |       | (134,822           | )          |                  | (118,393   | )                  |       | (159,647 | ) |
| Total stockholders’  equity                                                                                                                                                                        |       | 4,107,223          |       |                  | 4,559,700  |               |       | 4,579,878 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                                        |       | $                  | 49,432,871 |                  |       | $                  | 49,416,002 |   |   | $ | 48,800,945 |   |

----

(1)      InSeptember 2005, Union Bank of California, N.A. committed to a plan fordisposal of its international correspondent banking business. All prior periodspresented have been restated to reflect the discontinued operations.

See accompanying notes tocondensed consolidated financial statements.

7

----

**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** | ** ** | **income (loss)** | ** ** | **equity**        | ** ** |
| **BALANCE  DECEMBER 31, 2004**                                       |       | 152,191,818        |       | $          | 152,192    |           | $          | 881,928      |       | $            | (223,361   | )                      | $          | 3,526,312         |       |   | $ | (44,827 | ) |   | $ | 4,292,244 |   |
| Comprehensive income                                                 |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net income—For the  three months ended March 31, 2005 |       |               |       |       |       |           |       |         |       | 181,977      |       |                   |       |              |       | 181,977 |   |
| Other comprehensive income,  net of tax:                             |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net change in  unrealized losses on cash flow hedges            |       |               |       |       |       |           |       |         |       |         |       |                   | (23,894    | )                 |       | (23,894 | ) |
| Net change in unrealized  losses on securities available for sale    |       |               |       |       |       |           |       |         |       |         |       |                   | (66,382    | )                 |       | (66,382 | ) |
| Foreign currency  translation  adjustment                            |       |               |       |       |       |           |       |         |       |         |       |                   | 297        |              |       | 297 |   |
| Minimum pension  liability adjustment                                |       |               |       |       |       |           |       |         |       |         |       |                   | (16        | )                 |       | (16 | ) |
| Total comprehensive  income                                          |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       | 91,982 |   |
| Deferred compensation—restricted  stock awards                  |       |               |       |       |       |           |       |         |       | 100          |       |                   |       |              |       | 100 |   |
| Stock options  exercised                                             |       | 338,640            |       | 338        |       | 14,927         |       |         |       |         |       |                   |       |              |       | 15,265 |   |
| Common stock  repurchased(1)                                         |       |               |       |       |       |           |       | (240,166     | )          |         |       |                   |       |              |       | (240,166 | ) |
| Dividends declared on  common stock, $0.36 per share(2)         |       |               |       |       |       |           |       |         |       | (52,202      | )          |                   |       |              |       | (52,202 | ) |
| Net change                                                           |       |               |       | 338        |       | 14,927         |       | (240,166     | )          | 129,875      |       |                   | (89,995    | )                 |       | (185,021 | ) |
| **BALANCE  MARCH 31, 2005**                                     |       | 152,530,458        |       | $          | 152,530    |           | $          | 896,855      |       | $            | (463,527   | )                      | $          | 3,656,187         |       |   | $ | (134,822 | ) |   | $ | 4,107,223 |   |
| **BALANCE  DECEMBER 31, 2005**                                       |       | 154,469,215        |       | $          | 154,469    |           | $          | 994,956      |       | $            | (612,732   | )                      | $          | 4,141,400         |       |   | $ | (118,393 | ) |   | $ | 4,559,700 |   |
| Comprehensive income                                                 |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net income—For the  three months ended March 31, 2006 |       |               |       |       |       |           |       |         |       | 172,945      |       |                   |       |              |       | 172,945 |   |
| Other comprehensive income,  net of tax:                             |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net change in  unrealized losses on cash flow hedges            |       |               |       |       |       |           |       |         |       |         |       |                   | (11,907    | )                 |       | (11,907 | ) |
| Net change in  unrealized losses on securities available for sale    |       |               |       |       |       |           |       |         |       |         |       |                   | (29,331    | )                 |       | (29,331 | ) |
| Foreign currency  translation adjustment                        |       |               |       |       |       |           |       |         |       |         |       |                   | (16        | )                 |       | (16 | ) |
| Total comprehensive  income                                          |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       | 131,691 |   |
| Deferred compensation—restricted  stock awards                  |       | 2,925              |       | 3          |       | 204            |       |         |       | 3,105        |       |                   |       |              |       | 3,312 |   |
| Compensation expense—stock  options                             |       |               |       |       |       | 6,214          |       |         |       |         |       |                   |       |              |       | 6,214 |   |
| Stock options  exercised                                             |       | 360,035            |       | 360        |       | 17,569         |       |         |       |         |       |                   |       |              |       | 17,929 |   |
| Common stock  repurchased(1)                                         |       |               |       |       |       |           |       | (80,051      | )          |         |       |                   |       |              |       | (80,051 | ) |
| Dividends declared on  common stock, $0.41 per share(2)         |       |               |       |       |       |           |       |         |       | (58,917      | )          |                   |       |              |       | (58,917 | ) |
| Net change                                                           |       |               |       | 363        |       | 23,987         |       | (80,051      | )          | 117,133      |       |                   | (41,254    | )                 |       | 20,178 |   |
| **BALANCE  MARCH 31, 2006**                                     |       | 154,832,175        |       | $          | 154,832    |           | $          | 1,018,943    |       | $            | (692,783   | )                      | $          | 4,258,533         |       |   | $ | (159,647 | ) |   | $ | 4,579,878 |   |

----

(1)          Common stock repurchased includes commission costs.

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

See accompanying notes to condensed consolidatedfinancial statements.

8

----

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                               | ** ** | **For the Three Months   Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                     | ** ** | **2005**                                                                 | ** ** | **2006** | ** ** |
| **Cash Flows from Operating  Activities:**                                               |       |                                                                     |       |   |   |
| Net income                                                                               |       | $                                                                        | 181,977    |   | $ | 172,945 |   |
| Income (loss) from discontinued operations, net of taxes                                 |       | 2,226                                                                    |       | (8,510 | ) |
| Income from continuing operations, net of taxes                                          |       | 179,751                                                                  |       | 181,455 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:       |       |                                                                     |       |   |   |
| Reversal of allowance for loan losses                                                    |       | (12,119                                                                  | )          | (7,000 | ) |
| (Reversal of) provision for losses on off-balance sheet commitments                      |       | 3,000                                                                    |       | (3,000 | ) |
| Depreciation, amortization and accretion                                                 |       | 40,885                                                                   |       | 35,336 |   |
| Stock-based compensation—stock options                                              |       | —                                                                   |       | 6,214 |   |
| Stock-based compensation—restricted stock                                           |       | 100                                                                      |       | 3,312 |   |
| Provision for deferred income taxes                                                      |       | 37,605                                                                   |       | 50,398 |   |
| (Gains) losses on sales of securities available for sale, net                            |       | (344                                                                     | )          | 214 |   |
| Net decrease in accrued expenses                                                         |       | (41,164                                                                  | )          | (58,878 | ) |
| Net increase (decrease) in unearned and deferred income                                  |       | 20,714                                                                   |       | (2,100 | ) |
| Net (increase) decrease in trading account assets                                        |       | 1,049                                                                    |       | (17,047 | ) |
| Net increase in prepaid expenses                                                         |       | (135,518                                                                 | )          | (87,878 | ) |
| Net (increase) decrease in fees and other charges receivable                             |       | 73,848                                                                   |       | (9,318 | ) |
| Net increase in other liabilities                                                        |       | 14,107                                                                   |       | 816,916 |   |
| Net increase in other assets                                                             |       | (155,264                                                                 | )          | (622,930 | ) |
| Loans originated for resale                                                              |       | (35,640                                                                  | )          | (58,529 | ) |
| Net proceeds from loans originated for resale                                            |       | 114,823                                                                  |       | 96,558 |   |
| Excess tax benefit—stock options exercised                                          |       | —                                                                   |       | (3,900 | ) |
| Other, net                                                                               |       | (10,694                                                                  | )          | 1,708 |   |
| Discontinued operations, net                                                             |       | 32,315                                                                   |       | 126,736 |   |
| Total adjustments                                                                        |       | (52,297                                                                  | )          | 266,812 |   |
| Net cash provided by operating activities                                                |       | 127,454                                                                  |       | 448,267 |   |
| **Cash Flows from Investing  Activities:**                                               |       |                                                                     |       |   |   |
| Proceeds from sales of securities available for sale                                     |       | 24,958                                                                   |       | 4,041 |   |
| Proceeds from matured and called securities available for sale                           |       | 347,619                                                                  |       | 389,888 |   |
| Purchases of securities available for sale                                               |       | (575,295                                                                 | )          | (758,213 | ) |
| Net (purchases) sales of premises and equipment                                          |       | (15,472                                                                  | )          | 2,923 |   |
| Net increase in loans                                                                    |       | (723,287                                                                 | )          | (478,230 | ) |
| Other, net                                                                               |       | (42                                                                      | )          | 708 |   |
| Discontinued operations, net                                                             |       | 11,487                                                                   |       | 622,138 |   |
| Net cash used in investing activities                                                    |       | (930,032                                                                 | )          | (216,745 | ) |
| **Cash Flows from Financing  Activities:**                                               |       |                                                                     |       |   |   |
| Net increase (decrease) in deposits                                                      |       | 1,695,473                                                                |       | (926,336 | ) |
| Net decrease in federal funds purchased and securities sold under  repurchase agreements |       | (186,679                                                                 | )          | (358,771 | ) |
| Net increase in commercial paper and other borrowed funds                                |       | 172,021                                                                  |       | 672,236 |   |
| Common stock repurchased                                                                 |       | (240,166                                                                 | )          | (80,051 | ) |
| Payments of cash dividends                                                               |       | (53,548                                                                  | )          | (59,103 | ) |
| Stock options exercised                                                                  |       | 15,265                                                                   |       | 17,929 |   |
| Other, net                                                                               |       | 297                                                                      |       | (16 | ) |
| Discontinued operations, net                                                             |       | (160,043                                                                 | )          | (747,910 | ) |
| Net cash provided by (used in) financing activities                                      |       | 1,242,620                                                                |       | (1,482,022 | ) |
| Net increase  (decrease) in cash and cash equivalents                                    |       | 440,042                                                                  |       | (1,250,500 | ) |
| Cash and cash  equivalents at beginning of period                                        |       | 3,199,854                                                                |       | 3,969,876 |   |
| Effect of exchange  rate changes on cash and cash equivalents                            |       | (27                                                                      | )          | 132 |   |
| Cash and cash  equivalents at end of period                                              |       | $                                                                        | 3,639,869  |   | $ | 2,719,508 |   |
| **Cash Paid During the Period  For:**                                                    |       |                                                                     |       |   |   |
| Interest                                                                                 |       | $                                                                        | 54,715     |   | $ | 143,090 |   |
| Income taxes                                                                             |       | 41,325                                                                   |       | 111,783 |   |

 

See accompanying notes tocondensed consolidated financial statements.

9

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 1—Basisof Presentation and Nature of Operations**

The unaudited condensed consolidated financialstatements of UnionBanCal Corporation and subsidiaries (the Company) have beenprepared in accordance with accounting principles generally accepted in the UnitedStates of America (US GAAP) for interim financial reporting and theinstructions to Form 10-Q and Rule 10-01 of RegulationS-X of the Rules and Regulations of the Securities and Exchange Commission(SEC). However, they do not include all of the disclosures necessary for annualfinancial statements in conformity with US GAAP. The results of operations forthe period ended March 31, 2006 are not necessarily indicative of theoperating results anticipated for the full year. Accordingly, these unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005. Thepreparation of financial statements in conformity with US GAAP also requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpense during the reporting period. Actual results could differ from thoseestimates.

UnionBanCal Corporation is a commercial bank holdingcompany and has, as its major subsidiary, a banking subsidiary, Union Bank ofCalifornia, N.A. (the Bank). The Company provides a wide range of financialservices to consumers, small businesses, middle-market companies and majorcorporations, primarily in California, Oregon, and Washington, but alsonationally. Upon completion of the exit from the international correspondentbanking business (see Note 3 “Discontinued Operations” of this Quarterly Reporton Form 10-Q), the Bank will continue to provide trade finance andother international financial services (but not international correspondentbanking) to customers.

Under a previously announced stock repurchase planthat provided for repurchases up to $200 million, the Company was authorized torepurchase $22 million of the Company’s common stock as of March 31, 2006.The Company repurchased $80 million of common stock in the first quarter of2006, compared to $40 million in the first quarter of 2005. Under a separatestock repurchase agreement, the Company repurchased $200 million of its commonstock in the first quarter 2005, from its majority owner, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), with nocomparable repurchases in the first quarter 2006. BTMU, which is a wholly-ownedsubsidiary of Mitsubishi UFJ Financial Group, Inc., ownedapproximately 63 percent of the Company’s outstanding common stock at March 31,2006.

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

*Stock-BasedCompensation*

On January 1, 2006, the Company adopted Statementof Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment,” arevision of SFAS No. 123, “Accounting for Stock-Based Compensation,” andelected to use the modified prospective application method to transition to thenew accounting standard. SFAS No. 123R requires that compensation costs relatedto share-based payment transactions be recognized in the financial statements. Measurementof the cost of employee service is based on the grant-date fair value of theequity or liability instrument issued. SFAS 123R also prescribes that estimatedforfeitures of shares are to be included in the calculation of compensationexpense.

10

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 1—Basis ofPresentation and Nature of Operations (Continued)**

Under the modified prospective transition method,compensation cost is recognized as of January 1, 2006 for the portion ofoutstanding stock option awards for which the requisite service has not yetbeen rendered. The cost will be recognized over the period during which theemployees are required to provide service. The after-tax impact of the adoptionof SFAS 123R on income from continuing operations was a reduction of $3.8million. The corresponding impact to both basic and diluted earnings per sharewas a reduction of $0.03 per share. Cash flows from operating activitiesincreased as a result of this non-cash adjustment to net income in the amountof $6.2 million.

For the period ended March 31, 2005, as allowedunder SFAS No. 123, “Accounting for Stock-Based Compensation,” the Companyrecognized compensation expense using the intrinsic value-based method ofvaluing stock options prescribed in Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees” and related Interpretations. Underthe intrinsic value-based method, compensation cost was measured as the amountby which the quoted market price of the Company’s stock at the date of grantexceeds the stock option exercise price. For the quarter ended March 31,2005, options granted under the plans had an exercise price equal to the marketvalue of the underlying common stock on the date of the grant and, therefore,were not included in compensation expense.

At March 31, 2006, the Company had twostock-based employee compensation plans. For further discussion concerning theCompany’s stock-based employee compensation plans see Note 11 to theseCondensed Consolidated Financial Statements and Note 16 of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005. Optionsgranted under the plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The value of the restricted stockawards issued under the plans and the value of that portion of outstandingoption awards for which the requisite service has not yet been rendered isbeing amortized over the remaining service period as compensation expense.

Thefollowing table illustrates the effect on net income, which includesdiscontinued operations, and corresponding earnings per share if the Companyhad applied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation for the three months ended March 31,2005. For the purpose of this disclosure, the Company has recognizedcompensation expense for graded vesting on a straight-line basis and did notinclude an estimate for forfeitures.

| ** **                                                                                            | ** ** | **For the Three   Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                                  | ** ** | **March 31, 2005**                         | ** ** |
| As reported net  income                                                                               |       |                                                 | $          | 181,977 |   |   |
| Add: stock-based  employee compensation expense included in reported net income, net of income  taxes |       |                                                 | 62         |   |   |
| Deduct: total  stock-based employee compensation expense, net of income taxes                         |       |                                                 | 5,606      |   |   |
| Pro forma net income, after stock-based employee compensation expense                                 |       |                                                 | $          | 176,433 |   |   |
| Net income per common share—basic                                                                | ** ** |                                                 |       |   |   |
| As reported                                                                                           |       |                                                 | $          | 1.24 |   |   |
| Pro forma                                                                                             |       |                                                 | $          | 1.20 |   |   |
| Net income per common  share—diluted                                                             | ** ** |                                                 |       |   |   |
| As reported                                                                                           |       |                                                 | $          | 1.21 |   |   |
| Pro forma                                                                                             |       |                                                 | $          | 1.18 |   |   |

 

11

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 2—Recently Issued andProposed Accounting Pronouncements**

*Accounting forShare-Based Payments*

In December 2004,the Financial Accounting Standards Board (FASB), issued SFAS No. 123(revised 2004), “Share-Based Payment.” This Statement requires that compensationcosts related to share-based payment transactions be recognized in thefinancial statements. Measurement of the cost of employee service will be basedon the grant-date fair value of the equity or liability instruments issued. Thatcost will be recognized over the period during which an employee is required toprovide service in exchange for the award. Additionally, liability awards willbe remeasured each reporting period. Statement 123R replaces SFAS No. 123,“Accounting for Stock-Based Compensation” and supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” This Statement is effective forannual periods beginning after June 15, 2005 and requires adoption using amodified prospective application or a modified retrospective application. However,on April 14, 2005, the SEC issued rule 2005-57, which allowedcompanies to delay implementation of the Statement to the beginning of the nextfiscal year. The Company adopted Statement 123R on January 1, 2006 underthe modified prospective method, which resulted in an increase in noninterestexpense of approximately $6.2 million in the quarter ended March 31, 2006.Disclosure required under SFAS No. 123R is shown in Note 1 and Note 11 ofthese condensed consolidated financial statements.

*Exchanges ofNonmonetary Assets*

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendmentof APB Opinion No. 29.” This Statement amends the principle that exchangesof nonmonetary assets should be measured based on the fair value of the assetsexchanged and more broadly provides for exceptions regarding exchanges ofnonmonetary assets that do not have commercial substance. This Statementspecifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. The provisions of the Statement are effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.At adoption, there was no impact on the Company’s financial position or resultsof operations.

*Accounting Changes andError Corrections*

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3.” TheStatement requires that a voluntary change in accounting principle be appliedretrospectively to all prior periods financial statements presented, unlessimpracticable to do so. It also provides that a change in method ofdepreciation or amortization for long-lived nonfinancial assets be accountedfor as a change in accounting estimate effected by a change in accountingprinciple, with the change applied prospectively and that correction of errorsin previously issued financial statements should be termed a “restatement.” TheStatement is effective January 1, 2006. At adoption, there was no impacton the Company’s financial position or results of operations.

*Accounting for CertainHybrid Financial Instruments*

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140.” The Statement allows financial instrumentsthat have embedded derivatives to be accounted for as a whole, (eliminating theneed to bifurcate the derivative from its host) if the holder elects toirrevocably account for the whole instrument 

12

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**UnionBanCal Corporation and Subsidiaries**

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

**Note 2—RecentlyIssued and Proposed Accounting Pronouncements (Continued)**

on a fairvalue basis. The Statement is effective for all financial instruments acquiredor issued after December 31, 2006. Management believes that adopting thisStatement will not have a material impact on the Company’s financial positionor results of operations.

*Accounting forServicing of Financial Assets*

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

*Accounting forConditional Asset Retirement Obligations*

In March 2005, the FASBissued Interpretation No. 47 (FIN 47), “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143.” FIN47 generally applies to long-lived assets and requires a liability to berecognized for a conditional asset retirement obligation if the fair value ofthat liability can be reasonably estimated. A conditional asset retirementobligation is defined as a legal obligation to perform an activity associatedwith an asset retirement in which the timing and/or method of settlement areconditional on a future event that may or may not occur or be within thecontrol of the company. A liability should be recognized when incurred (basedon its fair value at that date), which generally would be upon the acquisitionor construction of the related asset. Upon recognition, the offset to theliability would be capitalized as part of the cost of the asset and depreciatedover the estimated useful life of that asset. The Interpretation is effectiveno later than December 31, 2005. The Company adopted FIN 47 in the fourthquarter 2005 without material effect on its financial position or results ofoperations.

*Determining Whether aGeneral Partner Controls a Limited Partnership*

In June 2005, the FASBratified Emerging Issues Task Force (EITF) Issue No. 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights.” The EITF reached a consensus that the general partners in a limitedpartnership are presumed to control that limited partnership regardless of theextent of the general partners’ ownership interest in the limited partnership. Thepresumption of control by the general partner can be overcome if the limitedpartners have either (a) the substantive ability to dissolve the limitedpartnership or remove the general partners without cause or (b) substantiveparticipating rights. The guidance is effective for all limited partnershipscreated or modified after June 29, 2005 and for all existing limitedpartnerships beginning January 1, 2006. At adoption, there was no impacton the Company’s financial position or results of operations.

13

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 2—RecentlyIssued and Proposed Accounting Pronouncements (Continued)**

*Accounting for DefinedBenefit Pension and Other Postretirement Plans—Exposure Draft*

In March 2006, the FASBissued an Exposure Draft, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106, and 132(R).” This proposed Statement would require a company thatsponsors a defined benefit pension plan or other postretirement benefit plan tofully recognize, as an asset or liability, the amount by which thedefined-benefit-postretirement obligation is over- or under-funded. The amountwould be measured as the difference between the fair value of plan assets andthe projected benefit obligation. The proposed Statement would result in theimmediate recognition of unrecognized prior service costs and credits andunrecognized net actuarial gains or losses as components of other comprehensiveincome with any unrecognized transition obligation or asset recorded as anadjustment to beginning retained earnings. The final statement is expected tobe issued during the third quarter 2006, to be effective as of December 31,2006. Based on guidance in the current exposure draft, the Company’sstockholders’ equity at December 31, 2005 would have been reduced byapproximately six percent, if adopted.

**Note 3—Discontinued Operations**

During the third quarter 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 has accounted for this transaction as adiscontinued operation and restated its prior period financial statements. Theassets of the discontinued operations were reclassified as “held for sale” andaccounted for at the lower of cost or fair value less the costs to sell. Indetermining the timing for recognizing the transaction as a discontinued operation,the Bank concluded that the operations and cash flows of the disposal groupwill be eliminated at the end of the transition period in the second quarter of2006 and the Bank will not have any significant continuing involvement in theinternational correspondent banking business.

Interest expense was allocated to discontinuedoperations based on average net assets. The amount of interest expenseallocated to discontinued operations during the three months ended March 31,2005 and 2006 was $2.5 million and $0.6 million, respectively.

The severance reserve balances at December 31,2005 and March 31, 2006 were $21.7 million and $16.2 million, respectively.The decrease of $5.5 million from December 31, 2005 primarily related tocash payments to employees.

14

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 3—DiscontinuedOperations (Continued)**

At March 31, 2005 and2006, all assets related to the discontinued operations were recorded at thelower of cost or fair value, less costs of disposal. The assets and liabilitiesidentified as discontinued operations were comprised of the following:

| **(Dollars in thousands)**                                  | ** ** | **March 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Assets**                                                            | ** ** | ** **               | ** ** | ** **               | ** ** |
| Cash and due from  banks                                              |       | $                        | 92,136     |                     | $          | 108,284 |   |
| Interest bearing  deposits in banks                                   |       | 224,029                  |       | 18,489                   |       |
| Loans                                                                 |       | 1,584,124                |       | 101,134                  |       |
| Due from customers on  acceptances                                    |       | 34,714                   |       | 3,542                    |       |
| Premises and  equipment                                               |       | 3,634                    |       | 3                        |       |
| Other assets                                                          |       | 37,332                   |       | 9,473                    |       |
| Assets of discontinued operations to be disposed or sold         |       | $                        | 1,975,969  |                     | $          | 240,925 |   |
| **Liabilities**                                                       | ** ** | ** **               | ** ** | ** **               | ** ** |
| Noninterest bearing  deposits                                         |       | $                        | 530,237    |                     | $          | 124,321 |   |
| Interest bearing  deposits                                            |       | 766,049                  |       | 36,440                   |       |
| Other liabilities                                                     |       | 75,905                   |       | 40,904                   |       |
| Liabilities of  discontinued operations to be extinguished or assumed |       | $                        | 1,372,191  |                     | $          | 201,664 |   |

 

Thecomponents of income from discontinued operations for the three months ended March 31,2005 and 2006, respectively are:

| ** **                                                      | ** ** | **For the three months  ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                            | ** ** | **2005**                                                           | ** ** | **2006** | ** ** |
| Net interest income                                             |       | $                                                                  | 5,137      |   | $ | 1,725 |   |
| Provision for loan  losses                                      |       | 4,119                                                              |       | — |   |
| Noninterest income                                              |       | 17,136                                                             |       | 5,811 |   |
| Noninterest expense                                             |       | 14,515                                                             |       | 21,139 |   |
| Income (loss) from  discontinued operations before income taxes |       | 3,639                                                              |       | (13,603 | ) |
| Income tax expense  (benefit)                                   |       | 1,413                                                              |       | (5,093 | ) |
| Income (loss) from  discontinued operations                     |       | $                                                                  | 2,226      |   | $ | (8,510 | ) |

 

Included in noninterestexpense for the three months ended March 31, 2005 and 2006 were compliancerelated expenses of $2.6 million and $4.8 million, respectively.

**Note 4—Earnings Per Share**

Basic earnings per share (EPS) is computed by dividingnet income by the weighted average number of common shares outstanding duringthe period. Diluted EPS incorporates the dilutive effect of common stockequivalents outstanding on an average basis during the period. Stock optionsare a common stock 

15

----

**UnionBanCal Corporation and Subsidiaries**

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

**Note 4—EarningsPer Share (Continued)**

equivalent. The following table presents areconciliation of basic and diluted EPS for the three months ended March 31,2005 and 2006.

| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
| **(Amounts in thousands, except per share data)** | ** ** | **Basic**                                            | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Income from  continuing operations                                              |       | $                                                    | 179,751    |   | $ | 179,751 |   | $ | 181,455 |   | $ | 181,455 |   |
| Income (loss) from  discontinued operations                                     |       | 2,226                                                |       | 2,226 |   | (8,510 | ) | (8,510 | ) |
| Net Income                                                                      |       | $                                                    | 181,977    |   | $ | 181,977 |   | $ | 172,945 |   | $ | 172,945 |   |
| Weighted average  common shares outstanding                                     |       | 146,998                                              |       | 146,998 |   | 143,878 |   | 143,878 |   |
| Additional shares due to:                                                       |       |                                                 |       |   |   |   |   |   |   |
| Assumed conversion of dilutive stock options                                    |       | —                                               |       | 2,918 |   | — |   | 2,148 |   |
| Adjusted weighted average common shares outstanding                             |       | 146,998                                              |       | 149,916 |   | 143,878 |   | 146,026 |   |
| Income from  continuing operations per share                                    |       | $                                                    | 1.22       |   | $ | 1.20 |   | $ | 1.26 |   | $ | 1.24 |   |
| Income (loss) from  discontinued operations per share                           |       | 0.02                                                 |       | 0.01 |   | (0.06 | ) | (0.06 | ) |
| Net income per share                                                            |       | $                                                    | 1.24       |   | $ | 1.21 |   | $ | 1.20 |   | $ | 1.18 |   |

 

16

----

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

**(Unaudited)**

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

Thefollowing table presents the change in each of the components of othercomprehensive income (loss) and the related tax effect of the change allocatedto each component.

| ** **                                                                                               | ** ** | **Before** | ** ** | ** ** | ** ** | ** **      | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                               | ** ** | **Tax**    | ** ** | **Tax**    | ** ** | **Net of** | ** ** |
| **(Dollars in thousands)**                                                                     | ** ** | **Amount** | ** ** | **Effect** | ** ** | **Tax**         | ** ** |
| **For the Three Months Ended  March 31, 2005:**                                                     |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                              |       |       |       |       |       |            |       |
| Unrealized net losses on hedges arising during the period                                                |       | $          | (32,277    | )          | $          | 12,346          |       | $ | (19,931 | ) |
| Reclassification adjustment for net gains on hedges included in net  income                              |       | (6,418     | )          | 2,455      |       | (3,963          | )          |
| Net change in  unrealized losses on hedges                                                               |       | (38,695    | )          | 14,801     |       | (23,894         | )          |
| Securities available for  sale:                                                                          |       |       |       |       |       |            |       |
| Unrealized holding losses arising during the period on securities available  for sale               |       | (107,158   | )          | 40,988     |       | (66,170         | )          |
| Reclassification adjustment for net gains on securities available for  sale included in net income       |       | (344       | )          | 132        |       | (212            | )          |
| Net change in  unrealized losses on securities available for sale                                        |       | (107,502   | )          | 41,120     |       | (66,382         | )          |
| Foreign currency  translation adjustment                                                                 |       | 481        |       | (184       | )          | 297             |       |
| Minimum pension  liability adjustment                                                                    |       | (26        | )          | 10         |       | (16             | )          |
| Net change in  accumulated other comprehensive income (loss)                                             |       | $          | (145,742   | )          | $          | 55,747          |       | $ | (89,995 | ) |
| **For the Three Months Ended  March 31, 2006:**                                                     |       |       |       |       |       |            |       |
| Cash flow hedge activities:                                                                              |       |       |       |       |       |            |       |
| Unrealized net losses on hedges arising during the period                                                |       | $          | (25,004    | )          | $          | 9,564           |       | $ | (15,440 | ) |
| Reclassification adjustment for net losses on hedges included  in net income                        |       | 5,722      |       | (2,189     | )          | 3,533           |       |
| Net change in  unrealized losses on hedges                                                               |       | (19,282    | )          | 7,375      |       | (11,907         | )          |
| Securities available for  sale:                                                                          |       |       |       |       |       |            |       |
| Unrealized holding losses arising during the period on securities available  for sale               |       | (47,713    | )          | 18,250     |       | (29,463         | )          |
| Reclassification adjustment for net losses on securities  available for sale included in net income |       | 214        |       | (82        | )          | 132             |       |
| Net change in  unrealized losses on securities available for sale                                        |       | (47,499    | )          | 18,168     |       | (29,331         | )          |
| Foreign currency  translation adjustment                                                                 |       | (26        | )          | 10         |       | (16             | )          |
| Net change in accumulated  other comprehensive income (loss)                                             |       | $          | (66,807    | )          | $          | 25,553          |       | $ | (41,254 | ) |

 

17

----

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

**(Unaudited)**

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

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

| ** **                           | ** ** | **Net**                 | ** ** | **Net**                 | ** ** | ** **      | ** ** | ** **     | ** ** | ** **             | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|----------------|------------|------------------------|------------|
| ** **                           | ** ** | **Unrealized**          | ** ** | **Unrealized**          | ** ** | ** **      | ** ** | ** **     | ** ** | ** **             | ** ** |
| ** **                           | ** ** | **Gains (Losses)** | ** ** | **Gains (Losses)** | ** ** | **Foreign**     | ** ** | **Minimum**    | ** ** | **Accumulated**        | ** ** |
| ** **                           | ** ** | **on Cash**        | ** ** | **on Securites**   | ** ** | **Currency**    | ** ** | **Pension**    | ** ** | **Other**              | ** ** |
| ** **                           | ** ** | **Flow**                | ** ** | **Available**           | ** ** | **Translation** | ** ** | **Liability**  | ** ** | **Comprehensive**      | ** ** |
| **(Dollars in thousands)** | ** ** | **Hedges**              | ** ** | **For Sale**       | ** ** | **Adjustment**  | ** ** | **Adjustment** | ** ** | **Income (Loss)** | ** ** |
| **Balance,  December 31, 2004** |       |                    | $          | 1,429                   |       |            |       | $              | (31,696    | )                      |       |   | $ | (7,870 | ) |   | $ | (6,690 | ) |   | $ | (44,827 | ) |   |
| Change during the  period            |       |                    | (23,894    | )                       |       |            | (66,382    | )              |       |                   | 297        |   |   | (16 | ) |   | (89,995 | ) |   |
| **Balance,  March 31, 2005**    |       |                    | $          | (22,465                 | )          |            |       | $              | (98,078    | )                      |       |   | $ | (7,573 | ) |   | $ | (6,706 | ) |   | $ | (134,822 | ) |   |
| **Balance,  December 31, 2005** |       |                    | $          | (34,308                 | )          |            |       | $              | (74,099    | )                      |       |   | $ | 264 |   |   | $ | (10,250 | ) |   | $ | (118,393 | ) |   |
| Change during the  period            |       |                    | (11,907    | )                       |       |            | (29,331    | )              |       |                   | (16        | ) |   | — |   |   | (41,254 | ) |   |
| **Balance, March 31, 2006**     | ** ** | ** **              | $          | (46,215                 | )          |            |       | $              | (103,430   | )                      |       |   | $ | 248 |   |   | $ | (10,250 | ) |   | $ | (159,647 | ) |   |

 

**Note 6—Goodwill and IntangibleAssets**

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

| ** **                         | ** ** | **March 31, 2005** | ** ** | **March 31, 2006**  | ** ** |
|------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **Dollars in thousands** | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Core Deposit  Intangibles          |       | $                            | 67,237     |                          |       | $ | (33,651 | ) |   | $ | 33,586 |   | $ | 67,237 |   |   | $ | (47,368 | ) |   | $ | 19,869 |   |
| Rights-to-Expiration               |       | 35,808                       |       |                          | (14,360    | ) |   | 21,448 |   | 36,608 |   |   | (18,532 | ) |   | 18,076 |   |
| Other                              |       | 2,100                        |       |                          | (383       | ) |   | 1,717 |   | 2,100 |   |   | (859 | ) |   | 1,241 |   |
| Total                              |       | $                            | 105,145    |                          |       | $ | (48,394 | ) |   | $ | 56,751 |   | $ | 105,945 |   |   | $ | (66,759 | ) |   | $ | 39,186 |   |

 

Totalamortization expense for the three months ended March 31, 2005 and 2006was $5.0 million and $3.4 million, respectively.

| ** **                                            | ** ** | **Core Deposit  Intangibles** | ** ** | **Rights-to-  Expiration** | ** ** | **Other** | ** ** | **Total Identifiable  Intangible Assets** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|-----------|------------|-----------------------------------------------------|------------|
| Estimated  amortization expense for the years ending: |       |                               |       |                       |       |      |       |                                                |       |   |   |   |   |
| Remaining 2006                                        |       |                               | $          | 7,176                      |       |      | $          | 2,788                                               |       | $ | 291 |   |   | $ | 10,255 |   |   |
| 2007                                                  |       |                               | 5,471      |                       |       | 3,166     |       | 299                                                 |       |   | 8,936 |   |   |
| 2008                                                  |       |                               | 3,245      |                       |       | 2,675     |       | 231                                                 |       |   | 6,151 |   |   |
| 2009                                                  |       |                               | 1,764      |                       |       | 2,242     |       | 178                                                 |       |   | 4,184 |   |   |
| 2010                                                  |       |                               | 807        |                       |       | 1,859     |       | 137                                                 |       |   | 2,803 |   |   |
| 2011                                                  |       |                               | 443        |                       |       | 1,519     |       | 105                                                 |       |   | 2,067 |   |   |
| thereafter                                            |       |                               | 963        |                       |       | 3,827     |       | —                                              |       |   | 4,790 |   |   |
| Total amortization expense  after March 31, 2006 |       |                               | $          | 19,869                     |       |      | $          | 18,076                                              |       | $ | 1,241 |   |   | $ | 39,186 |   |   |

 

18

----

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

**(Unaudited)**

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

The changes in the carryingamount of goodwill during the three months ended March 31, 2005 and 2006are shown below.

| **(Dollars in thousands)**                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance,  January 1,                              |       | $        | 450,961    |     | $          | 454,015 |   |
| Acquired during the  three months ended March 31, |       | —   |       | —   |       |
| Contingent period  adjustments                         |       | (1,274   | )          | —   |       |
| Adjustment for  contingent consideration               |       | 438      |       | (526     | )          |
| Balance, March 31,                                |       | $        | 450,125    |     | $          | 453,489 |   |

 

**Note 7—Business Segments**

In April 2005, theCompany announced several organizational changes that affected its businesssegments. The Global Markets Group was eliminated and the activities of thisgroup were transferred. Corporate Treasury, which is responsible forAsset-Liability Management (ALM) wholesale funding and the ALM securities andderivatives hedging portfolios of the Company, is now included in “Other.” Thetrading of securities and foreign exchange contracts, as well as theresponsibilities for customer accommodated derivative contracts, are nowincluded in the “Global Markets Division” of the Community Banking andInvestment Services Group. In addition, the discontinued operations resultingfrom the disposal of most of the Company’s International Banking Group are alsoreflected in “Other.” The Company is now organized around the target markets itserves and operates in two principal areas:

·       TheCommunity Banking and Investment Services Group offers a range of bankingservices, primarily to individuals and small businesses, delivered generallythrough a tri-state (California, Washington and Oregon) network of branches andATMs. These services include mortgages, home equity lines of credit,consumer and commercial loans, deposit services and cash management as well asfiduciary, private banking, investment and asset management services forindividuals and institutions, and risk management and insurance products forbusinesses and individuals. At March 31, 2005 and 2006, this Group had$312.0 million and $315.7 million, respectively, of goodwill assigned to itsbusinesses.

·       TheCommercial Financial Services Group provides credit, depository and cashmanagement services to large corporate and middle-market companies and numerousspecialty niches. Services include commercial and project loans, real estatefinancing, asset-based financing, trade finance and letters of credit, leasefinancing, customized cash management services and selected capital marketsproducts. At March 31, 2005 and 2006, this Group had $138.1 million and$137.8 million, respectively, of goodwill assigned to its businesses.

The information, set forth in the table on thefollowing page, reflects selected income statement and balance sheet items bybusiness segment. The information presented does not necessarily represent thebusiness units’ financial condition and results of operations were theyindependent entities. Unlike financial accounting, there is no authoritativebody of guidance for management accounting equivalent to US GAAP. Consequently,reported results are not necessarily comparable with those presented by othercompanies. Included in the table within total assets are the amounts ofgoodwill for each business segment as of March 31, 2005 and 2006.

19

----

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

**(Unaudited)**

**Note7—Business Segments (Continued)**

The information in the table is derived from theinternal management reporting system used by management to measure theperformance of the business segments and the Company overall. The managementreporting system assigns balance sheet and income statement items to eachbusiness segment based on internal management accounting policies. Net interestincome is determined by the Company’s internal funds transfer pricing system,which assigns a cost of funds or a credit for funds to assets or liabilitiesbased on their type, maturity or repricing characteristics. Noninterest incomeand expense directly attributable to a business segment are assigned to thatbusiness segment. Certain indirect costs, such as operations and technologyexpense, are allocated to the segments based on studies of billable unit costsfor product or data processing. Other indirect costs, such as corporateoverhead, are allocated to the business segments based on a predeterminedpercentage of usage. Under the Company’s risk-adjusted return on capital(RAROC) methodology, credit expense is charged to business segments based uponexpected losses arising from credit risk. In addition, the attribution ofeconomic capital is related to unexpected losses arising from credit, marketand operational risks.

“Other” is comprised of our discontinued operations,certain parent company non-bank subsidiaries, the elimination of the fullytaxable-equivalent basis amount, the transfer pricing center, the amount of theprovision for loan losses over/(under) the RAROC expected loss for the period,the earnings associated with the unallocated equity capital and allowances forcredit losses, and the residual costs of support groups. In addition, “Other”includes the Pacific Rim Corporate Group, which offers financial products toJapanese-owned subsidiaries located in the U.S., Corporate Treasury, which isresponsible for ALM, wholesale funding, and the ALM Investment and derivativeshedging portfolios, and the results of our discontinued operations. Except asdiscussed above, none of the items in “Other” are significant to the Company’sbusiness.

In the first quarter 2006, the Company changed itsreporting to reflect a “market view” perspective in measuring the businesssegments. The market view is a measurement of customer markets aggregated toshow all revenues generated and expenses incurred from all products andservices sold to those customers regardless of where product areasorganizationally report. Therefore, revenues and expenses are included in boththe business segment that provides the service and the business segment thatmanages the customer relationship. The duplicative results from this internalmanagement accounting view are reflected in “Reconciling Items.”

20

----

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

**(Unaudited)**

**Note7—Business Segments (Continued)**

The business unit results forthe prior periods have been adjusted to reflect changes in the transfer pricingmethodology, the organizational changes that have occurred, discontinuedoperations and the market view contribution.

| ** **                                                                    | ** ** | **Community Banking  and Investment  Services Group** | ** ** | **Commercial Financial  Services Group** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **As of and for the**                            | ** ** | **As of and for the**          | ** ** |
| ** **                                                                    | ** ** | **Three Months Ended  March 31,**                     | ** ** | **Three Months Ended  March 31,**   | ** ** |
| ** **                                                                    | ** ** | **2005**                                                             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results of operations—Market  View****(dollars  in thousands):**       |       |                                                                 |       |                                               |       |   |   |   |   |
| Net interest income  (expense)                                                |       | $                                                                    | 222,860    |                                               | $          | 242,829 |   | $ | 203,576 |   | $ | 224,687 |   |
| Noninterest income (expense)                                                  |       | 149,747                                                              |       | 162,311                                            |       | 65,110 |   | 65,936 |   |
| Total revenue                                                                 |       | 372,607                                                              |       | 405,140                                            |       | 268,686 |   | 290,623 |   |
| Noninterest expense (income)                                                  |       | 269,271                                                              |       | 279,312                                            |       | 108,203 |   | 122,513 |   |
| Credit expense (income)                                                       |       | 8,933                                                                |       | 8,931                                              |       | 23,511 |   | 22,563 |   |
| Income from continuing  operations before income taxes                   |       | 94,403                                                               |       | 116,897                                            |       | 136,972 |   | 145,547 |   |
| Income tax expense                                                            |       | 35,415                                                               |       | 43,949                                             |       | 45,594 |   | 47,899 |   |
| Income from continuing  operations                                            |       | 58,988                                                               |       | 72,948                                             |       | 91,378 |   | 97,648 |   |
| Income (loss) from  discontinued operations, net of income taxes    |       | —                                                               |       | —                                             |       | — |   | — |   |
| Net income                                                                    |       | $                                                                    | 58,988     |                                               | $          | 72,948 |   | $ | 91,378 |   | $ | 97,648 |   |
| **Total assets, end of period—Market View (dollars in  millions):** |       | $                                                                    | 16,398     |                                               | $          | 18,694 |   | $ | 18,041 |   | $ | 20,836 |   |

 

| ** **                                                               | ** ** | **Other**                                        | ** ** | **Reconciling Items**                       | ** ** | **UnionBanCal  Corporation**                     | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                               | ** ** | **As of and for the**        | ** ** | **As of and for the**        | ** ** | **As of and for the**        | ** ** |
| ** **                                                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** | **Three months Ended  March 31,** | ** ** |
| ** **                                                               | ** ** | **2005**                                         | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results  of operations—Market View (dollars in thousands):**      |       |                                             |       |                                             |       |                                             |       |   |   |   |   |   |   |
| Net interest income (expense)                                            |       | $                                                | 9,816      |                                             | $          | (1,916                                           | )          | $ | (590 | ) | $ | (507 | ) | $ | 435,662 |   | $ | 465,093 |   |
| Noninterest income (expense)                                             |       | 6,498                                            |       | 7,508                                            |       | (15,730                                          | )          | (17,845 | ) | 205,625 |   | 217,910 |   |
| Total revenue                                                            |       | 16,314                                           |       | 5,592                                            |       | (16,320                                          | )          | (18,352 | ) | 641,287 |   | 683,003 |   |
| Noninterest expense (income)                                             |       | 21,225                                           |       | 20,232                                           |       | (5,747                                           | )          | (7,513 | ) | 392,952 |   | 414,544 |   |
| Credit expense (income)                                                  |       | (44,414                                          | )          | (38,451                                          | )          | (149                                             | )          | (43 | ) | (12,119 | ) | (7,000 | ) |
| Income from continuing operations before income taxes                    |       | 39,503                                           |       | 23,811                                           |       | (10,424                                          | )          | (10,796 | ) | 260,454 |   | 275,459 |   |
| Income tax expense                                                       |       | 3,681                                            |       | 6,285                                            |       | (3,987                                           | )          | (4,129 | ) | 80,703 |   | 94,004 |   |
| Income from continuing operations                                        |       | 35,822                                           |       | 17,526                                           |       | (6,437                                           | )          | (6,667 | ) | 179,751 |   | 181,455 |   |
| Income (loss) from discontinued operations, net of  income taxes         |       | 2,226                                            |       | (8,510                                           | )          | —                                           |       | — |   | 2,226 |   | (8,510 | ) |
| Net income                                                               |       | $                                                | 38,048     |                                             | $          | 9,016                                            |       | $ | (6,437 | ) | $ | (6,667 | ) | $ | 181,977 |   | $ | 172,945 |   |
| **Total assets, end of period—Market View (dollars  in millions):** |       | $                                                | 15,057     |                                             | $          | 9,323                                            |       | $ | (63 | ) | $ | (52 | ) | $ | 49,433 |   | $ | 48,801 |   |

 

21

----

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

**(Unaudited)**

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

Derivative positions areintegral components of the Company’s designated ALM activities. The Companyuses interest rate derivatives to manage the sensitivity of the Company’s netinterest income to changes in interest rates. These instruments are used tomanage interest rate risk relating to specified groups of assets andliabilities, primarily LIBOR-based commercial loans, certificates of deposit,medium-term notes and subordinated debt. The following describes thesignificant hedging strategies of the Company.

*Cash Flow Hedges*

*Hedging Strategies forVariable Rate Loans and Certificates of Deposit*

The Company engages in several types of cash flowhedging strategies for which the hedged transactions are forecasted future loaninterest payments, and the hedged risk is the variability in those payments dueto changes in the designated benchmark rate, i.e. U.S. dollar LIBOR. In thesestrategies, the hedging instruments are matched with groups of variable rateloans such that the tenor of the variable rate loans and that of the hedginginstrument are identical. Cash flow hedging strategies include the utilizationof purchased floor, cap and corridor options and interest rate swaps. At March 31,2006, the weighted average remaining life of the currently active (excludingany forward positions) cash flow hedges was approximately 1.6 years.

The Company uses purchased interest rate floors tohedge the variable cash flows associated with 1-month LIBOR or 3-monthLIBOR indexed loans. Payments received under the floor contract offset thedecline in loan interest income caused by the relevant LIBOR index fallingbelow the floor’s strike rate.

The Company uses interest rate floor corridors to hedgethe variable cash flows associated with 1-month LIBOR or 3-month LIBORindexed loans. Net payments to be received under the floor corridor contractsoffset the decline in loan interest income caused by the relevant LIBOR indexfalling below the corridor’s upper strike rate, but only to the extent theindex falls to the lower strike rate. The corridor will not provide protectionfrom declines in the relevant LIBOR index to the extent it falls below thecorridor’s lower strike rate.

The Company uses interest rate collars to hedge thevariable cash flows associated with 1-month LIBOR or 3-month LIBORindexed loans. Net payments to be received under the collar contract offset thedecline in loan interest income caused by the relevant LIBOR index fallingbelow the collar’s floor strike rate while net payments to be paid will reducethe increase in loan interest income caused by the LIBOR index rising above thecollar’s cap strike rate.

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

The Company uses purchased interest rate caps to hedge the variableinterest cash flows associated with the forecasted issuance and rollover ofshort-term, fixed rate time deposits (TDs). In these hedging relationships, theCompany hedges the LIBOR component of the TD rates, which is 3-month LIBOR,based on the TDs’ original term to maturity, which reflects their repricingfrequency. Net payments to be received 

22

----

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

**(Unaudited)**

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

under the cap contract offsetthe increase in interest expense caused by the relevant LIBOR index risingabove the cap’s strike rate.

The Company uses interest rate cap corridors to hedgethe variable cash flows associated with the forecasted issuance and rollover ofshort-term, fixed rate, TDs. In these hedging relationships, the Company hedgesthe LIBOR component of the TD rates, either 1-month LIBOR, 3-month LIBOR, or 6-monthLIBOR, based on the original term to maturity of the TDs, which reflects theirrepricing frequency. Net payments to be received under the cap corridorcontract offset the increase in deposit interest expense caused by the relevantLIBOR index rising above the corridor’s lower strike rate, but only to theextent the index rises to the upper strike rate. The corridor will not provideprotection from increases in the relevant LIBOR index to the extent it rises abovethe 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 TDs, the index and repricingfrequencies of the hedge matches those of the loans or TDs, and the period inwhich the designated hedged cash flows occurs is equal to the term of thehedge. As such, most of the ineffectiveness in the hedging relationship resultsfrom the mismatch between the timing of reset dates on the hedge versus thoseof the loans or TDs. In the first quarter of 2006, the Company recognized a netloss of less than $0.1 million due to ineffectiveness, which is recognizedin other noninterest expense, compared to a net loss of $0.1 million in thefirst quarter of 2005.

*Fair Value Hedges*

*Hedging Strategy forMedium-Term Notes*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s five-year, medium-term debtissuance, in order to convert the liability from a fixed rate to a floatingrate instrument. This strategy mitigates 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 mirror allof the provisions of the medium-term notes, which allows the Company to assumethat no ineffectiveness exists.

*Hedging Strategy forSubordinated Debt*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s ten-year, subordinated debtissuance, in order to convert the liability from a fixed rate to a floatingrate instrument. This strategy mitigates 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 subordinated debt was structured at inception to mirror allof the provisions of the subordinated debt, which allows the Company to assumethat no ineffectiveness exists.

23

----

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

**(Unaudited)**

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

*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.

*Economic HedgingStrategy for “MarketPath” Certificates of Deposit*

The Company engages in aneconomic hedging strategy in which interest bearing CDs issued to customers,which are tied to the changes in the Standard and Poor’s 500 index, areexchanged for a fixed rate of interest. The Company accounts for the embeddedderivative in the CDs at fair value. A total return swap that encompasses thevalue of a series of options that had individually hedged each CD is valued atfair value. The changes in the fair value of the embedded derivative and thehedge instrument are recognized as interest expense.

**Note 9—Commitments andContingencies**

Standby and commercial letters of credit areconditional commitments issued to guarantee the performance of a customer to athird party. Standby letters of credit generally are contingent upon thefailure of the customer to perform according to the terms of the underlyingcontract with the third party, while commercial letters of credit are issuedspecifically to facilitate foreign or domestic trade transactions. The majorityof these types of commitments have terms of one year or less. As of March 31,2006, the Company’s maximum exposure to loss for standby and commercial lettersof credit was $3.6 billion and $93.1 million, respectively. At March 31, 2006,the carrying value of the Company’s standby and commercial letters of credittotaled $7.7 million. Exposure to loss related to these commitments is coveredby the allowance for off-balance sheet commitments. Both of these amounts areincluded in other liabilities on the condensed consolidated balance sheet. Inaddition, the Company's maximum exposure to loss for standby and commercial lettersof credit related to discontinued operations was $30.1 million and $4.7million, respectively. The corresponding carrying value of these standby andcommercial letters of credit totaled $0.1 million. 

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

Principal investments include direct investments inprivate and public companies and indirect investments in private equity funds.The Company issues commitments to provide equity and mezzanine capitalfinancing to private and public companies through either direct investments inspecific companies or through investment funds and partnerships. The timing offuture cash requirements to fund such commitments is generally dependent on theinvestment cycle. This cycle, the period over which privately-held companiesare funded by private equity investors and ultimately sold, merged, or takenpublic through an initial offering, can vary based on overall market conditionsas well as the nature and type of industry in which the companies operate. AtMarch 31, 2006, the Company had commitments to fund principal investments of$116.1 million.

24

----

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

**(Unaudited)**

**Note 9—Commitmentsand Contingencies (Continued)**

The Company has contingent consideration agreementsthat guarantee additional payments to acquired insurance agencies’ stockholdersbased on the agencies’ future performance in excess of established revenueand/or earnings before interest, taxes, depreciation and amortization (EBITDA)thresholds. If the insurance agencies’ future performance exceeds thesethresholds during a three-year period, the Company will be liable to makepayments to former stockholders. As of March 31, 2006, the Company had amaximum exposure of $4.4 million for these agreements, the last of which expirein December 2006.

The Company is fund manager for limited liabilitycorporations issuing low-income housing credit (LIHC) investments. LIHCinvestments provide tax benefits to investors in the form of tax deductionsfrom operating losses and tax credits. To facilitate the sale of these LIHCinvestments, the Company guarantees the timely completion of projects anddelivery of tax benefits throughout the investment term. Guarantees may includea minimum rate of return, the availability of tax credits, and operatingdeficit thresholds over an eleven-year weighted average period. Additionally,the Company receives project completion and tax credit guarantees from thelimited liability corporations issuing the LIHC investments that reduce theCompany’s ultimate exposure to loss. As of March 31, 2006, the Company’smaximum exposure to loss under these guarantees is limited to a return ofinvestor capital and minimum investment yield, or $158.6 million. The Companymaintains a reserve of $6.1 million for these guarantees.

The Company has guarantees that obligate it to performif its affiliates are unable to discharge their obligations. These obligationsinclude guarantees of commercial paper obligations and leveraged leasetransactions. The guarantee issued by the Bank for an affiliate’s commercialpaper program is done in order to facilitate their sale. As of March 31, 2006,the Bank had a maximum exposure to loss under the commercial paper programguarantee of $1.5 billion. The Bank’s guarantee has an average term of lessthan nine months and is fully collateralized by a pledged deposit. The Companyguarantees its subsidiaries’ leveraged lease transactions with terms rangingfrom fifteen to thirty years. Following the original funding of these leveragedlease transactions, the Company has no material obligation to be satisfied. Asof March 31, 2006, the Company had no exposure to loss for theseagreements.

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 $2.4 billion at March 31, 2006. The market value of theassociated collateral was $2.4 billion at March 31, 2006.

The Company occasionally enters into financialguarantee contracts where a premium is received from another financialinstitution counterparty to guarantee a portion of the credit risk on interestrate swap contracts entered into between the financial institution and itscustomer. The Company becomes liable to pay the financial institution only ifthe financial institution is unable to collect amounts owed to them by theircustomer. As of March 31, 2006, the maximum exposure to loss under thesecontracts totaled $0.7 million. At March 31, 2006, the Company maintained areserve of $0.1 million for losses related to these guarantees.

25

----

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

**(Unaudited)**

**Note 9—Commitmentsand Contingencies (Continued)**

For further discussion of theCompany's commitments, contingencies and guarantees, see Note 24 of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.

**Note 10—Pension and OtherPostretirement Benefits**

Thefollowing tables summarize the components of net periodic benefit cost for thethree months ended March 31, 2005 and 2006.

| ** **                                   | ** ** | **Pension Benefits**                                          | ** ** | **Other Benefits**                                            | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Three Months  Ended March 31,** | ** ** | **For the Three Months  Ended March 31,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2005**                                                           | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Components  of net periodic benefit cost** |       |                                                               |       |                                                               |       |   |   |   |   |
| Service cost                                 |       | $                                                                  | 11,392     |                                                               | $          | 13,625 |   | $ | 1,549 |   | $ | 1,785 |   |
| Interest cost                                |       | 14,320                                                             |       | 16,049                                                             |       | 2,228 |   | 2,240 |   |
| Expected return on  plan assets              |       | (23,905                                                            | )          | (28,356                                                            | )          | (2,599 | ) | (2,843 | ) |
| Amortization of prior  service cost          |       | 267                                                                |       | 267                                                                |       | (24 | ) | 508 |   |
| Amortization of  transition amount           |       | —                                                             |       | —                                                             |       | 509 |   | (23 | ) |
| Recognized net  actuarial loss               |       | 6,101                                                              |       | 7,563                                                              |       | 968 |   | 1,065 |   |
| Total net periodic  benefit cost             |       | $                                                                  | 8,175      |                                                               | $          | 9,148 |   | $ | 2,631 |   | $ | 2,732 |   |

 

The Company made cashcontributions of $100 million to the Pension Plan in the first quarter of 2006.During 2006, the Company plans to make $19 million in contributions to theHealth Plan for postretirement benefits.

**Note 11—Management Stock Plans**

The Company has two management stock plans. The Year2000 UnionBanCal Corporation Management Stock Plan, as amended (the 2000 StockPlan), and the UnionBanCal Corporation Management Stock Plan, restatedeffective June 1, 1997 (the 1997 Stock Plan), have 20.0 million and 6.6 millionshares, respectively, of the Company’s common stock authorized to be awarded tokey employees, outside directors and consultants of the Company at thediscretion of the Executive Compensation and Benefits Committee of the Board ofDirectors (the Committee). Employees on rotational assignment from BTMU are noteligible for stock awards.

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. Starting in the first quarterof 2006, the value of options is amortized to compensation expense over thevesting period during which the employees are required to provide service.Unvested restricted stock issued under the Stock Plans is shown as a reductionto retained earnings at the time of the grant. The value of the restrictedshares at the date of grant is amortized to compensation expense over itsvesting period with a corresponding credit adjustment to retained earnings. Allcancelled or forfeited options and restricted stock become available for futuregrants.

Under the 2000 Stock Plan, the Company granted optionsto various key employees, including policy-making officers, and to non-employeedirectors for selected years. Under both Stock Plans, options granted 

26

----

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

**(Unaudited)**

**Note 11—ManagementStock Plans (Continued)**

to employeesvest pro-rata on each anniversary of the grant date and become fullyexercisable three years from the grant date, provided that the employee hascompleted the specified continuous service requirement. The options vestearlier if the employee dies, is permanently disabled, or retires under certaingrant, age, and service conditions or terminates employment under certainconditions. Options granted to non-employee directors are fully vested on thegrant date and exercisable 331¤3 percent oneach anniversary under the 1997 Stock Plan, and are fully vested andexercisable on the grant date under the 2000 Stock Plan.

*Stock Options*

Thefollowing is a summary of stock option transactions under the Stock Plans forthe quarter ended March 31, 2006.

| ** **                                    | ** ** | **For the Three Months Ended  March 31, 2006** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of**                                                           | ** ** | **Weighted-Average** | ** ** |
| ** **                                    | ** ** | **Shares**                                                                   | ** ** | **Exercise Price** | ** ** |
| Options outstanding,  beginning of the period |       | 8,696,589                                                                    |       |   | $ | 45.26 |   |   |   |
| Granted                                       |       | 4,500                                                                        |       |   | 69.18 |   |   |   |
| Exercised                                     |       | (360,035                                                                     | )          |   | 38.97 |   |   |   |
| Forfeited                                     |       | (5,319                                                                       | )          |   | 56.15 |   |   |   |
| Options outstanding, end of the period        |       | 8,335,735                                                                    |       |   | $ | 45.54 |   |   |   |
| Options exercisable,  end of the period       |       | 5,041,077                                                                    |       |   | $ | 40.51 |   |   |   |

 

Thefollowing table summarizes information about stock options outstanding andstock options exercisable.

| ** **          | ** ** | **As of March 31, 2006** | ** ** |
|---------------------|------------|----------------------------------------------|------------|
| ** **          | ** ** | **Number of  Shares**                   | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **          | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Options outstanding |       | 8,335,735                                    |       |   | $ | 45.54 |   |   |   | 6.16 |   |   |   | $ | 193,437 |   |   |
| Options exercisable |       | 5,041,077                                    |       |   | 40.51 |   |   |   | 5.57 |   |   |   | 142,139 |   |   |

 

27

----

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

**(Unaudited)**

**Note 11—ManagementStock Plans (Continued)**

The following is a summary ofthe Company’s unvested stock options under the Stock Plans.

| ** **                                | ** ** | **For the Three Months Ended  March 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Number of  Shares**                                                   | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
| Unvested awards,  beginning of the period |       | 3,346,716                                                                    |       |   | $ | 14.69 |   |   |
| Granted                                   |       | 4,500                                                                        |       |   | 11.85 |   |   |
| Vested                                    |       | (51,289                                                                      | )          |   | 14.69 |   |   |
| Forfeited                                 |       | (5,269                                                                       | )          |   | 14.90 |   |   |
| Unvested awards, end  of the period       |       | 3,294,658                                                                    |       |   | $ | 14.68 |   |   |

 

The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel that uses the assumptions noted in the following table. Because theBlack-Scholes option pricing model uses tranches based on expected terms thatresulted in ranges of input assumptions, such ranges are disclosed below.Expected volatilities are based on historical data and implied volatilitiesfrom traded options on the Company’s stock, and other factors. The Company useshistorical data to estimate option exercise and employee terminations withinthe valuation model. The expected term of an option granted is derived from theoutput of the option valuation model, which is based on historical data andrepresents the period of time that the option granted is expected to beoutstanding. The risk-free rate for periods within the contractual life of theoption is based on the U.S. Treasury yield curve in effect at the time of grantbased on the expected term.

| ** **                                                 | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                                           | ** ** | **2006** | ** ** |
| Weighted-average fair  value—per share                |       | $                                                                  | 13.38      |   | $ | 11.85 |   |
| Risk-free interest  rates (a range for 1 to 7 year tenors) |       | 3.41 - 4.33                                                        | %          | 4.27 - 4.32 | % |
| Expected volatility                                        |       | 27.00                                                              | %          | 16.57 - 22.88 | % |
| Expected term (in  years)                                  |       | 4.4                                                                |       | 3.4 - 5.4 |   |
| Expected dividend yield                                    |       | 2.72                                                               | %          | 2.72 | % |
|                                                            |            |                                                                    |            |  |  |  |  |

 

As of March 31, 2006, the total unrecognizedcompensation cost related to unvested stock option awards was $19.7 million andthe weighted-average period over which it is expected to be recognized is 0.8year.

For the three months endedMarch 31, 2006, the amount of cash received on exercise of options was $14.0million and the corresponding tax benefit realized was $3.9 million.

*Restricted Stock*

In general, restricted shares are granted under the 2000 Stock Plan tokey employees, and in 2005, to non-employee directors. The awards of restrictedstock vest pro-rata on each anniversary of the grant date and become fullyvested four years from the grant date, provided that the employee has completedthe specified continuous service requirement. They vest earlier if the employeedies, is permanently and totally disabled, retires under certain grant, age,and service conditions or terminates employment under certain conditions. Theawards of restricted stock granted to existing non-employee directors in 2005will vest in 

28

----

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

**(Unaudited)**

**Note 11—ManagementStock Plans (Continued)**

full in July 2006. The awardgranted to a newly elected director in 2005 will vest as to two-thirds of theshares in November 2006 and the remaining portion will vest in two equalinstallments in November 2007 and 2008, respectively. Restricted stockholdershave the right to vote their restricted shares and receive dividends.

The Company did not grant any restricted stock duringthe first quarter of 2005. During the first quarter of 2006, the Companygranted 4,100 shares of restricted stock with weighted average grant date fairvalues of $69.18. There were no restricted stock forfeitures in the firstquarter of 2005 and 1,175 restricted stock forfeitures in the first quarter of2006. 

As of March 31, 2006, the total unrecognizedcompensation cost related to unvested restricted stock awards was $15.1 millionand the weighted-average period over which it is expected to be recognized is1.2 years.

At March 31, 2005 and March31, 2006, a total of 2,945,680 shares and 5,443,873 shares, respectively, wereavailable for future grants as either stock options or restricted stock underthe 2000 Stock Plan. The remaining shares under the 1997 Stock Plan are notavailable for future grants.

**Note 12—Subsequent Events**

On April 26, 2006, the Company’s Board of Directorsdeclared a quarterly cash dividend of $0.47 per share of common stock. Thedividend will be paid on July 7, 2006 to stockholders of record as of June 2,2006.

On April 26, 2006, the Company’s Board of Directorsauthorized the repurchase of an additional $500 million of the Company’s commonstock. When combined with the $21 million remaining on its previous repurchaseauthorizations, the Company had $521 million available to repurchase at thatdate.

29

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**Item 2.**   Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

***Thisreport includes forward-looking statements, which include forecasts of ourfinancial results and condition, expectations for our operations and business,and our assumptions 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 this Quarterly Report on Form 10-Q and Item 1A “Risk Factors” ofour Annual Report on Form 10-K for the year ended December 31,2005 for a discussion of some factors that may cause results to differ***.

You should read the followingdiscussion and analysis of our condensed consolidated financial condition andresults of our operations for the period ended March 31, 2006 in thisQuarterly Report on Form 10-Q together with our ConsolidatedFinancial Statements and the Notes to Consolidated Financial Statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2005. Averages, as presented in the following tables, are substantially allbased upon daily average balances.

**Introduction**

We are a California-based,commercial bank holding company and have as our major subsidiary, a bankingsubsidiary, Union Bank of California, N.A. (the Bank). We had consolidatedassets of $48.8 billion at March 31, 2006. At March 31, 2006, TheBank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately 63percent of our outstanding common stock.

**Executive Overview**

We are providing you with an overview of what webelieve are the most significant factors and developments that impacted ourfirst quarter 2006 results and that could impact our future results. We askthat you carefully read the rest of this document for more detailed informationthat will complete your understanding of trends, events and uncertainties thatimpact us.

Our average loans grew by 15 percent in first quarter2006 compared to the first quarter 2005 and by 2 percent over the fourthquarter 2005. This growth has been concentrated in our commercial andresidential mortgage lending areas, although we expect that the growth rate inresidential mortgage loans will slow if interest rates continue to rise.

Although our deposit base continues to be strong, ouraverage noninterest bearing deposits did decline in first quarter 2006 comparedto the first quarter of 2005. At 45 percent of average total deposits, ouraverage noninterest bearing deposits continue to provide us with an advantagein our primary markets.

Overall credit quality remained strong during thefirst quarter 2006. Our nonperforming assets totaled $42 million at March 31,2006 compared to $62 million at December 31, 2005 and $101 million at March 31,2005. While such low levels of nonperforming assets are not sustainable, webelieve that our responsible lending and monitoring practices will help usmaintain high credit quality in our loan portfolios.

During the first quarter 2006, we reversed $10 millionof our provision for credit losses ($7 million reversal related to loans and a$3 million reversal of allowance for losses on off-balance sheet commitments) comparedwith a reversal of $9 million in the first quarter 2005. We expect that we willneed to provide for credit losses during 2006 as a result of our anticipatedloan growth.

In the first quarter 2006, our net interest income was$466 million compared to $437 million in the first quarter 2005, as webenefited from strong loan growth and higher interest rates.

Noninterest income grew 6 percent in the first quarter2006 compared with the first quarter 2005 primarily from higher service chargeson deposit accounts and trust and investment management fees.

30

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In the first quarter 2006, our noninterest expensegrew to $415 million compared to $393 million in the first quarter 2005. Mostof this increase was related to salaries and employee benefits, of which $10 millionrelated to our adoption of the new share-based compensation accounting rules andhigher costs for restricted stock awards.

Our effective tax rate increased to 34 percent in thefirst quarter 2006 from 31 percent during the first quarter 2005. This increasewas due to a reduction in reserves in the first quarter 2005 of $10 million forestimated amounts owed to the Internal Revenue Service (IRS) with respect tocertain leveraged lease transactions.

In the first quarter 2006, we returned a significantamount of capital to our stockholders in the form of dividends and common stockrepurchases. In addition, on April 26, 2006, we announced an increase of15 percent in our quarterly dividend effective with our next dividend paymenton July 7, 2006 and a $500 million increase to the buyback program.

As previously disclosed, wesold our international correspondent banking business in October 2005. Wecontinue to operate this business during a transition period, which we expectwill continue well into the second quarter 2006. We expect no material impacton our future earnings per share as a result of this sale. This transaction hasbeen accounted for as a discontinued operation; therefore, all subsequentdiscussion of our results is focused on continuing operations unless otherwisestated.

**Discontinued Operations**

During the third quarter 2005, we committed to a planto exit our international correspondent banking business and entered into adefinitive agreement to sell this business to Wachovia Bank, N.A. This businessconsisted of international payment and trade processing along with the relatedlending activities. The principal legal closing of the transaction occurred on October 6,2005 and we received $245 million. We continue to operate this business over atransition period which we expect will continue well into second quarter 2006.

This transaction has been accounted for as adiscontinued operation and all prior periods, except where specificallymentioned, have been restated to reflect this accounting treatment. All of theassets and liabilities of the discontinued operations have been separatelyidentified on our 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. For the detailed components of our assets and liabilities fromdiscontinued operations, see Note 3 “Discontinued Operations” to the CondensedConsolidated Financial Statements of this Quarterly Report on Form 10-Q.

Includedin our net income are the net results of our discontinued operations. For thethree months ended March 31, 2005 and 2006, income from discontinuedoperations included the following:

| ** **                                                      | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                            | ** ** | **2005**                                                           | ** ** | **2006** | ** ** |
| Net interest income                                             |       | $                                                                  | 5,137      |   | $ | 1,725 |   |
| Provision for loan  losses                                      |       | 4,119                                                              |       | — |   |
| Noninterest income                                              |       | 17,136                                                             |       | 5,811 |   |
| Noninterest expense                                             |       | 14,515                                                             |       | 21,139 |   |
| Income (loss) from  discontinued operations before income taxes |       | 3,639                                                              |       | (13,603 | ) |
| Income tax expense  (benefit)                                   |       | 1,413                                                              |       | (5,093 | ) |
| Income (loss) from  discontinued operations                     |       | $                                                                  | 2,226      |   | $ | (8,510 | ) |

 

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For the three monthsended March 31, 2005 and March 31, 2006, net interest income includedthe allocation of interest expense from continuing operations of approximately$2.5 million and $0.6 million, respectively. Interest expense allocated todiscontinued operations is calculated based on its average net assets and thecorresponding cost of funds rate equivalent to the average federal fundspurchased rate for the period. Includedin noninterest expense were compliance related expenses of $2.6 million and$4.8 million for the three months ended March 31, 2005 and 2006,respectively.

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

**Critical Accounting Policies**

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

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

Understanding our accountingpolicies is fundamental to understanding our consolidated financial conditionand consolidated results of operations. Accordingly, both our CriticalAccounting Policies and our significant accounting policies are discussed indetail in our 2005 Annual Report on Form 10-K filed with the SEC.

32

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**Financial Performance**

**Summary of Financial Performance**

| ** **                                                          | ** ** | ** **                                                                                                                       | ** ** | ** **                                                                                                                       | **Increase (Decrease)**   | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|--------------------------------|------------|
| ** **                                                          | ** ** | **For the Three Months Ended March 31,**                                                           | ** ** | ** **                                                                                                                       | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**                                | ** ** | **          2005          ** | ** ** | **          2006          ** | ** **                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results  of Operations**                                          |       |                                                                                                                             |       |                                                                                                                             |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income(1)                                              |       |                                                                                                                             | $          | 435,662                                                                                                                          |                           |       |   | $ | 465,093 |   |   |   | $ | 29,431 |   |   | 6.8 | % |   |
| Noninterest Income                                                  |       |                                                                                                                             |       |                                                                                                                             |                           |       |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                 |       |                                                                                                                             | 79,267     |                                                                                                                             |                           |       | 81,635 |   |   |   | 2,368 |   |   | 3.0 |   |   |
| Trust and investment management fees                                |       |                                                                                                                             | 41,963     |                                                                                                                             |                           |       | 50,115 |   |   |   | 8,152 |   |   | 19.4 |   |   |
| Insurance commissions                                               |       |                                                                                                                             | 22,017     |                                                                                                                             |                           |       | 19,518 |   |   |   | (2,499 | ) |   | (11.4 | ) |   |
| Merchant banking fees                                               |       |                                                                                                                             | 6,266      |                                                                                                                             |                           |       | 8,229 |   |   |   | 1,963 |   |   | 31.3 |   |   |
| Gain on private capital investments, net                            |       |                                                                                                                             | 7,935      |                                                                                                                             |                           |       | 2,827 |   |   |   | (5,108 | ) |   | (64.4 | ) |   |
| Other noninterest income                                            |       |                                                                                                                             | 48,177     |                                                                                                                             |                           |       | 55,586 |   |   |   | 7,409 |   |   | 15.4 |   |   |
| Total noninterest  income                                           |       |                                                                                                                             | 205,625    |                                                                                                                             |                           |       | 217,910 |   |   |   | 12,285 |   |   | 6.0 |   |   |
| Total revenue                                                       |       |                                                                                                                             | 641,287    |                                                                                                                             |                           |       | 683,003 |   |   |   | 41,716 |   |   | 6.5 |   |   |
| Reversal of provision  for loan losses                              |       |                                                                                                                             | (12,119    | )                                                                                                                                |                           |       | (7,000 | ) |   |   | 5,119 |   |   | (42.2 | ) |   |
| Noninterest Expense                                                 |       |                                                                                                                             |       |                                                                                                                             |                           |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                      |       |                                                                                                                             | 231,758    |                                                                                                                             |                           |       | 252,495 |   |   |   | 20,737 |   |   | 8.9 |   |   |
| Outside services                                                    |       |                                                                                                                             | 21,247     |                                                                                                                             |                           |       | 28,609 |   |   |   | 7,362 |   |   | 34.6 |   |   |
| Professional services                                               |       |                                                                                                                             | 11,741     |                                                                                                                             |                           |       | 14,547 |   |   |   | 2,806 |   |   | 23.9 |   |   |
| Advertising and public relations                                    |       |                                                                                                                             | 7,640      |                                                                                                                             |                           |       | 10,231 |   |   |   | 2,591 |   |   | 33.9 |   |   |
| Foreclosed asset expense (income)                                   |       |                                                                                                                             | 406        |                                                                                                                             |                           |       | (7,367 | ) |   |   | (7,773 | ) |   | nm |   |   |
| (Reversal of) provision for losses on off-balance sheet commitments |       |                                                                                                                             | 3,000      |                                                                                                                             |                           |       | (3,000 | ) |   |   | (6,000 | ) |   | nm |   |   |
| Other noninterest expense                                           |       |                                                                                                                             | 117,160    |                                                                                                                             |                           |       | 119,029 |   |   |   | 1,869 |   |   | 1.6 |   |   |
| Total noninterest  expense                                          |       |                                                                                                                             | 392,952    |                                                                                                                             |                           |       | 414,544 |   |   |   | 21,592 |   |   | 5.5 |   |   |
| Income from  continuing operations before income taxes              |       |                                                                                                                             | 260,454    |                                                                                                                             |                           |       | 275,459 |   |   |   | 15,005 |   |   | 5.8 |   |   |
| Income tax expenses                                                 |       |                                                                                                                             | 80,703     |                                                                                                                             |                           |       | 94,004 |   |   |   | 13,301 |   |   | 16.5 |   |   |
| Income from Continuing  Operations                                  |       |                                                                                                                             | 179,751    |                                                                                                                             |                           |       | 181,455 |   |   |   | 1,704 |   |   | 0.9 |   |   |
| Income (loss) from  discontinued operations before income taxes     |       |                                                                                                                             | 3,639      |                                                                                                                             |                           |       | (13,603 | ) |   |   | (17,242 | ) |   | nm |   |   |
| Income tax expenses  (benefit)                                      |       |                                                                                                                             | 1,413      |                                                                                                                             |                           |       | (5,093 | ) |   |   | (6,506 | ) |   | nm |   |   |
| Income (Loss) from  Discontinued Operations                         |       |                                                                                                                             | 2,226      |                                                                                                                             |                           |       | (8,510 | ) |   |   | (10,736 | ) |   | nm |   |   |
| Net Income                                                          |       |                                                                                                                             | $          | 181,977                                                                                                                          |                           |       |   | $ | 172,945 |   |   |   | $ | (9,032 | ) |   | (5.0 | )% |   |

----

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

nm = not meaningful

*The primary contributors to our financial performancefor the first quarter of 2006 compared to the first quarter of 2005 arepresented below.*

·       Thereversal of our allowance for loan losses in the first quarter of 2006 isprimarily due to further improvement in credit quality. Credit qualitycontinued to improve in our commercial loan portfolio evidenced by reductionsin nonperforming assets. However, this trend is balanced by increasinguncertainty in the economic outlook coupled with indications that theimprovement in credit quality could be at its peak. (See our discussion under “Allowancesfor Credit Losses.”)

·       Ournet interest income was favorably influenced by higher earning asset volumes(including higher volume for commercial loans, residential mortgages andconstruction loans) and higher average 

33

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yields on our earningassets. Offsetting these positive influences to our net interest margin werehigher rates on interest bearing liabilities, lower hedge income and lowernoninterest bearing deposits (See our discussion under “Net Interest Income.”)

The increase in ournoninterest income was due to several factors:

—              Servicecharges on deposits increased primarily due to higher overdraft fees related toa change in our overdraft and nonsufficient funds fee structure, partly offsetby lower account analysis fees stemming from an increase in the earnings creditrates on deposit balances;

—              Trustand investment management fees were higher primarily due to continued strongsales and organic growth and a one-time $3.8 million increase in trust feesresulting from a refinement in accrual methodology. Managed assets increased byapproximately 4 percent and non-managed assets increased by approximately5 percent from March 31, 2005 to March 31, 2006. Total assets underadministration increased by approximately 5 percent, to $216.8 billion, for thesame period;

—              Merchantbanking fees increased due to a higher volume of syndication transactions thanin the prior year quarter; partly offset by

—              Lowerinsurance commissions mainly attributable to lower contingent commissionpayments due to a revised state fund program and to higher loss ratiosexperienced by insurance companies;

—              Lowernet gains on the sales and capital distributions on private capital investmentscompared to the prior year; and

—              Higherother income included:

·       highergains on the sale of assets and higher trading gains of $5.0 million.

Our higher noninterest expensewas due to several factors:

—              Salariesand employee benefits increased primarily as a result of:

·       higherperformance-related incentive expense from the amortization of stock options inthe first quarter of 2006 and the increased amortization of restricted stock inthe first quarter of 2006 as a result of a higher level of grants;

·       annualmerit increases; and

·       higheremployee benefits expense mainly due to the impact of the lower discount ratewe used to calculate our future pension and other postretirement liabilities(reduced from 5.75 percent at December 31, 2004 to 5.50 percent at December 31,2005) and higher health insurance expense;

—              Outsideservices expense increased mainly as a result of higher vendor billingsstemming from a higher earnings credit rate in the first quarter of 2006primarily related to title and escrow deposit balances;

—              Professionalservices expense increased mainly due to consulting costs related to compliancerelated expenses;

—              Highermarketing cost in the current quarter; partly offset by

—              Foreclosedasset income in the first quarter of 2006, which was higher due to a gain onthe sale of a foreclosed property; and

—              Provisionfor losses on off-balance sheet commitments, which declined by $6.0 millioncompared to the first quarter of 2005 as a result of improvements in the creditquality of our borrowers.

34

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**Net Interest Income**

Thefollowing table shows the major components of net interest income and netinterest margin.

| ** **                                                                    | ** ** | **For the Three Months Ended** | ** ** | **Increase (Decrease) in** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                    | ** ** | **March 31, 2005**                       | ** ** | **March 31, 2006**         | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                                                                    | ** ** | ** **                                         | ** ** | **Interest**                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** |
| ** **                                                                    | ** ** | **Average**                                        | ** ** | **Income/**                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Balance** | ** ** | **Expense** (1) | ** ** |
| **(Dollars in thousands)**                                          | ** ** | **Balance**                                        | ** ** | **Expense**(1)                       | ** ** | **Rate**(1)(2) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                                    | ** ** | ** **                                         | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Loans:(3)                                                                     |       | $ 29,714,206                                  |       | $  405,124                 |       |   | 5.51 | % |   | $ 34,052,067 |   | $ 512,988 |   |   | 6.09 | % |   | $ 4,337,861 |   |   | 14.6 | % |   | $ 107,864 |   |   | 26.6 | % |   |
| Securities—taxable                                                       |       | 11,117,365                                         |       | 99,939                               |       |   | 3.60 |   |   | 8,233,854 |   | 96,053 |   |   | 4.67 |   |   | (2,883,511 | ) |   | (25.9 | ) |   | (3,886 | ) |   | (3.9 | ) |   |
| Securities—tax-exempt                                                    |       | 67,144                                             |       | 1,325                                |       |   | 7.89 |   |   | 65,204 |   | 1,298 |   |   | 7.96 |   |   | (1,940 | ) |   | (2.9 | ) |   | (27 | ) |   | (2.0 | ) |   |
| Interest bearing deposits in  banks                                           |       | 160,782                                            |       | 733                                  |       |   | 1.85 |   |   | 59,847 |   | 736 |   |   | 4.99 |   |   | (100,935 | ) |   | (62.8 | ) |   | 3 |   |   | 0.4 |   |   |
| Federal funds sold and securities purchased under  resale agreements          |       | 377,291                                            |       | 2,373                                |       |   | 2.55 |   |   | 345,342 |   | 3,845 |   |   | 4.52 |   |   | (31,949 | ) |   | (8.5 | ) |   | 1,472 |   |   | 62.0 |   |   |
| Trading account assets                                                        |       | 231,043                                            |       | 908                                  |       |   | 1.59 |   |   | 328,035 |   | 1,530 |   |   | 1.89 |   |   | 96,992 |   |   | 42.0 |   |   | 622 |   |   | 68.5 |   |   |
| Total earning assets                                                          |       | 41,667,831                                         |       | 510,402                              |       |   | 4.94 |   |   | 43,084,349 |   | 616,450 |   |   | 5.77 |   |   | 1,416,518 |   |   | 3.4 |   |   | 106,048 |   |   | 20.8 |   |   |
| Allowance for loan losses                                                     |       | (403,435                                           | )          |                                 |       |   |   |   |   | (348,626 | ) |   |   |   |   |   |   | 54,809 |   |   | (13.6 | ) |   |   |   |   |   |   |   |
| Cash and due from banks                                                       |       | 2,182,658                                          |       |                                 |       |   |   |   |   | 2,119,926 |   |   |   |   |   |   |   | (62,732 | ) |   | (2.9 | ) |   |   |   |   |   |   |   |
| Premises and equipment, net                                                   |       | 524,339                                            |       |                                 |       |   |   |   |   | 527,001 |   |   |   |   |   |   |   | 2,662 |   |   | 0.5 |   |   |   |   |   |   |   |   |
| Other assets                                                                  |       | 2,341,660                                          |       |                                 |       |   |   |   |   | 2,633,993 |   |   |   |   |   |   |   | 292,333 |   |   | 12.5 |   |   |   |   |   |   |   |   |
| Total assets                                                                  |       | $ 46,313,053                                  |       |                                 |       |   |   |   |   | $ 48,016,643 |   |   |   |   |   |   |   | $ 1,703,590 |   |   | 3.7 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                               | ** ** | ** **                                         | ** ** | ** **                           | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Deposits:                                                                     |       |                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing                                                              |       | $ 12,232,585                                  |       | 25,416                               |       |   | 0.84 |   |   | $ 13,261,888 |   | 62,358 |   |   | 1.91 |   |   | $ 1,029,303 |   |   | 8.4 | % |   | $ 36,942 |   |   | 145.3 |   |   |
| Savings and consumer time                                                     |       | 4,778,029                                          |       | 13,045                               |       |   | 1.11 |   |   | 4,467,627 |   | 18,487 |   |   | 1.68 |   |   | (310,402 | ) |   | (6.5 | ) |   | 5,442 |   |   | 41.7 |   |   |
| Large time                                                                    |       | 3,021,684                                          |       | 17,367                               |       |   | 2.33 |   |   | 3,608,597 |   | 34,464 |   |   | 3.87 |   |   | 586,913 |   |   | 19.4 |   |   | 17,097 |   |   | 98.4 |   |   |
| Total interest bearing deposits                                               |       | 20,032,298                                         |       | 55,828                               |       |   | 1.13 |   |   | 21,338,112 |   | 115,309 |   |   | 2.19 |   |   | 1,305,814 |   |   | 6.5 |   |   | 59,481 |   |   | 106.5 |   |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 1,279,862                                          |       | 7,455                                |       |   | 2.36 |   |   | 874,055 |   | 9,410 |   |   | 4.37 |   |   | (405,807 | ) |   | (31.7 | ) |   | 1,955 |   |   | 26.2 |   |   |
| Net funding allocated from (to) discontinued  operations(4)                   |       | (422,117                                           | )          | (2,457                               | )          |   | 2.36 |   |   | (57,088 | ) | (608 | ) |   | 4.32 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial paper                                                              |       | 865,460                                            |       | 4,560                                |       |   | 2.14 |   |   | 1,242,465 |   | 12,448 |   |   | 4.06 |   |   | 377,005 |   |   | 43.6 |   |   | 7,888 |   |   | 173.0 |   |   |
| Other borrowed funds                                                          |       | 180,519                                            |       | 1,529                                |       |   | 3.44 |   |   | 268,262 |   | 2,915 |   |   | 4.41 |   |   | 87,743 |   |   | 48.6 |   |   | 1,386 |   |   | 90.6 |   |   |
| Medium and long-term debt                                                     |       | 808,846                                            |       | 6,532                                |       |   | 3.27 |   |   | 800,014 |   | 10,397 |   |   | 5.27 |   |   | (8,832 | ) |   | (1.1 | ) |   | 3,865 |   |   | 59.2 |   |   |
| Trust notes                                                                   |       | 15,733                                             |       | 238                                  |       |   | 6.06 |   |   | 15,280 |   | 238 |   |   | 6.24 |   |   | (453 | ) |   | (2.9 | ) |   | — |   |   | — |   |   |
| Total borrowed funds                                                          |       | 2,728,303                                          |       | 17,857                               |       |   | 2.65 |   |   | 3,142,988 |   | 34,800 |   |   | 4.49 |   |   | 414,685 |   |   | 15.2 |   |   | 16,943 |   |   | 94.9 |   |   |
| Total interest bearing liabilities                                            |       | 22,760,601                                         |       | 73,685                               |       |   | 1.31 |   |   | 24,481,100 |   | 150,109 |   |   | 2.49 |   |   | 1,720,499 |   |   | 7.6 |   |   | 76,424 |   |   | 103.7 |   |   |
| Noninterest bearing deposits                                                  |       | 18,167,420                                         |       |                                 |       |   |   |   |   | 17,517,921 |   |   |   |   |   |   |   | (649,499 | ) |   | (3.6 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                             |       | 1,176,382                                          |       |                                 |       |   |   |   |   | 1,478,943 |   |   |   |   |   |   |   | 302,561 |   |   | 25.7 |   |   |   |   |   |   |   |   |
| Total liabilities                                                             |       | 42,104,403                                         |       |                                 |       |   |   |   |   | 43,477,964 |   |   |   |   |   |   |   | 1,373,561 |   |   | 3.3 |   |   |   |   |   |   |   |   |
| **Stockholders’ Equity**                                                 | ** ** | ** **                                         |       |                                 |       |   |   | ** ** |   | ** ** |   |   |   |   |   | ** ** |   | ** ** | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Common equity                                                                 |       | 4,208,650                                          |       |                                 |       |   |   |   |   | 4,538,679 |   |   |   |   |   |   |   | 330,029 |   |   | 7.8 |   |   |   |   |   |   |   |   |
| Total stockholders’ equity                                          |       | 4,208,650                                          |       |                                 |       |   |   |   |   | 4,538,679 |   |   |   |   |   |   |   | 330,029 |   |   | 7.8 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                               |       | $ 46,313,053                                  |       |                                 |       |   |   |   |   | $ 48,016,643 |   |   |   |   |   |   |   | $ 1,703,590 |   |   | 3.7 | % |   |   |   |   |   |   |   |
| **Reported Net Interest Income/Margin**                                       |       |                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent basis)                         |       |                                               |       | 436,717                              |       |   | 4.22 | % |   |   |   | 466,341 |   |   | 4.36 | % |   |   |   |   |   |   |   | 29,624 |   |   | 6.8 |   |   |
| Less: taxable-equivalent adjustment                                           |       |                                               |       | 1,055                                |       |   |   |   |   |   |   | 1,248 |   |   |   |   |   |   |   |   |   |   |   | 193 |   |   | 18.3 |   |   |
| Net interest income                                                           |       |                                               |       | $  435,662                 |       |   |   |   |   |   |   | $ 465,093 |   |   |   |   |   |   |   |   |   |   |   | $ 29,431 |   |   | 6.8 | % |   |

 

| ** **  | **Average Assets and**Liabilities of Discontinued Operations for  the Three Months Ended: | ** ** | ** ** | ** **           | **March 31,  2005** | ** ** | ** ** | ** ** | ** ** | ** ** | **March 31,  2006** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------|-------------------------------------------------------------------------------------------|------------|------------|----------------------|---------------------|------------|------------|------------|------------|------------|---------------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Assets      |                                                                                      |       |       | $ 1,964,673     |                |       |       |       |       |       |                | $ 618,653 |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |
| Liabilities |                                                                                      |       |       | $ 1,542,556     |                |       |       |       |       |       |                | $ 561,565 |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |
| Net assets  |                                                                                      |       |       | $  422,117 |                |       |       |       |       |       |                | $ 57,088  |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |

----

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

(2)                   Annualized.

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

(4)                   In September 2005, Union Bank of California, N.A.committed to a plan for disposal of its international correspondent bankingbusiness. All periods presented have been restated to reflect discontinued operations.Net funding allocated from (to) discontinued operations represents the shortage(excess) of assets over liabilities of discontinued operations. The expense(earning) on funds allocated from (to) discontinued operations is calculated bytaking the net balance and applying an earnings rate or a cost of fundsequivalent to the corresponding period’s fed funds purchased rate.

35

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*Net interestincome in the first quarter 2006, on a taxable-equivalent basis,increased 7 percent, from the first quarter 2005. Our results were primarilydue to the following:*

·       Averageearning assets increased $1.4 billion, or 3 percent, primarily due to anincrease in average loans, partly offset by a decline in average securities.The increase in average loans was largely due to a $2.0 billion increase inaverage commercial loans and a $1.6 billion increase in average residentialmortgages, while average securities declined by $2.9 billion as a result ofsales of approximately $1.5 billion and maturities offset by purchases of $1.0billion between December 2005 and February 2006;

·*      *Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 83basis points, despite being negatively impacted by lower hedge income, whichdecreased by $13.9 million;

·*      *Averagenoninterest bearing deposits decreased $649 million, or 4 percent, including adecrease of $381 million, or 14 percent, in average title and escrow depositsdue to lower residential real estate activity. Average business demand deposits,excluding title and escrow, declined $305 million, or 3 percent, primarilydue to disintermediation resulting from rising short-term interest rates. Consumerdeposits increased $37 million, or 1 percent. Average noninterest bearingdeposits represented 45 percent of average total deposits in first quarter2006.

·*      *Inthe first quarter 2006, the annualized average all-in cost of funds, whichincluded lower hedge income of $2.5 million, was 1.45 percent, reflecting our averagedeposit-to-loan ratio of 114 percent and the proportion of noninterestbearing deposits to total deposits.

As a result of these changes, our net interest marginincreased by 14 basis points.

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term certificatesof deposit (CDs), and to convert our long-term, fixed-rate borrowings tofloating rate. For 2006, these derivative positions are expected to provideless net interest income than in 2005, as positions mature and, to a lesserextent, as interest rates rise. However, as we expected, the declines in hedgeincome have been offset by increased yields on the underlying variable rateloans. For the quarters ended March 31, 2005 and 2006, we had hedge incomeof $9.5 million and hedge expense of $6.9 million, respectively.

**Noninterest Income**

| ** **                                | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **March 31,**                                 | ** ** | **March 31,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**      | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Service charges on  deposit accounts      |       | $ 79,267                                      |       | $ 81,635 |   | $ 2,368 |   |   | 3.0 | % |   |
| Trust and investment  management fees     |       | 41,963                                             |       | 50,115 |   | 8,152 |   |   | 19.4 |   |   |
| Insurance commissions                     |       | 22,017                                             |       | 19,518 |   | (2,499 | ) |   | (11.4 | ) |   |
| Merchant banking fees                     |       | 6,266                                              |       | 8,229 |   | 1,963 |   |   | 31.3 |   |   |
| Foreign exchange  gains, net              |       | 8,170                                              |       | 7,818 |   | (352 | ) |   | (4.3 | ) |   |
| Brokerage commissions  and fees           |       | 8,972                                              |       | 7,795 |   | (1,177 | ) |   | (13.1 | ) |   |
| Card processing fees,  net                |       | 5,607                                              |       | 6,697 |   | 1,090 |   |   | 19.4 |   |   |
| Securities gains  (losses), net           |       | 344                                                |       | (214 | ) | (558 | ) |   | nm |   |   |
| Gain on private  capital investments, net |       | 7,935                                              |       | 2,827 |   | (5,108 | ) |   | (64.4 | ) |   |
| Other                                     |       | 25,084                                             |       | 33,490 |   | 8,406 |   |   | 33.5 |   |   |
| Total noninterest  income                 |       | $ 205,625                                     |       | $ 217,910 |   | $ 12,285 |   |   | 6.0 | % |   |

----

nm= not meaningful

36

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**Noninterest Expense**

| ** **                                                           | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                           | ** ** | **March 31,**                                 | ** ** | **March 31,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries and other  compensation                                     |       | $                                                  | 178,957    |   | $ | 194,259 |   | $ | 15,302 |   |   | 8.6 | % |   |
| Employee benefits                                                    |       | 52,801                                             |       | 58,236 |   | 5,435 |   |   | 10.3 |   |   |
| Salaries and employee benefits                                       |       | 231,758                                            |       | 252,495 |   | 20,737 |   |   | 8.9 |   |   |
| Net occupancy                                                        |       | 32,362                                             |       | 32,837 |   | 475 |   |   | 1.5 |   |   |
| Outside services                                                     |       | 21,247                                             |       | 28,609 |   | 7,362 |   |   | 34.6 |   |   |
| Equipment                                                            |       | 17,403                                             |       | 17,922 |   | 519 |   |   | 3.0 |   |   |
| Software                                                             |       | 13,975                                             |       | 16,344 |   | 2,369 |   |   | 17.0 |   |   |
| Professional services                                                |       | 11,741                                             |       | 14,547 |   | 2,806 |   |   | 23.9 |   |   |
| Communications                                                       |       | 10,380                                             |       | 10,552 |   | 172 |   |   | 1.7 |   |   |
| Advertising and  public relations                                    |       | 7,640                                              |       | 10,231 |   | 2,591 |   |   | 33.9 |   |   |
| Data processing                                                      |       | 8,870                                              |       | 7,398 |   | (1,472 | ) |   | (16.6 | ) |   |
| Intangible asset  amortization                                       |       | 4,985                                              |       | 3,430 |   | (1,555 | ) |   | (31.2 | ) |   |
| Foreclosed asset  expense (income)                                   |       | 406                                                |       | (7,367 | ) | (7,773 | ) |   | nm |   |   |
| (Reversal of)  provision for losses on off-balance sheet commitments |       | 3,000                                              |       | (3,000 | ) | (6,000 | ) |   | nm |   |   |
| Other                                                                |       | 29,185                                             |       | 30,546 |   | 1,361 |   |   | 4.7 |   |   |
| Total noninterest  expense                                           |       | $                                                  | 392,952    |   | $ | 414,544 |   | $ | 21,592 |   |   | 5.5 | % |   |

----

nm = not meaningful

**Income Tax Expense**

Income tax expense on continuing operations in thefirst quarter 2006 resulted in a 34 percent effective income tax rate comparedwith an effective tax rate of 31 percent for the first quarter 2005. In thefirst quarter 2005 we recognized a reduction in reserves of $10.0 million forestimated amounts owed to the Internal Revenue Service with respect to certainleveraged leasing transactions.

For further informationregarding income tax expense, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Income Tax Expense” in our AnnualReport on Form 10-K for the year ended December 31, 2005.

37

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**Loans**

Thefollowing table shows loans outstanding by loan type.

| ** **                           | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)**            | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **March 31, 2006 From:** | ** ** |
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31, 2005**            | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** | **Amount**                              | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Domestic:                            |       |               |       |                  |       |               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial |       | $                  | 9,998,843  |                  |       | $                  | 11,450,955 |                                    |       | $ | 11,666,818 |   | $ | 1,667,975 |   |   | 16.7 | % |   | $ | 215,863 |   |   | 1.9 | % |   |
| Construction                         |       | 1,189,273          |       |                  | 1,447,292  |               |       | 1,598,162                               |       | 408,889 |   |   | 34.4 |   |   | 150,870 |   |   | 10.4 |   |   |
| Mortgage:                            |       |               |       |                  |       |               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                          |       | 10,121,033         |       |                  | 11,380,728 |               |       | 11,570,355                              |       | 1,449,322 |   |   | 14.3 |   |   | 189,627 |   |   | 1.7 |   |   |
| Commercial                           |       | 5,448,741          |       |                  | 5,682,624  |               |       | 5,647,089                               |       | 198,348 |   |   | 3.6 |   |   | (35,535 | ) |   | (0.6 | ) |   |
| Total mortgage                       |       | 15,569,774         |       |                  | 17,063,352 |               |       | 17,217,444                              |       | 1,647,670 |   |   | 10.6 |   |   | 154,092 |   |   | 0.9 |   |   |
| Consumer:                            |       |               |       |                  |       |               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Installment                          |       | 777,986            |       |                  | 891,062    |               |       | 947,881                                 |       | 169,895 |   |   | 21.8 |   |   | 56,819 |   |   | 6.4 |   |   |
| Revolving lines of credit            |       | 1,612,037          |       |                  | 1,610,680  |               |       | 1,532,671                               |       | (79,366 | ) |   | (4.9 | ) |   | (78,009 | ) |   | (4.8 | ) |   |
| Total consumer                       |       | 2,390,023          |       |                  | 2,501,742  |               |       | 2,480,552                               |       | 90,529 |   |   | 3.8 |   |   | (21,190 | ) |   | (0.8 | ) |   |
| Lease financing                      |       | 596,331            |       |                  | 579,593    |               |       | 563,491                                 |       | (32,840 | ) |   | (5.5 | ) |   | (16,102 | ) |   | (2.8 | ) |   |
| Total loans held to maturity         |       | 29,744,244         |       |                  | 33,042,934 |               |       | 33,526,467                              |       | 3,782,223 |   |   | 12.7 |   |   | 483,533 |   |   | 1.5 |   |   |
| Total loans held for sale            |       | 34,217             |       |                  | 52,661     |               |       | 2,401                                   |       | (31,816 | ) |   | (93.0 | ) |   | (50,260 | ) |   | (95.4 | ) |   |
| Total loans                          |       | $                  | 29,778,461 |                  |       | $                  | 33,095,595 |                                    |       | $ | 33,528,868 |   | $ | 3,750,407 |   |   | 12.6 | % |   | $ | 433,273 |   |   | 1.3 | % |   |

 

*Commercial, Financial and Industrial Loans*

Commercial, financial and industrial loans representone of the largest categories in the loan portfolio. These loans are extendedprincipally to corporations, middle-market businesses, and small businesses,with no industry concentration exceeding 10 percent of total loans. Although manyof our customers are located in California, the portfolio has a high degree ofgeographic diversification based upon our customers’ revenue bases, which webelieve lowers our vulnerability to changes in the economic outlook of anyparticular region of the U.S.

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

The commercial, financial andindustrial loan portfolio increased in the first quarter 2006 from the firstquarter 2005 mainly due to increased loan demand primarily in the Californiamiddle market and specialty segments, which reflected the improving economy inthose markets.

*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 in the firstquarter 2006 from the first quarter 2005 was mainly due to demand forapartment, condominium, shopping center and Real Estate Investment Trustfinancing. Additionally, improvement in commercial income property markets alsoaccounted for some related growth in development and construction loans.

The commercial mortgage loanportfolio consists of loans on commercial income properties primarily inCalifornia. The increase in commercial mortgages between the first quarter of2006 and the first quarter 

38

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of 2005 was mainly due to general improvements incommercial income propertymarkets, which resulted in increased financings and refinancings.

*Residential MortgageLoans*

We originate residentialmortgage loans, secured by one-to-four family residential properties, throughour multiple channel network (including branches, mortgage brokers, andloan-by-phone) throughout California, Oregon and Washington, and weperiodically purchase loans in our market area. At March 31, 2006, 60percent of our residential mortgage loans were interest only, of which none arenegative amortizing. At origination, these interest only loans had high creditscores and had weighted average loan-to-value (LTV) ratios of approximately 65percent. The remainder of the portfolio consists of balloon or regularamortizing loans.

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

*Consumer Loans*

We originate consumer loans,such as auto loans and home equity loans and lines, through our branch network.The primary driver of the increase in consumer loans was our “Flex EquityLine/Loan” product. The “Flex Equity Line/Loan” allows our customers theflexibility to manage a line of credit with as many as four fixed rate loansunder a single product. We offer a “Flex Equity High LTV” product, which allowsour customers to draw up to 100 percent of the value of their real estate or$100 thousand, whichever is less.

*Lease Financing*

We primarily offer two typesof leases to our customers: direct financing leases, where the assets leasedare acquired without additional financing from other sources; and leveragedleases, where a substantial portion of the financing is provided by debt withno recourse to us. Included in our lease portfolio are leveraged leases of $549million, which are net of non-recourse debt of approximately $1.1 billion. Weutilize a number of special purpose entities for our leveraged leases. Theseentities serve legal and tax purposes and do not function as vehicles to shiftliabilities to other parties or to deconsolidate affiliates for financialreporting purposes. As allowed by US GAAP and by law, the gross leasereceivable is offset by the qualifying non-recourse debt. In leveraged leasetransactions, the third-party lender may only look to the collateral value ofthe leased assets for repayment.

**Cross-Border Outstandings**

Our cross-borderoutstandings, including those that are part of our discontinued operations, reflectcertain additional economic and political risks that are not reflected indomestic outstandings. These risks include those arising from exchange ratefluctuations and restrictions on the transfer of funds. The following tablesets forth our cross-border outstandings as of March 31, 2005, forany country where such outstandings exceeded 1 percent of total assets. For theperiods ending December 31, 2005 and March 31, 2006 we did not meetthe 1 percent threshold for disclosure. The cross-border outstandingswere compiled based upon category and domicile of ultimate risk and arecomprised of balances with banks, trading account assets, securities availablefor sale, securities purchased under resale agreements, loans, accrued interestreceivable, acceptances outstanding and investments with foreign entities. Forany country shown in the table below, any significant local currencyoutstandings are either hedged or funded by local currency borrowings.

| ** **                          | ** ** | ** **       | ** ** | **Public**   | ** ** | **Corporations**   | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|--------------|------------|--------------------|------------|------------------|------------|
| ** **                          | ** ** | **Financial**    | ** ** | **Sector**   | ** ** | **and Other** | ** ** | **Total**        | ** ** |
| **(Dollars in millions)** | ** ** | **Institutions** | ** ** | **Entities** | ** ** | **Borrowers**      | ** ** | **Outstandings** | ** ** |
| March 31, 2005                 |       |             |       |         |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Korea                               |       |             | $          | 679          |       |               |       | $                | —     |   |   |   | $ | 6 |   |   |   | $ | 685 |   |   |
|                                     |            |                  |            |              |            |                    |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

39

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**Provision for Loan Losses**

We recorded a reversal of theallowance for loan losses of $7 million in the first quarter of 2006, comparedwith a reversal of the allowance for loan losses of $12 million in the firstquarter of 2005. Provisions for loan losses are charged to income to bring ourallowance for loan losses to a level deemed appropriate by management based onthe factors discussed under “Allowances for Credit Losses” below. There was arecovery for losses related to the change in the allowance for losses onoff-balance sheet commitments in the first quarter 2006 of $3 million comparedto a provision for losses on off-balance sheet commitments in the first quarter2005 of $3 million.

**Allowances for Credit Losses**

*Allowance Policy andMethodology*

We maintain allowances forcredit losses (defined as both the allowance for loan and the allowance foroff-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 in the “Notes toConsolidated 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 2005 Annual Report on Form 10-K,which was filed with the SEC.

*Comparison of the Total Allowances and Related Provisionfor Credit Losses from December 31, 2005*

At March 31, 2006, our total allowances forcredit losses was $423 million, which consisted of $340 million related toloans and $83 million related to off-balance sheet commitments. The allowancesfor credit losses consisted of $360 million and $63 million of allocated andunallocated allowance, respectively. At March 31, 2006, our allowances forcredit loss coverage ratios were 1.26 percent of total loans and 1,003 percentof total nonaccrual loans. At December 31, 2005, our total allowances forcredit losses was $438 million, or 1.32 percent of the total loan portfolio and744 percent of total nonaccrual loans.

In addition, the allowances incorporates the resultsof measuring 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 the measurement methods, incomerecognition and disclosures related to impaired loans. At March 31, 2006,total impaired loans were $27 million, and the associated impairment allowancewas $9 million, compared with $59 million and $13 million, respectively, at December 31,2005.

At March 31, 2006 and December 31, 2005, theallowance for losses related to off-balance sheet commitments included withinour total allowances for credit losses, was $83 million and $86 million,respectively. In determining the adequacy of our allowances for credit losses, weconsider both the allowance for loan losses and for off-balance sheetcommitment losses.

We recorded a reversal of our allowance for loanlosses of $7 million in the first quarter 2006, as a result of management’sassessment of factors, including improvements in the quality of our loanportfolio, growth in the U.S. economy and improving conditions in domesticmarkets in which we operate, offset by the growth in the loan portfolio.

40

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During the first quarter of2006, 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 March 31, 2006, the formula allowancedecreased to $348 million, compared to $356 million at December 31, 2005. Thenet decrease was due primarily to the impact of a decrease in criticizedloans offset by growth in the commercial loan portfolio.

At March 31, 2006, thespecific allowance decreased to $12 million, compared to $17 million at December 31,2005. This decrease is primarily reflective of lower nonaccrual loans andleases.

*Changes in theUnallocated Allowance*

At March 31, 2006, the unallocated allowancedecreased modestly to $63 million from $65 million at December 31, 2005,reflecting management’s belief that maintaining the unallocated allowance nearour December 31, 2005 assessment is appropriate based on continuinguncertainty associated with our principal portfolio segments as we approach aturning point in credit quality trends. Additionally, the reasons for which webelieve an unallocated allowance is warranted are detailed below.

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

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

The following describesthe specific conditions we considered.

·       Withrespect to fuel prices, we considered the ability of borrowers to absorb higheroil prices without anticipated negative effects, the prospects of high costs ofoil and petroleum products and the impact across virtually all sectors of theeconomy, which could be in a range of $6 million to $29 million.

·       Withrespect to commercial real estate, we considered an improvement in thecommercial real estate sector, partly offset by weakness in the residentialconstruction market, which could be in the range of $8 million to $18 million.

·       Withrespect to concentrated sales, which include suppliers of “big box” stores likeCostco, Wal-Mart, Home Depot, Lowe’s and other companies that generate 15percent or more of their revenues from one customer, we considered thepotential negative impact competitive market pricing would have on their profitmargins, which could be in the range of $5 million to $9 million.

·       Withrespect to contractors, we considered the decline in new home sales and theimpact of higher commodity prices on contractor margins, which could be in therange of $4 million to $6 million.

·       Withrespect to leasing, we considered the uncertain state of the airline industry,as well as improving positions in our utilities portfolio, which could be inthe range of $3 million to $6 million.

41

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

*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 March 31,**           | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                                              | ** ** | **2005**                                | ** ** | **2006**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Balance, beginning of  period                                                     |       | $                                       | 399,156    |                         | $          | 351,532    |       | $ | (47,624 | ) | (11.9 | )% |
| Loans charged off:                                                                |       |                                    |       |                         |       |       |       |   |   |
| Commercial, financial and industrial                                              |       | 3,337                                   |       | 10,744                       |       | 7,407      |       | nm |   |
| Construction                                                                      |       | 118                                     |       | —                       |       | (118       | )          | (100.0 | ) |
| Mortgage                                                                          |       | 1,296                                   |       | —                       |       | (1,296     | )          | (100.0 | ) |
| Consumer                                                                          |       | 1,083                                   |       | 918                          |       | (165       | )          | (15.2 | ) |
| Lease financing                                                                   |       | 131                                     |       | 19                           |       | (112       | )          | (85.5 | ) |
| Total loans charged  off                                                          |       | 5,965                                   |       | 11,681                       |       | 5,716      |       | 95.8 |   |
| Recoveries of loans  previously charged off:                                      |       |                                    |       |                         |       |       |       |   |   |
| Commercial, financial  and industrial                                             |       | 19,600                                  |       | 1,909                        |       | (17,691    | )          | (90.3 | ) |
| Mortgage                                                                          |       | 23                                      |       | 2                            |       | (21        | )          | (91.3 | ) |
| Consumer                                                                          |       | 590                                     |       | 440                          |       | (150       | )          | (25.4 | ) |
| Lease financing                                                                   |       | 17                                      |       | 4,228                        |       | 4,211      |       | nm |   |
| Total recoveries of  loans previously charged off                                 |       | 20,230                                  |       | 6,579                        |       | (13,651    | )          | (67.5 | ) |
| Net loans charged off  (recovered)                                                |       | (14,265                                 | )          | 5,102                        |       | 19,367     |       | nm |   |
| Reversal of allowance  for loan losses                                            |       | (12,119                                 | )          | (7,000                       | )          | 5,119      |       | (42.2 | ) |
| Foreign translation  adjustment and other net additions (deductions)         |       | (27                                     | )          | 13                           |       | 40         |       |  

nm |   |
| Ending balance of  allowance for loan losses                                      |       | $                                       | 401,275    |                         | $          | 339,443    |       | $ | (61,832 | ) | (15.4 | ) |
| Allowance for losses on off-balance sheet commitments                             |       | 85,374                                  |       | 83,374                       |       | (2,000     | )          | (2.3 | ) |
| Allowances for credit  losses                                                     |       | $                                       | 486,649    |                         | $          | 422,817    |       | $ | (63,832 | ) | (13.1 | )% |
| Allowances for credit losses to total loans                                       |       | 1.63                                    | %          | 1.26                         | %          |       |       |   |   |
| Reversal of allowance  for loan losses to net loans charged off (recovered)       |       | nm                                      |       | nm                           |       |       |       |  

  |   |
| Net loans charged off  (recovered) to average loans outstanding for the period(1) |       | (0.19                                   | )          | 0.06                         |       |       |       |  

  |   |

----

(1)                Annualized.

nm = not meaningful

Total loans charged off in thefirst quarter 2006 increased from the first quarter 2005, primarily due to the charge-off of four commercial loans, each inexcess of $1 million. Charge-offs reflect the realization oflosses in the portfolio that were recognized previously through provision forcredit losses. In addition, first quarter 2006 recoveries of loans previouslycharged off decreased from the first quarter of 2005 primarily a result of thehigher levels of loans charged-off in periods prior to March 31, 2005. 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.

42

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**Nonperforming Assets**

Nonperforming assets consist of nonaccrual loans andforeclosed assets. Nonaccrual loans are those for which management hasdiscontinued accrual of interest because there exists significant uncertaintyas to the full and timely collection of either principal or interest or suchloans have become contractually past due 90 days with respect to principal orinterest. For a more detailed discussion of the accounting for nonaccrualloans, see Note 1 to our Consolidated Financial Statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2005.

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

Thefollowing table sets forth an analysis of nonperforming assets.

| ** **                                                 | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)**            | ** ** |                            |
|------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------------------------------|------------|---------------------------------|
| ** **                                                 | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **March 31, 2006 From:** | ** ** |                            |
| ** **                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31, 2005**            | ** ** | **December 31, 2005** | ** ** |   |
| **(Dollars in thousands)**                       | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** | **Amount**                              | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |   |
| Commercial, financial  and industrial                      |       |               | $          | 30,089                |       |               |       | $                                       | 50,073     |                            |   | $ | 18,691 |   | $ | (11,398 | ) |   | (37.9 | )% |   | $ | (31,382 | ) |   | (62.7 | )% |   |
| Construction                                               |       |               | 1,425      |                  |       |               | —     |                                    |       | —                          |   | (1,425 | ) |   | (100.0 | ) |   | — |   |   | nm |   |   |
| Commercial mortgage                                        |       |               | 9,587      |                  |       |               | 8,819      |                                    |       | 8,257                           |   | (1,330 | ) |   | (13.9 | ) |   | (562 | ) |   | (6.4 | ) |   |
| Lease financing                                            |       |               | 54,893     |                  |       |               | —     |                                    |       | 15,187                          |   | (39,706 | ) |   | (72.3 | ) |   | 15,187 |   |   | nm |   |   |
| Total nonaccrual loans                                     |       |               | 95,994     |                  |       |               | 58,892     |                                    |       | 42,135                          |   | (53,859 | ) |   | (56.1 | ) |   | (16,757 | ) |   | (28.5 | ) |   |
| Foreclosed assets                                          |       |               | 5,232      |                  |       |               | 2,753      |                                    |       | 257                             |   | (4,975 | ) |   | (95.1 | ) |   | (2,496 | ) |   | (90.7 | ) |   |
| Total nonperforming  assets                                |       |               | $          | 101,226               |       |               |       | $                                       | 61,645     |                            |   | $ | 42,392 |   | $ | (58,834 | ) |   | (58.1 | ) |   | $ | (19,253 | ) |   | (31.2 | ) |   |
| Allowances for credit  losses(1)                           |       |               | $          | 486,649               |       |               |       | $                                       | 437,907    |                            |   | $ | 422,817 |   | $ | (63,832 | ) |   | (13.1 | )% |   | $ | (15,090 | ) |   | (3.4 | )% |   |
| Nonaccrual loans to  total loans                           |       |               | 0.32       | %                     |       |               | 0.18       | %                                       |       | 0.13                            | % |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowances for credit  losses to nonaccrual loans          |       |               | 506.96     |                  |       |               | 743.58     |                                    |       | 1,003.48                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets  to total loans and foreclosed assets |       |               | 0.34       |                  |       |               | 0.19       |                                    |       | 0.13                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets  to total assets                      |       |               | 0.20       |                  |       |               | 0.12       |                                    |       | 0.09                            |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

(1)                   Includes allowance for losses related tooff-balance sheet commitments.

nm = not meaningful

At March 31, 2006, ournonperforming assets included approximately $5 million in acquired syndicatedloans. The decrease in nonaccrual commercial, financial, and industrialfinancings were primarily due to pay-downs, note sales, and charge-offs. Theincrease in nonaccrual lease financings was primarily due to leases in theutilities sector. During the first quarter 2006, we sold approximately $18million of nonperforming loans compared to $35 million in the first quarter2005. Losses and recoveries that result when the sale decision is made arereflected in our net charge-offs.

43

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

| ** **                                                    | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase (Decrease)**            | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------------------------------|------------|
| ** **                                                    | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **March 31, 2006 From:** | ** ** |
| ** **                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **March 31, 2005**            | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                          | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** | **Amount**                              | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial  and industrial                         |       |               | $          | 271                   |       |               |       | $                                       | 187        |   |   |   | $ | 412 |   |   |   | $ | 141 |   |   |   | 52.0 | % |   |   | $ | 225 |   |   |   | 120.3 | % |   |
| Construction                                                  |       |               | 629        |                  |       |               | 677        |                                    |       |   | — |   |   |   | (629 | ) |   |   | (100.0 | ) |   |   | (677 | ) |   |   | (100.0 | ) |   |
| Mortgage:                                                     |       |               |       |                  |       |               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                   |       |               | 1,580      |                  |       |               | 2,784      |                                    |       |   | 2,968 |   |   |   | 1,388 |   |   |   | 87.8 |   |   |   | 184 |   |   |   | 6.6 |   |   |
| Commercial                                                    |       |               | 878        |                  |       |               | 499        |                                    |       |   | 1,007 |   |   |   | 129 |   |   |   | 14.7 |   |   |   | 508 |   |   |   | 101.8 |   |   |
| Total mortgage                                                |       |               | 2,458      |                  |       |               | 3,283      |                                    |       |   | 3,975 |   |   |   | 1,517 |   |   |   | 61.7 |   |   |   | 692 |   |   |   | 21.1 |   |   |
| Consumer and other                                            |       |               | 616        |                  |       |               | 819        |                                    |       |   | 812 |   |   |   | 196 |   |   |   | 31.8 |   |   |   | (7 | ) |   |   | (0.9 | ) |   |
| Total loans 90 days or more  past due and still accruing |       |               | $          | 3,974                 |       |               |       | $                                       | 4,966      |   |   |   | $ | 5,199 |   |   |   | $ | 1,225 |   |   |   | 30.8 | % |   |   | $ | 233 |   |   |   | 4.7 | % |   |

 

**Quantitative and Qualitative Disclosures About MarketRisk**

Our exposure to market risk exists primarily ininterest rate risk in our non-trading balance sheet and, to a much lesserdegree, in price risk in our trading portfolio for our customer-focused tradingand sales activities. The objective of market risk management is to mitigate anundue adverse impact on earnings and capital arising from changes in interestrates and other market variables. This risk management objective supports ourbroad objective of enhancing shareholder value, which encompasses stableearnings growth over time and capital stability.

The Board of Directors, through its Finance and CapitalCommittee, approves our ALM Policy, which governs the management of market riskand liquidity. In the administration of market risk management, the CEO Forumprovides broad and strategic guidance and, as appropriate, specific directionto the Asset & Liability Management Committee (ALCO) whose votingmembers are comprised of senior executives. ALCO is responsible for ongoingmanagement of interest rate and price risks as well as liquidity risk,including formulation of risk management strategies, in accordance with the CEOForum’s directives. The Treasurer is primarily responsible for theimplementation of risk management strategies approved by the CEO Forum or ALCOand for operating management of market risk through the funding, investment,and derivatives hedging activities of Corporate Treasury. The Manager of theGlobal Markets Division is responsible for operating management of price riskthrough the trading activities conducted in that division.

The Market Risk Monitoring unit is responsible for themonitoring of market risk. Market Risk Monitoring functions independently ofall operating and management units.

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

*Interest Rate Risk Management (Other Than Trading)*

During the first quarter of 2006, our assetsensitivity decreased as a result of several factors. Firstly, we added newfloor hedges to reduce our downside asset-sensitivity (see our discussion of “ALMDerivatives” below). Additionally, changes in our balance sheet composition andrefinements we made to our deposit-pricing model to reflect the increasingresponsiveness of non-maturity deposit rates to market rates in recent monthshave also contributed to a reduction in our asset sensitivity.

At March 31, 2006,Economic NII showed modest asset-sensitivity to parallel rate shifts. A +200 basispoint parallel shift would raise 12-month Economic NII by 1.01 percent,while a similar downward shift would reduce it by 1.21 percent. This compareswith an estimated 1.93 percent and negative 2.58 percent, respectively, at March 31,2005. We caution that ongoing enhancements to our interest rate risk modelingmay make prior-year comparisons of Economic NII less meaningful. 

44

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Economic NIIadjusts our reported NII for the effect of certain non-interest, DDA-related,fee and expense items. Those adjustment items are innately liability-sensitive,meaning that reported NII is more asset-sensitive than is Economic NII.

**Economic NII**

| **(Dollars in millions)** | ** ** | **March 31,  2005** | ** ** | **December 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| +200 basis points                   |       |                     | $          | 36.4                        |       |                     |       | $ | 18.9 |   |   |   | $ | 20.4 |   |   |
| as a percentage of  basc case NII   |       |                     | 1.93       | %                           |       |                     | 0.93       | % |   |   | 1.01 | % |   |
| -200  basis points                  |       |                     | $          | (48.6                       | )          |                     |       | $ | (40.2 | ) |   |   | $ | (24.5 | ) |   |
| as a percentage of basc case  NII   |       |                     | 2.58       | %                           |       |                     | 1.97       | % |   |   | 1.21 | % |   |

 

The figures in the above tableare reported on a continuing operations basis, with all assets and liabilitiesassociated with the disposal of the international correspondent bankingbusiness eliminated. We believe that this approach provides the bestrepresentation of our risk profiles. In the case of non-parallel yield curvechanges, our Economic NII is relatively neutral to short rates changes (withlong rates held constant) and modestly asset-sensitive to changes in long-termrates (with short-term rates held constant).

*ALM Activities*

In general, our unhedged, corebalance sheet is relatively asset sensitive, meaning that our loans generallyre-price more quickly than our core deposits. In managing the interestsensitivity of our balance sheet, we use the ALM investment securitiesportfolio and derivatives positions as the primary tools to adjust our riskprofile. During the first quarter of 2006, we completed our ALM portfoliorebalancing strategy as described below while continuing to allow maturing ALMsecurities runoff to help support loan growth. New derivative hedges were alsoadded during the quarter as described below, to help reduce our assetsensitivity.

*ALM Investments*

At March 31, 2005 and 2006, our securitiesavailable for sale portfolio included $10.0 billion and $6.6 billion,respectively, of securities for ALM purposes. During the first quarter of 2006,we purchased approximately $646 million of AAA-rated Non-Agency mortgage-backedsecurities to complete our portfolio rebalancing strategy, initiated in thefourth quarter of 2005, to diversify our Agency concentration risk. Thecomposition of the portfolio is expected to remain relatively stable for theremainder of 2006. Also, approximately $380 million of ALM securities maturedor were called during the quarter. The estimated ALM portfolio effectiveduration was 2.3 at March 31, 2006, compared to 2.2 at March 31,2005.

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 one percentincrease in interest rates.

*ALM Derivatives*

During the first quarter 2006, we purchased $1 billionnotional amount of LIBOR floors in order to moderate the downsideasset-sensitivity of our overall risk position while retaining the upsidesensitivity should rates rise further. During the first quarter of 2006, wealso allowed $1.8 billion of caps and cap corridors, which hedged our CDportfolios to mature. The net effect of the purchases and maturities was areduction in our ALM derivatives portfolio of approximately $750 million. Thefair value of the ALM derivative contracts have declined throughout the year asseveral “in-the-money” contracts have matured and as the value of our remainingreceive fixed and floor positions have declined with rising interest rates. 

45

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For additional discussion ofderivative instruments and our hedging strategies, see Note 8 to ourCondensed Consolidated Financial Statements included in this report and Note 19to our Consolidated Financial Statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

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

| ** **                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Increase / (Decrease)**       | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **From December 31, 2005** | ** ** |
| **(Dollars in thousands)**                                            | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** | **to March 31, 2006**      | ** ** |
| Total gross notional  amount of positions held for purposes other than trading: |       | $                  | 8,680,000  |                  | $          | 7,550,000          |       | $                                         | 6,800,000  |   |   | $ | (750,000 | ) |   |
| Of which, interest rate swaps pay fixed rates of interest:                      |       | —             |       | —                |       | —             |       |                                      | —     |   |   |
| Fair value of  positions held for purposes other than trading:                  |       |               |       |                  |       |               |       |                                      |       |   |   |
| Gross positive fair value                                                       |       | 20,040             |       | 5,721                 |       | 13,370             |       |                                      | 7,649      |   |   |
| Gross negative fair value                                                       |       | 43,305             |       | 55,943                |       | 69,746             |       |                                      | 13,803     |   |   |
| Fair value of  position                                                         |       | $                  | (23,265    | )                     | $          | (50,222            | )          | $                                         | (56,376    | ) |   | $ | (6,154 | ) |   |

 

*Trading Activities*

Effective January 1, 2005, the Securities Tradingand Institutional Sales department, which serves the fixed-income needs of ourinstitutional clients, was combined with the retail brokerage operations of ourbroker/dealer subsidiary, UnionBanc Investment Services LLC. The great majorityof our securities trading income comes from customer-related transactions. UnionBancInvestment Services LLC’s trading risk is monitored and controlled using theexisting Value-at-Risk methodology.

We began marketing energy derivatives contracts toexisting energy industry customers, primarily oil and gas producers, in late2004, in order to meet their hedging needs. Volume increased from $1.1 billionin notional amount of contracts outstanding as of December 31, 2005 to$1.5 billion as of March 31, 2006. Consistent with our customer interestrate derivatives business, all transactions are fully matched to remove ourexposure to market risk, with income produced from the credit spread earned.

For information about themarket risk in our trading activities, please see “Quantitative and QualitativeDisclosures about Market Risk” in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

**Liquidity Risk**

Liquidity risk is the undue risk to the Bank’searnings and capital, which would result from the Bank’s inability to meet itsobligations as they come due without incurring unacceptable costs. Liquidityrisk management is governed by the ALM Policy, which is approved by the Financeand Capital Committee of the Board. ALCO conducts monthly ongoing reviews ofour liquidity situation and provides regular updates to our CEO Forum whoapprove our Liquidity Contingency Plan. Liquidity is managed through this ALCOcoordination process on an entity-wide basis, encompassing all major businessunits. Our liquidity management is implemented through our three primarysources of liquidity: core deposits, drawing upon the strengths of ourextensive retail and commercial core deposit franchise; asset liquidation,including selling securities under repurchase agreements; and wholesalefunding, which includes funds raised from interbank and other sources, bothdomestic and offshore.

46

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Core deposits provide us with a sizable source ofrelatively stable and low-cost funds. Our average core deposits, which includedemand deposits, money market demand accounts, and savings and consumer timedeposits, combined with average common stockholders’ equity, funded over 83 percentof average total assets of approximately $48 billion in the first quarter of2006. Most of the remaining funding was provided by short-term borrowingsin the form of certificates of deposit, large time deposits, foreign deposits,federal funds purchased, securities sold under repurchase agreements,commercial paper, and other borrowings.

Oursecurities portfolio provides additional enhancement to our liquidityposition, which may be created through either securities sales or repurchaseagreements. At March 31, 2006, we could have sold or transferred underrepurchase agreements approximately $4 billion of our available for salesecurities. Liquidity may also be provided by the sale or maturity of otherassets such as interest-bearing deposits in banks, federal funds sold, andtrading account securities. The aggregate balance of these assets averaged $733million in the first quarter of 2006. Additional liquidity may be providedthrough loan maturities and sales.

**Regulatory Capital**

The following tables summarizeour risk-based capital, risk-weighted assets, and risk-basedcapital ratios. The tables include assets of discontinued operations.

**UnionBanCal Corporation**

| ** **                           | ** ** | ** **         | ** ** | ** **            | ** ** | ** **         | ** ** | **Minimum**     | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|-----------------|------------|
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **Regulatory**  | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**           | ** ** | **2005**              | ** ** | **2006**           | ** ** | **Requirement** | ** ** |
| **Capital  Components**              | ** ** |               |       | ** **            |       |               |       | ** **      |       |   |   | ** ** |   | ** ** |   |
| Tier 1 capital                       | ** ** |               | $          | 3,728,822             | ** ** |               |       | $               | 4,178,160  | ** ** |   |   | $ | 4,243,053 | ** ** |   | ** ** |   |
| Tier 2 capital                       | ** ** |               | 968,292    | ** **            |       |               | 876,713    | ** **      |       |   | 862,051 | ** ** |   | ** ** |   |
| Total risk-based capital             | ** ** |               | $          | 4,697,114             | ** ** |               |       | $               | 5,054,873  | ** ** |   |   | $ | 5,105,104 | ** ** |   | ** ** |   |
| Risk-weighted assets                 | ** ** |               | $          | 41,167,052            | ** ** |               |       | $               | 45,540,448 | ** ** |   |   | $ | 46,657,433 | ** ** |   | ** ** |   |
| Quarterly average assets             | ** ** |               | $          | 47,892,405            | ** ** |               |       | $               | 49,789,877 | ** ** |   |   | $ | 48,200,458 | ** ** |   | ** ** |   |

 

| ** **                                | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount** | ** ** | **Ratio**  | ** **   | **Amount** | ** ** | **Ratio**                        | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|--------------|------------|------------|----------------------------------|------------|
| **Capital  Ratios**                       | ** ** | ** ** |       |      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** |                             | ** ** | ** ** |   |
| Total capital (to risk-weighted  assets)  |       | $          | 4,697,114  |      | 11.41      | %          | $          | 5,054,873  |       | 11.10      | %          | $          | 5,105,104    |       | 10.94      | %     3 | $          | 3,732,595 |   |   | 8.0 | % |   |
| Tier 1 capital (to  risk-weighted assets) |       | 3,728,822  |       | 9.06      |       | 4,178,160  |       | 9.17       |       | 4,243,053  |       | 9.09       | 3  | 1,866,297  |       |                             | 4.0        |   |   |
| Leverage(1)                               |       | 3,728,822  |       | 7.79      |       | 4,178,160  |       | 8.39       |       | 4,243,053  |       | 8.80       | 3  | 1,928,018  |       |                             | 4.0        |   |   |
|                                           |            |            |            |           |            |            |            |            |            |            |            |            |              |            |            |                                  |            |  |  |  |  |  |  |

----

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

47

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

| ** **                           | ** ** | ** **         | ** ** | ** **           | ** ** | ** **         | ** ** | **Minimum**     | ** ** | **“Well-Capitalized”** | ** ** |
|--------------------------------------|------------|--------------------|------------|----------------------|------------|--------------------|------------|-----------------|------------|----------------------------------|------------|
|                                      | ** ** | **March 31,** | ** ** | **December 31** | ** ** | **March 31,** | ** ** | **Regulatory**  | ** ** | **Regulatory**                   | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**           | ** ** | **2005**             | ** ** | **2006**           | ** ** | **Requirement** | ** ** | **Requirement**                  | ** ** |
| **Capital Components**               | ** ** |               |       | ** **           |       |               |       | ** **      |       |                             |       | ** ** |   |   |   |   |   |
| Tier 1 capital                       | ** ** |               | $          | 3,719,837            | ** ** |               |       | $               | 4,315,471  | ** **                       |       |   | $ | 4,377,832 | ** ** |   |   |   |   |   |
| Tier 2 capital                       | ** ** |               | 492,259    | ** **           |       |               | 433,353    | ** **      |       |                             | 426,955    | ** ** |   |   |   |   |   |
| Total risk-based capital        | ** ** |               | $          | 4,212,096            | ** ** |               |       | $               | 4,748,824  | ** **                       |       |   | $ | 4,804,787 | ** ** |   |   |   |   |   |
| Risk-weighted assets                 | ** ** |               | $          | 40,563,339           | ** ** |               |       | $               | 44,851,154 | ** **                       |       |   | $ | 45,943,246 | ** ** |   |   |   |   |   |
| Quarterly average  assets            | ** ** |               | $          | 47,267,803           | ** ** |               |       | $               | 49,127,241 | ** **                       |       |   | $ | 47,563,560 | ** ** |   |   |   |   |   |

 

| ** **                               | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount**                  | ** ** | **Ratio** | ** **             | **Amount** | ** ** | **Ratio**                   | ** **                            |
|------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------|------------------------|------------|------------|-----------------------------|---------------------------------------|
| **Capital Ratios**                       | ** ** | ** ** |       |      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** |      | ** **             |       |       |                        |                                  |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 4,212,096  |      | 10.38      | %          | $          | 4,748,824  |       | 10.59      | %          | $          | 4,804,787  |                        | 10.46      | %         | 3$ 3,675,460 |       |       | 8.0                         | %       |   | 3$ 4,594,325 |   |   | 10.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 3,719,837  |       | 9.17      |       | 4,315,471  |       | 9.62       |       | 4,377,832  |       | 9.53       |       | 3  1,837,730 |       |      | 4.0                    |       |       | 3  2,756,595 |                                  |   | 6.0 |   |   |
| Leverage(1)                              |       | 3,719,837  |       | 7.87      |       | 4,315,471  |       | 8.78       |       | 4,377,832  |       | 9.20       |       | 3  1,902,542 |       |      | 4.0                    |       |       | 3  2,378,178 |                                  |   | 5.0 |   |   |
|                                          |            |            |            |           |            |            |            |            |            |            |            |            |            |                             |            |           |                        |            |            |                             |                                       |  |  |  |  |  |  |  |

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

We and Union Bank of California, N.A. are subject tovarious regulations 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 the Total capital ratio forUnionBanCal Corporation from March 31, 2005 was primarily due to anincrease in risk-weighted assets, which was substantially the result ofincreases in our loan and lease financing receivables and unused off-balancesheet commitments. The increase in our leverage ratios from March 31, 2005was due to the increase in our Tier 1 capital.

As of March 31, 2006,management believes the capital ratios of Union Bank of California, N.A. metall regulatory requirements of “well-capitalized” institutions, which are10 percent for the Total risk-based capital ratio, 6 percent for the Tier1 risk-based capital ratio and 5 percent for the Leverage ratio.

**Business Segments**

In April 2005, we announced severalorganizational changes that affected our business segments. The Global MarketsGroup has been eliminated and the activities of this group have beentransferred. Corporate Treasury, which is responsible for ALM and theinvestment portfolio, is now included in “Other.”  The trading of securities and foreignexchange contracts, as well as the responsibilities for customer accommodatedderivative contracts, are now included in the “Global Markets Division” of theCommunity Banking and Investment Services Group. In addition, the discontinuedoperations resulting from the sale of most of our International Banking Groupis also reflected in “Other.”  We are noworganized around the target markets we serve and operate in two principalareas, as shown in the table that follows. The results show the financialperformance of our major business units.

The risk-adjusted return on capital (RAROC)methodology used seeks to attribute economic capital to business units consistentwith the level of risk they assume. These risks are primarily credit, marketand operational. Credit risk is the potential loss in economic value due to thelikelihood that the obligor will not perform as agreed. Market risk is thepotential loss in fair value due to changes in interest rates, currency ratesand equity prices. Operational risk is the potential loss due to all otherfactors, such as failures in internal control, system failures, or externalevents. RAROC is one of several measures that is used to measure business unitcompensation.

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The following tables reflect the condensed incomestatements, selected average balance sheet items, and selected financialratios, including changes from the prior year, for each of our primary businessunits. The information presented does not necessarily represent the businessunits’ financial condition and results of operations as if they wereindependent entities. In the first quarter of 2006, we changed our reporting toreflect a “market view” perspective in measuring our business segments. Themarket view is a measurement of our 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 boththe business segment that provides the service and the business segment thatmanages the customer relationship. The duplicative results from this internalmanagement accounting view are reflected in “Reconciling Items.” The marketview approach fosters cross-selling with a total profitability view of theproducts and services being managed. For example, the Securities Trading andSales unit within the Global Markets Division, is a business unit that manages thefixed income securities activities for all retail and corporate customers throughoutthe Bank.

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.

The RAROC measurement methodology recognizes creditexpense for expected losses arising from credit risk and attributes economiccapital related to unexpected losses arising from credit, market andoperational risks. As a result of the methodology used by the RAROC model tocalculate expected losses, differences between the provision for credit lossesand credit expense in any one period could be significant. However, over aneconomic cycle, the cumulative provision for credit losses and credit expensefor expected losses should be substantially the same. Business unit results arebased on an internal management reporting system used by management to measurethe performance of the units and UnionBanCal Corporation as a whole. Ourmanagement reporting system identifies balance sheet and income statement itemsfor each business unit based on internal management accounting policies. Netinterest income is determined using our internal funds transfer pricing system,which assigns a cost of funds to assets or a credit for funds to liabilitiesand capital, based on their type, maturity or repricing characteristics. Noninterestincome and expense directly or indirectly attributable to a business unit areassigned to that business. The business units are assigned the costs ofproducts and services directly attributable to their business activity throughstandard unit cost accounting based on volume of usage. All other corporateexpenses (overhead) are allocated to the business units based on apredetermined percentage of usage.

The business unit results for the prior periods havebeen adjusted to reflect changes in the transfer pricing methodology, theorganizational changes that have occurred, our discontinued operations and themarket view contribution.

 

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| ** **                                                           | ** ** | **Community Banking  and Investment  Services Group**                    | ** ** | ** **              | ** ** | ** **                                                                              | ** ** | **Commercial Financial  Services Group** | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                                           | ** ** | **As of and for the  Three Months  Ended March 31,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Three Months  Ended March 31,** | ** ** | **Increase/(decrease)**                            | ** ** |
| ** **                                                           | ** ** | **2005**                                                                                | ** ** | **2006**                | ** ** | **Amount**                                                                              | ** ** | **Percent**                                        | ** ** | **2005**   | ** ** | **2006**            | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market View   (dollars in thousands):** | ** ** | ** **                                                                              | ** ** | ** **              | ** ** | ** **                                                                              |       |                                               | ** ** | ** ** |       | ** **          |       | ** ** |   | ** ** |   |   | ** ** | ** ** |   |   |
| Net interest income  (expense)                                       |       | $ 222,860                                                                          |       | $ 242,829          |       | $ 19,969                                                                           |       |                                               | 9          | %          |       | $ 203,576      |       | $ 224,687 |   | $ 21,111 |   |   | 10 | % |   |   |
| Noninterest income (expense)                                         |       | 149,747                                                                                 |       | 162,311                 |       | 12,564                                                                                  |       |                                               | 8          |       |       | 65,110              |       | 65,936 |   | 826 |   |   | 1 |   |   |   |
| Total revenue                                                        |       | 372,607                                                                                 |       | 405,140                 |       | 32,533                                                                                  |       |                                               | 9          |       |       | 268,686             |       | 290,623 |   | 21,937 |   |   | 8 |   |   |   |
| Noninterest expense  (income)                                        |       | 269,271                                                                                 |       | 279,312                 |       | 10,041                                                                                  |       |                                               | 4          |       |       | 108,203             |       | 122,513 |   | 14,310 |   |   | 13 |   |   |   |
| Credit expense                                                       |       | 8,933                                                                                   |       | 8,931                   |       | (2                                                                                      | )          |                                               | 0          |       |       | 23,511              |       | 22,563 |   | (948 | ) |   | (4 | ) |   |   |
| Income from continuing  operations before income taxes               |       | 94,403                                                                                  |       | 116,897                 |       | 22,494                                                                                  |       |                                               | 24         |       |       | 136,972             |       | 145,547 |   | 8,575 |   |   | 6 |   |   |   |
| Income tax expense  (income)                                         |       | 35,415                                                                                  |       | 43,949                  |       | 8,534                                                                                   |       |                                               | 24         |       |       | 45,594              |       | 47,899 |   | 2,305 |   |   | 5 |   |   |   |
| Income from continuing  operations                                   |       | 58,988                                                                                  |       | 72,948                  |       | 13,960                                                                                  |       |                                               | 24         |       |       | 91,378              |       | 97,648 |   | 6,270 |   |   | 7 |   |   |   |
| Income (loss) from  discontinued operations, net of income taxes     |       | —                                                                                  |       | —                  |       | —                                                                                  |       |                                               | na         |       |       | —              |       | — |   | — |   |   | na |   |   |   |
| Net income (loss)                                                    |       | $  58,988                                                                     |       | $  72,948     |       | $ 13,960                                                                           |       |                                               | 24         |       |       | $  91,378 |       | $  97,648 |   | $  6,270 |   |   | 7 |   |   |   |
| **Average balances—Market View (dollars in millions):**         | ** ** | ** **                                                                              | ** ** | ** **              | ** ** | ** **                                                                              |       |                                               | ** ** | ** ** |       | ** **          |       | ** ** |   | ** ** |   |   | ** ** | ** ** |   |   |
| Total loans                                                          |       | $  14,550                                                                     |       | $  16,348     |       | $  1,798                                                                      |       |                                               | 12         |       |       | $  14,909 |       | $  17,540 |   | $  2,631 |   |   | 18 |   |   |   |
| Total assets                                                         |       | 16,053                                                                                  |       | 17,993                  |       | 1,940                                                                                   |       |                                               | 12         |       |       | 18,075              |       | 21,438 |   | 3,363 |   |   | 19 |   |   |   |
| Total deposits                                                       |       | 20,362                                                                                  |       | 19,615                  |       | (747                                                                                    | )          |                                               | (4         | )          |       | 14,874              |       | 15,660 |   | 786 |   |   | 5 |   |   |   |
| **Financial  ratios—Market View**                               | ** ** | ** **                                                                              | ** ** | ** **              | ** ** | ** **                                                                              |       |                                               | ** ** | ** ** |       | ** **          |       | ** ** |   | ** ** |   |   | ** ** | ** ** |   |   |
| Risk adjusted return  on capital(1)                                  |       | 29                                                                                      | %          | 33                      | %          |                                                                                    |       |                                               |       |       |       | 23                  | %          | 21 | % |   |   |   |   |   |   |   |
| Return on average  assets(1)                                         |       | 1.49                                                                                    |       | 1.64                    |       |                                                                                    |       |                                               |       |       |       | 2.05                |       | 1.85 |   |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                  |       | 72.27                                                                                   |       | 68.94                   |       |                                                                                    |       |                                               |       |       |       | 40.16               |       | 44.69 |   |   |   |   |   |   |   |   |

 

| ** **                                                            | ** ** | **Other**                                                                               | ** ** | ** **                         | ** ** | **Reconciling Items**                                                              | ** ** | **UnionBanCal Corporation**                                                              | ** ** | ** **              | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **As of and for the  Three Months  Ended March 31,** | ** ** | **Increase/(decrease)**            | ** ** | **As of and for the  Three Months  Ended March 31,** | ** ** | **As of and for the  Three Months   Ended March 31,** | ** ** | **Increase/(decrease)** | ** ** |
| ** **                                                            | ** ** | **2005**                                                                                | ** ** | **2006**                           | ** ** | **Amount**                                                                              | ** ** | **Percent**                                                                                   | ** ** | **2005**                | ** ** | **2006** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market View (dollars in thousands):**    |       |                                                                                    |       |                               |       |                                                                                    |       |                                                                                          |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income   (expense)                                       |       | $  9,816                                                                      |       | $ (1,916                      | )          | $ (11,732                                                                          | )          |                                                                                          | (120       | )%                      |       | $    (590 | ) | $    (507 | ) |   | $ 435,662 |   |   |   | $ 465,093 |   |   | $ 29,431 |   |   | 7 | % |   |
| Noninterest income   (expense)                                        |       | 6,498                                                                                   |       | 7,508                              |       | 1,010                                                                                   |       |                                                                                          | 16         |                    |       | (15,730 | ) | (17,845 | ) |   | 205,625 |   |   |   | 217,910 |   |   | 12,285 |   |   | 6 |   |   |
| Total revenue                                                         |       | 16,314                                                                                  |       | 5,592                              |       | (10,722                                                                                 | )          |                                                                                          | (66        | )                       |       | (16,320 | ) | (18,352 | ) |   | 641,287 |   |   |   | 683,003 |   |   | 41,716 |   |   | 7 |   |   |
| Noninterest expense   (income)                                        |       | 21,225                                                                                  |       | 20,232                             |       | (993                                                                                    | )          |                                                                                          | (5         | )                       |       | (5,747 | ) | (7,513 | ) |   | 392,952 |   |   |   | 414,544 |   |   | 21,592 |   |   | 5 |   |   |
| Credit expense                                                        |       | (44,414                                                                                 | )          | (38,451                            | )          | 5,963                                                                                   |       |                                                                                          | 13         |                    |       | (149 | ) | (43 | ) |   | (12,119 | ) |   |   | (7,000 | ) |   | 5,119 |   |   | 42 |   |   |
| Income from   continuing   operations before  income taxes            |       | 39,503                                                                                  |       | 23,811                             |       | (15,692                                                                                 | )          |                                                                                          | (40        | )                       |       | (10,424 | ) | (10,796 | ) |   | 260,454 |   |   |   | 275,459 |   |   | 15,005 |   |   | 6 |   |   |
| Income tax expense   (income)                                         |       | 3,681                                                                                   |       | 6,285                              |       | 2,604                                                                                   |       |                                                                                          | 71         |                    |       | (3,987 | ) | (4,129 | ) |   | 80,703 |   |   |   | 94,004 |   |   | 13,301 |   |   | 16 |   |   |
| Income from   continuing   operations                                 |       | 35,822                                                                                  |       | 17,526                             |       | (18,296                                                                                 | )          |                                                                                          | (51        | )                       |       | (6,437 | ) | (6,667 | ) |   | 179,751 |   |   |   | 181,455 |   |   | 1,704 |   |   | 1 |   |   |
| Income (loss) from  discontinued operations, net of income taxes |       | 2,226                                                                                   |       | (8,510                             | )          | (10,736                                                                                 | )          |                                                                                          | (482       | )                       |       | — |   | — |   |   | 2,226 |   |   |   | (8,510 | ) |   | (10,736 | ) |   | (482 | ) |   |
| Net income (loss)                                                     |       | $ 38,048                                                                           |       | $  9,016                 |       | $ (29,032                                                                          | )          |                                                                                          | (76        | )                       |       | $ (6,437 | ) | $ (6,667 | ) |   | $ 181,977 |   |   |   | $ 172,945 |   |   | $ (9,032 | ) |   | (5 | ) |   |
| **Average balances—Market View (dollars in millions):**     |       |                                                                                    |       |                               |       |                                                                                    |       |                                                                                          |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans                                                           |       | $     317                                                      |       | $     208 |       | $    (109                                                           | )          |                                                                                          | (34        | )                       |       | $     (62 | ) | $     (44 | ) |   | $ 29,714 |   |   |   | $ 34,052 |   |   | $  4,338 |   |   | 15 |   |   |
| Total assets                                                          |       | 12,254                                                                                  |       | 8,638                              |       | (3,616                                                                                  | )          |                                                                                          | (30        | )                       |       | (69 | ) | (52 | ) |   | 46,313 |   |   |   | 48,017 |   |   | 1,704 |   |   | 4 |   |   |
| Total deposits                                                        |       | 2,981                                                                                   |       | 3,599                              |       | 618                                                                                     |       |                                                                                          | 21         |                    |       | (17 | ) | (18 | ) |   | 38,200 |   |   |   | 38,856 |   |   | 656 |   |   | 2 |   |   |
| **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 |   |   | 1.57 | % |   |   | 1.53 | % |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                   |       | na                                                                                      |       | na                                 |       |                                                                                    |       |                                                                                          |       |                    |       | na |   | na |   |   | 60.64 |   |   |   | 62.10 |   |   |   |   |   |   |   |   |

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(1)                   Annualized.

(2)                   The efficiency ratio is noninterestexpense, excluding foreclosed asset expense (income) and the provision forlosses on off-balance sheet commitments, as a percentage of net interest income(taxable-equivalent basis) and noninterest income and is calculated forcontinuing operations only.

na = not applicable

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*Community Banking andInvestment Services Group*

The Community Banking and Investment Services Groupprovides financial products including credit, deposit, trust, investmentmanagement, risk management, and insurance products delivered through ourbranches, relationship managers, private bankers, trust administrators, andinsurance agents to individuals, small businesses and institutional clients.

During the first quarter of 2006, net income of thegroup increased by 24 percent over the same period in 2005, reflecting thegroup’s continued focus on growing the consumer asset portfolio and attractingretail and small business deposits. Net interest income increased by 9 percentdue to a higher margin on deposits.

The group’s strategy is to grow assets through anexpanded small business sales force, increased emphasis on real estate-securedand Small Business Administration (SBA) guaranteed loans to small business, anda stronger network of residential real estate brokers. The focus on home equityloans and more effective cross-selling efforts have led to an overall growth inconsumer loans, despite run-off of discontinued auto dealer and auto leaselines of business. In addition, the group expects a larger branch network,created from new branches and acquired branches, to improve growth prospectswhen combined with more robust efforts in the telephone and internet channels.

Despite the decrease of 4 percent in core depositsfrom the prior year, primarily reflecting increased competition for interestbearing deposits, the group continues to focus on attracting consumer and smallbusiness deposits through marketing activities, relationship management,increased and improved sales resources, new locations, and new products. Amongthe more successful marketing activities has been the “Power Bank” network, inFresno, California. These branches offer an expanded set of service options,extended hours and have been remodeled to improve the customer experience withfacility enhancements.

Of the 8 percent increase in the group’s noninterestincome, trust fees contributed 5 percent of the growth, primarily due tocontinued strong sales and organic growth, as well as a one-time $3.8 millionincrease resulting from a refinement in accrual methodology. In addition,deposit fees contributed 3 percent to the increase. Overall, total revenues forthe first quarter 2006 increased by over 9 percent compared to the firstquarter 2005.

The Community Banking and Investment Services Group iscomprised of five major divisions: Community Banking, Wealth Management,Institutional Services and Asset Management, Consumer Asset Management andGlobal Markets.

*Community Banking  *servesits customers through 317 full-service branches in California, 4 full-servicebranches in Oregon and Washington, and a network of 603 proprietary ATMs. Customersmay also access our services 24 hours a day by telephone or through our websiteat www.uboc.com. In addition, the division offers automated teller andpoint-of-sale merchant services.

This division isorganized by service delivery method, by markets and by geography. We serve ourcustomers in the following ways:

·       throughcommunity banking branches, which serve consumers and businesses with checkingand deposit services, as well as various types of consumer financing;

·       throughaccess to our internet banking services, which augment our physical deliverychannels by providing an array of customer transaction, bill payment and loanpayment services;

·       throughbranches and business banking centers, which serve small businesses with annualsales up to $5 million; and

·       throughin-store branches, which also serve consumers and small businesses.

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*WealthManagement  *provides comprehensive private bankingservices to our affluent clientele.

·       ThePrivate Bank focuses primarily on delivering financial services to high networth individuals with sophisticated financial needs as well as to professionalservice firms. Specific products and services include trust and estateservices, investment account management services, and deposit and creditproducts. A key strategy of The Private Bank is to expand its business byleveraging existing Bank client relationships. Through 14 existing locations,The Private Bank relationship managers offer all of our available products andservices.

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

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

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

*Consumer Asset Management  *provides the centralized origination,underwriting, processing, servicing, collection and administration for consumerassets including residential mortgages.

*Global Markets**  *serves our customers with their insurance, foreignexchange and interest rate risk management and investment needs. Since thefourth quarter 2004, the Global Markets Division has been offering 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 market risk whenproviding insurance or derivative contracts, since the market risk for theseproducts is offset with third parties.

*Insurance Services**  *products are sold through UBOC Insurance, Inc.(through its insurance agency subsidiaries) and securities are sold throughUnionBanc Investment Services LLC, both of which are subsidiaries of Union Bankof California, N.A. Effective January 1, 2006, our insurance agencysubsidiaries were combined into UnionBanc Insurance Services, Inc.

Through alliances with other financial institutions,the Community Banking and Investment Services Group offers additional productsand services, such as credit cards, merchant bank cards, leasing, andasset-based and leveraged financing.

The group competes with larger banks by attempting toprovide service quality superior to that of its major competitors. The group’sprimary means of competing with community banks include its branch network andits technology to deliver banking services. The group also offers convenientbanking hours to consumers through our drive-through banking locations andselected branches that are open seven days a week.

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The group competes with anumber of commercial banks, internet banks, savings associations and creditunions, as well as more specialized financial service providers such asinvestment brokerage companies, consumer finance companies, and residentialreal estate lenders.

*Commercial FinancialServices Group*

The Commercial Financial Services Group offersfinancing, depository and cash management services to middle market and largecorporate businesses primarily headquartered in the western United States. Thegroup has continued to focus on specific geographic markets and industrysegments such as energy, entertainment, and real estate. Relationship managersprovide credit services, including commercial loans, accounts receivable andinventory financing, project financing, lease financing, trade financing, andreal estate financing. In addition to credit services, the group 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.

In the first quarter of 2006, the 7 percent increasein net income was due to significant growth in both loans and deposits. Netinterest income increased by 10 percent due to higher deposit balances and ahigher margin on deposits. Deposit growth came primarily from sales successesin real estate industries and government markets. In addition to new sales,pricing strategies to retain volume helped to offset the disintermediationassociated with a rising interest rate environment.

First quarter 2006 average loans increased by 18percent over the same period last year. This was primarily due to continuedimprovement in our approach to the commercial real estate market and increasedloan demand in the California middle-market and specialty segments.

Noninterest income did not change significantly,increasing 1 percent from the first quarter of 2005. The increase innoninterest expense during the first quarter 2006, compared to the firstquarter 2005, was mainly due to outside services expense from higher costs ofservices related to title and escrow balances, stemming from a higher earningscredit rate, as well as higher performance-related incentive expense.

The group’s initiatives will continue to includeexpanding wholesale deposit activities and increasing domestic trade financing.Loan strategies include originating, underwriting and syndicating loans in corecompetency markets, such as the California middle-market, corporate banking,commercial real estate, energy, entertainment, equipment leasing and commercialfinance. The group is particularly strong in processing services, includingservices such as Automated Clearing House (ACH), check processing, and cashvault services.

The CommercialFinancial Services Group is comprised of the following business units:

·       theCommercial Banking Division, which serves California middle-market and largecorporate companies with commercial lending, trade financing, and asset-basedloans;

·       theCommercial Deposit and Treasury Management Division, which provides deposit andcash management expertise to middle-market and large corporate clients,government agencies and specialized industries. This division also managesUnion Bank of California’s web strategies for retail, small business, wealthmanagement and commercial clients, as well as product development andmanagement for our entire banking franchise;

·       theReal Estate Industries Division, which provides real estate lending productssuch as construction loans, commercial mortgages and bridge financing;

·       theEnergy Capital Services Division, which provides corporate financing andproject financing to oil and gas companies, as well as power and utilitycompanies, nationwide; and

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·       theCorporate Capital Markets Division, which provides financing to middle-marketand large corporate clients in their defined industries and geographic markets,together with limited merchant and investment banking related products andservices.

The group’s main strategy isto target industries and companies for which the group can reasonably expect tobe one of a customer’s primary banks. Consistent with its strategy, the groupattempts to serve a large part of its targeted customers’ credit and depositoryneeds. The group competes with other banks primarily on the basis of thequality of its relationship managers, the level of industry expertise, thedelivery of quality customer service, and its reputation as a “business bank.”The group also competes 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, the groupcompetes with investment banks, commercial finance companies, leasingcompanies, and insurance companies.

*Other*

“Other” includes thefollowing items:

·       corporateactivities that are not directly attributable to one of the two major businessunits. Included in this category are certainother items such as the results of operations of certain parent companynon-bank subsidiaries and the elimination of the fully taxable-equivalent basisamount;

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

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

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

·       thePacific Rim Corporate Group, with assets of $254 million at March 31,2006, which offers a range of credit, deposit, and investment managementproducts and services to companies in the U.S., which are affiliated withcompanies headquartered in Japan;

·       CorporateTreasury, which is responsible for our ALM, wholesale funding, and the ALMInvestment and derivatives hedging portfolios. These treasury managementactivities are carried out to counter-balance the residual risk positions ofour core balance sheet and to manage those risks within conservative guidelines.(For additional discussion regarding these risk management activities, see “Quantitativeand Qualitative Disclosures About Market Risk.”);

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

·       theresidual costs of support groups.

The first quarter 2006financial results were impacted by the following factors:

·       creditexpense (income) of ($38.5) million was due to the difference between the $7.0million reversal of provision for loan losses calculated under our US GAAPmethodology and the $31.5 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       netinterest income included the result of differences between the credit forequity for the reportable segments under RAROC and the net interest incomeearned by UnionBanCal Corporation, a credit for deposits in the Pacific RimCorporate Group and transfer pricing results. Net interest income declined$11.7 million compared to the three months ended March 31, 2005 primarilyas a result 

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of a decrease in income fromALM derivatives hedges and from the net impact of changes in transfer pricingrates over the prior period as market rates increased;

·       noninterestincome of $7.5 million;

·       noninterestexpense of $20.2 million;

·       lossfrom discontinued operations of $8.5 million.

The first quarter 2005financial results were impacted by the following factors:

·       creditexpense (income) of ($44.4) million was due to the difference between the $12.1million reversal of provision for loan losses calculated under our US GAAPmethodology and the $32.3 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       netinterest income is the result of differences between the credit for equity forthe reportable segments under RAROC, the net transfer pricing results, the netinterest income earned by UnionBanCal Corporation, and a credit for deposits inthe Pacific Rim Corporate Group;

·       noninterestincome $6.5 million;

·       noninterestexpense of $21.2 million; and

·       income tax expense includeda credit adjustment of $10.0 million to reflect a reduction in reserves to theInternal Revenue Service with respect to the tax treatment of certain leasingtransactions.

**Regulatory Matters**

In October 2004,Union Bank of California International entered into a written agreement withthe Federal Reserve Bank of New York relating to Union Bank of CaliforniaInternational’s Bank Secrecy Act and anti-money laundering controls andprocesses. Union Bank of California International, a wholly owned subsidiary ofUnion Bank of California, N.A., and as an Edge Act subsidiary, is limited toengaging in international banking activities, most of which were sold in October 2005.We expect to dissolve this subsidiary in 2006. Although the principal businessactivities of this subsidiary have been sold, we remain legally responsible forresolving the issues raised by the Federal Reserve Bank of New York.

In March 2005, Union Bank of California, N.A.entered into a memorandum of understanding with the Office of the Comptrollerof the Currency, which requires Union Bank of California, N.A. to strengthenits Bank Secrecy Act and anti-money laundering controls and processes. During 2005, we began the process ofstrengthening those controls and processes, which will continue in 2006.

Management is committed to resolving the issues raisedby the regulators and continues to take actions it believes to be appropriateto achieve this objective.

Until resolved, these pendingregulatory matters, or any future regulatory actions concerning anti-moneylaundering controls and processes, may adversely affect UnionBanCal Corporation’sand Union Bank of California, N.A.’s ability to obtain regulatory approvals forfuture initiatives requiring regulatory approval, including acquisitions. Also,any future regulatory actions relating to this subject could result in theimposition of fines or penalties as has occurred with a number of other banksin recent years. However, neither Union Bank of California, N.A.’s memorandumof understanding with the Office of the Comptroller of the Currency, Union Bankof California International’s agreement with the Federal Reserve Bank of NewYork, nor the financial impact of enhanced Bank Secrecy Act and anti-moneylaundering controls and processes, are expected to have a material adverseimpact on the financial condition or results of operations of Union Bank ofCalifornia, N.A. or UnionBanCal Corporation.

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**Item 3.   Quantitative and QualitativeDisclosures About Market Risk**

A discussion of our marketrisk exposure is incorporated by reference to Part I, Item 2 of thisdocument under the captions “Quantitative and Qualitative Disclosures AboutMarket Risk,” “Liquidity Risk,” and Part II, Item 1A “Risk Factors” and inItem 1A “Risk Factors” of our Annual Report on Form 10-K for theyear ended December 31, 2005.

**Item 4.   Controls and Procedures**

Our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer) haveconcluded that the design and operation of our disclosure controls andprocedures are effective as of March 31, 2006. This conclusion is based onan evaluation conducted under the supervision and with the participation ofmanagement. Disclosure controls and procedures are those controls andprocedures which ensure that information required to be disclosed in thisfiling is accumulated and communicated to management and is recorded,processed, summarized and reported in a timely manner and in accordance withSecurities and Exchange Commission rules and regulations.

During the quarter ended March 31, 2006, 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.OTHER INFORMATION**

**Item1.   Legal Proceedings**

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

**Item1A.   Risk Factors**

Fora discussion of risk factors relating to our business, please refer to Item 1Aof Part I of our Annual Report on Form 10-K for the year ended December 31,2005, which is incorporated by reference herein.

**Item2.   Unregistered Sales of Equity Securities and Use of Proceeds**

*Repurchases of EquitySecurities*

Thefollowing table presents repurchases by us of our equity securities during thefirst quarter 2006:

| **Period**                                            | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number  of Shares Purchased  as Part of Publicly  Announced Programs** | ** ** | **Approximate  Dollar   Value of Shares That  May Yet Be  Purchased  Under the Programs** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| **January 2006**(January 1-31, 2006)        |       |                                                 | —     | ** **                                       |       |                                                                                                              | $          | —                                                                                                                            | ** ** |   |   | — | ** ** |   |   | $ | 102,334,370 |   |   |
| **February 2006**(February 2-28, 2006) |       |                                                 | 769,700    | ** **                                       |       |                                                                                                              | $          | 68.18                                                                                                                             | ** ** |   |   | 769,700 | ** ** |   |   | $ | 49,857,016 |   |   |
| **March 2006**(March 1-20, 2006)            |       |                                                 | 398,000    | ** **                                       |       |                                                                                                              | $          | 69.19                                                                                                                             | ** ** |   |   | 398,000 | ** ** |   |   | $ | 22,318,422 | (1) |   |
| **Total**                                             |       |                                                 | 1,167,700  | ** **                                       |       |                                                                                                              | $          | 68.52                                                                                                                             | ** ** |   |   | 1,167,700 | ** ** |   |   |   |   |   |

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(1)      Inthe first quarter of 2006, UnionBanCal Corporation used $80.0 million from the$200 million repurchase program announced on April 21, 2005.

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**Item4.   Submission of Matters to a Vote of Security Holders**

Set forth below isinformation concerning each matter submitted to a vote at the Annual Meeting ofStockholders on April 26, 2006 (“Annual Meeting”):

*Election of Directors:  *Eachof the following persons was elected as a director to hold office until the2007 Annual Meeting of Stockholders or until earlier retirement, resignation orremoval.

| **NOMINEE**                 | ** ** | **FOR**     | ** ** | **WITHHELD** | ** ** |
|-----------------------------|------------|-------------|------------|--------------|------------|
| Aida M. Alvarez             |       | 137,994,921 |       | 345,846      |       |
| David R. Andrews            |       | 138,088,668 |       | 252,099      |       |
| L. Dale Crandall            |       | 137,827,185 |       | 513,582      |       |
| Richard D. Farman           |       | 136,681,925 |       | 1,658,841    |       |
| Stanley F. Farrar           |       | 135,953,253 |       | 2,387,514    |       |
| Philip B. Flynn             |       | 136,552,631 |       | 1,788,136    |       |
| Michael J. Gillfillan       |       | 137,825,352 |       | 515,415      |       |
| Ronald L.  Havner, Jr. |       | 138,081,638 |       | 259,128      |       |
| Norimichi Kanari            |       | 136,626,956 |       | 1,713,811    |       |
| Mary S. Metz                |       | 136,884,189 |       | 1,456,578    |       |
| Shigemitsu Miki             |       | 112,235,456 |       | 26,105,311   |       |
| Takashi Morimura            |       | 136,640,280 |       | 1,703,686    |       |
| J. Fernando Niebla          |       | 137,781,823 |       | 558,944      |       |
| Masashi Oka                 |       | 136,527,965 |       | 1,812,801    |       |
| Tetsuo Shimura              |       | 136,548,234 |       | 1,792,533    |       |

 

*Proposal No. 2:**  *To approve the Amended and Restated1997 UnionBanCal Corporation Performance Share Plan to enable awards under thePlan to qualify as deductible, performance-based compensation under Section 162(m) ofthe Internal Revenue Code received the following votes:

| **FOR**              |   | 135,941,571 |   |
|----------------------|--------|-------------|--------|
| **AGAINST**          |   | 2,076,881   |   |
| **ABSTAIN**          |   | 322,314     |   |
| **BROKER NON-VOTES** |   | 3,200       |   |

 

*Proposal No. 3:*   Toapprove the Union Bank of California Senior Executive Bonus Plan to enablebonuses paid under the Plan to qualify as deductible, performance-basedcompensation under Section 162(m) of the Internal Revenue Codereceived the following votes:

| **FOR**              |   | 134,287,157 |   |
|----------------------|--------|-------------|--------|
| **AGAINST**          |   | 3,734,905   |   |
| **ABSTAIN**          |   | 318,704     |   |
| **BROKER NON-VOTES** |   | 3,200       |   |

 

*Proposal No. 4:**  *Toratify the selection of Deloitte & Touche LLP as independentregistered public accounting firm of UnionBanCal Corporation for 2006 receivedthe following votes:

| **FOR**              |   | 136,637,650 |   |
|----------------------|--------|-------------|--------|
| **AGAINST**          |   | 1,620,754   |   |
| **ABSTAIN**          |   | 85,562      |   |
| **BROKER NON-VOTES** |   | 0           |   |

 

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**Item5.   Other Information**

**(a)   RestrictedStock Agreement.**

Effective as of January 3,2006, the Executive Compensation & Benefits Committee of the Board ofDirectors of UnionBanCal Corporation granted 2,000 shares of restricted stockto Linda Betzer pursuant to a restricted stock agreement, a form of which is filedherewith as Exhibit 10.3 and incorporated by reference herein.

**Item 6.   Exhibits**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Form of 2006 Nonqualified Stock Option  Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)                                          |
| 10.2 |       | Form of Performance  Share Agreement under the 1997 UnionBanCal Corporation Performance Share Plan(2)                                                           |
| 10.3 |       | Form of Restricted  Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock  Plan(1)                                                       |
| 10.4 |       | Amended and Restated 1997  UnionBanCal Corporation Performance Share Plan(3)                                                                                         |
| 10.5 |       | Union Bank of California,  N.A. Senior Executive Bonus Plan(4)                                                                                                       |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 31.2 |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)                                                     |
| 32.1 |       | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
| 32.2 |       | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |

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(1)                   Filedherewith.

(2)                   Incorporatedby reference to Exhibit 10.1 to UnionBanCal Corporation’s Current Reporton Form 8-K dated March 24, 2006 (SEC File No. 001-15081).

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

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

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**Signatures**

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

|                        | UNIONBANCAL CORPORATION (Registrant) |
|------------------------|--------------------------------------|
| Date: May 8, 2006 | By:                                  | /s/ TAKASHI MORIMURA |
|                   |                                 | Takashi Morimura |
|                   |                                 | *President  and Chief Executive Officer* |
|                   |                                 | *(Principal  Executive Officer)* |
| Date: May 8, 2006      | By:                                  | /s/ DAVID I. MATSON |
|                   |                                 | David I. Matson |
| * *               |                                 | *Vice  Chairman and Chief Financial Officer* |
|                   |                                 | *(Principal  Financial Officer)* |
| Date: May 8, 2006      | By:                                  | /s/ DAVID A. ANDERSON |
|                   |                                 | David A. Anderson |
| * *               |                                 | *Executive  Vice President and Controller* |
|                   |                                 | *(Chief  Accounting Officer)* |

 

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**EXHIBIT INDEX**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Form of 2006 Nonqualified Stock Option  Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)                                          |
| 10.2 |       | Form of Performance Share Agreement under the  1997 UnionBanCal Corporation Performance Share Plan(2)                                                           |
| 10.3 |       | Form of Restricted Stock Agreement under the  Year 2000 UnionBanCal Corporation Management Stock Plan(1)                                                        |
| 10.4 |       | Amended and Restated 1997 UnionBanCal Corporation  Performance Share Plan(3)                                                                                         |
| 10.5 |       | Union Bank of California, N.A. Senior Executive  Bonus Plan(4)                                                                                                       |
| 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.

(2)                   Incorporated byreference to Exhibit 10.1 to UnionBanCal Corporation’s Current Report on Form 8-Kdated March 24, 2006 (SEC File No. 001-15081).

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

(4)                   Incorporated byreference to Appendix B to the UnionBanCal Corporation Definitive ProxyStatement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

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