Table of Contents



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

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010ORo

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


Commission file number 1-15081

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

Delaware

94-1234979(State of Incorporation)

(I.R.S. Employer Identification No.)400 California Street, San Francisco, California

94104-1302(Address of principal executive offices)

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


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

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

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

Large accelerated filer o

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

Smaller reporting company o


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

Number of shares of Common Stock outstanding at July 31, 2010: 136,330,829

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



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Table of Contents



UnionBanCal Corporation and Subsidiaries    TABLE OF CONTENTS



PART I.Financial information

6Consolidated Financial Highlights

6ITEM 1. FINANCIAL STATEMENTS

8Consolidated Statements of Income

8Consolidated Balance Sheets

9Consolidated Statements of Changes in Stockholder's Equity

10Consolidated Statements of Cash Flows

11Note 1Basis of Presentation and Nature of Operations

12Note 2Recently Issued Accounting Pronouncements

12Note 3Business Combinations

14Note 4Privatization

18Note 5Securities

20Note 6Loans and Allowance for Loan Losses

28Note 7Goodwill and Intangible Assets

31Note 8Variable Interest Entities

33Note 9Private Capital and Other Investments

36Note 10Employee Pension and Other Postretirement
Benefits

37Note 11Other Noninterest Income and Noninterest
Expense

38Note 12Borrowed Funds

39Note 13Medium- and Long-Term Debt

40Note 14Fair Value Measurement and Fair Value of Financial
Instruments

41Note 15Derivative Instruments and Other Financial Instruments Used
For Hedging

51Note 16Accumulated Other Comprehensive Loss

57Note 17Commitments, Contingencies and Guarantees

58Note 18Business Segments

60Note 19Subsequent Events

63ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

64Introduction

64Executive Overview

64Critical Accounting Estimates

66Financial Performance

69Net Interest Income

72Noninterest Income and Noninterest Expense

75Income Tax Expense

76Loans

76Cross-Border Outstandings

78Provision for Credit Losses

79Allowances for Credit Losses

79Nonperforming Assets

82Loans 90 Days or More Past Due and Still Accruing

84Securities

84Deposits

86Fair Value of Financial Instruments

87


2

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Quantitative and Qualitative Disclosures About Market Risk

87Liquidity Risk

91Regulatory Capital

94Business Segments

94ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

103ITEM 4. CONTROLS AND PROCEDURES

103PART II.Other Information

104ITEM 1. LEGAL PROCEEDINGS

104ITEM 1A. RISK FACTORS

104ITEM 6. EXHIBITS

110SIGNATURES

111


3

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our
operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts
and expectations. See Part I, Item 1A. "Risk Factors," and the other risks described in our 2009 Annual Report on Form 10-K for factors to be considered when reading
any forward-looking statements in this filing.

This
report includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of
the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking
on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," or words of similar
meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information
with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of
these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.

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



4

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

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

5

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

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

June 30,
2009

June 30,
2010

Percent
ChangeResults of operations:Net interest income(1)

$
553,094

$
602,775


8.98
%Provision for loan losses


360,000


44,000


(87.78
)Noninterest income


183,213


244,294


33.34Noninterest expense


532,058


584,200


9.80Income (loss) before income taxes and including noncontrolling interests(1)


(155,751
)

218,869


nmTaxable-equivalent adjustment


2,748


2,382


(13.32
)Income tax expense (benefit)


(78,492
)

66,264


nmNet income (loss) including noncontrolling interests


(80,007
)

150,223


nmDeduct: Net loss from noncontrolling interests





3,536


nmNet income (loss) attributable to UnionBanCal Corporation (UNBC)

$
(80,007
)
$
153,759


nmBalance sheet (end of period):Total assets

$
73,984,788

$
84,309,990


13.96
%Total securities(2)


8,574,553


23,054,467


nmTotal loans


48,896,520


48,362,889


(1.09
)Nonperforming assets


1,144,602


1,562,804


36.54Total deposits


58,338,959


66,270,584


13.60Medium- and long-term debt


5,131,068


4,702,403


(8.35
)UNBC Stockholder's equity


7,429,500


9,941,892


33.82Balance sheet (period average):Total assets

$
71,495,226

$
85,510,707


19.60
%Total securities(2)


8,612,531


23,088,490


nmTotal loans


49,556,222


47,827,078


(3.49
)Earning assets


65,008,223


78,135,432


20.19Total deposits


54,352,412


68,104,408


25.30UNBC Stockholder's equity


7,303,050


9,630,657


31.87Financial ratios:Return on average assets(3)


(0.45
)%

0.72
%Return on average UNBC stockholder's equity(3)


(4.39
)

6.40Efficiency ratio(4)


68.28


64.86Net interest margin(1)(3)


3.41


3.09Tangible common equity ratio(5)


6.56


8.83Tier 1 common capital ratio(6)


8.66


11.93Tier 1 risk-based capital ratio.


8.68


11.95Total risk-based capital ratio


11.54


14.64Leverage ratio


7.89


9.23Allowance for loan losses to total loans(7)


2.21


2.81Allowance for loan losses to nonaccrual loans(7)


98.14


100.38Allowance for credit losses to total loans(8)


2.55


3.16Allowance for credit losses to nonaccrual loans(8)


113.24


113.13Net loans charged off to average total loans(3)


1.23


0.78Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


2.34


3.22Nonperforming assets to total assets


1.55


1.85Nonaccrual loans to total loans


2.25


2.80Excluding FDIC covered assets(9):Allowance for loan losses to total loans(7)


N/A


2.92Allowance for loan losses to nonaccrual loans(7)


N/A


102.17Allowance for credit losses to total loans(8)


N/A


3.29Allowance for credit losses to nonaccrual loans(8)


N/A


115.14Net loans charged off to average total loans(3)


N/A


0.81Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


N/A


2.97Nonperforming assets to total assets


N/A


1.68Nonaccrual loans to total loans


N/A


2.86


(1)Amounts
are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)Total
securities consist of securities available for sale and securities held to maturity.(3)Annualized.(4)The
efficiency ratio is net noninterest expense (noninterest expense excluding foreclosed asset expense (income), the provision for (reversal
of) losses on off-balance sheet commitments, low income housing credit (LIHC) investment amortization expense, expenses of the consolidated variable interest entities (VIEs) and
one-time costs related to the acquisitions of certain assets and liabilities of Frontier Bank (Frontier) and Tamalpais Bank (Tamalpais)) as a percentage of total revenue (net interest
income (taxable-equivalent basis) and noninterest income.)(5)The
tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible equity (UNBC stockholder's equity less
goodwill and intangible assets net of related deferred taxes of $247.3 million and $191.6 million at June 30, 2009 and 2010, respectively) divided by tangible assets (total assets
less goodwill and intangible assets net of related deferred taxes). The methodology of determining tangible common equity may differ among companies. The tangible common equity ratio has been included
to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions.(6)The
Tier 1 common capital ratio is the ratio of Tier 1 capital, less qualifying trust preferred securities of
$13 million at June 30, 2009 and 2010, to risk weighted assets. The Tier 1 common capital ratio, a non-GAAP financial measure, has been included to facilitate the
understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions.(7)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonaccrual
loans, as appropriate.(8)The
allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate.(9)These
ratios exclude the impact of the acquired loans and foreclosed assets, which are covered under loss share agreements between Union
Bank, N.A. and the Federal Deposit Insurance Corporation. Such agreements are related to the April 2010 acquisitions of certain assets and assumption of certain liabilities of Frontier and Tamalpais. nm = not meaningful N/A = not applicable for periods prior to the April 2010 Frontier and Tamalpais transactions.


6

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UnionBanCal Corporation and Subsidiaries
Consolidated Financial Highlights
(Unaudited)

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

June 30,
2009

June 30,
2010

Percent
ChangeResults of operations:Net interest income(1)

$
1,115,714

$
1,179,569


5.72
%Provision for loan losses


609,000


214,000


(64.86
)Noninterest income


357,929


454,199


26.90Noninterest expense


1,053,441


1,108,772


5.25Income (loss) before income taxes and including noncontrolling interests(1)


(188,798
)

310,996


nmTaxable-equivalent adjustment


5,365


4,823


(10.10
)Income tax expense (benefit)


(104,348
)

81,665


nmNet income (loss) including noncontrolling interests


(89,815
)

224,508


nmDeduct: Net loss from noncontrolling interests





6,595


nmNet income (loss) attributable to UNBC

$
(89,815
)
$
231,103


nmBalance sheet (end of period):Total assets

$
73,984,788

$
84,309,990


13.96
%Total securities(2)


8,574,553


23,054,467


nmTotal loans


48,896,520


48,362,889


(1.09
)Nonperforming assets


1,144,602


1,562,804


36.54Total deposits


58,338,959


66,270,584


13.60Medium- and long-term debt


5,131,068


4,702,403


(8.35
)UNBC Stockholder's equity


7,429,500


9,941,892


33.82Balance sheet (period average):Total assets

$
69,296,183

$
85,162,313


22.90
%Total securities(2)


8,491,983


23,316,311


nmTotal loans


49,671,989


47,340,005


(4.69
)Earning assets


62,743,021


78,223,154


24.67Total deposits


50,514,116


67,972,012


34.56UNBC Stockholder's equity


7,319,518


9,581,811


30.91Financial ratios:Return on average assets(3)


(0.26
)%

0.55
%Return on average UNBC stockholder's equity(3)


(2.47
)

4.86Efficiency ratio(4)


66.98


64.92Net interest margin(1)(3)


3.56


3.02Tangible common equity ratio(5)


6.56


8.83Tier 1 common capital ratio(6)


8.66


11.93Tier 1 risk-based capital ratio


8.68


11.95Total risk-based capital ratio


11.54


14.64Allowance for loan losses to total loans(7)


2.21


2.81Allowance for loan losses to nonaccrual loans(7)


98.14


100.38Allowance for credit losses to total loans(8)


2.55


3.16Allowance for credit losses to nonaccrual loans(8)


113.24


113.13Net loans charged off to average total loans(3)


1.09


0.91Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


2.34


3.22Nonperforming assets to total assets


1.55


1.85Nonaccrual loans to total loans


2.25


2.80Excluding FDIC covered assets(9):Allowance for loan losses to total loans(7)


N/A


2.92Allowance for loan losses to nonaccrual loans(7)


N/A


102.17Allowance for credit losses to total loans(8)


N/A


3.29Allowance for credit losses to nonaccrual loans(8)


N/A


115.14Net loans charged off to average total loans(3)


N/A


0.92Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


N/A


2.97Nonperforming assets to total assets


N/A


1.68Nonaccrual loans to total loans


N/A


2.86


---

nm = not meaningful

N/A = not applicable for periods prior to the April 2010 Frontier and Tamalpais transactions.

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Table of Contents

Item 1.   Financial Statements

UnionBanCal Corporation and Subsidiaries  Consolidated Statements of Income  (Unaudited)

For the Three Months
Ended June 30,

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

2009

2010

2009

2010Interest IncomeLoans

$
584,532

$
568,852

$
1,186,374

$
1,108,426Securities


98,385


134,591


201,282


277,927Interest bearing deposits in banks


3,550


3,696


4,450


7,751Federal funds sold and securities purchased under resale agreements


97


150


238


269Trading account assets


210


585


360


1,404Total interest income


686,774


707,874


1,392,704


1,395,777Interest ExpenseDeposits


100,186


78,477


205,224


164,039Federal funds purchased and securities sold under repurchase agreements


19


41


72


78Commercial paper


954


289


2,546


529Other borrowed funds


5,616


1,172


17,093


2,374Medium- and long-term debt


29,415


27,175


56,944


53,416Trust notes


238


327


476


595Total interest expense


136,428


107,481


282,355


221,031Net Interest Income


550,346


600,393


1,110,349


1,174,746Provision for loan losses


360,000


44,000


609,000


214,000Net interest income after provision for loan losses


190,346


556,393


501,349


960,746Noninterest IncomeService charges on deposit accounts


71,843


63,843


143,165


129,983Trust and investment management fees


34,130


34,244


68,037


65,664Securities gains (losses), net


(172
)

27,244


(172
)

61,137Trading account activities


16,251


25,379


38,943


46,472Merchant banking fees


19,924


22,223


33,756


35,899Card processing fees, net


8,124


12,856


15,660


21,476Brokerage commissions and fees


8,506


10,906


16,813


19,434Other


24,607


47,599


41,727


74,134Total noninterest income


183,213


244,294


357,929


454,199Noninterest ExpenseSalaries and employee benefits


233,057


319,691


476,620


599,277Net occupancy


43,222


46,441


85,143


89,821Intangible asset amortization


40,281


30,613


81,168


62,406Regulatory agencies


52,836


30,526


70,774


60,374Outside services


22,948


24,269


41,782


47,054Professional services


19,489


26,103


35,427


42,464Equipment


16,602


16,929


32,015


32,740Software


14,205


15,831


29,243


30,559Foreclosed asset expense


3,282


871


4,168


673(Reversal of) provision for losses on off-balance sheet commitments


15,000


1,000


41,000


(4,000
)Privatization-related expense


7,433


426


34,252


5,579Other


63,703


71,500


121,849


141,825Total noninterest expense


532,058


584,200


1,053,441


1,108,772Income (loss) before income taxes and including noncontrolling interests


(158,499
)

216,487


(194,163
)

306,173Income tax expense (benefit)


(78,492
)

66,264


(104,348
)

81,665Net Income (Loss) including Noncontrolling Interests


(80,007
)

150,223


(89,815
)

224,508Deduct: Net loss from noncontrolling interests





3,536





6,595Net Income (Loss) attributable to UNBC

$
(80,007
)
$
153,759

$
(89,815
)
$
231,103


See accompanying notes to consolidated financial statements.

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Consolidated Balance Sheets  (Unaudited)

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010AssetsCash and due from banks

$
1,285,780

$
1,198,258

$
1,221,462Interest bearing deposits in banks (includes $13,176 at June 30, 2010 related to consolidated variable interest entities (VIEs))


8,556,837


6,585,029


2,873,014Federal funds sold and securities purchased under resale agreements


198,955


442,552


287,698Total cash and cash equivalents


10,041,572


8,225,839


4,382,174Trading account assets:Pledged as collateral


51,714


15,168


64,106Held in portfolio


853,922


710,480


1,054,994Securities available for sale:Pledged as collateral





2,500


Held in portfolio


7,403,173


22,556,329


21,788,581Securities held to maturity (Fair value: June 30, 2009, $1,112,813; December 31, 2009, $1,457,654; and June 30, 2010, $1,433,596)


1,171,380


1,227,718


1,265,886Loans:Loans, excluding Federal Deposit Insurance Corporation (FDIC) covered loans


48,896,520


47,228,508


46,498,887FDIC covered loans








1,864,002Total loans


48,896,520


47,228,508


48,362,889Allowance for loan losses


(1,081,633
)

(1,357,000
)

(1,357,869
)Loans, net


47,814,887


45,871,508


47,005,020Due from customers on acceptances


19,944


8,514


11,446Premises and equipment, net


664,673


674,298


669,302Intangible assets


641,406


561,040


517,311Goodwill


2,369,326


2,369,326


2,416,979FDIC indemnification asset








908,771Other assets (includes $293,881 at June 30, 2010 related to consolidated VIEs)


2,952,791


3,375,408


4,225,420Total assets

$
73,984,788

$
85,598,128

$
84,309,990LiabilitiesNoninterest bearing

$
14,926,564

$
14,558,989

$
15,319,290Interest bearing


43,412,395


53,958,664


50,951,294Total deposits


58,338,959


68,517,653


66,270,584Federal funds purchased and securities sold under repurchase agreements


203,205


150,453


101,516Commercial paper


492,127


888,541


610,580Other borrowed funds


606,019


591,934


286,275Trading account liabilities


690,704


538,894


815,282Acceptances outstanding


19,944


8,514


11,446Other liabilities (includes $1,841 at June 30, 2010 related to consolidated VIEs)


1,059,508


1,096,095


1,278,223Medium- and long-term debt (includes $7,853 at June 30, 2010 related to consolidated VIEs)


5,131,068


4,212,184


4,702,403Junior subordinated debt payable to subsidiary grantor trust


13,754


13,527


13,419Total liabilities


66,555,288


76,017,795


74,089,728Commitments, contingencies and guaranteesSee Note 16EquityUNBC Stockholder's Equity:Preferred stock:Authorized 5,000,000 shares; no shares issued or outstanding








Common stock, par value $1 per share:Authorized 300,000,000 shares; 136,330,829 shares issued


136,331


136,331


136,331Additional paid-in capital


3,195,023


5,195,023


5,195,023Retained earnings


4,874,987


4,899,841


5,130,944Accumulated other comprehensive loss


(776,841
)

(650,862
)

(520,406
)Total UNBC stockholder's equity


7,429,500


9,580,333


9,941,892Noncontrolling interests








278,370Total equity


7,429,500


9,580,333


10,220,262Total liabilities and equity

$
73,984,788

$
85,598,128

$
84,309,990


See accompanying notes to consolidated financial statements.

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UnionBanCal Corporation and Subsidiaries  Consolidated Statements of Changes in Stockholder's Equity  (Unaudited)

(Dollars in thousands)

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Noncontrolling
interests(1)

Total
stockholder's
equityBALANCE DECEMBER 31, 2008

$
136,331

$
3,195,023

$
4,964,802

$
(811,851
)
$


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








(89,815
)







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











(13,577
)




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











40,985





40,985Foreign currency translation adjustment











201





201Net change in pension and other benefits











7,401





7,401Total comprehensive loss, net of tax

















(54,805
)Net change








(89,815
)

35,010





(54,805
)BALANCE JUNE 30, 2009

$
136,331

$
3,195,023

$
4,874,987

$
(776,841
)
$


$
7,429,500BALANCE DECEMBER 31, 2009

$
136,331

$
5,195,023

$
4,899,841

$
(650,862
)
$


$
9,580,333Cumulative effect of change in accounting for VIEs(1)














271,923


271,923Comprehensive income:Net income (loss)For the six months ended June 30, 2010








231,103





(6,595
)

224,508Other comprehensive income (loss), net of tax:Net change in unrealized gains on cash flow hedges











(31,620
)




(31,620
)Net change in unrealized losses on securities











154,943





154,943Foreign currency translation adjustment











(450
)




(450
)Net change in pension and other benefits











7,583





7,583Total comprehensive income, net of tax

















354,964Other














13,042


13,042Net change








231,103


130,456


278,370


639,929BALANCE JUNE 30, 2010

$
136,331

$
5,195,023

$
5,130,944

$
(520,406
)
$
278,370

$
10,220,262


---

See accompanying notes to consolidated financial statements.

10

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Table of Contents

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

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

2009

2010Cash Flows from Operating Activities:Net income (loss) including noncontrolling interests

$
(89,815
)
$
224,508Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for loan losses


609,000


214,000(Reversal of) provision for losses on off-balance sheet commitments


41,000


(4,000
)Depreciation, amortization and accretion, net


81,551


129,847Deferred income taxes


(34,590
)

10,397Net losses (gains) on sales of securities


172


(61,137
)Net decrease (increase) in trading account assets


311,143


(393,452
)Net increase in prepaid expenses


(23,188
)

(36,933
)Net increase in fees and other receivable


(55,404
)

(176,299
)Net increase in other assets


(326,619
)

(220,239
)Net increase (decrease) in accrued expenses


(253,101
)

25,640Net increase (decrease) in trading account liabilities


(343,959
)

276,388Net increase (decrease) in other liabilities


(413,091
)

11,322Loans originated for resale


(64,953
)

Net proceeds from sale of loans originated for resale


37,531


Other, net


31,430


(4,394
)Discontinued operations, net


(6,027
)

Total adjustments


(409,105
)

(228,860
)Net cash used in operating activities


(498,920
)

(4,352
)Cash Flows from Investing Activities:Proceeds from sales of securities available for sale


24,234


2,090,143Proceeds from matured and called securities available for sale


1,191,246


2,851,795Purchases of securities available for sale


(1,513,612
)

(3,811,723
)Proceeds from matured securities held to maturity


2,366


2,049Purchases of premises and equipment, net


(38,854
)

(40,475
)Net decrease in loans


442,279


575,686Net cash acquired from acquisitions





272,175Other, net


(1,566
)

(2,950
)Net cash provided by investing activities


106,093


1,936,700Cash Flows from Financing Activities:Net increase (decrease) in deposits


12,289,190


(5,135,017
)Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements


30,447


(50,877
)Net decrease in commercial paper and other borrowed funds


(7,262,778
)

(584,900
)Proceeds from issuance of medium- and long-term debt


1,625,000


1,000,000Repayment of medium-term debt


(750,000
)

(1,018,535
)Other, net


201


(450
)Change in noncontrolling interests





13,042Discontinued operations, net


(1,929
)

Net cash provided by (used in) financing activities


5,930,131


(5,776,737
)Net increase (decrease) in cash and cash equivalents


5,537,304


(3,844,389
)Cash and cash equivalents at beginning of period


4,504,345


8,225,839Effect of exchange rate changes on cash and cash equivalents


(77
)

724Cash and cash equivalents at end of period

$
10,041,572

$
4,382,174Cash Paid During the Period For:Interest

$
304,247

$
222,762Income taxes, net


289,040


62,358Supplemental Schedule of Noncash Investing and Financing Activities:Acquisitions:Fair value of assets acquired

$


$
3,225,566Fair value of liabilities assumed





3,497,741Securities available for sale transferred to securities held to maturity


1,144,036


Loans transferred to foreclosed assets (OREO)


32,371


53,922


See accompanying notes to consolidated financial statements.

11

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Table of Contents

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

Note 1Basis of Presentation and Nature of Operations

The unaudited consolidated financial statements of UnionBanCal Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United
States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP.
In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the period ended
June 30, 2010 are not necessarily indicative of the operating results anticipated for the full year. These unaudited consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in UnionBanCal Corporation's Annual Report on Form 10-K for the year ended December 31, 2009 (2009
Form 10-K). The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting period. Actual results could differ compared to those estimates.

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

On
April 16 and April 30, 2010, the Bank entered into Purchase and Assumption Agreements (Agreements) with the Federal Deposit Insurance Corporation (FDIC) to acquire
certain assets and assume certain liabilities of Tamalpais Bank and Frontier Bank, respectively. Pursuant to the Agreements, the Bank acquired $571.5 million and $2.9 billion of assets
at fair value related to Tamalpais Bank and Frontier Bank, respectively. See Note 3 to these consolidated financial statements in this Form 10-Q for additional information
about the transactions.

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

See
Note 4 to these consolidated financial statements for additional information on the Company's privatization transaction.

Note 2Recently Issued Accounting Pronouncements



In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-16,
"Accounting for Transfers of Financial Assets" which formally codifies Statement of Financial Accounting Standards (SFAS) No. 166, "Accounting for Transfers of Financial Assetsan
amendment of FASB Statement 140," which was issued in June 2009. The guidance eliminates the concept of qualifying special purpose entities (QSPEs) and modifies financial asset derecognition criteria.
The elimination of the exception for QSPEs will likely result in many sponsors that transferred financial assets to such vehicles to consolidate them. The derecognition modifications require that
companies consider all

12

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)

arrangements
such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates when determining whether derecognition is appropriate for a
transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a participating interest. The guidance also requires that all
beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are amended to require description of a company's continuing involvement with transferred
financial assets and details regarding financial or other support provided. The guidance was effective January 1, 2010. At adoption, there was no impact on the Company's financial position or
results of operations.



In December 2009, the FASB issued ASU 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities" which formally codifies SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" which was issued in June 2009. The guidance changes the method of analyzing which
party shall consolidate a variable interest entity (VIE) by providing revised criteria for determining the primary beneficiary. A company would be required to determine the primary beneficiary of a
VIE on a continual basis based on a qualitative assessment of which party, if any, has the power to direct activities and the right to receive benefits or the obligation to absorb losses. The guidance
also states that if power is shared by multiple parties such that no one party has the power to direct the activities, then no party shall consolidate the VIE. Disclosures are also amended to require
disclosure of continuing involvement with VIEs and judgments used in the consolidation analysis such as the method, significant judgments and assumptions used for determining the primary beneficiary.
The guidance was effective January 1, 2010. As a result of reviewing the Company's VIEs and the determination of the primary beneficiary, the Company consolidated certain Low Income Housing Tax
Credit investment funds. At adoption, management recorded increases in total assets of $281 million, liabilities of $9 million and stockholder's equity attributable to noncontrolling
interests of $272 million. This guidance did not have a material impact on the Company's results of operations. Disclosures required under this guidance are included in Note 8 to these
consolidated financial statements.



In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements." This guidance amends
FASB Accounting Standards Codification (ASC) 820-10, "Fair Value Measurements and Disclosures" with respect to disclosures. Specifically, this guidance requires the disclosure of transfers
in and out of Level 1 and Level 2 and a gross presentation within the Level 3 rollforward. This guidance also clarifies that the information should be presented by class of
financial asset or liability and that a discussion of valuation techniques and inputs is required for Level 2 and Level 3 recurring and nonrecurring fair value measurements. The
guidance, which applies only to disclosures, was effective March 31, 2010 except for the gross presentation within the Level 3 rollforward, which is effective March 31, 2011.
Disclosures required under this guidance are included in Note 14 to these consolidated financial statements.



In March 2010, the FASB issued ASU 2010-11, "Scope Exception Related to Embedded Derivatives." This guidance clarifies the
scope exception for embedded credit derivatives and defines which embedded credit derivatives should be evaluated for bifurcation and separate accounting. This guidance is effective

13

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)

July 1,
2010 with early adoption permitted. Management has chosen not to early adopt and believes that this guidance will not have a significant impact on the Company's financial position or
results of operations.



In April 2010, the FASB issued ASU 2010-18, "Effect of a Loan Modification When the Loan is Part of a Pool that is
Accounted for as a Single Asset: a Consensus of the FASB Emerging Issues Task Force." This guidance states that troubled debt restructuring accounting cannot be applied to individual loans within
purchased credit-impaired loan pools. This guidance is effective for modifications of loans accounted for within pools after July 1, 2010. Early
adoption is permitted and prospective application should be applied. Management has chosen not to early adopt and believes that this guidance will not have a significant impact on the Company's
financial position or results of operations.



In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses." This guidance, which relates solely to disclosures, requires expanded disclosures related to the credit quality of financing receivables and the related allowance for credit
losses. The new disclosures require an aging of past due receivables and credit quality indicators at the end of each reporting period. This guidance also requires that new and existing disclosures be
disaggregated by portfolio segment or class of financing receivable including existing disclosures related to the allowance for credit losses, nonaccrual status and impairment. The guidance, related
to disclosures as of the end of the reporting period, is effective as of December 31, 2010; and the guidance, related to disclosures about activity occurring during the reporting period, is
effective beginning in January 1, 2011.

Note 3Business Combinations

Frontier Bank:

On April 30, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume
certain liabilities of Frontier Bank (Frontier), a Washington state-chartered commercial bank headquartered in Everett, Washington. This acquisition increased the Bank's market share in the Pacific
Northwest. Frontier operated 50 locations in Washington and Oregon.

Excluding
the effects of purchase accounting adjustments, the Bank acquired total assets of $3.2 billion, including $2.7 billion in loans, $173.9 million of other
real estate owned (OREO) and $78.6 million of securities available for sale. Additionally, the Bank assumed $2.5 billion of deposits and $369.4 million of borrowings and other
liabilities. The assets were acquired at an 11 percent discount to Frontier's book value and the deposits were assumed without a premium. The Bank recorded a payable to the FDIC totaling
$9.5 million, which is included in other liabilities on the consolidated balance sheet, for consideration of the net assets acquired (i.e., the net difference between the assets acquired
and the liabilities assumed). This amount is payable within one year of the acquisition date and is outstanding at June 30, 2010.

In
connection with the acquisition, the Bank also entered into two loss share agreements with the FDICone for single-family residential mortgage loans and one for commercial
loans, the related unfunded commitments and other covered assets. All acquired loans and OREO, totaling $2.9 billion, are covered by loss

14

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 3Business Combinations (Continued)

share
agreements (covered assets) between the FDIC and the Bank. Pursuant to the terms of these loss share agreements, the FDIC's obligation to reimburse the Bank for losses on the covered assets
begins with the first dollar of loss incurred. The terms of the loss share agreements with respect to all covered assets provide for the FDIC to reimburse the Bank for 80 percent of covered
losses, plus three months of foregone interest. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the loss share percentage at the time of recovery. The covered
OREO is included in other assets on the consolidated balance sheet.

The
following table presents the covered assets and the estimated fair value at the acquisition date:

(Dollars in thousands)

Amount
Covered

Fair
ValueLoans held for investment

$
2,710,370

$
1,566,888OREO


173,905


154,566Total

$
2,884,275

$
1,721,454


The amounts covered by the loss share agreements are the pre-acquisition book values of the underlying assets, the contractual balance
of unfunded commitments that were acquired, and certain future expenses associated with managing defaulted loans and OREO. The loss share agreement applicable to single-family residential mortgage
loans provides for FDIC loss sharing and the Bank reimbursement of recoveries to the FDIC, in each case as described above, for ten years. The loss share agreement applicable to commercial loans, the
related unfunded commitments, and other covered assets provides for FDIC loss sharing for five years and the Bank reimbursement of recoveries to the FDIC for eight years, in each case as described
above. The agreements with the FDIC also include a provision that may result in a lump-sum payment to the FDIC approximately ten years from the acquisition date by the Bank if net losses
on covered assets are less than the original loss estimates established by the FDIC at acquisition, subject to certain adjustments.

The
purchase and assumption and loss share agreements have specific and detailed compliance, servicing, notification and reporting requirements. Any failure to comply with the
requirements of the loss share agreements, or to properly service the loans and OREO covered by any loss share arrangement, may cause individual loans or loan pools to lose their eligibility for loss
share payments from the FDIC. The fair value of the loss share agreements was recorded as an indemnification asset at an estimated fair value of $860 million on the acquisition date and is
included on the consolidated balance sheet. The difference between the present value and the undiscounted cash flows that we expect to collect from the FDIC is accreted into noninterest income over
the life of the FDIC indemnification asset. The FDIC indemnification asset is adjusted for any changes in expected cash flows based on the loan performance. Any increases in cash flows of the loans
due to decreases in expected credit losses over those originally expected will lower the accretion rate recorded in noninterest income. Any decreases in cash flows of the loans over those originally
expected will increase the FDIC indemnification asset.

The
contribution of the Frontier transaction to the Company's results of operations for the period May 1 to June 30, 2010 is as follows: revenue of $25.6 million,
noninterest expense of $11.1 million and income before income taxes of $14.5 million. These amounts include the accretion related to the covered assets and FDIC indemnification asset
recorded during the second quarter of 2010.

15

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 3Business Combinations (Continued)



The assets acquired and liabilities assumed were recorded at their acquisition date fair values. These fair value estimates are
considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. In
addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date.

The
following table presents the net assets acquired from Frontier and the estimated purchase accounting adjustments, which resulted in goodwill as of the acquisition date:

(Dollars in thousands)Net assets acquired

$
363,146Purchase accounting adjustments:FDIC covered loans


(1,143,482
)Core deposit intangible asset


12,650FDIC indemnification asset


859,973FDIC covered OREO


(19,339
)Deposits


(4,945
)FDIC indemnification liability


(36,626
)Advances from Federal Home Loan Bank (FHLB)


(23,065
)Other assets/liabilities, net


(9,522
)Total purchase accounting adjustments


(364,356
)Fair value of net assets acquired


(1,210
)FDIC payable


(9,459
)Goodwill

$
10,669


The goodwill arising from the acquisition reflects the increased market share and related synergies that are expected to be gained. The goodwill
was assigned to the Company's Retail Banking and Corporate Banking reportable business segments. See Note 7 to these consolidated financial statements for additional information on the goodwill
allocation. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.

The
Bank did not immediately acquire the banking facilities, including furniture, fixtures, and equipment, as part of the Agreement. However, the Bank had the option to purchase these
assets and assume leases from the FDIC for a term expiring 90 days after the acquisition date, unless extended. The Bank extended the option to purchase these assets to September 30,
2010 and is evaluating which banking facilities and equipment it may purchase or lease. These assets are currently leased from the FDIC on a month-to-month basis.

16

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 3Business Combinations (Continued)

The
following table reflects the estimated fair values of the assets acquired and liabilities assumed for the Frontier transaction on the acquisition date:

(Dollars in thousands)Assets:Cash and due from banks

$
35,953Interest bearing deposits in banks


5,000Federal funds sold


178,395Total cash and cash equivalents


219,348Securities available for sale


78,587FDIC covered loans


1,566,888Goodwill


10,669Core deposit intangible


12,650FDIC indemnification asset


859,973FDIC covered OREO


154,566Other assets


23,611Total assets acquired

$
2,926,292Liabilities:Deposits:Noninterest bearing

$
303,433Interest bearing


2,184,304Total deposits


2,487,737Federal funds purchased and securities sold under repurchase agreement


1,940Advances from FHLB


383,359Other borrowed funds


1,280Other liabilities


51,976Total liabilities assumed

$
2,926,292


The following is a description of the methods used to determine the acquisition date fair values of significant assets and liabilities presented
above.

Loans

Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related
collateral, risk classification, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar
characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable
loans, where available, and include adjustments for liquidity concerns. To the extent comparable market rates are not readily available, a discount rate was
derived based on the assumptions of market participant's cost of funds, servicing costs, and return requirements for comparable risk assets.

17

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 3Business Combinations (Continued)

Other real estate owned

OREO is presented at the estimated present value that management expects to receive when the property is sold, net of related costs of
disposal.

FDIC indemnification asset

The FDIC indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the assets
and is not transferable with the assets should the Bank choose to dispose of them. The fair value was estimated using projected cash flows related to the loss share agreements based on the expected
reimbursements for losses and the applicable loss share percentages. The expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were
discounted to reflect the uncertainty of the timing and receipt of the loss share reimbursements from the FDIC.

Deposits

The fair values used for the demand, transaction accounts and savings deposits are, by definition, equal to the amount payable on
demand at the reporting date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the interest rates
embedded on such time deposits.

Advances from the Federal Home Loan Bank

The advances from FHLB were recorded at their estimated fair value, which was based on quoted prices supplied by the FHLB. Subsequent
to the acquisition dates, all of these advances were repaid in full.

Tamalpais Bank:

On April 16, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume
certain liabilities of Tamalpais Bank of San Rafael, California (Tamalpais). Tamalpais operated 7 branches in California. Excluding the effects of purchase accounting adjustments, the Bank acquired
total assets of $616.8 million, including $497.8 million in loans, and assumed $421.0 million of deposits. Certain of the assumed deposits were acquired at a premium of
2 percent and the assets were acquired at a discount to Tamalpais' book value of 10 percent.

In
connection with the acquisition, the Bank also entered into two loss share agreements, which have terms similar to those contained in the Frontier transaction with the FDIC. At
Tamalpais' acquisition date, covered assets totaled $506.2 million with a fair value of $380.9 million. The assets acquired and liabilities assumed were recorded at acquisition date fair
values. The methods used for determining fair values were consistent with those used for Frontier as described above. These fair value estimates are considered preliminary and are subject to change
for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

Note 4Privatization

The privatization transaction was accounted for as a business combination and the purchase price was pushed down to the Company's consolidated financial statements. Accordingly, the
purchase price paid by

18

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Privatization (Continued)

BTMU
plus related purchase accounting adjustments have been reflected on the Company's consolidated balance sheet as of October 1, 2008. This resulted in a new basis of accounting, which
reflects an adjustment for the estimated fair value of the Company's assets and liabilities. After all of the fair value adjustments to the Company's assets and liabilities were assigned, the
remainder of the purchase price was recorded as goodwill.

The
Company recorded amortization (accretion) of the fair value adjustments by category for the three and six months ended June 30, 2009 and 2010 as follows:

For the Three Months
Ended June 30,

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

2009

2010

2009

2010Securities

$
(10,181
)
$
(7,557
)
$
(16,968
)
$
(14,131
)Loans


(21,749
)

(12,934
)

(54,614
)

(27,267
)Cash flow hedges


3,565


683


7,330


1,756Premises and equipment


2,007


2,285


4,055


4,437Intangible assets


39,859


30,019


80,383


61,607Long-term debt


910


910


1,820


1,820Total amortization

$
14,411

$
13,406

$
22,006

$
28,222


The Company recorded expenses for the privatization transaction for the three and six months ended June 30, 2009 and 2010 as follows:

For the Three Months
Ended June 30,

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

2009

2010

2009

2010Salaries and employee benefits(1)

$
6,768

$
426

$
32,949

$
5,579Professional services


662





1,267


Other


3





36


Total

$
7,433

$
426

$
34,252

$
5,579


---

19

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities

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

Securities Available for Sale

June 30, 2009(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueOther U.S. government

$
697,942

$
12,188

$
434

$
709,696Residential mortgage-backed securitiesagency


5,847,261


156,976


8,621


5,995,616Residential mortgage-backed securitiesnon-agency


541,073


53


90,434


450,692State and municipal


48,353


1,926


65


50,214Asset-backed and debt securities


113,405





16,435


96,970Equity securities


100,156


158


417


99,897Foreign securities


88








88Total securities available for sale

$
7,348,278

$
171,301

$
116,406

$
7,403,173




December 31, 2009(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Treasury

$
299,488

$
189

$


$
299,677Other U.S. government


12,311,626


13,165


47,373


12,277,418Residential mortgage-backed securitiesagency


9,215,771


171,513


25,161


9,362,123Residential mortgage-backed securitiesnon-agency


454,646


36


63,243


391,439State and municipal


43,287


1,830


21


45,096Asset-backed and debt securities


112,609


1,598


6,072


108,135Equity securities


74,791


441


291


74,941Total securities available for sale

$
22,512,218

$
188,772

$
142,161

$
22,558,829




June 30, 2010(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Treasury

$
300,274

$
35

$


$
300,309Other U.S. government


11,970,568


117,693


19


12,088,242Residential mortgage-backed securitiesagency


8,625,866


196,764


1,746


8,820,884Residential mortgage-backed securitiesnon-agency


386,673


1,349


47,699


340,323State and municipal


45,867


1,887


8


47,746Asset-backed and debt securities


110,817


4,412


3,775


111,454Equity securities


79,463


542


382


79,623Total securities available for sale

$
21,519,528

$
322,682

$
53,629

$
21,788,581


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20

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)

Securities Held to Maturity

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



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

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueCollateralized loan obligations (CLOs)

$
1,736,180

$


$
564,800

$
1,171,380

$
49,218

$
107,785

$
1,112,813Total securities held to maturity

$
1,736,180

$


$
564,800

$
1,171,380

$
49,218

$
107,785

$
1,112,813




December 31, 2009Recognized in Other Comprehensive Income (OCI)(2)



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

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueCLOs

$
1,758,716

$


$
531,094

$
1,227,622

$
231,135

$
1,199

$
1,457,558Foreign securities


96








96








96Total securities held to maturity

$
1,758,812

$


$
531,094

$
1,227,718

$
231,135

$
1,199

$
1,457,654




June 30, 2010Recognized in Other Comprehensive Income (OCI)(2)



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

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueCLOs

$
1,764,111

$


$
498,320

$
1,265,791

$
176,261

$
8,551

$
1,433,501Foreign securities


95








95








95Total securities held to maturity

$
1,764,206

$


$
498,320

$
1,265,886

$
176,261

$
8,551

$
1,433,596


(1)For
securities transferred to held to maturity from available for sale, amortized cost is defined as the original purchase cost, plus or
minus any accretion or amortization of a purchase discount or premium, less payments and any impairment previously recognized in earnings. The amortized cost reflects fair value adjustments as a
result of the Company's privatization transaction. Refer to Note 4 to these consolidated financial statements.(2)The
amount recognized in OCI reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization,
while the amount not recognized in OCI reflects the incremental change in value after such transfer.


For the three and six months ended June 30, 2010, interest income included $0.6 million and $1.2 million, respectively, from
non-taxable securities.

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

21

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)

Maturity Schedule of Securities

Securities Available for Sale(1)

June 30, 2010(Dollars in thousands)

Amortized
Cost(3)

Fair
ValueDue in one year or less

$
3,527,587

$
3,529,943Due after one year through five years


9,034,676


9,156,846Due after five years through ten years


1,077,326


1,114,862Due after ten years


7,800,476


7,907,307Equity securities(2)


79,463


79,623Total securities available for sale

$
21,519,528

$
21,788,581


Securities Held to Maturity

June 30, 2010(Dollars in thousands)

Amortized
Cost(3)(4)

Carrying
Value

Fair
ValueDue in one year or less

$
2,566

$
2,710

$
2,496Due after one year through five years


61,873


45,406


54,115Due after five years through ten years


1,402,877


1,027,341


1,162,422Due after ten years


296,890


190,429


214,563Total securities held to maturity

$
1,764,206

$
1,265,886

$
1,433,596


(1)The
remaining contractual maturities of residential mortgage-backed securities are classified without regard to prepayments. The contractual
maturity of these securities is not a reliable indicator of their expected life since borrowers have the right to repay their obligations at any time.(2)Equity
securities do not have a stated maturity.(3)Amortized
cost reflects fair value adjustments as a result of the Company's privatization transaction. Refer to Note 4 to these
consolidated financial statements.(4)For
securities transferred to held to maturity from available for sale, amortized cost is defined as the original purchase cost, plus or
minus any accretion or amortization of a purchase discount or premium, less payments and any impairment previously recognized in earnings.


The proceeds from sales of securities available for sale, gross realized gains and gross realized losses are shown below. The specific
identification method is used to calculate realized gains and losses on sales.

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

2009

2010Proceeds from sales

$
24,234

$
2,090,143Gross realized gains


601


64,540Gross realized losses





435


22

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)

Analysis of Unrealized Losses on Securities

At June 30, 2009, December 31, 2009 and June 30, 2010, the Company's securities, with a continuous unrealized loss
position are shown below, separately for periods less than and greater than 12 months.

Securities Available for Sale

June 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$
151,379

$
434


4

$


$





$
151,379

$
434


4Residential mortgage-backed securitiesagency


746,712


4,962


22


329,462


3,659


45


1,076,174


8,621


67Residential mortgage-backed securitiesnon-agency











437,456


90,434


18


437,456


90,434


18State and municipal


2,942


19


9


2,090


46


8


5,032


65


17Asset-backed and debt securities


5,693


1,112


2


91,277


15,323


13


96,970


16,435


15Equity securities


156


37


1


38


380


1


194


417


2Total securities available for sale

$
906,882

$
6,564


38

$
860,323

$
109,842


85

$
1,767,205

$
116,406


123




December 31, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$
8,682,501

$
47,373


106

$


$





$
8,682,501

$
47,373


106Residential mortgage-backed securitiesagency


2,928,456


24,628


61


232,670


533


28


3,161,126


25,161


89Residential mortgage-backed securitiesnon-agency











362,471


63,243


17


362,471


63,243


17State and municipal


760


1


2


1,498


20


6


2,258


21


8Asset-backed and debt securities


27,325


2,219


3


62,427


3,853


9


89,752


6,072


12Equity securities











164


291


2


164


291


2Total securities available for sale

$
11,639,042

$
74,221


172

$
659,230

$
67,940


62

$
12,298,272

$
142,161


234


23

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)



June 30, 2010Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$
355,463

$
19


9

$


$





$
355,463

$
19


9Residential mortgage-backed securitiesagency


713,228


1,672


43


47,117


74


10


760,345


1,746


53Residential mortgage-backed securitiesnon-agency











258,234


47,699


16


258,234


47,699


16State and municipal


1,879





4


849


8


5


2,728


8


9Asset-backed and debt securities


17,387


562


1


31,302


3,213


7


48,689


3,775


8Equity securities


2,632


191


2


264


191


2


2,896


382


4Total securities available for sale

$
1,090,589

$
2,444


59

$
337,766

$
51,185


40

$
1,428,355

$
53,629


99


Securities Held to Maturity

June 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountCLOs

$
76,848

$
33,365


20

$
1,035,965

$
639,220


202

$
1,112,813

$
672,585


222Total securities held to maturity

$
76,848

$
33,365


20

$
1,035,965

$
639,220


202

$
1,112,813

$
672,585


222




December 31, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountCLOs

$
103,921

$
26,412


21

$
1,353,637

$
505,881


201

$
1,457,558

$
532,293


222Total securities held to maturity

$
103,921

$
26,412


21

$
1,353,637

$
505,881


201

$
1,457,558

$
532,293


222




June 30, 2010Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountCLOs

$
12,197

$
214


1

$
1,421,304

$
506,657


221

$
1,433,501

$
506,871


222Total securities held to maturity

$
12,197

$
214


1

$
1,421,304

$
506,657


221

$
1,433,501

$
506,871


222


The Company's securities are primarily investments in debt securities. Debt securities available for sale and debt securities held to maturity are
subject to quarterly impairment testing when a security's fair value is lower than its amortized cost. Debt securities with unrealized losses are considered
other-than-temporarily impaired if the Company intends to sell the security, if it is more likely than not that the Company will be

24

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)

required
to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of the security. Any impairment on securities the
Company intends, or is more likely than not required, to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities the Company
does not intend, or it is not more likely than not required, to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related
to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's
effective interest rate, and the amortized cost of the security.

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

At
June 30, 2010, the Company did not have the intent to sell temporarily impaired securities until a recovery of the fair value, which may be at maturity, and it is not more
likely than not that the Company will have to sell the securities prior to recovery of fair value.



Other U.S. Government securities are securities issued by one of the several Government-Sponsored Enterprises (GSEs) such as Fannie
Mae, Freddie Mac, Federal Home Loan Banks or Federal Farm Credit Banks. They are not backed by the full faith and credit of the United States government. These securities are issued with a stated
interest rate and mature in less than five years. The unrealized losses on other U.S. Government securities resulted from higher interest rates subsequent
to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at June 30, 2010.



Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie
Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from
higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at June 30, 2010.



Non-agency residential mortgage-backed securities are issued by financial institutions with no guarantee from GSEs. These
securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on
non-agency residential mortgage-backed securities resulted from declining credit quality of underlying collateral and additional credit spreads widening since purchase. The Company
estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of
the underlying collateral using industry consensus estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses
of each security, an insignificant amount of impairment was recognized on three securities during the first half of 2010. With respect to the remaining portfolio at June 30, 2010, the Company
expects to recover the entire amortized cost basis of these securities.

25

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)



State and municipal securities are primarily securities issued by state and local governments to finance operating expenses and various
projects. These securities are issued at a stated interest rate and have varying expected maturities ranging up to 30 years. The unrealized losses on the state and municipal securities resulted
from higher interest rates subsequent to purchase and not from credit quality. As a result, the securities were not other-than-temporarily impaired at June 30, 2010.



Asset-backed and debt securities in a loss position at June 30, 2010 consist of $42.9 million in privately placed debt
securities issued by power and utilities companies and $5.8 million in commercial mortgage-backed securities. Expected cash flows of these debt securities are assessed to determine if the
amortized cost basis of these securities is recoverable. Based on this assessment, the Company concluded that these securities were not other-than-temporarily impaired as of
June 30, 2010.



The Company's CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of
loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay
note holders through the trading and sale of underlying collateral. During the first quarter of 2009, the Company reclassified its CLOs from available for sale to held to maturity. The Company
considers the held to maturity classification to be more appropriate because the Company has the ability and the intent to hold these securities to maturity.

Certain
of these CLOs are highly illiquid securities for which fair values are difficult to obtain. Unrealized losses arise from widening credit spreads, credit quality of the underlying
collateral, uncertainty regarding the valuation of such securities and the market's opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an
estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Any security with a change in
credit rating is also subject to cash flow analysis to determine whether or not an other-than-temporary impairment exists. The fair value of the CLO portfolio
was adversely impacted in 2009 and the first half of 2010 by the overall financial market crisis. Although none of the CLOs in the Company's portfolio contain subprime loan assets, widening credit
spreads caused their value to decline. Based on the analysis performed as of June 30, 2010 to determine whether any of the unrealized losses related to CLOs were believed to be
other-than-temporary, the Company expects to recover the entire amortized cost basis of these securities.



Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of
securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the
same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the
principal

26

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5Securities (Continued)

amount
loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

The
Company separately identifies in the consolidated balance sheets, securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or
repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At June 30, 2010, the
Company had $5.6 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been
pledged to secure borrowings ($287.2 million), to support unrealized losses on derivative transactions reported in trading liabilities ($527.8 million) and to secure public and trust
department deposits ($4.8 billion).

At
June 30, 2009, December 31, 2009, and June 30, 2010, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of
$199.0 million ($168.0 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sales), $442.6 million ($434.6 million of which
has been repledged to secure public agency or bankruptcy deposits and to cover short sales), and $287.6 million ($265.3 million of which has been repledged to secure bankruptcy deposits
and to cover short sales), respectively. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.

27

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Loans and Allowance for Loan Losses

A summary of loans, net of unearned interest and deferred fees of $48 million at June 30, 2009 and $53 million at both December 31, 2009 and June 30,
2010, is as follows:

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010Loans held for investment, excluding FDIC covered loans:Commercial, financial and industrial

$
17,064,253

$
15,258,081

$
14,674,946Construction


2,791,583


2,429,009


2,113,669Mortgage:Residential


16,216,264


16,716,048


17,089,080Commercial


8,255,659


8,245,778


8,061,93024,471,923


24,961,826


25,151,010Consumer:Installment


2,353,090


2,244,239


2,129,996Revolving lines of credit


1,508,078


1,672,842


1,784,680Total Consumer


3,861,168


3,917,081


3,914,676Lease financing


657,339


653,743


641,966Total loans held for investment, excluding FDIC covered loans


48,846,266


47,219,740


46,496,267Total loans held for sale


50,254


8,768


2,620Total loans, excluding FDIC covered loans


48,896,520


47,228,508


46,498,887FDIC covered loans(1)








1,864,002Total loans


48,896,520


47,228,508


48,362,889Allowance for loan losses


1,081,633


1,357,000


1,357,869Loans, net

$
47,814,887

$
45,871,508

$
47,005,020


(1)Represents
the acquired loans that are covered by the loss share agreements with the FDIC.


During the second quarter of 2010, the Company evaluated loans acquired in the Frontier and Tamalpais transactions in accordance with accounting
guidance related to loans acquired with deteriorated credit quality. Acquired loans are considered impaired if there is evidence of deterioration of credit quality since origination and it is
probable, at the acquisition date, that the Company will be unable to collect all contractually required payments receivable. Management elected to account for all acquired loans, except for revolving
lines of credit, within the scope of the accounting guidance using the same methodology. The following table reflects the

28

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Loans and Allowance for Loan Losses (Continued)

carrying
value of loans, pursuant to accounting standards for purchased credit-impaired loans and other purchased loans as of June 30, 2010:

June 30, 2010(Dollars in thousands)

Purchased
credit-impaired
loans

Other
purchased
loans

TotalCommercial, financial and industrial

$
421,037

$
126,118

$
547,155Construction


358,417





358,417Mortgage:Residential


114,684





114,684Commercial


764,033


20,413


784,446Total mortgage


878,717


20,413


899,130Consumer:Installment


31,699


27


31,726Revolving lines of credit





27,574


27,574Total consumer


31,699


27,601


59,300Total FDIC covered loans

$
1,689,870

$
174,132

$
1,864,002


The acquired loans are referred to as "covered loans" as the Bank will be reimbursed for a substantial portion of any future losses on them under
the terms of the FDIC loss share agreements. At the acquisition dates, the estimated fair value of the purchased credit-impaired loan portfolio of Frontier and Tamalpais subject to the loss share
agreements was $1.7 billion, which represents the present value of expected cash flows from the portfolio. The difference between the undiscounted contractual cash flows and the undiscounted
expected cash flows is the nonaccretable difference. The nonaccretable difference represents the estimated credit losses in the acquired loan portfolio at the acquisition date.

The
accounting guidance for purchased credit-impaired loans provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the
acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method,
provided that the timing and amount of future cash flows is reasonably estimable. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is
accreted and the loan is reported as a nonperforming loan; otherwise, if the timing and amounts of expected cash flows for purchased credit-impaired loans are reasonably estimable, then interest is
accreted and the loans are reported as performing loans. The initial estimate of cash flows expected to be collected must be updated each subsequent reporting period based on updated assumptions
regarding default rates, loss severities, and other factors that are reflective of current market conditions. Probable decreases in expected cash flows after acquisition result in the recognition of
impairment, which would be recorded as a charge to the provision for loan losses. Probable and significant increases in expected cash flows would first reverse any related allowance for loan losses
and any remaining increases would be recognized prospectively as interest income over the estimated remaining lives of the loans. The impact of changes in variable interest rates are recognized
prospectively as adjustments to interest income.

29

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Loans and Allowance for Loan Losses (Continued)

The
following table presents the fair value of loans pursuant to accounting standards for purchased credit-impaired loans as of the respective acquisition dates:

(Dollars in thousands)Contractually required payments including interest

$
3,793,986Nonaccretable difference


1,746,316Cash flows expected to be collected (undiscounted)


2,047,670Accretable yield


298,306Fair value of purchased credit-impaired loans

$
1,749,364


The accretable yield for purchased credit-impaired loans was as follows for both the three and six months ended June 30, 2010:

(Dollars in thousands)

Accretable
YieldBalance at beginning of period

$
Additions


298,306Accretion


(22,279
)Balance at end of period

$
276,027


The carrying value and outstanding balance for the purchased credit-impaired loans as of the respective acquisition dates and at June 30,
2010 were as follows:

(Dollars in thousands)

Acquisition
Date

June 30,
2010Total outstanding balance

$
3,153,424

$
3,095,471Carrying value

$
1,749,364

$
1,689,870


As of the respective acquisition dates, the contractually required payments receivable, including interest, for all other purchased loans was
$268.2 million, the contractual cash flows not expected to be collected was $53.0 million, and the estimated fair value of the loans was $191.0 million. The difference between the
acquisition date fair value and the expected cash flows is being accreted to interest income over the remaining life of the loans for all loans that are currently performing.

All
acquired loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses
is not carried over or recorded as of the respective acquisition dates.

30

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Loans and Allowance for Loan Losses (Continued)

Changes
in the allowance for loan losses were as follows:

For the Three Months
Ended June 30,

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

2009

2010

2009

2010Allowance for loan losses, beginning of period

$
870,185

$
1,408,013

$
737,767

$
1,357,000Loans charged off


153,167


111,494


271,050


247,114Recoveries of loans previously charged off


1,588


17,963


3,093


34,172Total net loans charged off


151,579


93,531


267,957


212,942Provision for loan losses


360,000


44,000


609,000


214,000Other


3,027


(613
)

2,823


(189
)Allowance for loan losses, end of period


1,081,633


1,357,869


1,081,633


1,357,869Allowance for losses on off-balance sheet commitments


166,374


172,374


166,374


172,374Allowances for credit losses, end of period

$
1,248,007

$
1,530,243

$
1,248,007

$
1,530,243


The provision for loan losses decreased $316 million to $44 million for the second quarter of 2010 from $360 million for the
second quarter of 2009, primarily due to a decrease in criticized loans and lower loss content in the Company's nonaccrual loans during the second quarter of 2010 versus an increase in criticized
loans during the second quarter of 2009.

Nonaccrual
loans totaled $1.1 billion, $1.3 billion and $1.4 billion at June 30, 2009, December 31, 2009 and June 30, 2010, respectively. There
were $11.0 million, $20.8 million, and $97.6 million ($1.5 million, $3.8 million and $9.3 million of which were on accrual status at June 30, 2009,
December 31, 2009 and June 30, 2010, respectively) of troubled debt restructured loans at June 30, 2009, December 31, 2009 and June 30, 2010, respectively. Loans
90 days or more past due and still accruing totaled $4.0 million, $5.0 million and $5.8 million at June 30, 2009, December 31, 2009 and June 30, 2010,
respectively.

Note 7Goodwill and Intangible Assets

As part of the Company's privatization transaction, the Company recorded goodwill of $2.0 billion and intangible assets of $752 million. See Note 4 to these
consolidated financial statements for information on the Company's privatization transaction.

As
a result of the acquisition of certain assets and liabilities of Frontier and Tamalpais, the Company recorded goodwill and core deposit intangible assets totaling $47.7 million
and $14.7 million, respectively, in the second quarter of 2010. Goodwill of $34.2 million and $13.5 million was assigned to the Company's Retail Banking and Corporate Banking
reportable business segments, respectively. The amount of goodwill recorded represents the residual difference in fair values of the assets acquired net of the liabilities assumed and the payable to
the FDIC for the net assets acquired. The core deposit intangible assets will be amortized over approximately 10 years based upon the total economic benefits received. See Note 3 to
these consolidated financial statements for information on the Company's business combinations.

31

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 7Goodwill and Intangible Assets (Continued)



The changes in the carrying amount of goodwill during the six months ended June 30, 2009 and 2010 are shown below:

(Dollars in thousands)

2009

2010Balance, January 1,

$
2,369,326

$
2,369,326Acquisitions





47,653Balance, June 30,

$
2,369,326

$
2,416,979




(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010Goodwill by reportable business segment:Retail Banking

$
1,152,648

$
1,152,648

$
1,186,805Corporate Banking


1,216,678


1,216,678


1,230,174Total Goodwill

$
2,369,326

$
2,369,326

$
2,416,979


The Company reviews its goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The annual goodwill impairment test as of April 1, 2010 was performed during the second quarter of 2010, and no impairment was recognized.



The table below reflects the Company's identifiable intangible assets and accumulated amortization at June 30, 2009,
December 31, 2009 and June 30, 2010.

June 30, 2009

December 31, 2009

June 30, 2010(Dollars in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountCore deposit intangibles

$
619,398

$
(156,314
)
$
463,084

$
619,398

$
(233,042
)
$
386,356

$
637,196

$
(291,161
)
$
346,035Trade name


108,733


(2,057
)

106,676


108,733


(3,430
)

105,303


108,733


(4,804
)

103,929Customer relationships


53,761


(3,427
)

50,334


53,761


(5,531
)

48,230


53,761


(7,653
)

46,108Other


9,555


(962
)

8,593


9,555


(1,498
)

8,057


10,470


(2,325
)

8,145Subtotalintangibles with a definite useful life

$
791,447

$
(162,760
)
$
628,687

$
791,447

$
(243,501
)
$
547,946

$
810,160

$
(305,943
)
$
504,217Other intangibles with an indefinite useful life


12,719





12,719


13,094





13,094


13,094





13,094Total intangibles

$
804,166

$
(162,760
)
$
641,406

$
804,541

$
(243,501
)
$
561,040

$
823,254

$
(305,943
)
$
517,311


Total amortization expense for the second quarters of 2009 and 2010 was $40.3 million and $30.6 million, respectively. Total
amortization expense for the six months ended June 30, 2009 and 2010 was $81.2 million and $62.4 million, respectively.

32

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 7Goodwill and Intangible Assets (Continued)

Estimated
future amortization expense at June 30, 2010 is as follows:

(Dollars in thousands)

Core Deposit
Intangibles (CDI)

Trade Name

Customer
Relationships

Other

Total Identifiable
Intangible Assets
with a Definite
Useful LifeEstimated amortization expense for the years ending:Remaining 2010

$
57,196

$
1,373

$
2,123

$
834

$
61,5262011


90,273


2,747


3,968


1,510


98,4982012


71,835


2,747


3,679


1,059


79,3202013


47,459


2,747


3,436


1,076


54,7182014


34,151


2,747


3,232


766


40,396Thereafter


45,121


91,568


29,670


2,900


169,259Total estimated amortization expense

$
346,035

$
103,929

$
46,108

$
8,145

$
504,217


Note 8Variable Interest Entities

Effective January 1, 2010, the Company adopted ASU 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities." At adoption
of this guidance, the Company recorded increases in total assets of $281 million, liabilities of $9 million and stockholder's equity attributable to noncontrolling interests of
$272 million. The cumulative effect on retained earnings was not significant.

The
Company is involved in various structures that are considered to be VIEs. Generally, a VIE is a corporation, partnership, trust or any other legal structure that has equity investors
that: 1) do not have sufficient equity at risk for the entity to independently finance its activities; 2) lack the power to direct the activities that significantly impact the entity's
economic success; and/or 3) do not have an obligation to absorb the entity's losses or the right to receive the entity's returns. The Company's investments in VIEs primarily consist of equity
investments in low income housing credit (LIHC) structures and renewable energy projects, which are designed to generate a return primarily through the realization of federal tax credits, and private
capital investments.

Consolidated VIEs

The Company is required to consolidate VIEs in which it is the primary beneficiary. The Company is determined to be the primary
beneficiary of a VIE when it has the power to direct matters that most significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits of the
VIE that could potentially be significant to the VIE.

At
June 30, 2010, $307 million in assets and $10 million in liabilities were consolidated by the Company on its consolidated balance sheet related to two LIHC
investment fund structures because the Company sponsors, manages and syndicates the funds. The assets are included in other assets as well as cash and due from banks, the liabilities are primarily
included in medium- and long-term debt, and third-party investor interests are included in stockholder's equity as noncontrolling interests. Neither creditors nor equity investors

33

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 8Variable Interest Entities (Continued)

in
the LIHC investments have any recourse to the general credit of the Company and the Company's creditors do not have any recourse to the assets of the consolidated LIHC investments.

For
the three months and six months ended June 30, 2010, the Company recorded $6 million and $11 million of expenses related to its consolidated VIEs, respectively.
The expenses are included in other noninterest expense on the Company's consolidated statements of income.



The Company is a sponsor and syndicator of low-income housing tax credit investments. In these syndication transactions,
the Company creates the investment funds, serves as the managing investor member, and sells limited investor member interests to third parties. The Company receives benefits through income from the
structuring of these funds, servicing fees for managing the funds and, as an investor member, tax benefits and tax credits to reduce the Company's tax liability. As sponsor and managing member of the
funds, the Company's activities include selecting, evaluating, structuring, negotiating and closing the fund investment in operating limited partnerships, as well as oversight of the ongoing
operations of the fund portfolio. There is no single third-party investor with the power to remove the Company as managing member. In this role, the Company directs the activities that most
significantly impact the fund's economic performance and receives benefits from the fund.



The Company also forms limited liability companies (LLCs), which in turn invest in low income housing tax credit operating
partnerships. Interests in these funds are sold to third parties who pay a premium for a guaranteed return. The Company earns structuring fees from the sale of these funds and asset management fees.
The Company also serves as the funds' non-member asset manager and guarantor. As sponsor and non-member asset manager of the funds, the Company's activities include selecting,
evaluating, structuring, negotiating and closing investments in operating limited partnerships, as well as oversight of the ongoing operations of the fund portfolio. As guarantor, the Company
guarantees a minimum rate of return throughout the investment term. There is no single third-party investor with the power to remove the Company as asset manager. In the Company's role as sponsor and
asset manager, it directs the activities that most significantly impact the fund's economic performance. Separately, it has an obligation to absorb losses pertaining to its minimum rate of return
guarantee to investors. For details of the guarantee, see Note 17 to these consolidated financial statements.

Unconsolidated VIEs in Which the Company has a Variable Interest

The Company holds variable interests in other VIEs that it is not required to consolidate as it is not the primary beneficiary. In such
cases, it does not hold the power, through its equity investments or otherwise, to direct the VIE's significant activities. The following table presents the Company's carrying amounts related to the
unconsolidated VIEs and location on the consolidated balance sheet at June 30, 2010. The table also presents the Company's maximum exposure to loss resulting from its involvement with these
VIEs. The

34

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 8Variable Interest Entities (Continued)

maximum
exposure to loss represents the carrying value of the Company's involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become
worthless.

June 30, 2010(Dollars in thousands)

Total
Assets

Total
Liabilities

Maximum
Exposure to
LossLIHC investments

$
476,424

$
17,982

$
623,774Renewable energy investments


305,292





305,292Private capital investments


168,543





253,083Total unconsolidated VIEs

$
950,259

$
17,982

$
1,182,149




The Company makes equity investments in various private investment partnership funds and limited partnerships that sponsor qualified
affordable housing projects. As a limited partner and non-managing investor member in these operating partnerships, the Company is allocated tax credits and tax deductions from operating
losses associated with the underlying properties. The power to direct the activities of the investments resides with the general partner and/or managing member of these partnerships. As a result, the
Company does not consolidate these investments. These LIHC investments are accounted for under the equity or effective yield method and are reflected in other assets on the Company's consolidated
balance sheet. The Company increases the
LIHC investment carrying amount and recognizes a liability for all unconditional unfunded equity commitments. These liabilities are reflected in other liabilities on the Company's consolidated balance
sheet. In addition, the Company has $147 million in off-balance sheet conditional unfunded commitments that may be drawn when specific conditions are achieved, including the
completion of construction of low income housing units. These unfunded commitments are included in the maximum exposure to loss attributable to LIHC investments in the table above.



The Company makes equity investments in LLCs created to operate and manage renewable energy projects. The managing member or
general partner of the LLC identifies and selects the assets of the entity and provides management and/or oversight of the ongoing operations of the renewable energy project. As a passive and
limited investor member, the Company is allocated production tax credits and taxable income or losses associated with the projects. These renewable energy investments are accounted for under the
equity method with the investments reflected in other assets on the Company's consolidated balance sheet.



The Company makes equity investments in various private capital investment funds either directly in privately held companies or
indirectly through private equity funds. As a passive investor, the Company has no rights that provide the power to direct the activities of the investments. The power to identify and select the
assets of the investments resides with the managing member or general partner of each direct and fund investment. These private capital investments are accounted for under either the cost or equity
method and are reflected in other assets on the Company's consolidated balance sheet. In addition, the Company has

35

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 8Variable Interest Entities (Continued)

off-balance
sheet unfunded commitments of $85 million to provide additional liquidity as required by the funds. These unfunded commitments are reflected in the maximum exposure to
loss attributable to private capital investments in the table above.

Note 9Private Capital and Other Investments

The following table shows the balances of private capital and other investments, which are recorded in other assets, at June 30, 2009, December 31, 2009 and June 30,
2010.

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010Private capital and other investments:Private capital investmentscost basis

$
170,390

$
119,121

$
117,809Private capital investmentsequity method





46,296


64,049LIHC investmentsguaranteed


201,374


185,779


169,088LIHC investmentsunguaranteed


327,385


319,031


309,947Consolidated VIEs








293,881Renewable energy investments


280,331


305,917


305,292Total private capital and other investments

$
979,480

$
976,144

$
1,260,066


The Company invests in private capital funds either directly in privately held companies or indirectly through private equity funds. These
investments are accounted for based on the cost or equity method depending on whether the Company has significant influence over the investee. The investments' fair value is estimated when events or
conditions indicate that it is probable that the carrying value of the investment will not be fully recovered in the foreseeable future. Fair value is estimated based on the company's business model,
current and projected financial performance, liquidity and overall economic and market conditions. As a practical expedient, fair value can also be estimated as the net asset value (NAV) of the fund.
If fair value is estimated to be below cost, an evaluation for other-than-temporary impairment is performed. If any of the factors used to determine fair value indicate that a
recovery is unlikely or will not occur for a reasonable period of time, an other-than-temporary impairment is recorded. Based on this analysis, the Company recorded
$4.6 million of other-than-temporary impairment on its private capital investments in the six months ended June 30, 2010.

The
Company also invests in limited liability partnerships and other entities operating qualified affordable housing projects to receive tax benefits in the form of tax deductions from
operating losses and tax credits. These LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. The unguaranteed LIHC investments are
accounted for under the equity method. As of June 30, 2010, this category also included $29.9 million of investments in real estate private equity funds that are compliant with the
Community Reinvestment Act Standards (CRA investments). These investments are tested quarterly for impairment. The Company had no other-than-temporary impairment on its
unguaranteed LIHC and CRA investments during the six months ended June 30, 2010.

The
Company also invests in guaranteed LIHC investments where the availability of tax credits are guaranteed by a creditworthy entity. The investments are initially recorded at cost and
amortized over the period the tax credits are allocated to provide a constant effective yield. These investments are tested quarterly

36

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 9Private Capital and Other Investments (Continued)

for
impairment. The Company had no other-than-temporary impairment on its guaranteed LIHC investments during the six months ended June 30, 2010.

The
Company invests in limited liability partnerships that operate renewable energy projects. Tax credits, taxable income and distributions associated with these renewable energy
projects are allocated to investors according to the terms of the partnership agreements. These investments are accounted for under the equity method, with the initial investment recorded at cost and
the carrying value adjusted for the Company's share of partnership net income and distributions received. These investments are tested annually for impairment, based on projected operating results and
expected realizability of tax credits.
The Company had no other-than-temporary impairment during the six months ended June 30, 2010 on its renewable energy investments.

Note 10Employee Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the three and six months ended June 30, 2009 and 2010.

Pension Benefits

Other Benefits

Superannuation, SERP(1) and ESBP(2)For the Three Months
Ended June 30,

For the Three Months
Ended June 30,

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

2009

2010

2009

2010

2009

2010Components of net periodic benefit costService cost

$
12,571

$
13,056

$
2,332

$
2,347

$
256

$
263Interest cost


20,723


22,923


3,055


3,287


941


934Expected return on plan assets


(35,086
)

(36,488
)

(2,501
)

(3,092
)




Amortization of prior service cost








(16
)

(16
)




Amortization of transition amount








328


328





Recognized net actuarial loss


3,036


4,107


2,153


1,363


305


218Total net periodic benefit cost

$
1,244

$
3,598

$
5,351

$
4,217

$
1,502

$
1,415


(1)Supplemental
Executives Retirement Plan (SERP).(2)Executive
Supplemental Benefit Plans (ESBP).


37

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 10Employee Pension and Other Postretirement Benefits (Continued)

Pension Benefits

Other Benefits

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

For the Six Months
Ended June 30,

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

2009

2010

2009

2010

2009

2010Components of net periodic benefit costService cost

$
26,188

$
24,954

$
4,664

$
4,695

$
511

$
526Interest cost


41,534


45,291


6,110


6,575


1,882


1,868Expected return on plan assets


(70,305
)

(73,001
)

(5,002
)

(6,185
)




Amortization of prior service cost








(31
)

(31
)




Amortization of transition amount








656


656





Recognized net actuarial loss


6,090


7,285


4,306


2,725


1,171


437Total net periodic benefit cost

$
3,507

$
4,529

$
10,703

$
8,435

$
3,564

$
2,831


(1)Supplemental
Executives Retirement Plan (SERP).(2)Executive
Supplemental Benefit Plans (ESBP).


Note 11Other Noninterest Income and Noninterest Expense

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

Other Noninterest Income

For the Three Months Ended

For the Six Months Ended(Dollars in thousands)

June 30,
2009

June 30,
2010

June 30,
2009

June 30,
2010Private capital and other investment income

$
3,910

$
15,922

$
1,356

$
19,356Standby letters of credit fees


8,092


9,210


15,137


17,668Trade related commission and fees


1,920


1,848


3,758


3,539FDIC indemnification asset accretion





8,245





8,245Other


10,685


12,374


21,476


25,326Total other noninterest income

$
24,607

$
47,599

$
41,727

$
74,134


38

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 11Other Noninterest Income and Noninterest Expense (Continued)

Other Noninterest Expense

For the Three Months Ended

For the Six Months Ended(Dollars in thousands)

June 30,
2009

June 30,
2010

June 30,
2009

June 30,
2010Low income housing credit investment amortization

$
11,026

$
14,248

$
21,192

$
27,774Advertising and public relations


11,349


11,476


21,970


21,641Communications


9,192


9,726


17,910


19,255Data processing


8,042


8,176


16,617


16,286Travel


4,549


7,711


10,901


13,170Printing and office supplies


4,016


4,701


8,956


9,659Foreclosed asset expense


3,282


871


4,168


673Expenses related to consolidated VIEs





5,825





10,864Other


12,247


8,766


20,135


22,503Total other noninterest expense

$
63,703

$
71,500

$
121,849

$
141,825


Note 12Borrowed Funds

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

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 0.03%, 0.07% and 0.11% at June 30,
2009, December 31, 2009 and June 30, 2010, respectively

$
203,205

$
150,453

$
101,516Commercial paper, with weighted average interest rates of 0.47%, 0.16%, and 0.21% at June 30, 2009, December 31, 2009 and June 30, 2010,
respectively


492,127


888,541


610,580Other borrowed funds:Federal Home Loan Bank borrowings, with weighted average interest rates of 0.86% at June 30, 2009


400,000





Term federal funds purchased, with weighted average interest rates of 0.72%, 0.19% and 0.29% at June 30, 2009, December 31, 2009 and June 30,
 2010, respectively


102,000


505,000


175,000All other borrowed, with weighted average interest rates of 1.29%, 1.75% and 0.74% at June 30, 2009, December 31, 2009 and June 30, 2010,
respectively


104,019


86,934


111,275Total borrowed funds

$
1,301,351

$
1,630,928

$
998,371


39

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Medium- and Long-Term Debt

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

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010Medium-Term senior debt:Fixed rate Federal Home Loan Bank Advances. These notes bear a combined weighted average rate of 2.38% at June 30, 2009, 2.93% at December 31,
2009 and 2.62% at June 30, 2010

$
2,901,000

$
2,001,000

$
2,501,000Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.70% at June 30, 2009, 0.33% at
December 31, 2009, and 0.62% at June 30, 2010


500,000


500,000


500,000Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.82% at June 30, 2009, 0.45% at
December 31, 2009 and 0.74% at June 30, 2010


500,000


500,000


500,000Medium-Term note payable:Fixed rate 6.03% notes due July 2014 (related to consolidated VIE)








7,853Long-Term subordinated debt:Fixed rate 5.25% notes due December 2013


441,422


434,362


427,862Fixed rate 5.95% notes due May 2016


788,646


776,822


765,688Total medium- and long-term debt

$
5,131,068

$
4,212,184

$
4,702,403


As of June 30, 2009, December 31, 2009 and June 30, 2010, the Company had pledged loans and securities of
$39.5 billion, $38.0 billion, and $36.0 billion, respectively, as collateral for short- and medium-term advances from the Federal Reserve Bank and Federal Home Loan
Bank.

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

Under
the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity of more than 30 days and issued between October 14, 2008 and
October 31, 2009 is guaranteed by the full faith and credit of the United States. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon

40

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 13Medium- and Long-Term Debt (Continued)

the
earlier of either the maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date
of the debt or December 31, 2012.

Note 14Fair Value Measurement and Fair Value of Financial Instruments



Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price)
in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of
unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data.
Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy. This hierarchy is based on the quality and
reliability of the information used to determine fair value.



In
assigning the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured at fair value. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant to the
fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be many significant inputs that are readily observable.



The Company has an established and documented process for determining fair value for financial assets and financial liabilities that
are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is
based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as interest rates, yield curves, foreign exchange rates, volatilities and
credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that
consider the Company's

41

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)

creditworthiness
in determining the fair value of its trading liabilities. A description of the valuation methodologies used for certain financial assets and financial liabilities measured at fair
value is as follows:

Recurring
Fair Value Measurements:



Nonrecurring
Fair Value Measurements:



42

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)



43

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)



The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of
June 30, 2009, December 31, 2009 and June 30, 2010, by major category and by valuation hierarchy level.

June 30, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets:U.S. Treasury

$
66,829

$


$


$


$
66,829Other U.S. government


46,895











46,895State and municipal





8,446








8,446Commercial paper





47,194








47,194Derivative contracts


1,985


801,314





(67,027
)

736,272Total trading account assets


115,709


856,954





(67,027
)

905,636Securities available for sale:Other U.S. government


709,696











709,696Residential mortgage-backed securities





6,446,308








6,446,308State and municipal





45,466


4,748





50,214Asset-backed and debt securities





96,970








96,970Equity securities


98,337





1,560





99,897Foreign securities





88








88Total securities available for sale


808,033


6,588,832


6,308





7,403,173Other assets(2)





139,765





(50,126
)

89,639Total assets

$
923,742

$
7,585,551

$
6,308

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

$
5,590

$
757,265

$


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


45,002











45,002Total trading account liabilities


50,592


757,265





(117,153
)

690,704Total liabilities

$
50,592

$
757,265

$


$
(117,153
)
$
690,704


(1)Amounts
represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net
settle all contracts.(2)Other
assets include nontrading derivatives.


44

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)




December 31, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets:U.S. Treasury

$
15,430

$


$


$


$
15,430Other U.S. government


28,649











28,649State and municipal





24,878








24,878Commercial paper





74,594








74,594Derivative contracts


1,453


648,227





(67,583
)

582,097Total trading account assets


45,532


747,699





(67,583
)

725,648Securities available for sale:U.S. Treasury


299,677











299,677Other U.S. government


12,277,418











12,277,418Residential mortgage-backed securitiesagency





9,362,123








9,362,123Residential mortgage-backed securitiesnon-agency





391,439








391,439State and municipal





39,637


5,459





45,096Asset-backed and debt securities





108,135








108,135Equity securities


73,522





1,419





74,941Total securities available for sale


12,650,617


9,901,334


6,878





22,558,829Other assets(2)





97,186





(68,302
)

28,884Total assets

$
12,696,149

$
10,746,219

$
6,878

$
(135,885
)
$
23,313,361LiabilitiesTrading account liabilities:Derivatives

$
1,978

$
630,951

$


$
(101,958
)
$
530,971Securities sold, not yet purchased


7,923











7,923Total trading account liabilities


9,901


630,951





(101,958
)

538,894Other liabilities(2)





12,164





(9,927
)

2,237Total liabilities

$
9,901

$
643,115

$


$
(111,885
)
$
541,131


(1)Amounts
represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net
settle all contracts.(2)Other
assets and liabilities include nontrading derivatives.


45

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)




June 30, 2010(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets:U.S. Treasury

$
131,295

$


$


$


$
131,295Other U.S. government


55,675











55,675State and municipal





52,430








52,430Commercial paper





47,993








47,993Foreign exchange derivative contracts


516


49,558





(7,840
)

42,234Energy derivative contracts





181,306





(28,292
)

153,014Interest rate derivative contracts


133


636,424





(17,024
)

619,533Equity derivative contracts





18,604





(1,678
)

16,926Total trading account assets


187,619


986,315





(54,834
)

1,119,100Securities available for sale:U.S. Treasury


300,309











300,309Other U.S. government


12,088,242











12,088,242Residential mortgage-backed securitiesagency





8,820,884








8,820,884Residential mortgage-backed securitiesnon-agency





340,323








340,323State and municipal





40,501


7,245





47,746Asset-backed and debt securities





111,454








111,454Equity securities


78,225





1,398





79,623Total securities available for sale


12,466,776


9,313,162


8,643





21,788,581Other assets:Interest rate hedging contracts





14,632





(4,099
)

10,533Total other assets





14,632





(4,099
)

10,533Total assets

$
12,654,395

$
10,314,109

$
8,643

$
(58,933
)
$
22,918,214LiabilitiesTrading account liabilities:Foreign exchange derivative contracts

$
357

$
32,805

$


$
(7,083
)
$
26,079Energy derivative contracts





180,389





(23,206
)

157,183Interest rate derivative contracts


1,450


599,830





(46,253
)

555,027Equity derivative contracts





18,604








18,604Securities sold, not yet purchased


58,389











58,389Total trading account liabilities


60,196


831,628





(76,542
)

815,282Other liabilities








41,697





41,697Total liabilities

$
60,196

$
831,628

$
41,697

$
(76,542
)
$
856,979


(1)Amounts
represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net
settle all contracts.


46

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)




The following tables present a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the three and six months ended June 30, 2009 and 2010. Level 3 available for sale securities primarily consist of community redevelopment bonds. These bonds were
carried at cost, which approximates fair value.

Securities Available for Sale

For the Three Months
Ended June 30,

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

2009

2010

2009

2010Balance, beginning of period

$
4,731

$
8,182

$
1,203,092

$
6,878Total gains/(losses) (realized/unrealized):Included in income before taxes








20


Included in other comprehensive income (loss)


39


(27
)

(54,711
)

(20
)Purchases, sales, issuances and settlements


1,538


488


1,721


1,785Transfers in (out) Level 3(1)








(1,143,814
)

Balance, end of period

$
6,308

$
8,643

$
6,308

$
8,643Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$


$


$


$



Other Liabilities

For the Three Months
Ended June 30,

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

2010

2010Balance, beginning of period

$


$
Purchases, sales, issuances and settlements


41,697


41,697Balance, end of period

$
41,697

$
41,697Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$


$



(1)The
CLO portfolio was transferred out of Level 3 during the first quarter of 2009 as a result of the reclassification from available
for sale to held to maturity. Held to maturity securities are not measured at fair value on a recurring basis and therefore are not subject to this fair value disclosure requirement.


There were no transfers in or out of the Level 1 and 2 valuation hierarchies during the six months ended June 30, 2010.



Certain assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result
from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the six months ended
June 30, 2009 and 2010 that were still held on the consolidated balance sheet as of the respective periods

47

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)

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

June 30, 2009(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Loss for the
Three Months Ended
June 30, 2009

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

$
1,556

$


$


$
1,556

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


24,506





8,525


15,981


(85
)

(85
)Impaired Loans


360,790








360,790


(75,345
)

(115,635
)Other Assets:OREO


8,861








8,861


(2,224
)

(2,884
)CRA Investments


8,165








8,165


(5,103
)

(5,493
)Private Equity Investments


24,095








24,095


(2,473
)

(4,827
)Total

$
427,973

$


$
8,525

$
419,448

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




June 30, 2010(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Loss for the
Three Months Ended
June 30, 2010

Loss for the
Six Months Ended
June 30, 2010Loans:Impaired Loans

$
662,157

$


$


$
662,157

$
(9,071
)
$
(23,838
)Other Assets:OREO


35,372








35,372


(729
)

(1,775
)Private Equity Investments


9,892








9,892


(2,879
)

(4,641
)Total

$
707,421

$


$


$
707,421

$
(12,679
)
$
(30,254
)


Loans include residential mortgage and commercial loans held for sale measured at the lower of cost or fair value and individually impaired loans
that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of fixed-rate residential mortgage loans was determined using whole
loan forward prices obtained from GSEs. The fair value of commercial loans was determined using market pricing for similar assets, adjusted for management judgment. The fair value of impaired loans
was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment.

Other
assets consist of private equity investments that were written down to fair value due to impairment and OREO that was measured at the lower of cost or fair value. The fair value of
OREO was primarily based on independent appraisals.

Private
equity investments with a total fair value of $9.9 million at June 30, 2010 relate to five funds that invest in the communications and media industries, the oil and
gas sector, office and industrial properties, mezzanine, private equity and other senior debt instruments of companies undergoing leveraged buyouts or

48

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)

recapitalization.
The fair value of these investments was estimated using NAV. There was $2.6 million in unfunded commitments related to these investments included in the above nonrecurring
fair value table at June 30, 2010.



In addition to financial instruments recorded at fair value in the Company's financial statements, the disclosure of the estimated fair
value of financial instruments that are not carried at fair value is also required. Excluded from this disclosure requirement are lease financing arrangements, investments accounted for under the
equity method, employee pension and other postretirement obligations and all nonfinancial assets and liabilities, including goodwill and other intangible assets such as long-term customer
relationships. The fair values presented are estimates for certain individual financial instruments and do not represent an estimate of the fair value of the Company as a whole.

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

Private
equity investments including direct investments in privately held companies and indirect investments in private equity funds are carried at amounts that approximate fair value.
Due to the unavailability of quoted market prices, the investments are initially valued based on cost and subsequently valued utilizing available market data to determine if the carrying value of
these investments should be adjusted. Valuations are based on the investee's recent financial performance and future potential, the value of underlying investee's assets, the risks associated with the
particular business, current market conditions, and other relevant factors.

The
carrying value of the off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, represent the unamortized
fee income assessed based on the credit quality and other covenants imposed on the borrower. Since the amount originally assessed represents the market rate that would be charged for similar
agreements, management believes that the carrying value approximates the fair value of these instruments.

Financial
instruments for which their carrying values do not approximate fair value include loans, interest bearing deposits with stated maturities, other borrowed funds, medium- and
long-term debt, and trust notes.

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

Loans:The fair values of FDIC covered loans were originally estimated at acquisition date using a discounted cash flow methodology that
considered
factors including the type of loan and related collateral, risk classification, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates.
The carrying value at June 30, 2010 approximated fair value. The fair values of

49

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Fair Value Measurement and Fair Value of Financial Instruments (Continued)

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

FDIC indemnification asset:The fair value of the FDIC indemnification asset was estimated at each acquisition date using the present
value of the
cash flows that the Bank expect to collect from the FDIC under the loss share agreements. The carrying value at June 30, 2010, which reflects accretion since acquisition dates, approximated
fair value.

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

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

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

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

The
table below presents the carrying value and estimated fair value of certain financial instruments held by the Company as of December 31, 2009 and June 30, 2010.

December 31, 2009

June 30, 2010(Dollars in thousands)

Carrying
Value

Fair
Value

Carrying
Value

Fair
ValueAssetsSecurities held to maturity

$
1,227,718

$
1,457,558

$
1,265,886

$
1,433,596Loans, net of allowance for loan losses(1)


45,222,765


44,924,749


46,369,254


46,179,201FDIC indemnification asset








908,771


908,771LiabilitiesInterest bearing deposits


53,958,664


53,969,991


50,951,294


51,009,041Other borrowed funds


591,934


591,953


286,275


286,295Medium- and long-term debt


4,212,184


4,180,328


4,702,403


4,721,276Junior subordinated debt payable to subsidiary grantor trust


13,527


13,076


13,419


14,307Off-Balance Sheet InstrumentsCommitments to extend credit


122,986


122,986


119,098


119,098Standby and commercial letters of credit


5,772


5,772


6,350


6,350


(1)Excludes
lease financing, net of related allowance


50

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging

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

Credit
and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance
with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting and collateral support annex (CSA) agreements in order to reduce its
exposure to credit risk. Master netting agreements mitigate credit risk by permitting the offset of amounts due from and to individual counterparties in the event of default. The CSA requires the
counterparty with derivatives in a net loss position to provide collateral as prescribed by such agreement. Additionally, the Company considers the potential loss in the event of counterparty default
in estimating the fair value amount of the derivative instrument. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable.

Derivatives
are used to manage exposure to interest rate and foreign currency risk, generate profits from proprietary trading and assist customers with their risk management objectives.
The Company designates derivative instruments as those used for US GAAP hedge accounting purposes, and those for trading or economic hedge purposes. All derivative instruments are recognized as
assets or liabilities on the consolidated balance sheet at fair value.

The
tables below present the notional amounts, and the location and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheet, segregated
between derivative instruments designated and qualifying as hedging instruments under US GAAP and all other derivative instruments as of June 30, 2009, December 31, 2009 and
June 30, 2010.

June 30, 2009Asset Derivatives(1)

Liability Derivatives(1)(Dollars in thousands)

Notional
Amount

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueTotal derivatives designated as hedging instruments under US GAAP:Interest rate contracts(2)

$
6,250,000

Other assets

$
139,765

Other liabilities

$
Derivatives not designated as hedging instruments under US GAAP:Foreign exchange contracts

$
3,138,371

Trading account assets

$
51,673

Trading account liabilities

$
42,479Energy contracts


3,501,515

Trading account assets


255,498

Trading account liabilities


259,186Interest rate contracts


24,859,280

Trading account assets


489,442

Trading account liabilities


454,504Equity contracts


148,234

Trading account assets


6,686

Trading account liabilities


6,686Other contracts


5,778

Other assets


194

Other liabilities


(1,043
)Total derivatives not designated as hedging instruments under US GAAP

$
31,653,178



$
803,493



$
761,812


51

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)



December 31, 2009Asset Derivatives(1)

Liability Derivatives(1)(Dollars in thousands)

Notional
Amount

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueTotal derivatives designated as hedging instruments under US GAAP:Interest rate contracts(2)

$
8,800,000

Other assets

$
97,186

Other liabilities

$
12,164Derivatives not designated as hedging instruments under US GAAP:Foreign exchange contracts

$
2,701,925

Trading account assets

$
22,398

Trading account liabilities

$
27,097Energy contracts


3,405,389

Trading account assets


166,395

Trading account liabilities


167,640Interest rate contracts


25,226,564

Trading account assets


446,756

Trading account liabilities


424,060Equity contracts


254,372

Trading account assets


14,133

Trading account liabilities


14,133Other contracts


5,350

Other assets


389

Other liabilities


(848
)Total derivatives not designated as hedging instruments under US GAAP

$
31,593,600



$
650,071



$
632,082




June 30, 2010Asset Derivatives(1)

Liability Derivatives(1)(Dollars in thousands)

Notional
Amount

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueTotal derivatives designated as hedging instruments under US GAAP:Interest rate contracts(2)

$
4,000,000

Other assets

$
14,632

Other liabilities

$
Derivatives not designated as hedging instruments under US GAAP:Foreign exchange contracts

$
3,762,692

Trading account assets

$
50,074

Trading account liabilities

$
33,162Energy contracts


3,644,782

Trading account assets


181,306

Trading account liabilities


180,389Interest rate contracts


27,359,745

Trading account assets


636,557

Trading account liabilities


601,280Equity contracts


702,274

Trading account assets


18,605

Trading account liabilities


18,605Other contracts


4,667

Other assets


260

Other liabilities


(977
)Total derivatives not designated as hedging instruments under US GAAP

$
35,474,160



$
886,802



$
832,459


(1)Asset
and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements.(2)The
fair value includes unamortized premium of $6.1 million, $3.0 million and $4.3 million related to terminated
contracts at June 30, 2009, December 31, 2009 and June 30, 2010, respectively.


Certain of the Company's derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the
Company's credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand

52

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

immediate
and ongoing full overnight collateralization for those derivative instruments in net liability positions. At June 30, 2010, the aggregate fair value (including net interest
payable/receivable) of all
derivative instruments with credit-risk mitigated contingent features that are in a liability position was $73.1million. The Company had pledged securities (including accrued interest) of
$55.0 million for collateral in the normal course of business. If all of the credit-risk-related contingent features underlying these agreements had been triggered on
June 30, 2010, the Company would have been required to provide additional collateral of $18.1 million to settle these contracts.



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



The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged
risk being the variability in those payments due to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of
similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of
purchased floor, cap, collars and corridor options and interest rate swaps. At June 30, 2010, the weighted average remaining life of the currently active (excluding any forward positions) cash
flow hedges was approximately 2.8 years.

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

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

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

The
Company uses interest rate swaps to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received (or paid) under
the swap contract offset fluctuations in loan

53

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

interest
income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index.

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

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

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

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

For
cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the
same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness or hedge components excluded from the assessment of
hedge effectiveness are recognized in noninterest expense in the period in which they arise. Based upon amounts included in accumulated other comprehensive income at June 30, 2010, the Company
expects to realize approximately $4.6 million in net interest income during the twelve months ending June 30, 2011. This amount could differ from amounts actually realized due to changes
in interest rates and the addition of other hedges subsequent to June 30, 2010.

54

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The
following tables present the amount and location of the net gains and losses recorded in the Company's consolidated statements of income and changes in stockholder's equity for
derivatives designated as cash flow hedges for the three and six months ended June 30, 2009 and June 30, 2010.

Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)

Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)

Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)For the Three Months
Ended June 30,



For the Three Months
Ended June 30,



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

2009

2010

Location

2009

2010

Location

2009

2010Derivatives in cash flow hedging relationshipsInterest income

$
33,198

$
17,265Interest rate contracts

$
28,675

$
(12,806
)
Interest expense


41




Noninterest expense

$
61

$
1Total

$
28,675

$
(12,806
)


$
33,239

$
17,265



$
61

$
1




Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)

Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)

Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)For the Six Months
Ended June 30,



For the Six Months
Ended June 30,



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

2009

2010

Location

2009

2010

Location

2009

2010Derivatives in cash flow hedging relationshipsInterest income

$
65,336

$
37,381Interest rate contracts

$
35,657

$
(14,703
)
Interest expense


15




Noninterest expense

$
75

$
(5
)Total

$
35,657

$
(14,703
)


$
65,351

$
37,381



$
75

$
(5
)




Derivative instruments classified as trading include both derivatives entered into for the Company's own account and as an
accommodation for customers. Derivatives held for trading purposes are included in trading assets or trading liabilities with changes in fair value reflected in trading income or losses. The majority
of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.

The
Company offers market-linked certificates of deposit, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to the S&P 500, the
Dow Jones UBS Commodity Index or a currency-linked index. The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched
over-the-counter call option. Both the embedded derivative and call option are recorded at fair value with the realized and unrealized changes in fair value recorded in
noninterest income within trading account activities.

55

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The
Company has a limited portfolio of market path CDs, which provide the current CD holders with a return tied to the respective index. The Company engages in an economic hedging
strategy in which the interest paid based on the respective index is exchanged for a fixed rate of interest. The Company accounts for the derivative embedded in the market path CD separately at fair
value. A total return swap that encompasses the value of a series of options that had individually hedged each CD is recorded at
fair value. The fair value of the embedded derivative and the hedge instrument are recorded in other assets and other liabilities and the changes in the fair value of the embedded derivative and the
hedge instrument are recognized as interest expense.

The
following tables present the amount and location of the net gains and losses reported in the consolidated statement of income for derivative instruments classified as trading and
derivatives used as economic hedges for the three and six months ended June 30, 2009 and June 30, 2010.

Gain or (Loss) Recognized in Income on Derivative Instruments(Dollars in thousands)

Location

For the Three Months Ended
June 30, 2009

For the Six Months Ended
June 30, 2009Trading Derivatives and Economic Hedges:Interest rate contracts

Trading account activities

$
3,976

$
8,533Foreign exchange contracts

Trading account activities


9,376


17,447Energy contracts

Trading account activities


(3,882
)

453Equity contracts

Trading account activities


681


1,108Other contracts

Interest expense


(44
)

(82
)Total



$
10,107

$
27,459




Gain or (Loss) Recognized in Income on Derivative Instruments(Dollars in thousands)

Location

For the Three Months Ended
June 30, 2010

For the Six Months Ended
June 30, 2010Trading Derivatives and Economic Hedges:Interest rate contracts

Trading account activities

$
5,594

$
8,035Foreign exchange contracts

Trading account activities


7,776


16,695Energy contracts

Trading account activities


2,948


5,232Equity contracts

Trading account activities


3,180


6,121Other contracts

Interest expense


(21
)

(45
)Total



$
19,477

$
36,038


56

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Accumulated Other Comprehensive Loss

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

(Dollars in thousands)

Before
Tax
Amount

Tax
Effect

Net of
TaxFor the Six Months Ended June 30, 2009:Cash flow hedge activities:Unrealized net gains on hedges arising during the period

$
35,657

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


7,330


(2,804
)

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


(65,351
)

25,601


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


(22,364
)

8,787


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


54,706


(21,494
)

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


(598
)

235


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


(10,553
)

4,146


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


(6,414
)

2,520


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


30,369


(11,932
)

18,437Net change in unrealized losses on securities


67,510


(26,525
)

40,985Foreign currency translation adjustment


331


(130
)

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


(31
)

12


(19
)Amortization of transition amount


656


(258
)

398Recognized net actuarial loss


11,567


(4,545
)

7,022Net change in pension and other benefits


12,192


(4,791
)

7,401Net change in accumulated other comprehensive loss

$
57,669

$
(22,659
)
$
35,010For the Six Months Ended June 30, 2010:Cash flow hedge activities:Unrealized net losses on hedges arising during the period

$
(14,703
)
$
5,777

$
(8,926
)Less: accretion of privatization-related fair value adjustment


1,756


(690
)

1,066Less: Reclassification adjustment for net gains on hedges included in net income


(39,137
)

15,377


(23,760
)Net change in unrealized gains on hedges


(52,084
)

20,464


(31,620
)Securities:Unrealized holding gains arising during the period on securities available for sale


284,703


(111,860
)

172,843Reclassification adjustment for net gains on securities available for sale included in net income


(61,152
)

24,027


(37,125
)Less: accretion of privatization-related fair value adjustment on securities available for sale


(1,107
)

435


(672
)Less: accretion of privatization-related fair value adjustment on held to maturity securities


(13,024
)

5,117


(7,907
)Less: accretion of net unrealized losses on held to maturity securities


45,798


(17,994
)

27,804Net change in unrealized losses on securities


255,218


(100,275
)

154,943Foreign currency translation adjustment


(742
)

292


(450
)Reclassification adjustment for pension and other benefits included in net income:Amortization of prior service costs


(31
)

12


(19
)Amortization of transition amount


656


(258
)

398Recognized net actuarial loss


10,447


(3,243
)

7,204Net change in pension and other benefits


11,072


(3,489
)

7,583Net change in accumulated other comprehensive loss

$
213,464

$
(83,008
)
$
130,456


57

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Accumulated Other Comprehensive Loss (Continued)

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

(Dollars in thousands)

Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges

Net
Unrealized
Gains (Losses)
on Securities

Foreign
Currency
Translation
Adjustment

Pension and
Other
Benefits
Adjustment

Accumulated
Other
Comprehensive
LossBalance, December 31, 2008

$
73,308

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


(13,577
)

40,985


201


7,401


35,010Balance, June 30, 2009

$
59,731

$
(311,725
)
$
(912
)
$
(523,935
)
$
(776,841
)Balance, December 31, 2009

$
19,298

$
(296,309
)
$
263

$
(374,114
)
$
(650,862
)Change during the period


(31,620
)

154,943


(450
)

7,583


130,456Balance, June 30, 2010

$
(12,322
)
$
(141,366
)
$
(187
)
$
(366,531
)
$
(520,406
)


Note 17Commitments, Contingencies and Guarantees

The following table summarizes the Company's significant commitments.

(Dollars in thousands)

June 30, 2010Commitments to extend credit

$
22,145,572Standby letters of credit


4,603,630Commercial letters of credit


54,966Risk participations in bankers' acceptances


232Commitments to fund principal investments


85,204Commitments to fund LIHC investments


147,350Commitments to fund CLO securities


11,589


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

Standby
and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are
contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate
foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an
acceptance of another bank. The majority of these types of commitments have terms of one year or less. At June 30, 2010, the carrying value of the Company's risk participations in bankers'
acceptances and standby and commercial letters of credit totaled $6.3 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on
off-balance sheet commitments. The carrying value of the standby
and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet.

58

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Commitments, Contingencies and Guarantees (Continued)

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

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

The
Company invests in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by a creditworthy entity. The
unguaranteed LIHC investments carry partial guarantees covering the timely completion of projects, availability of tax credits and operating deficit thresholds from the issuer. For these LIHC
investments, the Company has committed to provide additional funding as stipulated by its investment participation.

The
Company is a fund manager for limited liability companies issuing LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating
losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted
average period. Additionally, the Company receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability
partnerships/corporations issuing the LIHC investments that reduce the Company's ultimate exposure to loss. As of June 30, 2010, the Company's maximum exposure to loss under these guarantees is
limited to a return of investor capital and minimum investment yield, or $215.1 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the
continued satisfactory performance of the underlying properties. The Company has a reserve of $7.5 million recorded related to these guarantees, which represents the remaining unamortized fair
value of the guarantee fees that were recognized at inception. For information on the Company's LIHC investments that were consolidated, refer to Note 8 to these consolidated financial
statements.

The
Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease
transactions, the Company does not have any material obligation to be satisfied. As of June 30, 2010, we had no exposure to loss for these agreements.

The
Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a
security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of
the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $1,579 million at June 30, 2010. The market value of
the associated collateral was $1,619 million at June 30, 2010. As of June 30, 2010, the Company had no exposure that would require it to pay under this securities lending
indemnification, since the collateral market value exceeded the securities lent.

59

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Commitments, Contingencies and Guarantees (Continued)

The
Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk
on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable
to collect amounts owed to them by their customer. As of June 30, 2010, the maximum exposure to loss under these contracts totaled $48.5 million. The risk that the Company would be
required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by the Company based on the estimated
probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those
considered special mention, substandard, doubtful and loss. Based on these criteria, at June 30, 2010, the Company had a maximum exposure to loss under these contracts with a low, moderate, and
high risk of payment exposure of $3.8 million, $31.3 million, and $13.4 million, respectively. At June 30, 2010, the Company maintained a reserve of $2.3 million for
losses related to these guarantees.

The
Company is a member of the Visa USA network (Visa), whose bylaws require members to indemnify it against losses related to certain antitrust lawsuits proportionate to each member's
ownership interest in Visa. The Company had a liability of $4.2 million and $3.1 million at December 31, 2009 and June 30, 2010, respectively, representing the estimated
fair value of the Company's obligations under the indemnity provisions. Visa has funded all settlements to date for the lawsuits through an escrow account they maintain, but there is no assurance this
will continue. Each quarter the Company reviews public disclosures made by Visa about the lawsuits and activity in their escrow account, and uses the information to revise its estimate of the fair
value of the indemnity obligation and adjust the liability as appropriate.

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

Note 18Business Segments

As a result of a corporate reorganization in the fourth quarter of 2009, the Company reevaluated its business segments. Under the new organizational structure, the Company has three
operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Corporate Banking Group and Pacific Rim Corporate Group segments have been aggregated together.
The Company has two reportable business segments: Retail Banking and Corporate Banking.

Prior
to this reorganization, the various operating segments were aggregated into two reportable business segments formerly known as "Retail Banking" and "Wholesale Banking". The
Company's new reportable business segment structure is similar to the previous structure. However, the Global and Wealth Markets division, which was previously included in Retail Banking, is now
included in Corporate Banking. Additionally, the goodwill, intangible assets, and related amortization/accretion associated with the privatization transaction previously were included in the Company's
segment results. To align with the chief operating decision maker's view of these segments, the Company has adjusted the 2009 reportable business segment results to exclude privatization-related
goodwill, intangible assets, and related amortization/accretion from the reportable business segment results and included such amounts in "Other."

60

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 18Business Segments (Continued)



"Other"
is comprised of certain non-bank subsidiaries of UnionBanCal Corporation; the transfer pricing center; the earnings associated with the allowance for credit losses;
the amount of the provision for credit losses over/(under) the risk-adjusted return on capital (RAROC) expected loss for the period; the residual costs of support groups; goodwill,
intangible assets, and the related amortization/accretion associated with the Company's privatization transaction; the elimination of the fully taxable-equivalent basis amount; and the difference
between the marginal tax rate and the consolidated effective tax rate. In addition, "Other" includes Corporate Treasury, which is responsible for Asset-Liability Management (ALM), wholesale funding,
and the ALM investment securities and derivatives hedging portfolios.

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

The
information in the tables are derived from the internal management reporting system used by management to measure the performance of the individual segments and the Company overall.
The management reporting system assigns balance sheet and income statement items to each operating
segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds
to assets or liabilities based on their type, maturity or repricing characteristics. During the first quarter of 2010, the Company refined its transfer pricing methodology with respect to reference
rates for deposits and to include additional assumptions about liquidity premiums, benefits granted for eligible loan collateral and charges for collateral requirements on deposits. Noninterest income
and expense directly attributable to an operating segment are assigned to that operating segment. Certain indirect costs, such as operations and technology expense, are allocated to the segments based
on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to an operating segment based on a predetermined percentage of usage.
Under the Company's RAROC methodology, credit expense is charged to an operating segment based upon expected losses arising from credit risk. In addition, the attribution of economic capital is
related to unexpected losses arising from credit, market and operational risks.

The
Company reflects a "market view" perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and
expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report.

61

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 18Business Segments (Continued)

Therefore,
revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this
internal management accounting view are reflected in "Reconciling Items."

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

Retail Banking

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

As of and for the
Three Months Ended
June 30,2009

2010

2009

2010Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
204,921

$
261,307

$
323,341

$
387,326Noninterest income (expense)


71,856


74,118


131,438


144,793Total revenue


276,777


335,425


454,779


532,119Noninterest expense (income)


197,811


230,480


196,570


247,083Credit expense (income)


6,873


6,718


86,426


74,112Income (loss) before income taxes and including noncontrolling interests


72,093


98,227


171,783


210,924Income tax expense (benefit)


28,188


38,407


45,965


58,789Net income (loss) including noncontrolling interests


43,905


59,820


125,818


152,135Less: Net income (loss) from noncontrolling interests











Net income (loss) attributable to UNBC

$
43,905

$
59,820

$
125,818

$
152,135Total assets, end of periodMarket View (dollars in millions):

$
21,974

$
22,972

$
33,600

$
30,896




Other

Reconciling Items

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

As of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,2009

2010

2009

2010

2009

2010Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
36,008

$
(34,897
)
$
(13,924
)
$
(13,343
)
$
550,346

$
600,393Noninterest income (expense)


(9,621
)

40,403


(10,460
)

(15,020
)

183,213


244,294Total revenue


26,387


5,506


(24,384
)

(28,363
)

733,559


844,687Noninterest expense (income)


145,638


119,287


(7,961
)

(12,650
)

532,058


584,200Credit expense (income)


266,840


(36,683
)

(139
)

(147
)

360,000


44,000Income (loss) before income taxes and including noncontrolling interests


(386,091
)

(77,098
)

(16,284
)

(15,566
)

(158,499
)

216,487Income tax expense (benefit)


(146,278
)

(24,846
)

(6,367
)

(6,086
)

(78,492
)

66,264Net income (loss) including noncontrolling interests


(239,813
)

(52,252
)

(9,917
)

(9,480
)

(80,007
)

150,223Less: Net income (loss) from noncontrolling interests





(3,536
)










(3,536
)Net income (loss) attributable to UNBC

$
(239,813
)
$
(48,716
)
$
(9,917
)
$
(9,480
)
$
(80,007
)
$
153,759Total assets, end of periodMarket View (dollars in millions):

$
20,158

$
32,347

$
(1,747
)
$
(1,905
)
$
73,985

$
84,310


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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 18Business Segments (Continued)

Retail Banking

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

As of and for the
Six Months Ended
June 30,2009

2010

2009

2010Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
396,471

$
505,391

$
609,909

$
766,876Noninterest income (expense)


139,359


140,447


246,327


262,423Total revenue


535,830


645,838


856,236


1,029,299Noninterest expense (income)


401,854


445,980


413,177


489,652Credit expense (income)


14,337


13,355


155,286


152,941Income (loss) before income taxes and including noncontrolling interests


119,639


186,503


287,773


386,706Income tax expense (benefit)


46,779


72,923


69,732


104,999Net income (loss) including noncontrolling interests


72,860


113,580


218,041


281,707Less: Net income (loss) from noncontrolling interests











Net income (loss) attributable to UNBC

$
72,860

$
113,580

$
218,041

$
281,707Total assets, end of periodMarket View (dollars in millions):

$
21,974

$
22,972

$
33,600

$
30,896




Other

Reconciling Items

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

As of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,2009

2010

2009

2010

2009

2010Results of operationsMarket View (dollars in thousands):Net interest income (expense)

$
128,753

$
(66,328
)
$
(24,784
)
$
(31,193
)
$
1,110,349

$
1,174,746Noninterest income (expense)


(6,554
)

78,953


(21,203
)

(27,624
)

357,929


454,199Total revenue


122,199


12,625


(45,987
)

(58,817
)

1,468,278


1,628,945Noninterest expense (income)


255,465


196,445


(17,055
)

(23,305
)

1,053,441


1,108,772Credit expense (income)


439,714


47,983


(337
)

(279
)

609,000


214,000Income (loss) before income taxes and including noncontrolling interests


(572,980
)

(231,803
)

(28,595
)

(35,233
)

(194,163
)

306,173Income tax expense (benefit)


(209,678
)

(82,481
)

(11,181
)

(13,776
)

(104,348
)

81,665Net income (loss) including noncontrolling interests


(363,302
)

(149,322
)

(17,414
)

(21,457
)

(89,815
)

224,508Less: Net income (loss) from noncontrolling interests





(6,595
)










(6,595
)Net income (loss) attributable to UNBC

$
(363,302
)
$
(142,727
)
$
(17,414
)
$
(21,457
)
$
(89,815
)
$
231,103Total assets, end of periodMarket View (dollars in millions):

$
20,158

$
32,347

$
(1,747
)
$
(1,905
)
$
73,985

$
84,310


Note 19Subsequent Events

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

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Table of Contents

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

This report includes forward-looking statements, which include forecasts of our financial
results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might
differ significantly compared to our forecasts and expectations. Please refer to Part II Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q (this
Form 10-Q) for a discussion of some factors that may cause results to differ.

Please
refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009 (2009 Form 10-K) along with the following discussion and analysis of our consolidated financial condition and results of operations for the period ended
June 30, 2010 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.

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

Introduction

We are a California-based financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a
commercial bank. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington and Texas as
well as nationally and internationally. We had consolidated assets of $84.3 billion at June 30, 2010.

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

Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that impacted our second
quarter 2010 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read
this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties
that impact us.



On April 30, 2010, Union Bank acquired certain assets and assumed certain liabilities of Frontier Bank (Frontier) from the
Federal Deposit Insurance Corporation (FDIC) in an FDIC-assisted transaction. Additionally on April 16, 2010, Union Bank acquired certain assets and assumed certain liabilities of
Tamalpais Bank (Tamalpais) from the FDIC in an FDIC-assisted transaction. For both acquisitions, we entered into loss share agreements with the FDIC, whereby the FDIC will cover a
substantial portion of any future losses on acquired loans and other real estate owned (OREO). We refer to the acquired assets subject to the loss share agreements collectively as "covered assets."

The
acquisitions have been accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their estimated fair values at their
respective acquisition dates. These fair value estimates are considered preliminary and are subject to change for up to one year after the respective acquisition dates as additional information
relative to closing date fair values becomes available.

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See
Note 3 to our consolidated financial statements in this Form 10-Q for additional information regarding these acquisitions.



Over the past three years, the U.S. and global economies experienced a serious recession and unprecedented volatility in the financial
markets. There was significant deterioration in sectors of the U.S consumer and business economy; all of which continue to present challenges during the first half and remainder of 2010 for the
banking and financial services industry, as the economic outlook remains uncertain.

Our
sources of revenue are net interest income (predominantly from loans and deposits, and also from investment securities and other funding sources) and noninterest income. For the
second quarter of 2010, total revenue was comprised of 71 percent net interest income and 29 percent noninterest income. Changes in interest rates, credit quality, economic trends and
the capital markets are primary factors that impact our revenue sources.

Our
primary sources of liquidity are core deposits and wholesale funding. Core deposits consist of total deposits, excluding brokered deposits and time deposits of $100,000 and over.
Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, and secured funds raised by selling securities under repurchase agreements and by
borrowing from the Federal Home Loan Bank of San Francisco (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity
in adverse situations.

In
the second quarter of 2010, our net interest income (on a taxable-equivalent basis) increased 9 percent from the second quarter of 2009 to $602.8 million, primarily due
to lower rates paid on interest bearing liabilities and investment securities growth, partially offset by lower yields on investment securities. However, our net interest margin of 3.09 percent
contracted 32 basis points compared to the same period last year, primarily as a result significant growth in our average interest bearing deposit liabilities, which far outpaced our loan demand. The
growth in our deposit liabilities was primarily used to invest in lower yielding U.S. Government and agency securities and interest bearing deposits in banks.

In
the second quarter of 2010, our noninterest income of $244.3 million increased 33 percent from the second quarter of 2009, primarily due to a gain of
$28.9 million on the sale of agency mortgage-backed securities and higher trading account activities. In the second quarter of 2010, our noninterest expense of $584.2 million increased
10 percent from the second quarter of 2009, primarily due to higher base salaries and incentive compensation accruals, acquisition related expenses and expenses related to consolidated VIEs.
These increases were partially offset by lower regulatory agency expense due to a special assessment in the second quarter of 2009, provision for losses on off-balance sheet commitments,
and privatization-related expense and related intangible asset amortization.

Our
effective tax rate was 30.6 percent in the second quarter of 2010, compared to (49.5) percent in the second quarter of 2009. The change in the effective tax rate was primarily
due to pre-tax loss in the prior year compared to pre-tax income in the current year, as well as the impact of tax credits and state income taxes.



Our total assets at June 30, 2010 of $84.3 billion grew $10.3 billion, or 14 percent, from June 30,
2009 primarily due to increased total deposits invested primarily in securities. Our stockholder's equity of $9.9 billion at June 30, 2010 grew $2.5 billion from June 30,
2009 primarily due to a $2.0 billion capital contribution in the form of tangible common equity from BTMU in September 2009.

In
the second quarter of 2010, our average total loans decreased 3 percent from the second quarter of 2009 to $47.8 billion. This decrease was primarily in the commercial,
financial and industrial sectors, due to tighter underwriting standards, proactive portfolio management, and a decrease in loan demand.

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Table of Contents

In
the second quarter of 2010, our average total deposits increased 25 percent to $68.1 billion compared to the second quarter of 2009. In the second quarter of 2010, our
average noninterest bearing deposits increased 7 percent to $14.8 billion compared to the second quarter of 2009. In the second quarter of 2010, our average interest bearing deposits
increased by 32 percent to $53.3 billion compared to the second quarter of 2009. These increases reflect the results of targeted retail and corporate deposit-gathering marketing
initiatives throughout Union Bank. Average noninterest bearing deposits represented 22 percent of average total deposits in the second quarter of 2010, compared to 26 percent in the
second quarter of 2009. The annualized average all-in-cost of funds decreased to 0.58 percent in the second quarter of 2010, compared to 0.88 percent in the
second quarter of 2009.



During the second quarter of 2010, we provided $45 million for our allowances for credit losses compared to $375 million
in the second quarter of 2009. The decrease was primarily due to a decrease in criticized loans and commitments and lower loss content in our nonaccrual loans during the second quarter of 2010 versus
an increase in criticized loans and commitments during the second quarter of 2009. See further discussion below in "Allowances for Credit Losses."

Our
nonperforming assets totaled $1.1 billion, $1.3 billion and $1.6 billion at June 30, 2009, December 31, 2009 and June 30, 2010,
respectively. Our nonperforming assets, excluding FDIC covered assets, totaled $1.1 billion, $1.3 billion and $1.4 billion at June 30, 2009, December 31, 2009 and
June 30, 2010 respectively. The increase in nonperforming assets, excluding FDIC covered assets, from June 30, 2009 resulted from higher levels of nonaccrual loans primarily in our
commercial mortgage and residential mortgage portfolios due to weak economic conditions, partially offset by sales of nonperforming commercial loans in the second quarter of 2010. Net charge offs were
$152 million, $95 million and $94 million in the second quarter of 2009, the fourth quarter of 2009 and the second quarter of 2010, respectively.

At
June 30, 2009, December 31, 2009 and June 30, 2010, our allowances for credit losses as a percent of total loans were 2.55 percent, 3.25 percent and
3.16 percent, respectively. At June 30, 2009, December 31, 2009 and June 30, 2010, our allowances for credit losses as a percent of nonaccrual loans were
113 percent, 116 percent and 113 percent, respectively. At June 30, 2009, December 31, 2009 and June 30, 2010, our allowance for loan losses as a percent of
total loans was 2.21 percent, 2.87 percent and 2.81 percent, respectively. At June 30, 2009, December 31, 2009 and June 30, 2010, our allowance
for loan losses as a percent of nonaccrual loans was 98 percent, 103 percent and 100 percent, respectively.

Critical Accounting Estimates

UnionBanCal Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America (US GAAP) and the general practices of the banking industry, which include management estimates and judgments.

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

Understanding
our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical
Accounting Estimates and our significant accounting policies are discussed in detail in our 2009 Form 10-K filed with the Securities and Exchange Commission (the SEC). Other than
the changes discussed below, there have been no material changes to these critical accounting estimates during the first half of 2010.

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Acquired loans are recorded at fair value at acquisition date in accordance with ASC 805 "Business Combinations", factoring in credit
losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date.

In
conjunction with the FDIC-assisted acquisitions of Frontier and Tamalpais, we acquired certain loans with evidence of credit quality deterioration subsequent to their
origination and for which it was probable, at acquisition, that we would be unable to collect all contractually required payments receivable. We elected to account for all acquired loans, except for
revolving lines of credit, within the scope of the accounting guidance using the same methodology. In accordance with applicable accounting guidance, we may aggregate loans that have common risk
characteristics into pools and thereby use a composite interest rate and estimate of cash flows expected to be collected for the pools. We have aggregated most of the purchased credit-impaired loans
into pools based on common risk characteristics. The pools then become the unit of accounting and are considered one loan for purposes of accounting for these loans at and subsequent to acquisition.
Once a pool is assembled, the integrity of the pool must be maintained. Significant judgment is required in evaluating whether individual loans have common risk characteristics for purposes of
establishing pools of loans.

At
the time of the acquisition, all acquired loans were recorded at fair value, including an estimate of losses that are expected to be incurred over the estimated remaining lives of the
loans. Many of the assumptions and estimates underlying the estimation of the initial fair value and the ongoing updates to management's expectation of future cash flows are both significant and
subjective, particularly considering the current economic environment. The economic environment and the lack of market liquidity and transparency are factors that have influenced, and may continue to
affect, these assumptions and estimates.

We
estimated the fair value of acquired loans at the acquisition date based on a discounted cash flow methodology that considered factors including the type of loan and related
collateral, risk classification, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar
characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable
loans, where available, and include adjustments for liquidity concerns. To the extent comparable market rates are not readily available, a discount rate was derived based on the assumptions of market
participant's cost of funds, servicing costs and return requirements for comparable risk assets. In either case, the discount rate does not include a factor for credit losses as that has been included
in the estimated cash flows. The initial estimate of cash flows to be collected was derived from assumptions such as default rates and loss severities.

The
accounting guidance for purchased credit-impaired loans provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the
acquisition date (i.e., the accretable yield) should be accreted into interest income at a level rate of return over the term of the loan, provided that the timing and amount of future cash
flows is reasonably estimable. The initial estimate of cash flows expected to be collected must be updated each subsequent reporting period based on updated assumptions regarding default rates, loss
severities, and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows after acquisition trigger the recognition of impairment,
through the provision and allowance for loan losses, which is then measured based on the present value of the expected principal loss, plus any related foregone interest cash flows discounted at the
loan pool's effective interest rate. Probable and significant increases in expected principal cash flows would first reverse any related allowance for loan losses; any remaining increases must be
recognized prospectively as interest income over the remaining lives of the loans. The impacts of changes in variable interest rates are recognized prospectively as adjustments to interest income. As
described above, the process of estimating cash flows expected to be collected has a significant impact on the initial recorded amount of the purchased credit-impaired loans and on subsequent
recognition of impairment losses and interest income. Estimating these cash flows requires a

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Table of Contents

significant
level of management judgment. In addition, certain of the underlying assumptions are highly subjective.



In conjunction with the FDIC-assisted acquisitions of Frontier and Tamalpais, we entered into loss share agreements with
the FDIC. The purchase and assumption and loss share agreements have specific and detailed compliance, servicing, notification and reporting requirements. Any failure to comply with the requirements
of the loss share agreements, or to properly service the loans and OREO covered by any loss share arrangement, may cause individual loans or loan pools to lose their eligibility for loss share
payments from the FDIC, potentially resulting in material losses that are currently not anticipated. At the date of the acquisition, we recorded amounts receivable under the loss share agreements as
an indemnification asset. Subsequent to the acquisition, the indemnification asset is tied to the loss in the covered loans and is not being accounted for under fair value. The FDIC indemnification
asset is accounted for on the same basis as the related covered loans and is the present value of the cash flows that we expect to collect from the FDIC under the loss share agreements. The difference
between the present value and the undiscounted cash flows that we expect to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. The FDIC
indemnification asset is adjusted for any changes in expected cash flows based on the loan performance. Any increases in cash flows of the loans due to decreases in expected credit losses over those
originally expected will lower the accretion rate recorded in noninterest income. Any decreases in cash flows of the loans over those originally expected will increase the FDIC indemnification asset.

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Table of Contents

Financial Performance

Summary of Financial Performance

Increase (Decrease)





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

For the Six Months
Ended June 30,2010 versus 2009

2010 versus 2009(Dollars in thousands)

2009

2010

Amount

Percent

2009

2010

Amount

PercentResults of OperationsNet interest income(1)

$
550,346

$
600,393

$
50,047


9.1
%
$
1,110,349

$
1,174,746

$
64,397


5.8
%Noninterest incomeService charges on deposit accounts


71,843


63,843


(8,000
)

(11.1
)

143,165


129,983


(13,182
)

(9.2
)Securities gains (losses), net


(172
)

27,244


27,416


nm


(172
)

61,137


61,309


nmTrading account activities


16,251


25,379


9,128


56.2


38,943


46,472


7,529


19.3Card processing fees, net


8,124


12,856


4,732


58.2


15,660


21,476


5,816


37.1Gains (losses) on private capital investments, net


(1,123
)

5,667


6,790


nm


(3,244
)

5,475


8,719


nmOther noninterest income


88,290


109,305


21,015


23.8


163,577


189,656


26,079


15.9Total noninterest income


183,213


244,294


61,081


33.3


357,929


454,199


96,270


26.9Total revenue


733,559


844,687


111,128


15.1


1,468,278


1,628,945


160,667


10.9Provision for loan losses


360,000


44,000


(316,000
)

(87.8
)

609,000


214,000


(395,000
)

(64.9
)Noninterest expenseSalaries and other compensation


191,104


269,749


78,645


41.2


379,327


494,149


114,822


30.3Employee benefits


41,953


49,942


7,989


19.0


97,293


105,128


7,835


8.1Salaries and employee benefits


233,057


319,691


86,634


37.2


476,620


599,277


122,657


25.7Net occupancy


43,222


46,441


3,219


7.4


85,143


89,821


4,678


5.5Intangible asset amortization


40,281


30,613


(9,668
)

(24.0
)

81,168


62,406


(18,762
)

(23.1
)Regulatory agencies


52,836


30,526


(22,310
)

(42.2
)

70,774


60,374


(10,400
)

(14.7
)Professional services


19,489


26,103


6,614


33.9


35,427


42,464


7,037


19.9Low income housing credit investment amortization


11,026


14,248


3,222


29.2


21,192


27,774


6,582


31.1(Reversal of) provision for losses on off-balance sheet commitments


15,000


1,000


(14,000
)

(93.3
)

41,000


(4,000
)

(45,000
)

nmExpenses related to consolidated VIEs





5,825


5,825


nm





10,864


10,864


nmPrivatization-related expense


7,433


426


(7,007
)

(94.3
)

34,252


5,579


(28,673
)

(83.7
)Other noninterest expense


109,714


109,327


(387
)

(0.4
)

207,865


214,213


6,348


3.1Total noninterest expense


532,058


584,200


52,142


9.8


1,053,441


1,108,772


55,331


5.3Income (loss) before income taxes and noncontrolling interest


(158,499
)

216,487


374,986


nm


(194,163
)

306,173


500,336


nmIncome tax expense (benefit)


(78,492
)

66,264


144,756


nm


(104,348
)

81,665


186,013


nmNet income (loss) before noncontrolling interests


(80,007
)

150,223


230,230


nm


(89,815
)

224,508


314,323


nmDeduct: Net loss from noncontrolling interests





3,536


3,536


nm





6,595


6,595


nmNet income (loss) attributable to UNBC

$
(80,007
)
$
153,759

$
233,766


nm

$
(89,815
)
$
231,103

$
320,918


nm


(1)Net
interest income does not include any adjustments for fully taxable equivalence.nm=
not meaningful


The primary contributors to our financial performance for the second quarter of 2010 compared to the second quarter of
2009 are presented below.



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The
increase in our noninterest income was the result of several factors:



The
increase in our noninterest expense was the result of several factors:



The primary contributors to our financial performance for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 are
presented below.



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The
increase in our noninterest income was the result of several factors:



The
increase in our noninterest expense was the result of several factors:



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Table of Contents

Net Interest Income

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

For the Three Months Ended

Increase (Decrease) inJune 30, 2009

June 30, 2010





Interest
Income/
Expense(1)Average BalanceAverage
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

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

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
17,920,408

$
194,560


4.35
%
$
14,586,256

$
167,566


4.61
%
$
(3,334,152
)

(19
)%
$
(26,994
)

(14
)%Construction


2,788,671


20,658


2.97


2,145,010


15,570


2.91


(643,661
)

(23
)

(5,088
)

(25
)Residential mortgage


16,089,739


230,269


5.72


16,984,464


226,871


5.34


894,725


6


(3,398
)

(1
)Commercial mortgage


8,254,595


91,689


4.44


8,179,760


85,809


4.20


(74,835
)

(1
)

(5,880
)

(6
)Consumer


3,841,202


44,116


4.61


3,919,221


43,049


4.41


78,019


2


(1,067
)

(2
)Lease financing


661,607


5,598


3.38


640,843


6,214


3.88


(20,764
)

(3
)

616


11Total Loans, excluding FDIC covered loans


49,556,222


586,890


4.74


46,455,554


545,079


4.70


(3,100,668
)

(6
)

(41,811
)

(7
)FDIC covered loans











1,371,524


25,796


7.54


1,371,524


nm


25,796


nmTotal loans


49,556,222


586,890


4.74


47,827,078


570,875


4.78


(1,729,144
)

(3
)

(16,015
)

(3
)Securitiestaxable


8,564,355


97,738


4.56


23,043,696


134,000


2.33


14,479,341


nm


36,262


37Securitiestax-exempt


48,176


1,016


8.44


44,794


924


8.25


(3,382
)

(7
)

(92
)

(9
)Interest bearing deposits in banks


5,594,318


3,550


0.25


5,920,479


3,696


0.25


326,161


6


146


4Federal funds sold and securities purchased under resale agreements


203,529


97


0.19


391,521


150


0.15


187,992


92


53


55Trading account assets


1,041,623


231


0.09


907,864


611


0.27


(133,759
)

(13
)

380


nmTotal earning assets


65,008,223


689,522


4.25


78,135,432


710,256


3.64


13,127,209


20


20,734


3Allowance for loan losses


(839,115
)







(1,459,394
)







(620,279
)

(74
)Cash and due from banks


1,285,449








1,202,081








(83,368
)

(6
)Premises and equipment, net


669,993








672,285








2,292


0Other assets


5,370,676








6,960,303








1,589,627


30Total assets

$
71,495,226







$
85,510,707







$
14,015,481


20
%LiabilitiesDeposits:Transaction accounts

$
29,514,913

$
66,549


0.90

$
37,607,938

$
48,001


0.51

$
8,093,025


27
%
$
(18,548
)

(28
)Savings and consumer time


4,328,326


13,546


1.26


7,420,779


15,358


0.83


3,092,453


71


1,812


13Large time


6,604,845


20,091


1.22


8,265,102


15,118


0.73


1,660,257


25


(4,973
)

(25
)Total interest bearing deposits


40,448,084


100,186


0.99


53,293,819


78,477


0.59


12,845,735


32


(21,709
)

(22
)Federal funds purchased and securities sold under repurchase agreements


163,381


19


0.05


138,242


41


0.12


(25,139
)

(15
)

22


nmCommercial paper


569,337


954


0.67


573,178


289


0.20


3,841


1


(665
)

(70
)Other borrowed funds(4)


2,124,419


5,616


1.06


683,388


1,172


0.69


(1,441,031
)

(68
)

(4,444
)

(79
)Medium- and long-term debt


5,137,901


29,415


2.30


4,718,371


27,175


2.31


(419,530
)

(8
)

(2,240
)

(8
)Trust notes


13,809


238


6.90


13,431


327


9.74


(378
)

(3
)

89


37Total borrowed funds


8,008,847


36,242


1.82


6,126,610


29,004


1.90


(1,882,237
)

(24
)

(7,238
)

(20
)Total interest bearing liabilities


48,456,931


136,428


1.13


59,420,429


107,481


0.73


10,963,498


23


(28,947
)

(21
)Noninterest bearing deposits


13,904,328








14,810,589








906,261


7Other liabilities


1,830,917








1,367,302








(463,615
)

(25
)Total liabilities


64,192,176








75,598,320








11,406,144


18EquityUNBC Stockholder's equity


7,303,050








9,630,657








2,327,607


32Noncontrolling interests











281,730








281,730


nmTotal equity


7,303,050








9,912,387








2,609,337


36Total liabilities and equity

$
71,495,226







$
85,510,707







$
14,015,481


20
%Net interest income/spread (taxable-equivalent basis)





553,094


3.12
%




602,775


2.91
%







49,681


9
%Impact of noninterest bearing source








0.29








0.18Net interest margin








3.41








3.09Less: taxable-equivalent adjustment





2,748








2,382











(366
)

(13
)Net interest income




$
550,346







$
600,393










$
50,047


9
%


(1)Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)Annualized.(3)Average
balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination
fees (costs) is included in interest income on loans, representing an adjustment to the yield.(4)Includes
interest bearing trading liabilities.nm=
not meaningful


72

---



Table of Contents

For the Six Months Ended

Increase (Decrease) inJune 30, 2009

June 30, 2010





Interest
Income/
Expense(1)Average BalanceAverage
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

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

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
18,210,574

$
388,347


4.30
%
$
14,769,587

$
329,455


4.50
%
$
(3,440,987
)

(19
)%
$
(58,892
)

(15
)%Construction


2,761,302


39,919


2.92


2,226,480


32,460


2.94


(534,822
)

(19
)

(7,459
)

(19
)Residential mortgage


16,006,925


464,707


5.81


16,884,994


454,360


5.38


878,069


5


(10,347
)

(2
)Commercial mortgage


8,253,963


194,078


4.70


8,206,857


172,202


4.20


(47,106
)

(1
)

(21,876
)

(11
)Consumer


3,782,055


90,655


4.83


3,917,482


85,858


4.42


135,427


4


(4,797
)

(5
)Lease financing


657,170


13,251


4.03


645,054


12,395


3.84


(12,116
)

(2
)

(856
)

(6
)Total Loans, excluding FDIC covered loans


49,671,989


1,190,957


4.81


46,650,454


1,086,730


4.67


(3,021,535
)

(6
)

(104,227
)

(9
)FDIC covered loans











689,551


25,796


7.52


689,551


nm


25,796


nmTotal loans


49,671,989


1,190,957


4.81


47,340,005


1,112,526


4.72


(2,331,984
)

(5
)

(78,431
)

(7
)Securitiestaxable


8,442,693


199,994


4.74


23,272,744


276,774


2.38


14,830,051


nm


76,780


38Securitiestax-exempt


49,290


2,041


8.28


43,567


1,809


8.30


(5,723
)

(12
)

(232
)

(11
)Interest bearing deposits in banks


3,225,689


4,450


0.28


6,256,793


7,751


0.25


3,031,104


94


3,301


74Federal funds sold and securitiespurchased under resale agreements


200,067


238


0.24


426,117


269


0.13


226,050


nm


31


13Trading account assets


1,153,293


389


0.07


883,928


1,471


0.34


(269,365
)

(23
)

1,082


nmTotal earning assets


62,743,021


1,398,069


4.47


78,223,154


1,400,600


3.59


15,480,133


25


2,531


0Allowance for loan losses


(774,142
)







(1,433,495
)







(659,353
)

(85
)Cash and due from banks


1,300,479








1,203,662








(96,817
)

(7
)Premises and equipment, net


671,995








673,092








1,097


0Other assets


5,354,830








6,495,900








1,141,070


21Total assets

$
69,296,183







$
85,162,313







$
15,866,130


23
%LiabilitiesDeposits:Transaction accounts

$
26,025,374

$
127,646


0.99

$
38,728,292

$
111,080


0.58

$
12,702,918


49
%
$
(16,566
)

(13
)Savings and consumer time


4,348,026


29,485


1.37


6,700,280


27,303


0.82


2,352,254


54


(2,182
)

(7
)Large time


6,917,071


48,093


1.40


7,945,037


25,656


0.65


1,027,966


15


(22,437
)

(47
)Total interest bearing deposits


37,290,471


205,224


1.11


53,373,609


164,039


0.62


16,083,138


43


(41,185
)

(20
)Federal funds purchased and securities sold under repurchase agreements


207,419


72


0.07


171,817


78


0.09


(35,602
)

(17
)

6


8Commercial paper


644,956


2,546


0.80


574,794


529


0.19


(70,162
)

(11
)

(2,017
)

(79
)Other borrowed funds(4)


3,595,580


17,093


0.96


698,454


2,374


0.69


(2,897,126
)

(81
)

(14,719
)

(86
)Medium- and long-term debt


4,941,716


56,944


2.32


4,639,712


53,416


2.32


(302,004
)

(6
)

(3,528
)

(6
)Trust notes


13,865


476


6.87


13,453


595


8.84


(412
)

(3
)

119


25Total borrowed funds


9,403,536


77,131


1.65


6,098,230


56,992


1.88


(3,305,306
)

(35
)

(20,139
)

(26
)Total interest bearing liabilities


46,694,007


282,355


1.22


59,471,839


221,031


0.75


12,777,832


27


(61,324
)

(22
)Noninterest bearing deposits


13,223,645








14,598,403








1,374,758


10Other liabilities


2,059,013








1,321,936








(737,077
)

(36
)Total liabilities


61,976,665








75,392,178








13,415,513


22EquityUNBC Stockholder's equity


7,319,518








9,581,811








2,262,293


31Noncontrolling interests











188,324








188,324


nmTotal equity


7,319,518








9,770,135








2,450,617


33Total liabilities and equity

$
69,296,183







$
85,162,313







$
15,866,130


23
%Net interest income/spread (taxable-equivalent basis)





1,115,714


3.25
%




1,179,569


2.84
%







63,855


6
%Impact of noninterest bearing source








0.31








0.18Net interest margin








3.56








3.02Less: taxable-equivalent adjustment





5,365








4,823











(542
)

(10
)Net interest income




$
1,110,349







$
1,174,746










$
64,397


6
%


(1)Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)Annualized.(3)Average
balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination
fees (costs) is included in interest income on loans, representing an adjustment to the yield.(4)Includes
interest bearing trading liabilities.nm=
not meaningful


73

---





Table of Contents

Net interest income in the second quarter of 2010, on a taxable-equivalent basis, increased $50.0 million, or 9 percent, compared to the second
quarter of 2009. Our net interest margin in the second quarter of 2010 decreased by 32 basis points to 3.09 percent compared to the second quarter of 2009. These results were primarily due to
the following:



Net
interest income in the first half of 2010, on a taxable-equivalent basis, increased $63.9 million, or 6 percent, compared to the first half of 2009. Our net interest
margin in the first half of 2010 decreased by 54 basis points to 3.02 percent compared to the first half of 2009. These results were primarily due to the following:



74

---



Table of Contents

Noninterest Income and Noninterest Expense

The following tables detail our noninterest income and noninterest expense items that exceeded 1 percent of our total revenues
for the three and six months ended June 30, 2009 and 2010.

Noninterest Income

For the Three Months Ended

For the Six Months EndedIncrease (Decrease)





Increase (Decrease)June 30,
2009

June 30,
2010

June 30,
2009

June 30,
2010(Dollars in thousands)

Amount

Percent

Amount

PercentService charges on deposit accounts

$
71,843

$
63,843

$
(8,000
)

(11.1
)%
$
143,165

$
129,983

$
(13,182
)

(9.2
)%Trust and investment management fees


34,130


34,244


114


0.3


68,037


65,664


(2,373
)

(3.5
)Securities gains (losses), net


(172
)

27,244


27,416


nm


(172
)

61,137


61,309


nmTrading account activities


16,251


25,379


9,128


56.2


38,943


46,472


7,529


19.3Merchant banking fees


19,924


22,223


2,299


11.5


33,756


35,899


2,143


6.3Card processing fees, net


8,124


12,856


4,732


58.2


15,660


21,476


5,816


37.1Brokerage commissions and fees


8,506


10,906


2,400


28.2


16,813


19,434


2,621


15.6Gains (losses) on private capital investments, net


(1,123
)

5,667


6,790


nm


(3,244
)

5,475


8,719


nmOther


25,730


41,932


16,202


63.0


44,971


68,659


23,688


52.7Total noninterest income

$
183,213

$
244,294

$
61,081


33.3
%
$
357,929

$
454,199

$
96,270


26.9
%


nm=
not meaningful


Noninterest Expense

For the Three Months Ended

For the Six Months EndedIncrease (Decrease)





Increase (Decrease)June 30,
2009

June 30,
2010

June 30,
2009

June 30,
2010(Dollars in thousands)

Amount

Percent

Amount

PercentSalaries and other compensation

$
191,104

$
269,749

$
78,645


41.2
%
$
379,327

$
494,149

$
114,822


30.3
%Employee benefits


41,953


49,942


7,989


19.0


97,293


105,128


7,835


8.1Salaries and employee benefits


233,057


319,691


86,634


37.2


476,620


599,277


122,657


25.7Net occupancy


43,222


46,441


3,219


7.4


85,143


89,821


4,678


5.5Intangible asset amortization


40,281


30,613


(9,668
)

(24.0
)

81,168


62,406


(18,762
)

(23.1
)Regulatory agencies


52,836


30,526


(22,310
)

(42.2
)

70,774


60,374


(10,400
)

(14.7
)Outside services


22,948


24,269


1,321


5.8


41,782


47,054


5,272


12.6Professional services


19,489


26,103


6,614


33.9


35,427


42,464


7,037


19.9Equipment


16,602


16,929


327


2.0


32,015


32,740


725


2.3Software


14,205


15,831


1,626


11.4


29,243


30,559


1,316


4.5Low income housing credit investment amortization


11,026


14,248


3,222


29.2


21,192


27,774


6,582


31.1Advertising and public relations


11,349


11,476


127


1.1


21,970


21,641


(329
)

(1.5
)Communications


9,192


9,726


534


5.8


17,910


19,255


1,345


7.5Foreclosed asset expense (income)


3,282


871


(2,411
)

(73.5
)

4,168


673


(3,495
)

(83.9
)(Reversal of) provision for losses on off-balance sheet commitments


15,000


1,000


(14,000
)

(93.3
)

41,000


(4,000
)

(45,000
)

nmExpenses related to consolidated VIEs





5,825


5,825


nm





10,864


10,864


nmPrivatization-related expense


7,433


426


(7,007
)

(94.3
)

34,252


5,579


(28,673
)

(83.7
)Other


32,136


30,225


(1,911
)

(5.9
)

60,777


62,291


1,514


2.5Total noninterest expense

$
532,058

$
584,200

$
52,142


9.8
%
$
1,053,441

$
1,108,772

$
55,331


5.3
%


nm=
not meaningful


75

---



Table of Contents




Income Tax Expense

Our effective tax rate in the second quarter of 2010 was 30.6 percent, compared to (49.5) percent for the second quarter of
2009. Our effective tax rate in the six months ended June 30, 2010 was 26.7 percent, compared to (53.7) percent for the six months ended June 30, 2009. A negative effective tax
rate indicates a net income tax benefit. The change in the effective tax rate was primarily due to a pre-tax loss in the prior year compared to pre-tax income in the current
year, as well as the impact of tax credits and state income taxes.

Our
quarterly effective tax rate for the second quarters of 2009 and 2010 was computed on an individual quarterly basis, and therefore may not be indicative of the effective tax rate for
future quarters and the full year.

For
further information regarding income tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsIncome Tax Expense" and
Note 11 to the consolidated financial statements in our 2009 Form 10-K.

Loans

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

Increase (Decrease)
June 30, 2010 From:June 30, 2009

December 31, 2009June 30,
2009

December 31,
2009

June 30,
2010(Dollars in thousands)

Amount

Percent

Amount

PercentLoans held for investment, excluding FDIC covered loans:Commercial, financial and industrial

$
17,064,253

$
15,258,081

$
14,674,946

$
(2,389,307
)

(14.0
)%
$
(583,135
)

(3.8
)%Construction


2,791,583


2,429,009


2,113,669


(677,914
)

(24.3
)

(315,340
)

(13.0
)Mortgage:Residential


16,216,264


16,716,048


17,089,080


872,816


5.4


373,032


2.2Commercial


8,255,659


8,245,778


8,061,930


(193,729
)

(2.3
)

(183,848
)

(2.2
)24,471,923


24,961,826


25,151,010


679,087


2.8


189,184


0.8Consumer:Installment


2,353,090


2,244,239


2,129,996


(223,094
)

(9.5
)

(114,243
)

(5.1
)Revolving lines of credit


1,508,078


1,672,842


1,784,680


276,602


18.3


111,838


6.7Total Consumer


3,861,168


3,917,081


3,914,676


53,508


1.4


(2,405
)

(0.1
)Lease financing


657,339


653,743


641,966


(15,373
)

(2.3
)

(11,777
)

(1.8
)Total loans held for investment, excluding FDIC covered loans


48,846,266


47,219,740


46,496,267


(2,349,999
)

(4.8
)

(723,473
)

(1.5
)Total loans held for sale


50,254


8,768


2,620


(47,634
)

(94.8
)

(6,148
)

(70.1
)Total loans, excluding FDIC covered loans


48,896,520


47,228,508


46,498,887


(2,397,633
)

(4.9
)

(729,621
)

(1.5
)FDIC covered loans(1):








1,864,002


1,864,002


100.0


1,864,002


100.0Total loans


48,896,520


47,228,508


48,362,889


(533,631
)

(1.1
)

1,134,381


2.4Allowance for loan losses


1,081,633


1,357,000


1,357,869


276,236


25.5


869


0.1Loans, net

$
47,814,887

$
45,871,508

$
47,005,020

$
(809,867
)

(1.7
)%
$
1,133,512


2.5
%


(1)Represents
the acquired loans that are covered by the loss share agreements with the FDIC.




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

76

---



Table of Contents

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

The
commercial, financial and industrial loan portfolio decreases from June 30, 2009 to June 30, 2010 and from December 31, 2009 to June 30, 2010 are mainly
due to a decline in the utilization rate of revolving credit lines by existing customers, our proactive portfolio management, our tighter underwriting standards, and a decline in loan demand in many
sectors as a result of the difficult economic environment.



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

Construction
loans are extended primarily to commercial property developers and to residential builders. As of June 30, 2010, the construction loan portfolio consisted of
approximately 87 percent in the commercial income producing real estate industry and 13 percent with residential homebuilders. The construction loan portfolio decreased 24 percent
from June 30, 2009 to June 30, 2010 due to declines of approximately $229 million, or 47 percent, in the homebuilder portfolio and $449 million, or
21 percent, in the income property portfolio. The income property portfolio reductions were concentrated mostly in the retail, industrial and apartment property types. The construction loan
portfolio decreased 13 percent from December 31, 2009 to June 30, 2010 due to reductions primarily in the income property portfolio with the largest reductions occurring in the
apartment and industrial property types.

Geographically,
the outstanding construction loan portfolio was concentrated 43 percent in California and 57 percent out of state as of June 30, 2010. The largest
out-of-state concentration was 14 percent in Washington. The California outstandings are distributed as follows: 41 percent in the Los Angeles/Orange County
region, including the Inland Empire, 27 percent in the San Francisco Bay Area, 15 percent in Sacramento and the Central Valley, 12 percent in San Diego, and 5 percent in
the Central Coast region.

The
commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio decreased slightly from
June 30, 2009 to June 30, 2010 due to continued moderate originations not offsetting amortization, early loan repayment and disposition of problem loans.



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

At
June 30, 2010, 71 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had
relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 66 percent. The remainder of the portfolio consists of a small amount
of balloon loans and regular amortizing loans.

We
do not have a program for originating or purchasing subprime loan products. "Low doc" and "no doc" (discontinued in 2008) loans comprise less than half of our residential loan
portfolio, and the delinquency rates relative to the outstanding balances at June 30, 2010 were about the same as fully documented loans. At June 30, 2010, the total amount of "no doc"
and "low doc" loans past due 30 days or more was $177 million, compared to $138 million at June 30, 2009. The total amount of residential mortgages delinquent
30 days or

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more
was $379 million at June 30, 2010, compared to $280 million at June 30, 2009. Although delinquencies have risen since June 30, 2009 as a result of the declining
real estate market and downturn in the economy, the delinquency rate remains low compared to the industry average for California prime loans. We believe that our underwriting standards remain
conservative and as described above, programs with higher risk have been discontinued.

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



We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network, Private Banking Offices
and via the internet. The increase in consumer loans from June 30, 2009 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to
manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are
classified as installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs
we offer. At origination, these loans had relatively high credit scores and had weighted-average LTV ratios of approximately 60 percent. Our total home equity loans and lines delinquent
30 days or more were $48 million at June 30, 2010, compared to $37 million at June 30, 2009. Our annual review program reviews all equity secured lines with a
commitment amount of $200,000 or more and an origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our
LTV position. Action is taken to reduce or freeze limits, as applicable and pursuant to applicable laws and regulations, to minimize additional exposure in a declining market.



We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional
financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At June 30, 2010, we had leveraged leases of
$548 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities do
not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by law, the gross lease receivable is
offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment.



We acquired loans as part of the FDIC-assisted acquisitions of certain assets and assumption of certain liabilities of
Frontier and Tamalpais during the second quarter of 2010. All of the acquired loans are covered under loss share agreements with the FDIC and are referred to as "covered loans." We will be reimbursed
for a substantial portion of any future losses on the covered loans under the terms of the FDIC loss share agreements. Total covered loans outstanding at June 30, 2010 were $1.9 billion,
which consisted of $784 million of commercial mortgage loans,
$547 million of commercial, financial and industrial loans, $358 million of construction loans, and $174 million of other loans.

Cross-Border Outstandings

Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings.
These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of June 30 and
December 31, 2009 for Canada, the only country where such outstandings exceeded one percent of total assets. As of June 30, 2010, there were no countries where such cross-border
outstandings exceeded

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one percent
of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets,
securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. For the country shown in
the table below, any significant local currency outstandings are funded by local currency borrowings.

(Dollars in millions)

Financial
Institutions

Public
Sector
Entities

Corporations
and Other
Borrowers

Total
OutstandingsJune 30, 2009Canada

$
69

$


$
872

$
941December 31, 2009Canada

$
88

$


$
837

$
925


Provision for Credit Losses

We recorded a provision for loan losses of $360 million and $44 million in the second quarters of 2009 and 2010,
respectively. We recorded a provision for losses on off-balance sheet commitments of $15 million and $1 million in the second quarter of 2009 and 2010, respectively. The
provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management
based on the factors discussed under "Allowances for Credit Losses" below.

Allowances for Credit Losses



We maintain allowances for credit losses (defined as both the allowance for loan losses and the allowance for off-balance
sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowances for credit
losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, our significant policies and methodology on the allowances for credit
losses are discussed in detail in Note 1 to our consolidated financial statements and in the section "Allowances for Credit Losses" included in our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 2009 Form 10-K. Unless otherwise noted, all ratios that follow in this section include covered loans.



At June 30, 2010, our total allowances for credit losses were $1,530 million, which consisted of $1,358 million
for loan losses and $172 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $1,199 million and $331 million of
allocated and unallocated allowance, respectively. At June 30, 2010, our allowances for credit loss coverage ratios were 3.16 percent of total loans and 113 percent of total
nonaccrual loans, including FDIC covered loans. At December 31, 2009, our total allowances for credit losses were $1,533 million, or 3.25 percent of total loans, and
116 percent of total nonaccrual loans.

At
June 30, 2010, our allowance for credit losses did not include an allowance for FDIC covered loans. Acquired loans are recorded at fair value at acquisition date in accordance
with applicable accounting guidance, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the
acquisition date. The acquired loans are and will continue to be subject to the Bank's internal credit review. As a result, if credit deterioration is noted subsequent to the respective acquisition
dates, such deterioration will be measured through the Bank's loss

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reserving
methodology and a provision for loan losses will be charged to earnings with a partially offsetting noninterest income amount reflecting the increase to the FDIC indemnification asset for
covered loans.

In
addition, the allowances incorporate the results of measuring impairment for specifically-identified impaired loans utilizing a methodology based on the present value of the remaining
expected cash flows or as a practical expedient, the loan's observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent). At June 30,
2010 and December 31, 2009, total impaired loans were $1,353 million and $1,317 million, respectively, and the associated allowances were $154 million and
$223 million, respectively.

At
June 30, 2010 and December 31, 2009, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses was
$172 million and $176 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for
off-balance sheet commitment losses. Net charge offs were $94 million in the second quarter of 2010, compared to $152 million in the second quarter of 2009. We expect the
current elevated level of charge offs, which we began to experience in the latter half of 2008, to continue during the remainder of 2010.

As
a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending
portfolios (especially our real estate portfolios), we recorded a provision for loan losses of $44 million in the second quarter of 2010, compared to a provision for loan losses of
$360 million in the second quarter of 2009. The decrease was primarily attributable to a decrease in total loans (excluding FDIC covered loans), a decrease in criticized assets and lower loss
content in our nonaccrual loans, partially offset by higher loss content in the commercial real estate, residential real estate, and the consumer loan portfolios.

Consistent
with our quarterly practice of reviewing and refining our estimates and assumptions regarding the effects of economic and business conditions on borrowers and other factors
used for assessing the appropriateness of the formula and specific or unallocated allowances for credit losses, we updated the number of periods that are included in the calculation of loss factors
(the look-back period) and quantitative and qualitative factors for the quarter ended June 30, 2010, as described below.

By
assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent
information that has become available. During second quarter of 2010, this included reducing the look-back period and adjusting the quantitative and qualitative factors to be more
representative of the economic cycle that we expect will impact the portfolio. Management determined that a shorter and more recent look-back period used to determine loss factors for risk
graded credits would better represent the current business cycle and more accurately estimate losses inherent in the current portfolio. Additionally, management updated the qualitative factor
adjustment in line with heightened emphasis on qualitative factors, such as the economic conditions, credit concentrations, portfolio trends, and other external factors.



At June 30, 2010, the formula allowance decreased to $1,038 million, compared to $1,110 million at
December 31, 2009. The net decrease was primarily due to a decrease in criticized balances, nonaccruals and lower loss content in the non-accrual loans. At June 30, 2010, the
specific allowance was $161 million, compared to $232 million at December 31, 2009.



At June 30, 2010, the unallocated allowance increased to $331 million, compared to $191 million at
December 31, 2009, primarily due to the negative impact of high unemployment and foreclosures on residential real estate loans, the effect of continued fiscal challenges for the State of
California and California local governments, the effect of commercial real estate property devaluations, the effect of the weak economy

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on
retailers, and the continued effect of sustained low natural gas prices and volatile crude oil prices on energy companies.



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

For the Three Months
Ended June 30,

Increase (Decrease)

For the Six Months
Ended June 30,

Increase (Decrease)(Dollars in thousands)

2009

2010

Amount

Percent

2009

2010

Amount

PercentBalance, beginning of period

$
870,185

$
1,408,013

$
537,828


61.8
%
$
737,767

$
1,357,000

$
619,233


83.9
%Loans charged off:Commercial, financial and industrial


85,870


29,770


(56,100
)

(65.3
)

181,638


96,930


(84,708
)

(46.6
)Construction


23,153


9,359


(13,794
)

(59.6
)

25,469


25,911


442


1.7Commercial mortgage


23,533


50,657


27,124


nm


27,869


82,526


54,657


nmResidential mortgage


8,880


11,407


2,527


28.5


14,933


21,683


6,750


45.2Consumer


11,731


10,301


(1,430
)

(12.2
)

21,141


20,064


(1,077
)

(5.1
)Total loans charged off


153,167


111,494


(41,673
)

(27.2
)

271,050


247,114


(23,936
)

(8.8
)Recoveries of loans previously charged off:Commercial, financial and industrial


1,125


8,306


7,181


nm


2,276


21,425


19,149


nmConstruction


150


7,236


7,086


nm


150


9,627


9,477


nmCommercial mortgage


18


1,699


1,681


nm


225


1,935


1,710


nmResidential mortgage


5


257


252


nm


20


285


265


nmConsumer


290


465


175


60.3


422


900


478


nmTotal recoveries of loans previously charged off


1,588


17,963


16,375


nm


3,093


34,172


31,079


nmNet loans charged off


151,579


93,531


(58,048
)

(38.3
)

267,957


212,942


(55,015
)

(20.5
)Provision for loan losses


360,000


44,000


(316,000
)

(87.8
)

609,000


214,000


(395,000
)

(64.9
)Other


3,027


(613
)

(3,640
)

nm


2,823


(189
)

(3,012
)

nmEnding balance of allowance for loan losses

$
1,081,633

$
1,357,869

$
276,236


25.5
%
$
1,081,633

$
1,357,869

$
276,236


25.5
%Allowance for losses on off-balance sheet commitments


166,374


172,374


6,000


3.6


166,374


172,374


6,000


3.6Allowances for credit losses

$
1,248,007

$
1,530,243

$
282,236


22.6
%
$
1,248,007

$
1,530,243

$
282,236


22.6
%Allowance for loan losses to total loans(1)


2.21
%

2.81
%







2.21
%

2.81
%Allowances for credit losses to total loans(2)


2.55


3.16








2.55


3.16Provision for loan losses to net loans charged off


237.50


47.04








227.28


100.50Net loans charged off to average loans outstanding for the period(3)


1.23


0.78








1.09


0.91Excluding FDIC covered loans(3):Allowance for loan losses to total loans(1)


N/A


2.92
%







N/A


2.92
%Allowances for credit losses to total loans(2)


N/A


3.29








N/A


3.29Net loans charged off to average loans outstanding for the period(4)


N/A


0.81








N/A


0.92


(1)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total
nonperforming loans, as appropriate.(2)The
allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate.(3)These
ratios exclude the impact of the acquired loans and foreclosed assets, which are covered under loss share agreements between Union
Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the assumption of certain liabilities of Frontier Bank and Tamalpais Bank.(4)Annualized.nm=
not meaningfulN/A=
not applicable for periods prior to the April 2010 Frontier and Tamalpais transactions.


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Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans that are nonperforming and foreclosed assets. Nonaccrual loans are
those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have
become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our consolidated
financial statements included in the Company's 2009 Form 10-K.

Restructured
loans are loans in which the Bank has formally restructured all or a significant portion of the loan and provided a concession in the form of debt forgiveness, a
modification of interest rate or payment terms. Any impairment, not previously recorded, is accounted for at the time of restructuring.
Restructured loans are separately disclosed as nonperforming assets for the calendar year of restructuring. If a restructured loan was negotiated at a market rate at the date of restructuring and
performs under the modified terms for a sustained period, it may be disclosed as performing assets in the subsequent calendar year.

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

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The
following table sets forth an analysis of nonperforming assets.

Increase (Decrease)
June 30, 2010 From:June 30,
2009

December 31,
2009June 30,
2009

December 31,
2009

June 30,
2010(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
361,118

$
335,581

$
157,351

$
(203,767
)

(56.4
)%
$
(178,230
)

(53.1
)%Construction


313,790


335,085


372,874


59,084


18.8


37,789


11.3Commercial mortgage


265,229


414,429


458,235


193,006


72.8


43,806


10.6Residential mortgage


142,354


194,482


226,763


84,409


59.3


32,281


16.6Consumer


19,635


20,492


25,421


5,786


29.5


4,929


24.1Lease financing





108











(108
)

(100.0
)Restructurednonaccrual





16,954


88,352


88,352


100.0


71,398


nmTotal nonaccrual loans, excluding FDIC covered loans


1,102,126


1,317,131


1,328,996


226,870


20.6


11,865


0.9FDIC covered nonaccrual loans








23,704


23,704


100.0


23,704


100.0Total nonaccrual loans


1,102,126


1,317,131


1,352,700


250,574


22.7


35,569


2.7Foreclosed assets, excluding FDIC covered foreclosed assets


32,967


32,662


52,359


19,392


58.8


19,697


60.3FDIC covered foreclosed assets








157,745


157,745


100.0


157,745


100.0Restructurednonperforming


9,509








(9,509
)

(100.0
)




Total nonperforming assets

$
1,144,602

$
1,349,793

$
1,562,804

$
418,202


36.5
%
$
213,011


15.8
%Total nonperforming assets, excluding FDIC covered assets

$
1,144,602

$
1,349,793

$
1,381,355

$
236,753


20.7
%
$
31,562


2.3
%Restructured loans that continue to accrue interest

$
1,467

$
3,811

$
9,285

$
7,818


nm

$
5,474


nmAllowance for loan losses

$
1,081,633

$
1,357,000

$
1,357,869

$
276,236


25.5
%
$
869


0.1
%Allowances for credit losses

$
1,248,007

$
1,533,374

$
1,530,243

$
282,236


22.6
%
$
(3,131
)

(0.2
)%Nonaccrual loans to total loans


2.25
%

2.79
%

2.80
%Allowance for loan losses to nonaccrual loans(1)


98.14


103.03


100.38Allowances for credit losses to nonaccrual loans(2)


113.24


116.42


113.13Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


2.34


2.86


3.22Nonperforming assets to total assets


1.55


1.58


1.85Excluding FDIC covered assets(3):Nonaccrual loans to total loans


N/A


N/A


2.86
%Nonperforming assets to total loans, distressed loans held for sale and foreclosed assets


N/A


N/A


2.97Nonperforming assets to total assets


N/A


N/A


1.68


(1)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total
nonperforming loans, as appropriate.(2)The
allowances for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate.(3)These
ratios exclude the impact of the acquired loans and foreclosed assets, which are covered under loss share agreement between Union Bank,
N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the assumption of certain liabilities of Frontier Bank and Tamalpais Bank.nm=
not meaningfulN/A=
not applicable for periods prior to the April 2010 Frontier and Tamalpais transactions.


The increase in nonaccrual loans from June 30, 2009 to June 30, 2010 was primarily due to an increase in commercial and residential
mortgage loans, primarily within the commercial real estate industry sector. During the second quarters of 2009 and 2010, we had $23.1 million and $129.5 million in sales of
nonperforming loans, respectively. Losses from these sales of $9.6 million and $54.1 million for the second quarters of 2009 and 2010 were reflected in charge offs.

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Covered
nonperforming assets totaled $181.4 million, representing 0.22 percent of total assets at June 30, 2010. These covered nonperforming assets are subject to
loss share agreements with the FDIC.

Loans 90 Days or More Past Due and Still Accruing

Increase (Decrease)
June 30, 2010 From:June 30,
2009

December 31,
2009June 30,
2009

December 31,
2009

June 30,
2010(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
3,699

$
4,393

$
4,832

$
1,133


30.6
%
$
439


10.0
%Construction




















Mortgage:Commercial





413











(413
)

(100.0
)Total mortgage





413











(413
)

(100.0
)Consumer and other(1)


307


229


432


125


40.7


203


88.6Total loans 90 days or more past due and still accruing, excluding FDIC covered loans


4,006


5,035


5,264


1,258


31.4


229


4.5FDIC covered loans(2)








531


531


100.0


531


100.0Total loans 90 days or more past due and still accruing

$
4,006

$
5,035

$
5,795

$
1,789


44.7
%
$
760


15.1
%


(1)Effective
January 1, 2009, the Company changed its nonaccrual accounting policy to place consumer home equity loans and
one-to-four single family residential loans on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure.(2)Excludes
loans totaling $300 million that are 90 days or more past due and still accruing at June 30, 2010, which
consisted of FDIC covered loans accounted in accordance with the accounting standards for acquired impaired loans.


Securities

Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality, market risk and
liquidity. At June 30, 2010, approximately 97 percent of our securities, based upon carrying value, were investment grade. The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of securities are detailed in Note 5 to our consolidated financial statements included in this Form 10-Q.

Our
securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. Our Asset and Liability Management (ALM)
Securities portfolio, which consists of available for sale U.S. Government, state and municipal, and mortgage-backed securities held for ALM purposes, totaled $21.6 billion at June 30,
2010. ALM Securities are valued at fair value by a pricing service whose prices can be corroborated by recent security trading activities.

Our
asset-backed securities primarily consist of collateralized loan obligations (CLO) securities, which are known as Cash Flow CLOs. A Cash Flow CLO is a structured finance product that
securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and
principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, we reclassified
our CLOs from available for sale to held to maturity. We consider the held to maturity classification to be more appropriate because we have the ability and the intent to hold these securities to
maturity.

At
June 30, 2010, the fair value of our CLO securities had decreased by approximately $24.1 million from December 31, 2009, primarily due to a decrease in liquidity
in the marketplace. We estimate the fair value of our CLOs using a pricing model, as well as broker quotes. The model is based on internally-developed assumptions, utilizing market data derived from
market participants and credit rating agencies. These

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assumptions
include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates.

We
conduct a formal review of our securities available for sale and securities held to maturity portfolios on a quarterly basis for the presence of
other-than-temporary impairment. We recognized an insignificant amount of impairment on three non-agency residential mortgage-backed securities during the first
half of 2010. Based on the review performed as of June 30, 2010, we expect to recover the entire amortized cost basis of securities available for sale and securities held to maturity
portfolios.

Analysis of Securities

The following tables show the remaining contractual maturities and expected yields of the securities based upon amortized cost at
June 30, 2010.

Securities Available For Sale

June 30, 2010MaturityOne Year or Less

Over One Year Through Five Years

Over Five Years Through Ten Years

Over Ten Years

Total Amortized Cost(4)(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldU.S. Treasury

$
299,963


0.32
%
$




%
$
311


2.75
%
$




%
$
300,274


0.32
%Other U.S. government


3,224,857


0.51


8,743,901


1.57


1,810


7.80








11,970,568


1.29Residential mortgage-backed securitiesagency(1)(2)


5


4.41


259,273


3.81


1,028,321


3.80


7,338,267


3.99


8,625,866


3.96Residential mortgage-backed securitiesnon-agency(1)(2)














10,468


5.07


376,205


5.32


386,673


5.31State and municipal


2,762


6.13


7,857


6.30


15,043


3.42


20,205


5.53


45,867


5.01Asset-backed and debt securities








23,645


7.25


21,373


3.98


65,799


7.02


110,817


6.48Equity securities(3)


























79,463


Total securities available for sale

$
3,527,587


0.50
%
$
9,034,676


1.65
%
$
1,077,326


3.82
%
$
7,800,476


4.08
%
$
21,519,528


2.45
%


Securities Held to Maturity

June 30, 2010MaturityOne Year or Less

Over One Year
Through Five Years

Over Five Years Through Ten Years

Over Ten Years

Total Amortized Cost(4)(5)(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldCollateralized loan obligations

$
2,471


6.67
%
$
61,873


2.09
%
$
1,402,877


1.22
%
$
296,890


1.13
%
$
1,764,111


1.24
%Foreign securities


95


0.25




















95


0.25Total securities held to maturity

$
2,566


6.43
%
$
61,873


2.09
%
$
1,402,877


1.22
%
$
296,890


1.13
%
$
1,764,206


1.24
%


(1)Although
the residential mortgage-backed securities have been ascribed to periods based upon their contractual maturities, principal payments
are received prior to maturity because borrowers have the right to repay their obligations at any time.(2)See
discussion of expected duration in "Quantitative and Qualitative Disclosures About Market Risk."(3)Equity
securities do not have a stated maturity and are included in the total column only.(4)Amortized
cost reflects fair value adjustments as a result of the Company's privatization transaction.(5)For
securities transferred to held to maturity from available for sale, amortized cost is defined as the original purchase cost, plus or
minus any accretion or amortization of a purchase discount or premium, less payments and any impairment previously recognized in earnings.


85

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Our securities available for sale portfolio at June 30, 2010 included ALM Securities with a fair value of $21.6 billion. These
securities had an expected weighted average maturity of 2.5 years.

Deposits

The table below provides information on our deposits as of June 30, 2009, December 31, 2009 and June 30, 2010.

Increase (Decrease) June 30, 2010 From December 31, 2009June 30,
2009

December 31,
2009

June 30,
2010(Dollars in thousands)

Amount

PercentInterest checking

$
3,803,550

$
849,283

$
1,156,090

$
306,807


36
%Money market


28,588,080


39,952,337


32,651,093


(7,301,244
)

(18
)Total interest bearing transaction accounts


32,391,630


40,801,620


33,807,183


(6,994,437
)

(17
)Savings


2,220,689


3,716,566


4,602,576


886,010


24Time


8,800,076


9,440,478


12,541,535


3,101,057


33Total interest bearing deposits(1)


43,412,395


53,958,664


50,951,294


(3,007,370
)

(6
)Noninterest bearing deposits


14,926,564


14,558,989


15,319,290


760,301


5Total deposits

$
58,338,959

$
68,517,653

$
66,270,584

$
(2,247,069
)

(3
)%(1) Total interest bearing deposits include:Brokered deposits:Interest bearing transaction accounts

$
1,120,859

$
5,340,452

$
4,121,335

$
(1,219,117
)

(23
)%Time


491,591


979,352


922,983


(56,369
)

(6
)Total brokered deposits


1,612,450


6,319,804


5,044,318


(1,275,486
)

(20
)Nonbrokered deposits


41,799,945


47,638,860


45,906,976


(1,731,884
)

(4
)Total interest bearing deposits

$
43,412,395

$
53,958,664

$
50,951,294

$
(3,007,370
)

(6
)%Core Deposits:Total deposits

$
58,338,959

$
68,517,653

$
66,270,584

$
(2,247,069
)

(3
)%Less: Total brokered deposits


1,612,450


6,319,804


5,044,318


(1,275,486
)

(20
)Less: Total nonbrokered time deposits of $100,000 and over


6,187,630


6,510,741


8,291,745


1,781,004


27Total core deposits

$
50,538,879

$
55,687,108

$
52,934,521

$
(2,752,587
)

(5
)%


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Table of Contents

Fair Value of Financial Instruments

The following table reflects financial instruments measured at fair value on a recurring basis as of June 30, 2009,
December 31, 2009 and June 30, 2010. For additional information on the fair value of financial instruments, see Note 14 to the consolidated financial statements in this
Form 10-Q.

June 30, 2009

December 31, 2009

June 30, 2010(Dollars in thousands)

Fair Value

Percentage
of Total

Fair Value

Percentage
of Total

Fair Value

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

$
923,742


11
%
$
12,696,149


55
%
$
12,654,395


55
%Level 2


7,585,551


90


10,746,219


46


10,314,109


45Level 3


6,308





6,878





8,643


Netting Adjustment(1)


(117,153
)

(1
)

(135,885
)

(1
)

(58,933
)

Total

$
8,398,448


100
%
$
23,313,361


100
%
$
22,918,214


100
%As a percentage of total Company assets





11
%




27
%




27
%Liabilities:Level 1

$
50,592


7
%
$
9,901


2
%
$
60,196


7
%Level 2


757,265


110


643,115


119


831,628


97Level 3














41,697


5Netting Adjustment(1)


(117,153
)

(17
)

(111,885
)

(21
)

(76,542
)

(9
)Total

$
690,704


100
%
$
541,131


100
%
$
856,979


100
%As a percentage of total Company liabilities





1
%




1
%




1
%


(1)Amounts
represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net
settle all contracts.


Quantitative and Qualitative Disclosures About Market Risk

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

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

The
Risk & Capital Committee (RCC), comprised of selected senior officers of the Bank, among other things, strives to ensure that the Bank has an effective process to identify,
measure, monitor, and manage market risk as required by the ALM Policy. The RCC provides the broad and strategic guidance of market risk management by formulating high-level strategies for
market risk management and defining the risk/return direction for the Bank, and by approving the investment, derivatives and trading policies that govern the Bank's activities. The Asset Liability
Management Committee (ALCO) as instructed by the RCC, is responsible for the management of market risk and approves specific risk management programs to be recommended to the RCC

87

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Table of Contents

for
approval, including those related to interest rate hedging, investment securities, wholesale funding and trading activities. The RCC may delegate to ALCO various decisions pertaining to market
risk management as it deems appropriate.

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

We
have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For
additional information about our market risk management, please see "Quantitative and Qualitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our 2009 Form 10-K.

In
order to measure the sensitivity of the Bank's financial position to interest rate risk, parallel rate shocks and gradual ramps over 12 months in both up and down scenarios are
compared to current rates to generate earnings and economic value of equity impacts. During the first quarter of 2010, under RCC delegated authority to approve temporary changes to risk measurement,
the -200 basis point parallel scenario was replaced with a -100 basis point parallel scenario. This change reflects the low probability associated with rate reductions of 200
basis point in the current extremely low rate environment, and the acceptance of a scenario that better reflects historically low rate levels achieved in the past. The +200 basis point scenario was
not changed. The RCC will monitor the rate environment and will consider restoring the -200 basis point measure in the future when deemed appropriate.



At June 30, 2010, Economic NII sensitivity was asset sensitive to parallel rate shifts. A +200 basis point parallel shift in
rates would increase 12-month Economic NII by 4.15 percent, while a -100 basis point downward shift in rates would decrease it by 2.58 percent. At
December 31, 2009, a +200 basis point parallel shift in rates would increase 12-month Economic NII by 0.03 percent, while a -100 basis point downward shift in
rates would reduce it by 1.65 percent. We caution that significant low levels of current interest rates and ongoing enhancements to our interest rate risk modeling may make prior year
comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are
innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.

Economic NII

(Dollars in millions)

June 30,
2009

December 31,
2009

June 30,
2010+200 basis points

$
27.6

$
0.9

$
105.0as a percentage of base case NII


1.11
%

0.03
%

4.15
%-100 basis points


N/A

$
(44.7
)
$
(65.3
)as a percentage of base case NII


N/A


(1.65
)%

(2.58
)%


Generally, short-term assets reprice faster than short-term liabilities. As a result, higher short-term rates
with fixed longer term rates will improve Economic NII. Alternatively, gradually lower short-term rates with gradually higher longer term rates will contract Economic NII.

As
more fully described in Note 3 to our consolidated financial statements, the Bank acquired certain assets of Frontier with a fair value of $2.9 billion and certain
assets of Tamalpais with a fair value of

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$571 million
in April 2010. These acquisitions resulted in an immaterial decrease in the asset sensitivity of the Bank's Economic NII.



During the first half of 2010, the Bank increased its asset sensitivity to position the Bank to benefit from rising rates in the future
by the termination of positions in receive fixed interest rate swaps and floor derivative portfolios, the repositioning of mortgage securities from longer to shorter durations and the execution of
term funding. Additionally, increased deposit balances, cash holdings and the effect of lower rates on the forecasted risk from mortgages and deposits contributed to the asset sensitive position. In
managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if
necessary.



At June 30, 2009 and 2010, our available for sale securities portfolio included $7.2 billion and $21.6 billion,
respectively, of securities for ALM purposes. At June 30, 2010, approximately $5.6 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as
required or permitted by law. During the second quarter of 2010, we purchased $2.2 billion and sold $1.0 billion par value of securities, as part of our investment portfolio strategy,
while $1.7 billion par value of ALM securities matured or were called.

Based
on current prepayment projections, the estimated ALM Securities portfolio's effective duration was 1.3 at June 30, 2010, compared to 2.4 at June 30, 2009. Effective
duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 1.3 suggests an expected price decrease of approximately
1.3 percent for an immediate 1.0 percent parallel increase in interest rates.



During the first half of 2010, the ALM derivatives portfolio decreased by $4.8 billion notional amount due to terminations of
receive fixed interest rate swaps and LIBOR floor contracts.

The
fair value of the ALM derivatives portfolio decreased primarily due to the termination of LIBOR floor contracts and the impact of a decline in interest rates on cap contracts, which
benefit from the expectation of higher future interest rates. The decrease was partially offset by the termination of receive fixed interest rate swaps. For additional discussion of derivative
instruments and our hedging strategies, see Note 15 to our consolidated financial statements in this Form 10-Q and Note 18 to our Consolidated Financial Statements
included in our 2009 Form 10-K.

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---



Table of Contents

The
following table provides the notional value and the fair value of our ALM derivatives portfolio as of June 30, 2009, December 31, 2009 and June 30, 2010 and the
change in fair value between December 31, 2009 and June 30, 2010.

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010

Increase (Decrease)
From December 31,
2009
to June 30,
2010Total gross notional amount of positions held for purposes other than trading:

$
6,250,000

$
8,800,000

$
4,000,000

$
(4,800,000
)of which, interest rate swaps pay fixed rates of interest











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

$
139,765

$
97,186

$
14,632

$
(82,554
)Gross negative fair value





12,164





(12,164
)Positive (negative) fair value of positions, net

$
139,765

$
85,022

$
14,632

$
(70,390
)




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

As
of June 30, 2010, we had $27.4 billion notional amount of interest rate derivative contracts. We enter into these agreements for customer accommodations and for our own
account, accepting risks up to management approved Value-at-Risk levels.

We
market energy derivative contracts to existing energy industry customers, primarily oil and gas producers, in order to meet their hedging needs. All transactions are fully matched to
offsetting (mirror) derivative contracts with third parties to remove our exposure to market risk, with income earned on the credit spread. As of June 30, 2010, we had $3.6 billion
notional amount of energy derivative contracts with approximately half of these energy derivative contracts entered into as an accommodation for customers and the remaining half entered into as
matching contracts to remove our exposure to market risk on our customer accommodation transactions.

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Table of Contents

The
following table provides the notional value and the fair value of our trading derivatives portfolio as of June 30, 2009, December 31, 2009 and June 30, 2010 and
the change in fair value between December 31, 2009 and June 30, 2010.

(Dollars in thousands)

June 30,
2009

December 31,
2009

June 30,
2010

Increase (Decrease)
From December 31,
2009
to June 30,
2010Total gross notional amount of positions held for trading purposes:Interest rate

$
24,859,280

$
25,226,564

$
27,359,745

$
2,133,181Foreign exchange(1)


2,406,591


2,407,178


3,282,695


875,517Equity


148,234


254,372


702,274


447,902Energy


3,501,515


3,405,389


3,644,782


239,393Total

$
30,915,620

$
31,293,503

$
34,989,496

$
3,695,993Fair value of positions held for trading purposes:Gross positive fair value

$
801,905

$
649,300

$
886,028

$
236,728Gross negative fair value


761,488


632,426


833,080


200,654Positive fair value of positions, net

$
40,417

$
16,874

$
52,948

$
36,074


(1)Excludes
spot contracts with notional amounts of $0.7 billion, $0.3 billion and $0.5 billion at June 30, 2009,
December 31, 2009 and June 30, 2010, respectively.




Liquidity Risk

Liquidity risk is the risk that the Bank's financial condition or overall safety and soundness is adversely affected by an inability,
or perceived inability, to meet its contractual obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow the
Bank to meet expected and unexpected obligations in both stable and adverse conditions.

The
management of liquidity risk is governed by the ALM Policy under the oversight of the RCC and the Audit & Finance Committee of the Board. ALCO oversees liquidity risk
management activities. Corporate Treasury formulates the Bank's liquidity and contingency planning strategies and is responsible for identifying, monitoring and reporting on liquidity risk. Market
Risk Management, which is part of the Enterprise Wide Risk Reporting and Analysis unit, partners with Corporate Treasury to establish sound policy and effective risk controls. RCC and ALCO also
maintain a Contingency Funding Plan that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding
activities.

Liquidity
risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as
off-balance sheet exposures. Various tools are used to measure and monitor liquidity, including pro-forma forecasting of the sources and use of cash flows over a
12-month time horizon, stress testing of the pro-forma forecast and assessment of the Bank's capacity to raise incremental unsecured and secured funding. Stress testing, which
incorporates both bank-specific and systemic market scenarios that would adversely affect the Bank's liquidity position, facilitates the identification of appropriate remedial measures to
help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, optimizing liability levels through pricing
strategies, adding new funding sources, altering dependency on certain funding sources and/or selling assets.

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Table of Contents

In
March 2010, the federal bank regulators adopted (effective May 21, 2010) an Interagency Policy Statement of Funding and Liquidity Risk Management which sets forth the
regulators' supervisory expectations for all insured depository institutions for management of funding and liquidity risk. Under the guidance of this policy statement, banks are expected, among other
measures, to adopt and observe sound practices for liquidity risk management, ensure oversight through the board of directors or appropriate committees, conduct regular stress testing, monitor and
effectively manage collateral
positions, ensure diversification in funding sources, to develop a formal contingency funding plan that clearly sets out the institution's strategies for addressing liquidity shortfalls in emergency
situations and to establish a monitoring framework for contingent events by using early-warning indicators and event triggers. The Bank's Board of Directors has approved a number of measures aimed at
assuring compliance with the policy statement, including a formal ALM Policy with specific governance on liquidity risk management.

Our
primary sources of liquidity are core deposits (described below), securities portfolio and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and
other sources, both domestic and international. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the FHLB. We evaluate and monitor the
stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured
borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources, and we therefore maintain these sources primarily to meet our contingency
funding needs.

The
acquisitions of certain assets and assumption of certain liabilities of Frontier and Tamalpais resulted in the assumption of FHLB advances (including accrued interest) of
$135 million from the FHLB of San Francisco and $385 million from the FHLB of Seattle, including prepayment fees payable of $4 million and $23 million, respectively.
Shortly after the respective acquisition dates, the Bank repaid in full all outstanding FHLB advances assumed in connection with these acquisitions.

Total
deposits declined $2.2 billion from $68.5 billion at December 31, 2009 to $66.3 billion at June 30, 2010. The decline in deposits was coupled
with a modest decrease in wholesale funding of $0.8 billion from $8.9 billion at December 31, 2009 to $8.1 billion at June 30, 2010.

Core
deposits, which consist of total deposits excluding brokered deposits and time deposits of $100,000 and over, provide us with a sizable source of relatively stable and
low-cost funds. At June 30, 2010, our core deposits totaled $52.9 billion, and combined with our stockholder's equity, funded 74.9 percent of our $84.3 billion
in total assets. During the past year, the Bank has experienced a significant increase in money market deposit accounts from $28.6 billion at June 30, 2009 to $32.7 billion at
June 30, 2010. These amounts are included in the Bank's core deposits. Management believes that some portion of these deposits may be relatively interest rate sensitive and that decreases in
rates paid by the Bank (or a failure to match increases in rates by competitors) may result in such deposits being redirected by customers from the Bank to other investment alternatives. Management
believes, however, that overall, core deposits remain a relatively stable funding source. The Bank maintains a variety of other funding sources, secured and unsecured, which management believes will
be adequate to meet the Bank's liquidity needs, including the following:



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Table of Contents



We
believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. Management does not rely on any one source of liquidity and manages
availability in response to changing balance sheet needs.

Our
costs and ability to raise funds in the capital markets are influenced by our credit ratings. Our credit ratings could be impacted by changes in the credit ratings of BTMU and MUFG.
The following table provides our credit ratings as of June 30, 2010.

Union Bank, N.A.

UnionBanCal
CorporationStandard & Poor's

Long-term

A+

AShort-term

A-1

A-1Moody's

Long-term

A2

Short-term

P-1

Fitch

Long-term

A

AShort-term

F1

F1DBRS

Long-term

A (high)

AShort-term

R-1 (middle)

R-1 (low)


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Table of Contents



Regulatory Capital

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

UnionBanCal Corporation

(Dollars in thousands)

June 30,
2009



December 31,
2009



June 30,
2010



Minimum
Regulatory
RequirementCapital ComponentsTier 1 capital

$
5,409,445




$
7,484,516




$
7,681,746Tier 2 capital


1,780,922





1,718,807





1,733,160Total risk-based capital

$
7,190,367




$
9,203,323




$
9,414,906Risk-weighted assets

$
62,312,964




$
63,298,173




$
64,301,375Quarterly average assets

$
68,585,363




$
79,226,967




$
83,254,866




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
7,190,367


11.54
%
$
9,203,323


14.54
%
$
9,414,906


14.64
%
3$
5,144,110


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


5,409,445


8.68


7,484,516


11.82


7,681,746


11.95


3  2,572,055


4.0Leverage(1)


5,409,445


7.89


7,484,516


9.45


7,681,746


9.23


3  3,330,195


4.0


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


Union Bank, N.A.

(Dollars in thousands)

June 30,
2009



December 31,
2009



June 30,
2010



Minimum
Regulatory
Requirement



"Well-Capitalized"
Regulatory
RequirementCapital ComponentsTier 1 capital

$
5,189,386




$
7,207,264




$
7,015,636Tier 2 capital


1,460,298





1,478,697





1,488,379Total risk-based capital

$
6,649,684




$
8,685,961




$
8,504,015Risk-weighted assets

$
62,228,803




$
63,272,931




$
63,897,301Quarterly average assets

$
68,782,111




$
79,609,326




$
82,826,588




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
6,649,684


10.69
%
$
8,685,961


13.73
%
$
8,504,015


13.31
%
3$
5,111,784


8.0
%
3$
6,389,730


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


5,189,386


8.34


7,207,264


11.39


7,015,636


10.98


3  2,555,892


4.0


3  3,833,838


6.0Leverage(1)


5,189,386


7.54


7,207,264


9.05


7,015,636


8.47


3  3,313,064


4.0


3  4,141,329


5.0


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


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

As
of June 30, 2010, management believes the capital ratios of Union Bank met all regulatory requirements of "well-capitalized" institutions, which are
10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio.

Business Segments

As a result of a corporate reorganization in the fourth quarter of 2009, we reevaluated our business segments. Under the new
organizational structure, we have three operating segments: Retail Banking Group,

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Corporate
Banking Group and Pacific Rim Corporate Group. The Corporate Banking Group and Pacific Rim Corporate Group segments have been aggregated together. We have two reportable business segments:
Retail Banking and Corporate Banking.

Prior
to this reorganization, the various operating segments were aggregated into two reportable business segments formerly known as "Retail Banking" and "Wholesale Banking." Our new
reportable business segment structure is similar to the previous structure. However, the Global and Wealth Markets Division, which was previously included in Retail Banking, is now included in
Corporate Banking. Additionally, the goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction previously were included in our segment results. To
align with the chief operating decision maker's view of our segments, we have adjusted our 2009 reportable business segment results to exclude intangible assets and related amortization/accretion from
our reportable business segment results and included such amounts in "Other."

In
the second quarter of 2010, we recorded $47.7 million of goodwill as a result of our FDIC-assisted acquisitions of certain assets and assumption of certain
liabilities of Frontier and Tamalpais. Goodwill of $34.2 million and $13.5 million was assigned to the Retail Banking and Corporate Banking reportable business segments, respectively.

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

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

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

The
RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit,
market and operational risks. As a result of the methodology used by the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one
period could be significant. However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results
are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal as a whole. Our management reporting system identifies balance sheet and
income statement items for each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing

95

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Table of Contents

system,
which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. During the first quarter of 2010, we
refined our transfer pricing methodology with respect to reference rates for deposits and to include additional assumptions about liquidity premiums, benefits granted for eligible loan collateral and
charges for collateral requirements on deposits. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned
the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are
allocated to the business units based on a predetermined percentage of usage.

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

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Retail Banking





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

Increase/(decrease)

As of and for the
Three Months Ended
June 30,

Increase/(decrease)2009

2010

Amount

Percent

2009

2010

Amount

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

$
204,921

$
261,307

$
56,386


28
%
$
323,341

$
387,326

$
63,985


20
%Noninterest income (expense)


71,856


74,118


2,262


3


131,438


144,793


13,355


10Total revenue


276,777


335,425


58,648


21


454,779


532,119


77,340


17Noninterest expense (income)


197,811


230,480


32,669


17


196,570


247,083


50,513


26Credit expense (income)


6,873


6,718


(155
)

(2
)

86,426


74,112


(12,314
)

(14
)Income (loss) before income taxes and including noncontrolling interests


72,093


98,227


26,134


36


171,783


210,924


39,141


23Income tax expense (benefit)


28,188


38,407


10,219


36


45,965


58,789


12,824


28Net income (loss) including noncontrolling interests


43,905


59,820


15,915


36


125,818


152,135


26,317


21Less: Net loss from noncontrolling interests(2)











na











naNet income (loss) attributable to UNBC

$
43,905

$
59,820

$
15,915


36
%
$
125,818

$
152,135

$
26,317


21
%Average balancesMarket View (dollars in millions):Total loans

$
21,029

$
21,843

$
814


4

$
30,448

$
26,618

$
(3,830
)

(13
)Total assets


21,831


22,739


908


4


34,324


30,255


(4,069
)

(12
)Total deposits


19,446


22,928


3,482


18


34,048


43,410


9,362


27Financial ratiosMarket ViewRisk adjusted return on capital(1)


33
%

44
%







15
%

19
%Return on average assets(1)


0.81


1.06








1.47


2.02Efficiency ratio(3)


71.33


68.68








40.80


43.77




Other





Reconciling Items

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

Increase/(decrease)

As of and for the
Three Months Ended
June 30,

As of and for the
Three Months Ended
June 30,

Increase/(decrease)2009

2010

Amount

Percent

2009

2010

2009

2010

Amount

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

$
36,008

$
(34,897
)
$
(70,905
)

nm
%
$
(13,924
)
$
(13,343
)
$
550,346

$
600,393

$
50,047


9
%Noninterest income (expense)


(9,621
)

40,403


50,024


nm


(10,460
)

(15,020
)

183,213


244,294


61,081


33Total revenue


26,387


5,506


(20,881
)

(79
)

(24,384
)

(28,363
)

733,559


844,687


111,128


15Noninterest expense (income)


145,638


119,287


(26,351
)

(18
)

(7,961
)

(12,650
)

532,058


584,200


52,142


10Credit expense (income)


266,840


(36,683
)

(303,523
)

(114
)

(139
)

(147
)

360,000


44,000


(316,000
)

(88
)Income (loss) before income taxes and including noncontrolling interests


(386,091
)

(77,098
)

308,993


80


(16,284
)

(15,566
)

(158,499
)

216,487


374,986


nmIncome tax expense (benefit)


(146,278
)

(24,846
)

121,432


83


(6,367
)

(6,086
)

(78,492
)

66,264


144,756


nmNet income (loss) including noncontrolling interests


(239,813
)

(52,252
)

187,561


78


(9,917
)

(9,480
)

(80,007
)

150,223


230,230


nmLess: Net loss from noncontrolling interests(2)





(3,536
)

(3,536
)

nm











(3,536
)

(3,536
)

nmNet income (loss) attributable to UNBC

$
(239,813
)
$
(48,716
)
$
191,097


80
%
$
(9,917
)
$
(9,480
)
$
(80,007
)
$
153,759

$
233,766


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

$
(331
)
$
1,262

$
1,593


nm

$
(1,590
)
$
(1,896
)
$
49,556

$
47,827

$
(1,729
)

(3
)Total assets


16,948


34,432


17,484


103


(1,608
)

(1,915
)

71,495


85,511


14,016


20Total deposits


2,030


3,404


1,374


68


(1,172
)

(1,637
)

54,352


68,105


13,753


25Financial ratiosMarket ViewRisk adjusted return on capital(1)


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


(0.45
)%

0.72
%Efficiency ratio(3)


na


na








na


na


68.28


64.86


(1)Annualized.(2)Reflects
net loss attributed to noncontrolling interest related to our consolidated variable interest entities (VIE)(3)The
efficiency ratio is net noninterest expense before privatization adjustments (noninterest expense excluding foreclosed asset expense
(income), the provision for (reversal of) losses on off-balance sheet commitments, low income housing credit (LIHC) investment amortization expense, expenses of the consolidated VIEs and
one-time costs related to the acquisitions of certain assets and liabilities of Frontier Bank and Tamalpais Bank) as a percentage of total revenue (net interest income (taxable-equivalent
basis) and noninterest income.) na = not applicable nm = not meaningful


97

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Table of Contents

Retail Banking





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

Increase/(decrease)

As of and for the
Six Months Ended
June 30,

Increase/(decrease)2009

2010

Amount

Percent

2009

2010

Amount

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

$
396,471

$
505,391

$
108,920


27
%
$
609,909

$
766,876

$
156,967


26
%Noninterest income (expense)


139,359


140,447


1,088


1


246,327


262,423


16,096


7Total revenue


535,830


645,838


110,008


21


856,236


1,029,299


173,063


20Noninterest expense (income)


401,854


445,980


44,126


11


413,177


489,652


76,475


19Credit expense (income)


14,337


13,355


(982
)

(7
)

155,286


152,941


(2,345
)

(2
)Income (loss) before income taxes and including noncontrolling interests


119,639


186,503


66,864


56


287,773


386,706


98,933


34Income tax expense (benefit)


46,779


72,923


26,144


56


69,732


104,999


35,267


51Net income (loss) including noncontrolling interests


72,860


113,580


40,720


56


218,041


281,707


63,666


29Less: Net loss from noncontrolling interests(2)











na











naNet income (loss) attributable to UNBC

$
72,860

$
113,580

$
40,720


56
%
$
218,041

$
281,707

$
63,666


29
%Average balancesMarket View (dollars in millions):Total loans

$
20,892

$
21,737

$
845


4

$
30,591

$
26,909

$
(3,682
)

(12
)Total assets


21,698


22,607


909


4


34,373


30,491


(3,882
)

(11
)Total deposits


18,985


21,646


2,661


14


30,456


44,447


13,991


46Financial ratiosMarket ViewRisk adjusted return on capital(1)


27
%

42
%







13
%

18
%Return on average assets(1)


0.68


1.01








1.28


1.86Efficiency ratio(3)


74.84


68.96








45.78


44.95




Other





Reconciling Items

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

Increase/(decrease)

As of and for the
Six Months Ended
June 30,

As of and for the
Six Months Ended
June 30,

Increase/(decrease)2009

2010

Amount

Percent

2009

2010

2009

2010

Amount

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

$
128,753

$
(66,328
)
$
(195,081
)

nm
%
$
(24,784
)
$
(31,193
)
$
1,110,349

$
1,174,746

$
64,397


6
%Noninterest income (expense)


(6,554
)

78,953


85,507


nm


(21,203
)

(27,624
)

357,929


454,199


96,270


27Total revenue


122,199


12,625


(109,574
)

(90
)

(45,987
)

(58,817
)

1,468,278


1,628,945


160,667


11Noninterest expense (income)


255,465


196,445


(59,020
)

(23
)

(17,055
)

(23,305
)

1,053,441


1,108,772


55,331


5Credit expense (income)


439,714


47,983


(391,731
)

(89
)

(337
)

(279
)

609,000


214,000


(395,000
)

(65
)Income (loss) before income taxes and including noncontrolling interests


(572,980
)

(231,803
)

341,177


60


(28,595
)

(35,233
)

(194,163
)

306,173


500,336


nmIncome tax expense (benefit)


(209,678
)

(82,481
)

127,197


61


(11,181
)

(13,776
)

(104,348
)

81,665


186,013


nmNet income (loss) including noncontrolling interests


(363,302
)

(149,322
)

213,980


59


(17,414
)

(21,457
)

(89,815
)

224,508


314,323


nmLess: Net loss from noncontrolling interests(2)





(6,595
)

(6,595
)

nm











(6,595
)

(6,595
)

nmNet income (loss) attributable to UNBC

$
(363,302
)
$
(142,727
)
$
220,575


61
%
$
(17,414
)
$
(21,457
)
$
(89,815
)
$
231,103

$
320,918


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

$
(323
)
$
581

$
904


nm

$
(1,488
)
$
(1,887
)
$
49,672

$
47,340

$
(2,332
)

(5
)Total assets


14,734


33,969


19,235


131


(1,509
)

(1,905
)

69,296


85,162


15,866


23Total deposits


2,228


3,472


1,244


56


(1,155
)

(1,593
)

50,514


67,972


17,458


35Financial ratiosMarket ViewRisk adjusted return on capital(1)


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


(0.26
)%

0.55
%Efficiency ratio(3)


na


na








na


na


66.98


64.92


(1)Annualized.(2)Reflects
net loss attributed to noncontrolling interest related to our consolidated variable interest entities (VIE)(3)The
efficiency ratio is net noninterest expense before privatization adjustments (noninterest expense excluding foreclosed asset expense
(income), the provision for (reversal of) losses on off-balance sheet commitments, low income housing credit (LIHC) investment amortization expense, expenses of the consolidated VIEs and
one-time costs related to the acquisitions of certain assets and liabilities of Frontier Bank and Tamalpais Bank) as a percentage of total revenue (net interest income (taxable-equivalent
basis) and noninterest income.) na = not applicable nm = not meaningful


98

---



Table of Contents



Retail Banking provides deposit and credit financial products delivered through our branches and relationship managers to individuals
and small businesses. Retail Banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and
sales strategies to attract new customers in these identified target markets.

During
the six months ended June 30, 2010, net income of Retail Banking increased compared to the same period in 2009, resulting from a 27 percent increase in net interest
income, partially offset by an 11 percent increase in noninterest expense. The increase in net interest income was primarily due to increased margin combined with the growth in loans and
interest bearing deposits.

Average
asset growth for the six months ended June 30, 2010 compared to the same period in 2009 was primarily driven by a 4 percent growth in average loans, mainly in
residential mortgages.

Average
deposits increased 14 percent during the six months ended June 30, 2010 compared to the same period in 2009. This increase was primarily due to Retail Banking's
strategy, which continues to focus on marketing activities to attract new consumer and small business deposits, customer cross-sell, relationship management, sales resources, and new
products and locations. We expect that a larger branch network, combined with this Retail Banking strategy and more robust telephone and internet channels, will improve growth prospects.

Noninterest
income increased by 1 percent during the six months ended June 30, 2010 compared to the same period in 2009. Noninterest expense increased by 11 percent
during the six months ended June 30, 2010 compared to the same period in 2009. This increase was primarily due to increased staff costs, FDIC insurance assessment expense and acquisition
expenses.

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



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



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

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

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Table of Contents

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



Corporate Banking offers financing, depository and cash management services to middle market and large corporate businesses primarily
headquartered in the Western U.S. Corporate Banking continues to focus on specific geographic markets and industry segments such as energy, institutional trusts, entertainment and real estate.
Relationship managers provide credit services, including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade financing and real estate financing.
In addition to credit services, Corporate Banking offers a broad range of depository and global treasury solutions delivered through deposit managers with significant industry expertise and experience
in businesses of all sizes including numerous vertical industry niches such as U.S. correspondent banks and government entities, as well as investment and risk management products.

The
main strategy of our Corporate Banking business units is to target industries and companies for which we can reasonably expect to be one of a customer's primary banks. Consistent
with this strategy, Corporate Banking business units attempt to serve a large part of the targeted customers' credit and depository needs. The Corporate Banking business units compete with other banks
primarily on the basis of the quality of our relationship managers, the level of industry expertise, the delivery of quality customer service, and our reputation as a "business bank." We also compete
with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks.
In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies. Competition in our principal markets may further intensify as a result of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which, among other things, permits de novo branching into California by national banks, state
banks and foreign banks from other states (see Part II, Item IA, "Risk FactorsSubstantial competition could adversely affect us" in this Form 10-Q for
additional information about the Dodd-Frank Act).

During
the six months ended June 30, 2010, net income of Corporate Banking increased 29 percent, compared to the same period of 2009, resulting from a 26 percent
increase in net interest income and a
7 percent increase in noninterest income, partially offset by a 19 percent increase in noninterest expense. The increase in net interest income was mainly due to higher deposits.

During
the six months ended June 30, 2010, average loans decreased 12 percent compared to the same period of 2009 primarily due to decreases in our commercial and
industrial loan portfolio and real estate construction portfolio, partially offset by an increase in our residential mortgage portfolio.

During
the six months ended June 30, 2010, average deposits increased 46 percent compared to the same period of 2009. Money market deposits experienced significant growth
as a result of long-term corporate deposit-gathering strategies, a "flight to quality" and entry into new business niches. These new niches provided funding from large institutional
accounts, including brokerage firms. These relationships reflect execution of a business strategy to obtain deposits from brokerage and institutional clients. In addition, state and local government
and Corporate Banking deposits experienced significant growth.

Noninterest
income increased 7 percent during the six months ended June 30, 2010, compared to the same period of 2009, primarily due to higher amortized fees on standby
letters of credit, gain on private capital investments and gain on sale on leases, partially offset by lower trading income. Noninterest expense increased 19 percent during the six months ended
2010 compared to the same period of 2009 primarily due to increased staff costs and FDIC insurance assessment cost.Corporate Banking initiatives continue to include expanding commercial and loan
relationship strategies that include originating, underwriting and syndicating loans in core competency markets, such as the California middle market, corporate banking, commercial real estate,
institutional trusts, energy, equipment leasing and commercial finance. Corporate Deposits and Global

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Table of Contents

Treasury
Management Division provides a full range of depository and treasury management products and solutions.

Corporate Bankingis comprised of the following main divisions:



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Table of Contents





Our net loss decreased by $220.6 million in the six months ended June 30, 2010, compared to the same period in 2009,
primarily due to lower loan loss provision and noninterest expense, and higher noninterest income; partially offset by lower net interest income.

"Other"
includes the following items:



The
financial results for the six months ended June 30, 2010 were impacted by the following factors:



102

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Table of Contents



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



Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.   Controls and Procedures

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer)
have concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2010. This conclusion is based on an evaluation conducted under the
supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is
accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During
the quarter ended June 30, 2010, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

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Table of Contents



PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2009
Form 10-K, which is incorporated by reference herein, in addition to the following information.

Industry Factors

U.S. and global economies have experienced a serious recession, unprecedented volatility in the financial
markets, and significant deterioration in sectors of the U.S. consumer and business economy, all of which continue to present challenges for the banking and financial services industry and for
UnionBanCal Corporation; the U.S. Government has responded to these circumstances with a variety of measures; there can be no assurance that these measures will successfully address these
circumstances.

Over the past three years, adverse financial and economic developments have impacted the U.S. and global economies and financial markets and present challenges
for the banking and financial services industry and for UnionBanCal Corporation. These developments include a general recession both globally and in the U.S. and have contributed to substantial
volatility in the financial markets.

In
response, various significant economic and monetary stimulus measures were enacted by the U.S. Congress. Refer to "Supervision and Regulation" in Item 1 of our 2009
Form 10-K for discussion of these measures.

It
cannot be predicted whether the U.S. Governmental actions in the past two years will result in lasting improvement in financial and economic conditions affecting the U.S. banking
industry and the U.S. economy. It also cannot be predicted whether and to what extent the efforts of the U.S. Government to combat the recessionary conditions will continue. If, notwithstanding the
government's fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period,
this would present additional significant challenges for the U.S. banking and financial services industry and for our company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not
been eligible to participate in some federal programs such as the Department of Treasury's Capital Purchase Program and may not qualify for participation in future federal programs.

Recently,
certain sovereign borrowers have encountered difficulties in financing renewals of their indebtedness. If this trend continues or worsens, it could have adverse impacts on
costs in the global debt markets which could increase funding costs for banks generally. Further, European regulators have recently announced findings from capital stress tests on many European banks.
The confidence in the transparency and robustness in these stress tests remains unclear. These combined factors, if continuing to worsen, could further increase the uncertainty in global markets.

Difficult market conditions have adversely affected the U.S. banking industry

Dramatic declines in the housing market in the U.S. in general, and in California in particular, during 2008 and continuing in 2009 and 2010, with falling or
sluggish home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities as well as commercial and investment banks. These write-downs, initially of mortgage-

104

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Table of Contents

backed
securities but spreading to credit default swaps and other derivative and cash securities and, eventually, residential, commercial real estate loans and small business and other commercial
loans, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. These adverse economic conditions have
led to an increased level of commercial and consumer delinquencies, reduced consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting
economic pressure on consumers and lack of confidence in the financial markets adversely affected our business, financial condition and results of operations in 2009. In addition, turbulent political
and economic conditions in foreign countries have negatively impacted the U.S. financial markets and economy in general. A worsening of these conditions would likely exacerbate the adverse effects of
these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:



The effects of changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could
adversely affect us

We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit
Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will continue and likely intensify in the
future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change
their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to
compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or
fines. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our

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operations.
Compliance with laws and regulations, especially new laws and regulations, increases our expenses and diverts management attention from our business operations.

On
July 21, 2010, President Obama signed into law the Dodd-Frank Act. This new legislation will affect U.S. financial institutions, including Union Bank, in many ways,
some of which will likely increase the cost of doing business and present other challenges to the financial services industry. Many of the new law's provisions will be implemented by rules and
regulations of the federal banking agencies over the coming months, the scope and impact of which cannot yet be determined. The new law contains many provisions which may have particular relevance to
the business of Union Bank. While the effect of these provisions of the Dodd-Frank Act on Union Bank cannot be predicted at this time, they may result in increased FDIC deposit insurance
premiums, increased capital and liquidity requirements, increased regulatory and compliance costs and other operational costs and expenses, reduced fee-based revenues and restrictions on
some aspects of our operations, which may be material.

International
laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness
in these jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may
adversely affect our activities and investments and those of our subsidiaries in the future.

We
maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil
penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if compliance systems and procedures
were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.

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

Refer
to "Supervision and Regulation" in Item 1 of our 2009 Form 10-K for discussion of certain recently enacted and proposed laws and regulations that may
affect our business.

Our deposit customers may pursue alternatives to bank deposits or seek higher yielding deposits, which may increase our funding costs and adversely affect our
liquidity position

Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock
market, other non-depository investments or higher yielding deposits, as providing superior expected returns. Technology and other changes have made it more convenient for bank customers
to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers. Future increases in
short-term interest rates could increase such transfers of deposits to higher yielding deposits or other investments either with us or with external providers. In addition, our level of
deposits may be affected by lack

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of
consumer confidence in financial institutions, which have caused fewer depositors to be willing to maintain deposits that are not fully insured by the FDIC. Depositors may withdraw certain deposits
from Union Bank and place them in other institutions or invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences
may force us to pay higher interest rates or reduce fees to retain certain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.

In
addition, we have benefited from a "flight to quality" by consumers and businesses seeking the relative safety of bank deposits over the past two years. As interest rates rise from
historically low levels during the current period, our newly acquired deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past, and as a recovery in
the economy ensues, some existing or prospective deposit customers of banks generally, including Union Bank, may be inclined to pursue other investment alternatives.

Efforts
and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of
alternative investments or into higher yielding deposits, we can lose a relatively inexpensive source of funds, increasing our funding cost.

Substantial competition could adversely affect us

Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, Oregon and Washington, as
well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions, credit unions and major foreign-affiliated or foreign banks, as well as
many financial and nonfinancial firms that offer services similar to those offered by us, including many large securities firms. Some of our competitors are community or regional banks that have
strong local market positions. Other competitors include large financial institutions that have substantial capital, technology and marketing resources that are well in excess of ours. Competition in
our industry may further intensify as a result of the recent and increasing level of consolidation of financial services companies, including in our principal markets resulting from adverse economic
and market conditions. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. Competition in our
principal markets may further intensify as a result of the Dodd-Frank Act, which, among other things, permits de novo branching into California by national banks, state banks and foreign
banks from other states. We also experience competition, especially for deposits, from internet-based banking institutions, which have grown rapidly in recent years.



Adverse economic factors affecting certain industries we serve could adversely affect our business

We are subject to certain industry-specific economic factors. For example, a significant portion of our total loan portfolio is related to residential real
estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could
negatively impact our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in California could have an adverse effect on
our operations and the quality of our real estate loan portfolio. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways,
including by decreasing the value of the collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.

We
provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors and are impacting the performance of our
commercial real estate and commercial and industrial portfolios. The commercial real estate industry in the U.S., and in California in particular, has been increasingly adversely impacted by the
recessionary environment and lack of liquidity in

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the
financial markets. The home building and mortgage industry in California has been especially adversely impacted by the deterioration in residential real estate markets. Poor economic conditions
and financial access for commercial real estate developers and homebuilders could continue to adversely affect property values, resulting in higher nonperforming assets and charge offs in this sector.
Our commercial and industrial portfolio, and the communications and media industry, the retail industry, the energy industry and the technology industry in particular, are also being impacted by
recessionary market conditions. Continued volatility in fuel prices and energy costs could adversely affect businesses in several of these industries. Conditions and credit markets remain uncertain
and are expected to continue producing elevated charge-offs. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an
increase in nonperforming loans or charge offs and a slowing of growth or reduction in our loan portfolio.

Adverse California economic conditions could adversely affect our business

The government of the State of California currently faces economic and fiscal challenges, the long-term impact of which on the State's economy cannot
be predicted with any certainty. A substantial majority of our assets, deposits and fee income are generated in California. As a result, poor economic conditions in California may cause us to incur
losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including
significant deterioration in the residential real estate sector and the California state government's budgetary and fiscal difficulties. Governor Schwarzenegger declared a fiscal emergency on
January 8, 2010, calling the State legislature into special session to begin taking action on the State's $19.1 billion reported deficit. The State of California began its fiscal year on
July 1, 2010 with the State legislature having failed to pass a budget to address the deficit. If an agreement is not reached soon, the State's financial situation would likely worsen, the
State's credit ratings could further deteriorate and it may have to issue IOUs, halt infrastructure projects and reduce state worker pay, among other measures.

The
revised budget plan proposed by Governor Schwarzenegger for the 2010-2011 fiscal year includes $12.4 billion in spending cuts to services and program eliminations,
including to healthcare and social services programs. All three of the proposed budget plans before the State legislature assume that California will receive $3.4 billion in federal assistance.
However, there have been no assurances from the federal government that such funds will be furnished to California. If such funds are not awarded, California may be forced to further cut state
services or raise taxes or fees.

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

Risks associated with potential acquisitions or divestitures or restructurings may adversely affect us

We have in the past, and may in the future, seek to expand our business by acquiring other businesses which we believe will enhance our business, including our
FDIC-assisted acquisitions of certain assets and liabilities of Frontier Bank and Tamalpais Bank. We cannot predict the frequency, size or timing of our acquisitions, as this will depend
on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. There can be no assurance that our
acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the time required to complete the integration; the amount of
longer-term cost savings; continued growth; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory
approvals and unexpected contingent liabilities can arise from the businesses we acquire. Our purchase and assumption and loss share agreements with the FDIC relating to our Frontier Bank and
Tamalpais Bank transactions have specific and detailed compliance, servicing, notification and reporting requirements. Any failure to comply with the requirements of the loss share agreements, or to
properly service the loans and OREO covered by any loss share arrangement, may cause individual loans or

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loan
pools to lose their eligibility for loss share payments from the FDIC, potentially resulting in material losses that are currently not anticipated.

Integration
of an acquired business can be complex and costly. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could
be adversely affected. We may not be successful in completing any acquisition or investment as this will depend on the availability of prospective target opportunities at valuation levels we find
attractive and the competition for such opportunities from other parties.

In
addition, we continue to evaluate the performance of all of our businesses and may sell or restructure a business. Any divestitures or restructurings may result in significant
write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition and
may involve additional risks including difficulties in obtaining any required regulatory approvals, the diversion of management's attention from other business concerns, the disruption of our business
and the potential loss of key employees.

We
may not be successful in addressing these or any other significant risks encountered in connection with any acquisition, divestiture or restructuring we might make.

Our business could suffer if we fail to attract, retain and successfully integrate skilled personnel

Our success depends, in large part, on our ability to attract and retain key personnel, including executives. Any of our current employees, including our senior
management, may terminate their employment with us at any time. Competition for qualified personnel in our industry can be intense. We may not be successful in attracting and retaining sufficient
qualified personnel. We may also incur increased expenses and be required to divert the attention of other senior executives to recruit replacements for the loss of any key personnel.

In
the past few years, we have experienced significant turnover among members of management, primarily due to retirement. We must successfully integrate any new management personnel that
we bring into the organization in order to achieve our operating objectives as new management becomes familiar with our business.

In
2010, the federal banking agencies jointly adopted new guidance relating to incentive compensation policies at insured depository institutions. In general, the new guidance is
principles-based and requires insured depository institutions to seek to assure that their incentive compensation policies do not encourage undue risk-taking by management officials and
other employees. Over time, these guidelines could have the effect of making it more difficult for banks to attract and retain skilled personnel.

The challenging operating environment and current operational initiatives may strain our available resources

There are an increasing number of matters in addition to our core operations which require our attention and resources. These matters include implementation of
our integrated banking platform, adoption of the Basel II capital guidelines, various strategic initiatives, integration of the operations of our recent FDIC-assisted acquisitions, a
disruptive economic environment, a challenging regulatory environment, including the possible effects of the Dodd-Frank Act and regulations adopted thereunder, and integration of new
employees, including key members of management. Our ability to execute our core operations and to implement other important initiatives may be adversely affected if our resources are insufficient or
if we are unable to allocate available resources effectively.

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Item 6.   Exhibits

No.

Description2.1

Purchase and Assumption Agreement by and among the Federal Deposit Insurance Corporation as Receiver of Frontier Bank, the Federal Deposit Insurance Corporation and Union Bank, N.A., dated as of April 30,
2010(1)31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)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(2)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(2)


(1)Incorporated
by reference to exhibit 2.1 to the UnionBanCal Corporation Current Report on Form 8-K dated
April 30, 2010 (SEC File No. 001-15081).(2)Filed
herewith.


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SIGNATURES

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

UNIONBANCAL CORPORATION (Registrant)Date:    August 12, 2010

By:

/s/ MASASHI OKA Masashi Oka President and Chief Executive Officer
(Principal Executive Officer)Date:    August 12, 2010

By:

/s/ JOHN F. WOODS John F. Woods Vice Chairman and Chief Financial Officer
(Principal Financial Officer)Date:    August 12, 2010

By:

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


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EXHIBIT INDEX

No.

Description2.1

Purchase and Assumption Agreement by and among the Federal Deposit Insurance Corporation as Receiver of Frontier Bank, the Federal Deposit Insurance Corporation and Union Bank, N.A., dated as of April 30, 2010(1)31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)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(2)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(2)


(1)Incorporated
by reference to exhibit 2.1 to the UnionBanCal Corporation Current Report on Form 8-K dated
April 30, 2010 (SEC File No. 001-15081).(2)Filed
herewith.


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