**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

**For thequarterly period ended September 30, 2006**

**OR**

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

**For thetransition period from                 to                 **

Commission file number 1-15081

**UnionBanCal Corporation**

(Exact name of registrant asspecified in its charter)

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

 

| **400 California Street**                              |
|--------------------------------------------------------|
| **San  Francisco, California 94104-1302**              |
| (Address and zip code  of principal executive offices) |
| Registrant’s  telephone number: (415) 765-2969    |

 

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

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

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

Numberof shares of Common Stock outstanding at October 31, 2006: 140,358,662

 

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**UnionBanCal Corporationand Subsidiaries**

**TABLE OFCONTENTS**
|                                                                                                      | ** ** | **Page  Number** |
|------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART I**                                                                                      | ** ** | ** **       |
| **Financial  Information**                                                                           | ** ** | ** **       |
| Condensed Consolidated  Financial Highlights                                                         |       | 5                |
| ITEM  1. FINANCIAL STATEMENTS:                                                                       |       |             |
| Condensed Consolidated Statements of Income                                                          |       | 7                |
| Condensed Consolidated Balance Sheets                                                                |       | 8                |
| Condensed Consolidated Statements of Changes in  Stockholders’ Equity                           |       | 9                |
| Condensed  Consolidated Statements of Cash Flows                                                     |       | 10               |
| Notes to Condensed Consolidated Financial Statements                                                 |       | 11               |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS: |       |             |
| Introduction                                                                                         |       | 33               |
| Executive  Overview                                                                                  |       | 33               |
| Discontinued  Operations                                                                             |       | 34               |
| Critical  Accounting Policies                                                                        |       | 35               |
| Financial  Performance                                                                               |       | 37               |
| Net  Interest Income                                                                                 |       | 41               |
| Noninterest  Income                                                                                  |       | 44               |
| Noninterest  Expense                                                                                 |       | 44               |
| Income  Tax Expense                                                                                  |       | 45               |
| Loans                                                                                                |       | 45               |
| Cross-Border  Outstandings                                                                           |       | 47               |
| Provision  for Loan Losses                                                                           |       | 47               |
| Allowances  for Credit Losses                                                                        |       | 47               |
| Nonperforming  Assets                                                                                |       | 51               |
| Loans 90 Days or More Past Due and Still Accruing                                                    |       | 52               |
| Quantitative and Qualitative Disclosures About Market  Risk                                          |       | 52               |
| Liquidity Risk                                                                                       |       | 54               |
| Regulatory  Capital                                                                                  |       | 55               |
| Business  Segments                                                                                   |       | 56               |
| Regulatory  Matters                                                                                  |       | 64               |
| ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  |       | 65               |
| ITEM 4.  CONTROLS AND PROCEDURES                                                                     |       | 65               |
| **PART II**                                                                                     | ** ** | ** **       |
| **Other  Information**                                                                               | ** ** | ** **       |
| ITEM 1.   LEGAL  PROCEEDINGS                                                               |       | 66               |
| ITEM 1A. RISK  FACTORS                                                                               |       | 66               |
| ITEM  2.   UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS                    |       | 67               |
| ITEM 6.   EXHIBITS                                                                         |       | 67               |
| SIGNATURES                                                                                           |       | 68               |

 

2

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**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This report includes forward-looking statements, whichinclude forecasts of our financial results and condition, expectations for ouroperations and business, and our assumptions for those forecasts andexpectations. Do not rely unduly on forward-looking statements. Actual resultsmight differ significantly from our forecasts and expectations. For adiscussion of risk factors relating to the Company’s business, please refer toItem 1A “Risk Factors” of Part I of our Annual Report on Form 10-Kfor the year ended December 31, 2005 (2005 Form 10-K) which isincorporated by reference herein and Item 1A “Risk Factors” of Part II ofour Quarterly Report on Form 10-Q (this form 10-Q).

This document includes forward-looking information,which is subject to the “safe harbor” created by section 27A of the SecuritiesAct of 1933, as amended, and section 21E of the Securities Exchange Act of1934, as amended. We may make forward-looking statements in ourSEC filings, press releases, news articles, conference calls with analysts andstockholders and when we are speaking on behalf of UnionBanCal Corporation. Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts. Often, they include the words “believe,” “expect,”“target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,”or words of similar meaning, or future or conditional verbs such as “will,” “would,”“should,” “could,” “might,” or “may.” These forward-looking statements areintended to provide investors with additional information with which they mayassess our future potential. All of these forward-looking statements are basedon assumptions about an uncertain future and are based on information availableto us at the date of these statements. We do not undertake to updateforward-looking statements to reflect facts, circumstances, assumptions orevents that occur after the date the forward-looking statements are made.

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

·       Our business strategies and initiatives, the growth of our business andour competitive position

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

·       Pending legal and regulatory actions, and future legislative andregulatory developments, including the effects of changes to the FederalDeposit Insurance Corporation’s deposit insurance assessment

·       Increased regulatory controls, processes and supervisory actionsregarding Bank Secrecy Act and anti-money laundering matters, and their costsand impact on our business

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

·       Our ability to meet regulatory requirements

·       Credit quality and provision for credit losses, including the expectedneed to provide for credit losses due to anticipated loan growth, andindications that improvement in credit quality could be at its peak

·       The unallocated portion of our allowances for credit losses, includingthe conditions we consider

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

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

·       Loan growth rates, including residential mortgage loans

3

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·       Deposit pricing pressures, including trends in customers transferring fundsfrom noninterest bearing deposits to interest bearing deposits or otherinvestment alternatives

·       Our belief that our average noninterest bearing deposits continue toprovide us with a funding advantage compared to most of our peers

·       Deposit renewals

·       Our ability and intent to hold various assets

·       The formation of financial subsidiaries

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

·       The composition and market sensitivity of our securities portfolios,our hedging strategies and our management of the sensitivity of our balancesheet

·       Potential dividend restrictions

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

·       Off-balance sheet arrangements

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

·       Our insurance coverage

·       Estimated pension and health costs and contributions and the investmentobjectives and asset allocation strategy of our pension plan and health plan

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

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

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

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

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

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

4

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

| ** **                                                                      | ** ** | **As of and for the** | ** **  | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|------------------------|------------|
| ** **                                                                      | ** ** | **Three Months Ended**          | ** **  | ** **             | ** ** |
| ** **                                                                      | ** ** | **September 30,**                    | ** **  | **September 30,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2005**                                  | ** **  | **2006**               | ** ** | **Change** | ** ** |
| **Results of operations:**                                                      |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| Net interest income(1)                                                          |       |                                      | $           | 465,193                |       |   |   | $ | 460,596 |   |   |   | (0.99 | )% |   |
| Reversal of allowance  for loan losses                                          |       |                                      | (15,000     | )                      |       |   | — |   |   |   | (100.00 | ) |   |
| Noninterest income                                                              |       |                                      | 212,188     |                   |       |   | 217,255 |   |   |   | 2.39 |   |   |
| Noninterest expense                                                             |       |                                      | 396,696     |                   |       |   | 417,021 |   |   |   | 5.12 |   |   |
| Income before income  taxes(1)                                                  |       |                                      | 295,685     |                   |       |   | 260,830 |   |   |   | (11.79 | ) |   |
| Taxable-equivalent  adjustment                                                  |       |                                      | 1,051       |                   |       |   | 1,872 |   |   |   | 78.12 |   |   |
| Income tax expense                                                              |       |                                      | 93,388      |                   |       |   | 87,048 |   |   |   | (6.79 | ) |   |
| Income from continuing  operations                                              |       |                                      | 201,246     |                   |       |   | 171,910 |   |   |   | (14.58 | ) |   |
| Loss from discontinued  operations, net of income taxes                         |       |                                      | (15,961     | )                      |       |   | (1,204 | ) |   |   | 92.46 |   |   |
| Net income                                                                      |       |                                      | $           | 185,285                |       |   |   | $ | 170,706 |   |   |   | (7.87 | ) |   |
| **Per common share:**                                                           |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| Basic earnings:                                                                 |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| From continuing  operations                                                     |       |                                      | $           | 1.39                   |       |   |   | $ | 1.22 |   |   |   | (12.23 | )% |   |
| Net income                                                                      |       |                                      | 1.28        |                   |       |   | 1.21 |   |   |   | (5.47 | ) |   |
| Diluted earnings:                                                               |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| From continuing  operations                                                     |       |                                      | 1.36        |                   |       |   | 1.21 |   |   |   | (11.03 | ) |   |
| Net income                                                                      |       |                                      | 1.26        |                   |       |   | 1.20 |   |   |   | (4.76 | ) |   |
| Dividends(2)                                                                    |       |                                      | 0.41        |                   |       |   | 0.47 |   |   |   | 14.63 |   |   |
| Book value (end of  period)                                                     |       |                                      | 30.07       |                   |       |   | 33.17 |   |   |   | 10.31 |   |   |
| Common shares  outstanding (end of period)(3)                                   |       |                                      | 144,584,972 |                   |       |   | 140,326,737 |   |   |   | (2.95 | ) |   |
| Weighted average  common shares outstanding—basic(3)                       |       |                                      | 144,459,465 |                   |       |   | 140,941,823 |   |   |   | (2.44 | ) |   |
| Weighted average  common shares outstanding—diluted(3)                     |       |                                      | 147,613,377 |                   |       |   | 142,566,089 |   |   |   | (3.42 | ) |   |
| **Balance sheet (end of period):**                                              |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| Total assets(4)                                                                 |       |                                      | $           | 51,298,842             |       |   |   | $ | 52,013,256 |   |   |   | 1.39 | % |   |
| Total loans                                                                     |       |                                      | 32,004,747  |                   |       |   | 35,673,469 |   |   |   | 11.46 |   |   |
| Nonperforming assets                                                            |       |                                      | 37,507      |                   |       |   | 47,803 |   |   |   | 27.45 |   |   |
| Total deposits                                                                  |       |                                      | 41,648,355  |                   |       |   | 41,820,206 |   |   |   | 0.41 |   |   |
| Stockholders’ equity                                                       |       |                                      | 4,346,956   |                   |       |   | 4,654,789 |   |   |   | 7.08 |   |   |
| **Balance sheet (period average):**                                             |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| Total assets                                                                    |       |                                      | $           | 48,212,029             |       |   |   | $ | 50,777,419 |   |   |   | 5.32 | % |   |
| Total loans                                                                     |       |                                      | 32,177,816  |                   |       |   | 35,965,823 |   |   |   | 11.77 |   |   |
| Earning assets                                                                  |       |                                      | 43,371,177  |                   |       |   | 45,854,645 |   |   |   | 5.73 |   |   |
| Total deposits                                                                  |       |                                      | 40,293,528  |                   |       |   | 40,582,139 |   |   |   | 0.72 |   |   |
| Stockholders’ equity                                                       |       |                                      | 4,275,122   |                   |       |   | 4,578,635 |   |   |   | 7.10 |   |   |
| **Financial ratios**(5)**:**                                                    |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| Return on average assets(6):                                                    |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| From continuing  operations                                                     |       |                                      | 1.66        | %                      |       |   | 1.34 | % |   |   |   |   |   |
| Net income                                                                      |       |                                      | 1.52        |                   |       |   | 1.33 |   |   |   |   |   |   |
| Return on average stockholders’ equity(6):                                 |       |                                      |        |                   |       |   |   |   |   |   |   |   |   |
| From continuing  operations                                                     |       |                                      | 18.68       |                   |       |   | 14.90 |   |   |   |   |   |   |
| Net income                                                                      |       |                                      | 17.19       |                   |       |   | 14.79 |   |   |   |   |   |   |
| Efficiency ratio(7)                                                             |       |                                      | 59.07       |                   |       |   | 61.55 |   |   |   |   |   |   |
| Net interest margin(1)                                                          |       |                                      | 4.27        |                   |       |   | 4.00 |   |   |   |   |   |   |
| Dividend payout ratio                                                           |       |                                      | 29.50       |                   |       |   | 38.52 |   |   |   |   |   |   |
| Tangible equity ratio                                                           |       |                                      | 7.57        |                   |       |   | 8.09 |   |   |   |   |   |   |
| Tier 1 risk-based  capital ratio(4)                                             |       |                                      | 8.88        |                   |       |   | 8.68 |   |   |   |   |   |   |
| Total risk-based  capital ratio(4)                                              |       |                                      | 10.86       |                   |       |   | 11.74 |   |   |   |   |   |   |
| Leverage ratio(4)                                                               |       |                                      | 7.96        |                   |       |   | 8.47 |   |   |   |   |   |   |
| Allowances for credit  losses to total loans(8)                                 |       |                                      | 1.39        |                   |       |   | 1.14 |   |   |   |   |   |   |
| Allowances for credit  losses to nonaccrual loans(8)                            |       |                                      | 1,272.29    |                   |       |   | 850.01 |   |   |   |   |   |   |
| Net loans charged off  to average total loans(6)                                |       |                                      | 0.20        |                   |       |   | 0.02 |   |   |   |   |   |   |
| Nonperforming assets  to total loans and foreclosed assets                      |       |                                      | 0.12        |                   |       |   | 0.13 |   |   |   |   |   |   |
| Nonperforming assets to total  assets(4)                                        |       |                                      | 0.07        |                   |       |   | 0.09 |   |   |   |   |   |   |
|                                                                                 |            |                                           |             |                        |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)                   Taxable-equivalent basis.

(2)                   Dividends per share reflect dividends declared onUnionBanCal Corporation’s common stock outstanding as of the declaration date.

(3)                   Common shares outstanding reflect common shares issuedless treasury shares.

(4)                   End of period total assets and assets used to calculateall regulatory capital ratios include those of discontinued operations.

(5)                   Average balances used to calculate our financial ratiosare based on continuing operations data only, unless otherwise indicated.

(6)                   Annualized.

(7)                   The efficiency ratio is noninterest expense, excludingforeclosed asset expense (income) and the reversal of allowance for losses onoff-balance sheet commitments, as a percentage of net interest income(taxable-equivalent basis) and noninterest income and is calculated forcontinuing operations only.

(8)                   The allowances for credit losses ratios include theallowances for loan losses and losses on off-balance sheet commitments. Theseratios relate to continuing operations only.

nm = not meaningful

5

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**PART I.FINANCIAL INFORMATION**

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

| ** **                                                                      | ** ** | **As of and for the  Nine Months Ended** | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**                                                 | ** ** | **September 30,** | ** ** | **Percent** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2005**                                                               | ** ** | **2006**               | ** ** | **Change** | ** ** |
| **Results of operations:**                                                      |       |                                                                   |       |                   |       |   |   |   |   |
| Net interest income(1)                                                          |       | $                                                                      | 1,361,638  |                   | $          | 1,395,937 |   |   | 2.52 | % |   |
| Reversal of allowance for loan losses                                           |       | (40,683                                                                | )          | (8,000                 | )          |   | (80.34 | ) |   |
| Noninterest income                                                              |       | 621,367                                                                |       | 654,393                |       |   | 5.32 |   |   |
| Noninterest expense                                                             |       | 1,178,048                                                              |       | 1,244,595              |       |   | 5.65 |   |   |
| Income before income taxes(1)                                                   |       | 845,640                                                                |       | 813,735                |       |   | (3.77 | ) |   |
| Taxable-equivalent adjustment                                                   |       | 3,124                                                                  |       | 4,478                  |       |   | 43.34 |   |   |
| Income tax expense                                                              |       | 274,041                                                                |       | 273,255                |       |   | (0.29 | ) |   |
| Income from continuing operations                                               |       | 568,475                                                                |       | 536,002                |       |   | (5.71 | ) |   |
| Loss from discontinued operations, net of income  taxes                         |       | (14,031                                                                | )          | (9,440                 | )          |   | 32.72 |   |   |
| Net income                                                                      |       | $                                                                      | 554,444    |                   | $          | 526,562 |   |   | (5.03 | ) |   |
| **Per common share:**                                                           |       |                                                                   |       |                   |       |   |   |   |   |
| Basic  earnings:                                                                |       |                                                                   |       |                   |       |   |   |   |   |
| From continuing operations                                                      |       | $                                                                      | 3.91       |                   | $          | 3.76 |   |   | (3.84 | )% |   |
| Net income                                                                      |       | 3.82                                                                   |       | 3.70                   |       |   | (3.14 | ) |   |
| Diluted  earnings:                                                              |       |                                                                   |       |                   |       |   |   |   |   |
| From continuing operations                                                      |       | 3.84                                                                   |       | 3.71                   |       |   | (3.39 | ) |   |
| Net income                                                                      |       | 3.74                                                                   |       | 3.65                   |       |   | (2.41 | ) |   |
| Dividends(2)                                                                    |       | 1.18                                                                   |       | 1.35                   |       |   | 14.41 |   |   |
| Book value (end of period)                                                      |       | 30.07                                                                  |       | 33.17                  |       |   | 10.31 |   |   |
| Common shares outstanding (end of period)(3)                                    |       | 144,584,972                                                            |       | 140,326,737            |       |   | (2.95 | ) |   |
| Weighted average common shares outstanding—basic(3)                        |       | 145,325,640                                                            |       | 142,371,445            |       |   | (2.03 | ) |   |
| Weighted average common shares outstanding—diluted(3)                      |       | 148,062,139                                                            |       | 144,449,370            |       |   | (2.44 | ) |   |
| **Balance sheet (end of period):**                                              |       |                                                                   |       |                   |       |   |   |   |   |
| Total assets(4)                                                                 |       | $                                                                      | 51,298,842 |                   | $          | 52,013,256 |   |   | 1.39 | % |   |
| Total loans                                                                     |       | 32,004,747                                                             |       | 35,673,469             |       |   | 11.46 |   |   |
| Nonperforming assets                                                            |       | 37,507                                                                 |       | 47,803                 |       |   | 27.45 |   |   |
| Total deposits                                                                  |       | 41,648,355                                                             |       | 41,820,206             |       |   | 0.41 |   |   |
| Stockholders’ equity                                                       |       | 4,346,956                                                              |       | 4,654,789              |       |   | 7.08 |   |   |
| **Balance sheet (period average):**                                             |       |                                                                   |       |                   |       |   |   |   |   |
| Total assets                                                                    |       | $                                                                      | 47,342,684 |                   | $          | 49,426,668 |   |   | 4.40 | % |   |
| Total loans                                                                     |       | 30,843,202                                                             |       | 35,100,506             |       |   | 13.80 |   |   |
| Earning assets                                                                  |       | 42,575,954                                                             |       | 44,481,217             |       |   | 4.48 |   |   |
| Total deposits                                                                  |       | 39,304,760                                                             |       | 39,716,972             |       |   | 1.05 |   |   |
| Stockholders’ equity                                                       |       | 4,209,884                                                              |       | 4,552,410              |       |   | 8.14 |   |   |
| **Financial ratios**(5)**:**                                                    |       |                                                                   |       |                   |       |   |   |   |   |
| Return on  average assets(6):                                                   |       |                                                                   |       |                   |       |   |   |   |   |
| From continuing operations                                                      |       | 1.61                                                                   | %          | 1.45                   | %          |   |   |   |   |
| Net income                                                                      |       | 1.57                                                                   |       | 1.42                   |       |   |   |   |   |
| Return on  average stockholders’ equity(6):                                |       |                                                                   |       |                   |       |   |   |   |   |
| From continuing operations                                                      |       | 18.05                                                                  |       | 15.74                  |       |   |   |   |   |
| Net income                                                                      |       | 17.61                                                                  |       | 15.46                  |       |   |   |   |   |
| Efficiency ratio(7)                                                             |       | 59.74                                                                  |       | 61.79                  |       |   |   |   |   |
| Net interest margin(1)                                                          |       | 4.27                                                                   |       | 4.19                   |       |   |   |   |   |
| Dividend payout ratio                                                           |       | 30.18                                                                  |       | 35.90                  |       |   |   |   |   |
| Tangible equity ratio                                                           |       | 7.57                                                                   |       | 8.09                   |       |   |   |   |   |
| Tier 1 risk-based capital ratio(4)                                              |       | 8.88                                                                   |       | 8.68                   |       |   |   |   |   |
| Total risk-based capital ratio(4)                                               |       | 10.86                                                                  |       | 11.74                  |       |   |   |   |   |
| Leverage ratio(4)                                                               |       | 7.96                                                                   |       | 8.47                   |       |   |   |   |   |
| Allowances for credit losses to total loans(8)                                  |       | 1.39                                                                   |       | 1.14                   |       |   |   |   |   |
| Allowances for credit losses to nonaccrual loans(8)                             |       | 1,272.29                                                               |       | 850.01                 |       |   |   |   |   |
| Net loans charged off (recovered) to average total  loans(6)                    |       | (0.02                                                                  | )          | 0.06                   |       |   |   |   |   |
| Nonperforming assets to total loans and foreclosed assets                       |       | 0.12                                                                   |       | 0.13                   |       |   |   |   |   |
| Nonperforming assets  to total assets(4)                                        |       | 0.07                                                                   |       | 0.09                   |       |   |   |   |   |

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(1)                   Taxable-equivalent basis.

(2)                   Dividends per share reflectdividends declared on UnionBanCal Corporation’s common stock outstanding as ofthe declaration date.

(3)                   Common shares outstandingreflect common shares issued less treasury shares.

(4)                   End of period total assets andassets used to calculate all regulatory capital ratios include those ofdiscontinued operations.

(5)                   Average balances used tocalculate our financial ratios are based on continuing operations data only,unless otherwise indicated.

(6)                   Annualized.

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

(8)                   The allowances for creditlosses ratios include the allowances for loan losses and losses on off-balancesheet commitments. These ratios relate to continuing operations only.

nm = not meaningful

6

----

 

 

 

 

**Item 1.**              FinancialStatements

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

| ** **                                                                      | ** ** | **For the Three Months**                  | ** ** | **For the Nine Months**                   | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended September 30,**                        | ** ** | **Ended September 30,**                        | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| **Interest Income**                                                             | ** ** |                                                     | ** ** |                                                     |       |   | ** ** | ** ** |   | ** ** |   | ** ** | ** ** |
| Loans                                                                           |       |                                                     | $          | 461,381                                                  |       |   |   | $ | 574,543 |   |   | $ | 1,304,324 |   | $ | 1,634,122 |   |
| Securities                                                                      |       |                                                     | 97,569     |                                                     |       |   | 108,166 |   |   | 300,868 |   | 308,574 |   |
| Interest bearing deposits in banks                                              |       |                                                     | 303        |                                                     |       |   | 411 |   |   | 1,432 |   | 1,570 |   |
| Federal funds sold and securities purchased under  resale agreements            |       |                                                     | 6,777      |                                                     |       |   | 12,024 |   |   | 14,406 |   | 20,594 |   |
| Trading account assets                                                          |       |                                                     | 1,062      |                                                     |       |   | 1,659 |   |   | 2,902 |   | 4,645 |   |
| Total interest income                                                           |       |                                                     | 567,092    |                                                     |       |   | 696,803 |   |   | 1,623,932 |   | 1,969,505 |   |
| **Interest Expense**                                                            | ** ** |                                                     | ** ** |                                                     |       |   | ** ** | ** ** |   | ** ** |   | ** ** | ** ** |
| Deposits                                                                        |       |                                                     | 82,796     |                                                     |       |   | 182,298 |   |   | 206,048 |   | 441,284 |   |
| Federal funds purchased and securities sold under  repurchase agreements        |       |                                                     | 294        |                                                     |       |   | 4,891 |   |   | 9,330 |   | 22,148 |   |
| Commercial paper                                                                |       |                                                     | 9,394      |                                                     |       |   | 20,835 |   |   | 21,761 |   | 52,420 |   |
| Medium and long-term debt                                                       |       |                                                     | 8,520      |                                                     |       |   | 21,974 |   |   | 22,511 |   | 49,246 |   |
| Trust notes                                                                     |       |                                                     | 239        |                                                     |       |   | 239 |   |   | 715 |   | 715 |   |
| Other borrowed funds                                                            |       |                                                     | 1,707      |                                                     |       |   | 7,842 |   |   | 5,053 |   | 12,233 |   |
| Total interest expense                                                          |       |                                                     | 102,950    |                                                     |       |   | 238,079 |   |   | 265,418 |   | 578,046 |   |
| **Net  Interest Income**                                                        |       |                                                     | 464,142    |                                                     |       |   | 458,724 |   |   | 1,358,514 |   | 1,391,459 |   |
| Reversal of allowance for loan losses                                           |       |                                                     | (15,000    | )                                                        |       |   | — |   |   | (40,683 | ) | (8,000 | ) |
| Net interest income after reversal of allowance for  loan losses                |       |                                                     | 479,142    |                                                     |       |   | 458,724 |   |   | 1,399,197 |   | 1,399,459 |   |
| **Noninterest Income**                                                          | ** ** |                                                     | ** ** |                                                     |       |   | ** ** | ** ** |   | ** ** |   | ** ** | ** ** |
| Service charges on deposit accounts                                             |       |                                                     | 84,822     |                                                     |       |   | 79,083 |   |   | 243,835 |   | 242,555 |   |
| Trust and investment management fees                                            |       |                                                     | 43,500     |                                                     |       |   | 47,555 |   |   | 127,053 |   | 146,050 |   |
| Insurance commissions                                                           |       |                                                     | 17,819     |                                                     |       |   | 17,301 |   |   | 59,176 |   | 54,571 |   |
| Merchant banking fees                                                           |       |                                                     | 11,257     |                                                     |       |   | 11,655 |   |   | 35,637 |   | 28,280 |   |
| Brokerage commissions and fees                                                  |       |                                                     | 5,290      |                                                     |       |   | 8,531 |   |   | 22,867 |   | 26,656 |   |
| Foreign exchange gains, net                                                     |       |                                                     | 8,849      |                                                     |       |   | 8,179 |   |   | 25,570 |   | 24,304 |   |
| Card processing fees, net                                                       |       |                                                     | 6,597      |                                                     |       |   | 7,241 |   |   | 18,668 |   | 21,144 |   |
| Securities gains (losses), net                                                  |       |                                                     | (320       | )                                                        |       |   | 43 |   |   | (13,289 | ) | 1,822 |   |
| Other                                                                           |       |                                                     | 34,374     |                                                     |       |   | 37,667 |   |   | 101,850 |   | 109,011 |   |
| Total noninterest income                                                        |       |                                                     | 212,188    |                                                     |       |   | 217,255 |   |   | 621,367 |   | 654,393 |   |
| **Noninterest Expense**                                                         | ** ** |                                                     | ** ** |                                                     |       |   | ** ** | ** ** |   | ** ** |   | ** ** | ** ** |
| Salaries and employee benefits                                                  |       |                                                     | 236,124    |                                                     |       |   | 244,613 |   |   | 701,858 |   | 745,745 |   |
| Net occupancy                                                                   |       |                                                     | 34,336     |                                                     |       |   | 35,753 |   |   | 100,251 |   | 103,109 |   |
| Outside services                                                                |       |                                                     | 28,533     |                                                     |       |   | 31,890 |   |   | 76,248 |   | 91,203 |   |
| Equipment                                                                       |       |                                                     | 15,828     |                                                     |       |   | 17,387 |   |   | 50,164 |   | 52,155 |   |
| Software                                                                        |       |                                                     | 14,378     |                                                     |       |   | 15,334 |   |   | 43,084 |   | 47,001 |   |
| Professional services                                                           |       |                                                     | 11,240     |                                                     |       |   | 12,169 |   |   | 36,131 |   | 43,754 |   |
| Communications                                                                  |       |                                                     | 10,808     |                                                     |       |   | 9,942 |   |   | 30,950 |   | 30,555 |   |
| Foreclosed asset income                                                         |       |                                                     | (3,435     | )                                                        |       |   | (183 | ) |   | (5,606 | ) | (15,332 | ) |
| Reversal of allowance for losses on off-balance sheet  commitments              |       |                                                     | —     |                                                     |       |   | — |   |   | (1,000 | ) | (7,000 | ) |
| Other                                                                           |       |                                                     | 48,884     |                                                     |       |   | 50,116 |   |   | 145,968 |   | 153,405 |   |
| Total noninterest expense                                                       |       |                                                     | 396,696    |                                                     |       |   | 417,021 |   |   | 1,178,048 |   | 1,244,595 |   |
| Income from continuing operations before income taxes                           |       |                                                     | 294,634    |                                                     |       |   | 258,958 |   |   | 842,516 |   | 809,257 |   |
| Income tax expense                                                              |       |                                                     | 93,388     |                                                     |       |   | 87,048 |   |   | 274,041 |   | 273,255 |   |
| **Income  from Continuing Operations**                                          |       |                                                     | 201,246    |                                                     |       |   | 171,910 |   |   | 568,475 |   | 536,002 |   |
| Loss from discontinued operations before income taxes                           |       |                                                     | (25,612    | )                                                        |       |   | (2,061 | ) |   | (22,385 | ) | (15,233 | ) |
| Income tax benefit                                                              |       |                                                     | (9,651     | )                                                        |       |   | (857 | ) |   | (8,354 | ) | (5,793 | ) |
| **Loss  from Discontinued Operations**                                          |       |                                                     | (15,961    | )                                                        |       |   | (1,204 | ) |   | (14,031 | ) | (9,440 | ) |
| **Net  Income**                                                                 |       |                                                     | $          | 185,285                                                  |       |   |   | $ | 170,706 |   |   | $ | 554,444 |   | $ | 526,562 |   |
| **Income  from continuing operations per common share—basic**              |       |                                                     | $          | 1.39                                                     |       |   |   | $ | 1.22 |   |   | $ | 3.91 |   | $ | 3.76 |   |
| **Net  Income per common share—basic**                                     |       |                                                     | $          | 1.28                                                     |       |   |   | $ | 1.21 |   |   | $ | 3.82 |   | $ | 3.70 |   |
| **Income  from continuing operations per common share—diluted**            |       |                                                     | $          | 1.36                                                     |       |   |   | $ | 1.21 |   |   | $ | 3.84 |   | $ | 3.71 |   |
| **Net  Income per common share—diluted**                                   |       |                                                     | $          | 1.26                                                     |       |   |   | $ | 1.20 |   |   | $ | 3.74 |   | $ | 3.65 |   |
| **Weighted  average common shares outstanding—basic**                      |       |                                                     | 144,459    |                                                     |       |   | 140,942 |   |   | 145,326 |   | 142,371 |   |
| **Weighted  average common shares outstanding—diluted**                    |       |                                                     | 147,613    |                                                     |       |   | 142,566 |   |   | 148,062 |   | 144,449 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

7

----

 

 

 

 

**UnionBanCal Corporation and SubsidiariesCondensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                                     | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** | **(Unaudited)**        | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                                           | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| **Assets**                                                                                                                                                                                     | ** ** |                   | ** ** | ** **            |       |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and due from banks                                                                                                                                                                        |       |                   | $          | 2,163,149             |       |                   |       | $ | 2,402,212 |   |   |   | $ | 2,168,245 |   |   |
| Interest bearing deposits in banks                                                                                                                                                             |       |                   | 471,340    |                  |       |                   | 771,164    |   |   |   | 26,700 |   |   |
| Federal funds sold and securities purchased under  resale agreements                                                                                                                           |       |                   | 1,454,193  |                  |       |                   | 796,500    |   |   |   | 1,827,000 |   |   |
| Total cash and cash equivalents                                                                                                                                                                |       |                   | 4,088,682  |                  |       |                   | 3,969,876  |   |   |   | 4,021,945 |   |   |
| Trading account assets                                                                                                                                                                         |       |                   | 371,551    |                  |       |                   | 312,655    |   |   |   | 360,267 |   |   |
| Securities available  for sale:                                                                                                                                                                |       |                   |       |                  |       |                   |       |   |   |   |   |   |   |
| Securities pledged as collateral                                                                                                                                                               |       |                   | 158,878    |                  |       |                   | 96,994     |   |   |   | 58,877 |   |   |
| Held in portfolio                                                                                                                                                                              |       |                   | 9,647,093  |                  |       |                   | 8,072,286  |   |   |   | 8,582,667 |   |   |
| Loans (net of allowance for loan losses:  September 30, 2005, $363,671; December 31, 2005, $351,532;  September 30, 2006, $326,955)                                             |       |                   | 31,641,076 |                  |       |                   | 32,744,063 |   |   |   | 35,346,514 |   |   |
| Due from customers on acceptances                                                                                                                                                              |       |                   | 47,167     |                  |       |                   | 19,252     |   |   |   | 25,851 |   |   |
| Premises and equipment, net                                                                                                                                                                    |       |                   | 509,922    |                  |       |                   | 536,074    |   |   |   | 499,702 |   |   |
| Intangible assets                                                                                                                                                                              |       |                   | 46,781     |                  |       |                   | 42,616     |   |   |   | 32,331 |   |   |
| Goodwill                                                                                                                                                                                       |       |                   | 452,617    |                  |       |                   | 454,015    |   |   |   | 453,489 |   |   |
| Other assets                                                                                                                                                                                   |       |                   | 2,318,507  |                  |       |                   | 2,113,577  |   |   |   | 2,594,084 |   |   |
| Assets of discontinued operations to be disposed or  sold                                                                                                                                      |       |                   | 2,016,568  |                  |       |                   | 1,054,594  |   |   |   | 37,529 |   |   |
| Total assets                                                                                                                                                                                   |       |                   | $          | 51,298,842            |       |                   |       | $ | 49,416,002 |   |   |   | $ | 52,013,256 |   |   |
| **Liabilities**                                                                                                                                                                                | ** ** |                   | ** ** | ** **            |       |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Noninterest bearing                                                                                                                                                                            |       |                   | $          | 20,541,706            |       |                   |       | $ | 19,489,377 |   |   |   | $ | 17,446,321 |   |   |
| Interest bearing                                                                                                                                                                               |       |                   | 21,106,649 |                  |       |                   | 20,592,862 |   |   |   | 24,373,885 |   |   |
| Total deposits                                                                                                                                                                                 |       |                   | 41,648,355 |                  |       |                   | 40,082,239 |   |   |   | 41,820,206 |   |   |
| Federal funds purchased and securities sold under  repurchase agreements                                                                                                                       |       |                   | 357,725    |                  |       |                   | 651,529    |   |   |   | 265,596 |   |   |
| Commercial paper                                                                                                                                                                               |       |                   | 859,515    |                  |       |                   | 680,027    |   |   |   | 1,859,747 |   |   |
| Other borrowed funds                                                                                                                                                                           |       |                   | 114,324    |                  |       |                   | 134,485    |   |   |   | 308,080 |   |   |
| Acceptances outstanding                                                                                                                                                                        |       |                   | 47,167     |                  |       |                   | 19,252     |   |   |   | 25,851 |   |   |
| Other liabilities                                                                                                                                                                              |       |                   | 1,616,174  |                  |       |                   | 1,466,478  |   |   |   | 1,542,719 |   |   |
| Medium and long-term debt                                                                                                                                                                      |       |                   | 806,353    |                  |       |                   | 801,095    |   |   |   | 1,517,977 |   |   |
| Junior subordinated debt payable to subsidiary  grantor trust                                                                                                                                  |       |                   | 15,451     |                  |       |                   | 15,338     |   |   |   | 14,998 |   |   |
| Liabilities of discontinued operations to be  extinguished or assumed                                                                                                                          |       |                   | 1,486,822  |                  |       |                   | 1,005,859  |   |   |   | 3,293 |   |   |
| Total liabilities                                                                                                                                                                              |       |                   | 46,951,886 |                  |       |                   | 44,856,302 |   |   |   | 47,358,467 |   |   |
| Commitments, contingencies and guarantees—See Note 9                                                                                                                                      |       |                   |       |                  |       |                   |       |   |   |   |   |   |   |
| **Stockholders’ Equity**                                                                                                                                                                  | ** ** |                   | ** ** | ** **            |       |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Preferred stock:                                                                                                                                                                               |       |                   |       |                  |       |                   |       |   |   |   |   |   |   |
| Authorized 5,000,000 shares; no shares issued or  outstanding as of September 30, 2005, December 31, 2005 and  September 30,  2006                                              |       |                   | —     |                  |       |                   | —     |   |   |   | — |   |   |
| Common stock, par  value $1 per share:                                                                                                                                                         |       |                   |       |                  |       |                   |       |   |   |   |   |   |   |
| Authorized 300,000,000 shares; issued 153,960,915  shares as of September 30, 2005, 154,469,215 shares as of  December 31, 2005 and 155,854,756 shares as of September 30, 2006 |       |                   | 153,961    |                  |       |                   | 154,469    |   |   |   | 155,855 |   |   |
| Additional paid-in capital                                                                                                                                                                     |       |                   | 967,242    |                  |       |                   | 994,956    |   |   |   | 1,064,993 |   |   |
| Treasury stock—9,375,943 shares as of  September 30, 2005, 10,262,143 shares as of December 31, 2005  and 15,528,019 shares as of September 30, 2006             |       |                   | (552,786   | )                     |       |                   | (612,732   | ) |   |   | (956,545 | ) |   |
| Retained earnings                                                                                                                                                                              |       |                   | 3,901,625  |                  |       |                   | 4,141,400  |   |   |   | 4,494,698 |   |   |
| Accumulated other comprehensive loss                                                                                                                                                           |       |                   | (123,086   | )                     |       |                   | (118,393   | ) |   |   | (104,212 | ) |   |
| Total stockholders’ equity                                                                                                                                                                |       |                   | 4,346,956  |                  |       |                   | 4,559,700  |   |   |   | 4,654,789 |   |   |
| Total liabilities and  stockholders’ equity                                                                                                                                               |       |                   | $          | 51,298,842            |       |                   |       | $ | 49,416,002 |   |   |   | $ | 52,013,256 |   |   |

 

See accompanying notes tocondensed consolidated financial statements.

8

----

**UnionBanCalCorporation and SubsidiariesCondensed Consolidated Statements of Changes in Stockholders’ Equity(Unaudited)**

| ** **                                                               | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | **Total**         | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                               | ** ** | ** **         | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | **other**              | ** ** | **stock-**        | ** ** |
| ** **                                                               | ** ** | **Number**         | ** ** | **Common** | ** ** | **paid-in**    | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **comprehensive**      | ** ** | **holders’** | ** ** |
| **(In thousands, except shares)**                         | ** ** | **of shares** | ** ** | **stock**  | ** ** | **capital**    | ** ** | **stock**    | ** ** | **earnings** | ** ** | **income (loss)** | ** ** | **equity**        | ** ** |
| **BALANCE  DECEMBER 31, 2004**                                           |       | 152,191,818        |       | $          | 152,192    |           | $          | 881,928      |       | $            | (223,361   | )                      | $          | 3,526,312         |       |   | $ | (44,827 | ) |   | $ | 4,292,244 |   |
| Comprehensive income                                                     |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net income—For the nine months ended  September 30, 2005       |       |               |       |       |       |           |       |         |       | 554,444      |       |                   |       |              |       | 554,444 |   |
| Other  comprehensive income, net of tax:                                 |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net change in unrealized losses on cash flow  hedges                |       |               |       |       |       |           |       |         |       |         |       |                   | (29,476    | )                 |       | (29,476 | ) |
| Net change in unrealized losses on securities  available for sale        |       |               |       |       |       |           |       |         |       |         |       |                   | (48,846    | )                 |       | (48,846 | ) |
| Foreign currency translation  adjustment                                 |       |               |       |       |       |           |       |         |       |         |       |                   | 79         |              |       | 79 |   |
| Minimum pension liability adjustment                                     |       |               |       |       |       |           |       |         |       |         |       |                   | (16        | )                 |       | (16 | ) |
| Total comprehensive  income                                              |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       | 476,185 |   |
| Deferred compensation—restricted  stock awards                      |       | 215,363            |       | 215        |       | 12,956         |       |         |       | (8,461       | )          |                   |       |              |       | 4,710 |   |
| Stock options  exercised                                                 |       | 1,553,734          |       | 1,554      |       | 58,004         |       |         |       |         |       |                   |       |              |       | 59,558 |   |
| Excess tax benefit—stock  options                                   |       |               |       |       |       | 14,354         |       |         |       |         |       |                   |       |              |       | 14,354 |   |
| Common stock repurchased(1)                                              |       |               |       |       |       |           |       | (329,425     | )          |         |       |                   |       |              |       | (329,425 | ) |
| Dividends declared on  common stock, $1.18 per share(2)             |       |               |       |       |       |           |       |         |       | (170,670     | )          |                   |       |              |       | (170,670 | ) |
| Net change                                                               |       |               |       | 1,769      |       | 85,314         |       | (329,425     | )          | 375,313      |       |                   | (78,259    | )                 |       | 54,712 |   |
| **BALANCE  SEPTEMBER 30, 2005**                                          |       | 153,960,915        |       | $          | 153,961    |           | $          | 967,242      |       | $            | (552,786   | )                      | $          | 3,901,625         |       |   | $ | (123,086 | ) |   | $ | 4,346,956 |   |
| **BALANCE  DECEMBER 31, 2005**                                           |       | 154,469,215        |       | $          | 154,469    |           | $          | 994,956      |       | $            | (612,732   | )                      | $          | 4,141,400         |       |   | $ | (118,393 | ) |   | $ | 4,559,700 |   |
| Comprehensive income                                                     |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net income—For the nine months ended  September 30, 2006       |       |               |       |       |       |           |       |         |       | 526,562      |       |                   |       |              |       | 526,562 |   |
| Other  comprehensive income, net of tax:                                 |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       |   |   |
| Net change in unrealized losses on cash flow  hedges                |       |               |       |       |       |           |       |         |       |         |       |                   | 5,295      |              |       | 5,295 |   |
| Net change in unrealized losses on securities  available for sale        |       |               |       |       |       |           |       |         |       |         |       |                   | 8,824      |              |       | 8,824 |   |
| Foreign currency translation  adjustment                                 |       |               |       |       |       |           |       |         |       |         |       |                   | 62         |              |       | 62 |   |
| Total comprehensive  income                                              |       |               |       |       |       |           |       |         |       |         |       |                   |       |              |       | 540,743 |   |
| Reclassifications due  to impact of SFAS No. 123R implementation(3) |       |               |       |       |       | (19,035        | )          |         |       | 19,035       |       |                   |       |              |       | — |   |
| Stock options  exercised                                                 |       | 1,192,874          |       | 1,193      |       | 46,783         |       |         |       |         |       |                   |       |              |       | 47,976 |   |
| Restricted stock  granted, net of forfeitures                            |       | 192,667            |       | 193        |       | (193           | )          |         |       |         |       |                   |       |              |       | — |   |
| Excess tax benefit—stock  options and restricted stock              |       |               |       |       |       | 11,823         |       |         |       |         |       |                   |       |              |       | 11,823 |   |
| Compensation expense—stock  options and restricted stock units      |       |               |       |       |       | 17,509         |       |         |       |         |       |                   |       |              |       | 17,509 |   |
| Compensation expense—restricted  stock                              |       |               |       |       |       | 10,728         |       |         |       |         |       |                   |       |              |       | 10,728 |   |
| Compensation expense—performance  share units                  |       |               |       |       |       | 2,422          |       |         |       |         |       |                   |       |              |       | 2,422 |   |
| Common stock  repurchased(1)                                             |       |               |       |       |       |           |       | (343,813     | )          |         |       |                   |       |              |       | (343,813 | ) |
| Dividends declared on  common stock, $1.35 per share(2)             |       |               |       |       |       |           |       |         |       | (192,299     | )          |                   |       |              |       | (192,299 | ) |
| Net change                                                               |       |               |       | 1,386      |       | 70,037         |       | (343,813     | )          | 353,298      |       |                   | 14,181     |              |       | 95,089 |   |
| **BALANCE  SEPTEMBER 30, 2006**                                          |       | 155,854,756        |       | $          | 155,855    |           | $          | 1,064,993    |       | $            | (956,545   | )                      | $          | 4,494,698         |       |   | $ | (104,212 | ) |   | $ | 4,654,789 |   |

----

(1)                   Common stock repurchased includescommission costs.

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

(3)                   Reclassification reflects a reduction inadditional paid-in capital and a corresponding credit to retained earnings forunrecognized compensation expense on nonvested restricted stock as of January 1,2006. Starting in 2006, compensation expense relating to restricted stock is recordedin additional paid-in capital as recognized.

See accompanying notes to condensed consolidatedfinancial statements.

9

----

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

| ** **                                                                               | ** ** | **For the Nine Months** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                               | ** ** | **Ended September 30,**      | ** ** |
| **(Dollars in thousands)**                                                     | ** ** | **2005**                               | ** ** | **2006** | ** ** |
| **Cash Flows from Operating  Activities:**                                               |       |                                   |       |   |   |
| Net income                                                                               |       | $                                      | 554,444    |   | $ | 526,562 |   |
| Loss from discontinued operations, net of income  taxes                                  |       | (14,031                                | )          | (9,440 | ) |
| Income from continuing operations, net of income  taxes                                  |       | 568,475                                |       | 536,002 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:       |       |                                   |       |   |   |
| Reversal of allowance for loan losses                                                    |       | (40,683                                | )          | (8,000 | ) |
| Reversal of allowance for losses on off-balance sheet  commitments                       |       | (1,000                                 | )          | (7,000 | ) |
| Depreciation, amortization and accretion                                                 |       | 97,815                                 |       | 96,151 |   |
| Stock-based compensation—stock options and other  share based compensation          |       | 4,710                                  |       | 30,659 |   |
| Provision for deferred income taxes                                                      |       | 71,328                                 |       | 30,990 |   |
| (Gains) losses on sales of securities available for  sale, net                           |       | 13,289                                 |       | (1,822 | ) |
| Net increase in accrued expenses                                                         |       | 4,709                                  |       | 7,296 |   |
| Net increase in trading account assets                                                   |       | (135,711                               | )          | (47,612 | ) |
| Net increase in prepaid expenses                                                         |       | (191,791                               | )          | (77,643 | ) |
| Net (increase) decrease in fees and other receivables                                    |       | 29,015                                 |       | (42,024 | ) |
| Net increase in other liabilities                                                        |       | 423,451                                |       | 49,514 |   |
| Net increase in other assets                                                             |       | (436,132                               | )          | (344,765 | ) |
| Loans originated for resale                                                              |       | (90,238                                | )          | (405,543 | ) |
| Net proceeds from loans originated for resale                                            |       | 200,637                                |       | 265,702 |   |
| Excess tax benefit—stock options and restricted stock                               |       | (14,354                                | )          | (11,823 | ) |
| Other, net                                                                               |       | (2,130                                 | )          | (1,460 | ) |
| Discontinued operations, net                                                             |       | 960                                    |       | 188,372 |   |
| Total adjustments                                                                        |       | (66,125                                | )          | (279,008 | ) |
| Net cash provided by operating activities                                                |       | 502,350                                |       | 256,994 |   |
| **Cash Flows from Investing  Activities:**                                               |       |                                   |       |   |   |
| Proceeds from sales of securities available for sale                                     |       | 506,070                                |       | 79,454 |   |
| Proceeds from matured and called securities available  for sale                          |       | 1,753,484                              |       | 1,171,339 |   |
| Purchases of securities available for sale                                               |       | (1,036,810                             | )          | (1,713,659 | ) |
| Net increase in loans                                                                    |       | (2,984,426                             | )          | (2,447,096 | ) |
| Other, net                                                                               |       | (47,776                                | )          | (46,542 | ) |
| Discontinued operations, net                                                             |       | 9,794                                  |       | 725,358 |   |
| Net cash used in investing activities                                                    |       | (1,799,664                             | )          | (2,231,146 | ) |
| **Cash Flows from Financing  Activities:**                                               |       |                                   |       |   |   |
| Net increase in deposits                                                                 |       | 2,928,849                              |       | 1,737,967 |   |
| Net decrease in federal funds purchased and securities  sold under repurchase agreements |       | (229,524                               | )          | (385,933 | ) |
| Net increase (decrease) in commercial paper and other  borrowed funds                    |       | (23,597                                | )          | 1,353,315 |   |
| Proceeds from issuance of long-term debt                                                 |       | —                                 |       | 693,742 |   |
| Common stock repurchased                                                                 |       | (329,425                               | )          | (343,813 | ) |
| Payments of cash dividends                                                               |       | (164,946                               | )          | (185,206 | ) |
| Stock options exercised                                                                  |       | 73,912                                 |       | 59,799 |   |
| Other, net                                                                               |       | 79                                     |       | 3,562 |   |
| Discontinued operations, net                                                             |       | (69,219                                | )          | (908,671 | ) |
| Net cash provided by financing activities                                                |       | 2,186,129                              |       | 2,024,762 |   |
| Net increase in cash and cash equivalents                                                |       | 888,815                                |       | 50,610 |   |
| Cash and cash equivalents at beginning of period                                         |       | 3,199,854                              |       | 3,969,876 |   |
| Effect of exchange rate changes on cash and cash  equivalents                            |       | 13                                     |       | 1,459 |   |
| Cash and cash equivalents at end of period                                               |       | $                                      | 4,088,682  |   | $ | 4,021,945 |   |
| **Cash Paid During the Period  For:**                                                    |       |                                   |       |   |   |
| Interest                                                                                 |       | $                                      | 226,584    |   | $ | 507,257 |   |
| Income taxes                                                                             |       | 158,089                                |       | 276,269 |   |
| **Supplemental Schedule of  Noncash Investing and Financing Activities:**                |       |                                   |       |   |   |
| Loans transferred to  foreclosed assets (OREO) and/or distressed loans held for sale     |       | $                                      | —     |   | $ | 1,324 |   |

 

See accompanying notes to condensed consolidated financial statements.

10

----

**UnionBanCal Corporation and Subsidiaries**

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

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

The unaudited condensed consolidated financialstatements of UnionBanCal Corporation and subsidiaries (the Company) have beenprepared in accordance with accounting principles generally accepted in the UnitedStates of America (US GAAP) for interim financial reporting and theinstructions to Form 10-Q and Rule 10-01 of RegulationS-X of the Rules and Regulations of the Securities and Exchange Commission(SEC). However, they do not include all of the disclosures necessary for annualfinancial statements in conformity with US GAAP. The results of operations forthe period ended September 30, 2006 are not necessarily indicative of theoperating results anticipated for the full year. Accordingly, these unauditedcondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements included in the Company’s 2005 Form 10-K.The preparation of financial statements in conformity with US GAAP alsorequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expense during the reporting period. Actual results could differfrom those estimates.

UnionBanCal Corporation is a commercial bank holdingcompany and has, as its major subsidiary, a banking subsidiary, Union Bank ofCalifornia, N.A. (the Bank). The Company provides a wide range of financialservices to consumers, small businesses, middle-market companies and majorcorporations, primarily in California, Oregon, and Washington, but alsonationally. The Bank also provides trade finance and other internationalfinancial services (but not international correspondent banking) to customers.

Under previously announced stock repurchase programs,the Company was authorized to repurchase $259 million of the Company’s commonstock as of September 30, 2006. The Company repurchased $143 million ofcommon stock in the third quarter of 2006, compared to none in the thirdquarter of 2005. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which is a wholly-owned subsidiary ofMitsubishi UFJ Financial Group, Inc., owned approximately 64percent of the Company’s outstanding common stock at September 30, 2006.

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

*Stock-BasedCompensation*

On January 1, 2006, the Company adopted Statementof Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment,” arevision of SFAS No. 123, “Accounting for Stock-Based Compensation,” andelected to use the modified prospective application method to transition to thenew accounting standard. SFAS No. 123R requires that compensation costsrelated to share-based payment transactions be recognized in the financialstatements. Measurement of the cost of employee service is based on thegrant-date fair value of the equity or liability instrument issued. SFAS 123Ralso prescribes that estimated forfeitures of shares are to be included in thecalculation of compensation expense.

Under the modified prospective transition method, compensation cost isrecognized for the portion of outstanding awards for which the requisiteservice has not yet been rendered. The cost is being recognized over the periodduring which the employees are required to provide service. The after-taximpact of this change on income from continuing operations was a reduction of$3.4 million and $10.6 million for the three months and nine months ended September 30,2006, respectively, which includes estimated forfeitures for restricted stockand the recognition of compensation costs related to nonvested stock options. 

11

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

The corresponding impact toboth basic and diluted earnings per share was a reduction of $0.02 and $0.07per share for the three months and nine months ended September 30, 2006,respectively.

For the period ended September 30, 2005, asallowed under SFAS No. 123, “Accounting for Stock-Based Compensation,” theCompany recognized compensation expense using the intrinsic value-based methodof valuing stock options prescribed in Accounting Principles Board Opinion(APB) No. 25, “Accounting for Stock Issued to Employees” and relatedInterpretations. Under the intrinsic value-based method, compensation cost wasmeasured as the amount by which the quoted market price of the Company’s stockat the date of grant exceeded the stock option exercise price. For the threemonths and nine months ended September 30, 2005, options granted under theplans had an exercise price equal to the market value of the underlying commonstock on the date of the grant and, therefore, were not included incompensation costs.

At September 30, 2006, the Company had twostock-based employee compensation plans. For further discussion concerning theCompany’s stock-based employee compensation plans, see Note 11 to theseCondensed Consolidated Financial Statements and Note 16 to the ConsolidatedFinancial Statements in the 2005 Form 10-K. Options granted underthe plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The value of the restricted stock awardsissued under the plans and the value of that portion of outstanding optionawards for which the requisite service has not yet been rendered is beingrecognized over the remaining service period as compensation cost.

Thefollowing table illustrates the effect on net income, which includesdiscontinued operations, and corresponding earnings per share if the Companyhad applied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation. For the purpose of this disclosure, theCompany has recognized compensation costs for graded vesting on a straight-linebasis and did not include an estimate for forfeitures.

| **(Dollars in thousands)**                                                                  | ** ** | **For the Three  Months Ended  September 30, 2005** | ** ** | **For the Nine  Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| As reported net  income                                                                               |       |                                                                         | $          | 185,285                                                                     |       |   |   | $ | 554,444 |   |   |
| Add: stock-based  employee compensation expense included in reported net income, net of income  taxes |       |                                                                         | 1,274      |                                                                        |       |   | 2,908 |   |   |
| Deduct: total  stock-based employee compensation expense, net of income taxes                         |       |                                                                         | 6,086      |                                                                        |       |   | 18,445 |   |   |
| Pro forma net income,  after stock-based employee compensation expense                                |       |                                                                         | $          | 180,473                                                                     |       |   |   | $ | 538,907 |   |   |
| Net income per common  share—basic                                                               |       |                                                                         |       |                                                                        |       |   |   |   |   |
| As reported                                                                                           |       |                                                                         | $          | 1.28                                                                        |       |   |   | $ | 3.82 |   |   |
| Pro forma                                                                                             |       |                                                                         | $          | 1.25                                                                        |       |   |   | $ | 3.71 |   |   |
| Net income per common share—diluted                                                              |       |                                                                         |       |                                                                        |       |   |   |   |   |
| As reported                                                                                           |       |                                                                         | $          | 1.26                                                                        |       |   |   | $ | 3.74 |   |   |
| Pro forma                                                                                             |       |                                                                         | $          | 1.23                                                                        |       |   |   | $ | 3.66 |   |   |

 

12

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

*Accounting for CertainHybrid Financial Instruments*

In February 2006, theFinancial Accounting Standards Board (FASB) issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133and 140.” The Statement allows financial instruments that have embeddedderivatives to be accounted for as a whole (eliminating the need to bifurcatethe derivative from its host), if the holder elects to irrevocably account forthe whole instrument on a fair value basis. The Statement is effective for allfinancial instruments acquired or issued after December 31, 2006. Managementis currently evaluating the impact of this Statement on the Company’s financialposition and results of operations.

*Accounting forServicing of Financial Assets*

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140.” The Statement requires that all separately recognized servicing assetsand servicing liabilities be initially measured at fair value, if practicable. Itallows an entity to choose one of two subsequent measurement methods for eachclass of separately recognized servicing assets and servicing liabilities: theamortization method or the fair value measurement method. Under theamortization method, servicing assets and liabilities are amortized inproportion to and over the period of estimated net servicing income orservicing loss. Under the fair value method, servicing assets and liabilitiesare recorded at fair value each reporting period with any changes reported incurrent period earnings. The Statement is effective for all servicing assets onJanuary 1, 2007. Management believes that adopting this Statement will nothave a material impact on the Company’s financial position or results ofoperations.

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

In July 2006, the FASBissued Staff Position (FSP) FAS 13-2, “Accounting for a Change orProjected Change in the Timing of Cash Flows Relating to Income Taxes Generatedby a Leveraged Lease Transaction.”  TheFSP requires that if, during the lease term, the projected timing of the incometax cash flows generated by a leveraged lease is revised, the rate of returnand the allocation of income would be recalculated from the inception of thelease. At adoption, the change in the net investment balance resulting from thecalculation would be recognized as an adjustment to the beginning balance ofretained earnings. Following adoption, a change in the net investment balanceresulting from a recalculation would be recognized as a gain or a loss in theperiod in which the assumption is changed. The FSP is effective for allleveraged leases on January 1, 2007. The Company invests inLease-in-Lease-Out (LILO) transactions that have been challenged by the InternalRevenue Service (IRS). The Company has paid the IRS the income tax associatedwith the LILO transactions. However, the Company is defending the initialfiling position as to the timing of the tax benefits associated with thesetransactions. The Company may be required to recalculate these leases toreflect a potential change in the timing of income tax cash flows in accordancewith this FSP. If recalculation of these leases is required, the Companyestimates that the impact of this FSP at adoption on January 1, 2007,could be a reduction of beginning retained earnings in the range of $16.5 to$20.5 million. Any adjustment to retained earnings would then be recognizedback into income over the remaining term of the affected leases.

13

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

*Accounting forUncertainty in Income Taxes*

In July 2006, the FASBissued Interpretation (FIN) No. 48, “Accounting for Uncertainty in IncomeTaxes—An Interpretation of FASB Statement No. 109,” which clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.”  The Interpretationestablishes a “more-likely-than-not” recognition threshold that must be metbefore a tax benefit can be recognized in the financial statements. For taxpositions that meet the more-likely-than-not threshold, an enterprise mayrecognize only the largest amount of tax benefit that is greater than 50percent likely of being realized upon ultimate settlement with the taxingauthority. The Interpretation is effective January 1, 2007. The cumulativeeffect of applying the provisions of the Interpretation would be recognized asan adjustment to the beginning balance of retained earnings. Management iscurrently evaluating the impact of this Interpretation on the Company’sfinancial position and results of operations.

*Accounting for FairValue Measurements*

In September 2006, theFASB issued SFAS No.157, “Fair Value Measurements.” The Statement defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles and expands disclosures about fairvalue measurements. The Statement applies whenever other accounting standardsrequire or permit assets or liabilities to be measured at fair value. TheStatement is effective January 1, 2008. Management is currently evaluatingthe impact of this Statement on the Company’s financial position and results ofoperations.

*Accounting for DefinedBenefit Pension and Other Postretirement Plans*

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106, and 132(R).”  The Statementrequires a company that sponsors a defined benefit pension plan or otherpostretirement benefit plan to recognize the funded status of the benefit planas an asset or liability, measured as the difference between the fair value ofplan assets and the benefit obligation. It requires immediate recognition ofunrecognized prior service costs and credits, unrecognized net actuarial gainsor losses, and any unrecognized transition obligation or asset as components ofother comprehensive income. The Statement is effective for the year ending December 31,2006. If adopted at September 30, 2006, the Company’s stockholders’ equitywould have been reduced by approximately 5.5 percent.

*Effects of Prior YearMisstatements on Current Year Financial Statements*

In September 2006, the SEC staff issued Staff Accounting Bulletin(SAB) No.108, “Considering the Effects of Prior Year Misstatements WhenQuantifying Misstatements in Current Year Financial Statements.”  SAB 108 provides guidance on quantifying andevaluating the materiality of unrecorded misstatements. It requires the use ofboth the “iron curtain” and “rollover” approaches in quantifying and evaluatingthe materiality of a misstatement. Under the iron curtain approach the error isquantified as the cumulative amount by which the current year balance sheet ismisstated. The rollover approach quantifies the error as the amount by whichthe current year income statement is misstated. If either approach results inquantifying a misstatement that is material, financial statement adjustmentsare required. SAB 108 is 

14

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

effective for the year ending December 31,2006. Management is currently evaluating the impact of SAB 108 on the Company’sfinancial position and results of operations.

For additional information onrecently issued accounting pronouncements and other significant accounting principles,see Note 1 to the Consolidated Financial Statements in the Company’s 2005 Form 10-K.

**Note 3—Discontinued Operations**

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

The Company has accounted for this transaction as adiscontinued operation and restated its prior period financial statements. Theassets of the discontinued operations were reclassified as “held for sale” andaccounted for at the lower of cost or fair value less the costs to sell. All ofthe Company’s offices designated for disposal were closed as of September 30,2006. The remaining assets consist primarily of deposits with banks awaitingapproval of repatriation of capital and unremitted profits and loans that arematuring by January 2008. The remaining liabilities primarily consist ofaccrued expenses, which will be settled when due.

Interest expense was allocated to discontinuedoperations based on average net assets. The amount of interest expenseallocated to discontinued operations for the three months ended September 30,2005 and 2006 was $4.9 million and $0.5 million, respectively. For the ninemonths ended September 30, 2005 and 2006, the interest expense allocatedto discontinued operations was $11.5 million and $1.5 million, respectively.

The Company’s severance reserve balances fordiscontinued operations at December 31, 2005 and September 30, 2006were $21.7 million and $4.4 million, respectively. The decrease of $17.3million from December 31, 2005 primarily related to cash payments toemployees.

15

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 3—DiscontinuedOperations (Continued)**

All assets and liabilitiesrelated to the discontinued operations are recorded at the lower of cost orfair value, less costs of disposal. At September 30, 2005, December 31,2005 and September 30, 2006 the assets and liabilities identified asdiscontinued operations were comprised of the following:

| ** **                                                            | ** ** | **For the Period Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **September 30,  2005**            | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
| **Assets**                                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Cash and due from  banks                                              |       | $                                       | 77,738     |   | $ | 119,158 |   |   | $ | 32,456 | ** ** |   |
| Interest bearing  deposits in banks                                   |       | 245,371                                 |       | 138,762 |   |   | — | ** ** |   |
| Loans                                                                 |       | 1,589,905                               |       | 724,084 |   |   | 4,338 | ** ** |   |
| Due from customers on  acceptances                                    |       | 48,038                                  |       | 42,612 |   |   | 376 | ** ** |   |
| Premises and  equipment                                               |       | 3,030                                   |       | 1,409 |   |   | — | ** ** |   |
| Other assets                                                          |       | 52,486                                  |       | 28,569 |   |   | 359 | ** ** |   |
| Assets of discontinued  operations to be disposed or sold             |       | $                                       | 2,016,568  |   | $ | 1,054,594 |   |   | $ | 37,529 | ** ** |   |
| **Liabilities**                                                       | ** ** | ** **                              | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Noninterest bearing  deposits                                         |       | $                                       | 508,705    |   | $ | 446,953 |   |   | $ | — | ** ** |   |
| Interest bearing  deposits                                            |       | 878,406                                 |       | 461,717 |   |   | — | ** ** |   |
| Other liabilities                                                     |       | 99,711                                  |       | 97,189 |   |   | 3,293 | ** ** |   |
| Liabilities of discontinued  operations to be extinguished or assumed |       | $                                       | 1,486,822  |   | $ | 1,005,859 |   |   | $ | 3,293 | ** ** |   |

 

Thecomponents of loss from discontinued operations for the three and nine monthsended September 30, 2005 and 2006 are:

| ** **                                             | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(Dollars in thousands)**                   | ** ** | **     2005     **   | ** ** | **     2006     **  | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** |
| Net interest income  (expense)                         |       |                                                                   | $          | 5,400                                                                 |       |   |   | $ | (501 | ) |   |   | $ | 15,683 |   |   |   | $ | 1,138 |   |   |
| Provision for loan losses                              |       |                                                                   | —     |                                                                  |       |   | — |   |   |   | 6,683 |   |   |   | — |   |   |
| Noninterest income                                     |       |                                                                   | 21,233     |                                                                  |       |   | 268 |   |   |   | 56,165 |   |   |   | 13,184 |   |   |
| Noninterest expense                                    |       |                                                                   | 52,245     |                                                                  |       |   | 1,828 |   |   |   | 87,550 |   |   |   | 29,555 |   |   |
| Loss from  discontinued operations before income taxes |       |                                                                   | (25,612    | )                                                                     |       |   | (2,061 | ) |   |   | (22,385 | ) |   |   | (15,233 | ) |   |
| Income tax benefit                                     |       |                                                                   | (9,651     | )                                                                     |       |   | (857 | ) |   |   | (8,354 | ) |   |   | (5,793 | ) |   |
| Loss from discontinued  operations                     |       |                                                                   | $          | (15,961                                                               | )          |   |   | $ | (1,204 | ) |   |   | $ | (14,031 | ) |   |   | $ | (9,440 | ) |   |

 

Noninterest income for thenine months ended September 30, 2006 included a $4.0 million payment  from Wachovia Bank, N.A. received in thesecond quarter of 2006, reflecting the final settlement upon the conversion ofthe international correspondent banking customer base to Wachovia Bank, N.A.Included in noninterest expense were compliance related expenses of $14.0million and $1.4 million for the three months ended September 30, 2005 and2006, respectively and $25.0 million and $8.5 million for the nine months endedSeptember 30, 2005 and 2006, respectively. The Company recorded $1.4million of expenses related to the termination of lease contracts in the secondquarter 2006.

16

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 4—Earnings Per Share**

Basic earnings per share (EPS) ratio is computed bydividing net income by the weighted average number of common shares outstandingduring the period. Subsequent to the quarter ended March 31, 2006, theCompany no longer includes nonvested restricted shares in the weighted averagenumber of common shares outstanding—basic but includes the impact of thoseshares in the calculation of diluted shares. The impact of this change onprevious periods is immaterial. Diluted EPS incorporates the dilutive effect ofcommon stock equivalents outstanding on an average basis during the period. Stockoptions and nonvested restricted stock are common stock equivalents.

The followingtable presents a reconciliation of basic and diluted EPS for the three and ninemonths ended September 30, 2005 and 2006.

| ** **                                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| **(Amounts in thousands, except per share data)** | ** ** | **Basic**                                                | ** ** | **Diluted**                                             | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Income from continuing operations                                               |       | $                                                        | 201,246    |                                                    | $          | 201,246 |   | $ | 171,910 |   | $ | 171,910 |   | $ | 568,475 |   | $ | 568,475 |   | $ | 536,002 |   | $ | 536,002 |   |
| Loss from discontinued operations                                               |       | (15,961                                                  | )          | (15,961                                                 | )          | (1,204 | ) | (1,204 | ) | (14,031 | ) | (14,031 | ) | (9,440 | ) | (9,440 | ) |
| Net income                                                                      |       | $                                                        | 185,285    |                                                    | $          | 185,285 |   | $ | 170,706 |   | $ | 170,706 |   | $ | 554,444 |   | $ | 554,444 |   | $ | 526,562 |   | $ | 526,562 |   |
| Weighted average common shares   outstanding                                    |       | 144,459                                                  |       | 144,459                                                 |       | 140,942 |   | 140,942 |   | 145,326 |   | 145,326 |   | 142,371 |   | 142,371 |   |
| Additional shares due  to:                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed conversion of dilutive stock   options                                  |       | —                                                   |       | 3,154                                                   |       | — |   | 1,624 |   | — |   | 2,736 |   | — |   | 2,078 |   |
| Adjusted weighted average common shares outstanding                             |       | 144,459                                                  |       | 147,613                                                 |       | 140,942 |   | 142,566 |   | 145,326 |   | 148,062 |   | 142,371 |   | 144,449 |   |
| Income from continuing operations   per share                                   |       | $                                                        | 1.39       |                                                    | $          | 1.36 |   | $ | 1.22 |   | $ | 1.21 |   | $ | 3.91 |   | $ | 3.84 |   | $ | 3.76 |   | $ | 3.71 |   |
| Loss from discontinued operations   per share                                   |       | (0.11                                                    | )          | (0.10                                                   | )          | (0.01 | ) | (0.01 | ) | (0.09 | ) | (0.10 | ) | (0.06 | ) | (0.06 | ) |
| Net income per share                                                            |       | $                                                        | 1.28       |                                                    | $          | 1.26 |   | $ | 1.21 |   | $ | 1.20 |   | $ | 3.82 |   | $ | 3.74 |   | $ | 3.70 |   | $ | 3.65 |   |

 

Thefollowing table provides the number of options and the corresponding exerciseprices for those options, which were not included in the computation of dilutedearnings per share for the three and nine months ended September 30, 2005and 2006 because they were anti-dilutive.

| ** **                | ** ** | **For the Three Months Ended September 30,**                                                                   | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                | ** ** | **           2005           ** | ** ** | **2006**                                                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| Options outstanding       |       |                                                                                                                                         | 38,250     |                                                                      |       | 1,230,865 |   | 78,480 |   | 1,126,950 |   |
| Exercise price of options |       |                                                                                                                                         | $          | 71.23                                                                     |       |   | $ | 61.56 - $71.2 | 3 | $ | 67.39 - $71.2 | 3 | $ | 67.39 - $71.2 | 3 |
|                           |            |                                                                                                                                              |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |

 

17

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

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

| **(Dollars in thousands)**                                                                     | ** ** | **Before  Tax  Amount** | ** ** | **Tax  Effect** | ** ** | **Net of  Tax** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|----------------------|------------|
| **For the Nine Months Ended  September 30, 2005:**                                                  |       |                    |       |            |       |                 |       |
| Cash flow hedge  activities:                                                                             |       |                    |       |            |       |                 |       |
| Unrealized net losses on hedges arising during the period                                                |       | $                       | (31,082    | )               | $          | 11,889               |       | $ | (19,193 | ) |
| Reclassification adjustment for net gains on hedges included in net  income                         |       | (16,652                 | )          | 6,369           |       | (10,283              | )          |
| Net change in  unrealized losses on hedges                                                               |       | (47,734                 | )          | 18,258          |       | (29,476              | )          |
| Securities available  for sale:                                                                          |       |                    |       |            |       |                 |       |
| Unrealized holding losses arising during the period on   securities available for sale                   |       | (92,392                 | )          | 35,340          |       | (57,052              | )          |
| Reclassification adjustment for net losses on securities   available for sale included in net income     |       | 13,289                  |       | (5,083          | )          | 8,206                |       |
| Net change in  unrealized losses on securities available for sale                                        |       | (79,103                 | )          | 30,257          |       | (48,846              | )          |
| Foreign currency  translation adjustment                                                                 |       | 128                     |       | (49             | )          | 79                   |       |
| Minimum pension  liability adjustment                                                                    |       | (26                     | )          | 10              |       | (16                  | )          |
| Net change in  accumulated other comprehensive income (loss)                                             |       | $                       | (126,735   | )               | $          | 48,476               |       | $ | (78,259 | ) |
| **For the Nine Months Ended  September 30, 2006:**                                                  |       |                    |       |            |       |                 |       |
| Cash flow hedge  activities:                                                                             |       |                    |       |            |       |                 |       |
| Unrealized net losses on hedges arising during the period                                                |       | $                       | (22,926    | )               | $          | 8,769                |       | $ | (14,157 | ) |
| Reclassification adjustment for net losses on hedges included   in net income                            |       | 31,501                  |       | (12,049         | )          | 19,452               |       |
| Net change in  unrealized losses on hedges                                                               |       | 8,575                   |       | (3,280          | )          | 5,295                |       |
| Securities available  for sale:                                                                          |       |                    |       |            |       |                 |       |
| Unrealized holding gains arising during the period on securities available  for sale                |       | 16,112                  |       | (6,163          | )          | 9,949                |       |
| Reclassification adjustment for net gains on securities available   for sale included in net income |       | (1,822                  | )          | 697             |       | (1,125               | )          |
| Net change in  unrealized losses on securities available for sale                                        |       | 14,290                  |       | (5,466          | )          | 8,824                |       |
| Foreign currency  translation adjustment                                                                 |       | 101                     |       | (39             | )          | 62                   |       |
| Net change in accumulated  other comprehensive income (loss)                                             |       | $                       | 22,966     |            | $          | (8,785               | )          | $ | 14,181 |   |

 

18

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 5—AccumulatedOther Comprehensive Income (Loss) (Continued)**

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

| ** **                            | ** ** | **Net**                 | ** ** | **Net**                 | ** ** | ** **      | ** ** | ** **     | ** ** | ** **             | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|----------------|------------|------------------------|------------|
| ** **                            | ** ** | **Unrealized**          | ** ** | **Unrealized**          | ** ** | ** **      | ** ** | ** **     | ** ** | ** **             | ** ** |
| ** **                            | ** ** | **Gains (Losses)** | ** ** | **Gains (Losses)** | ** ** | **Foreign**     | ** ** | **Minimum**    | ** ** | **Accumulated**        | ** ** |
| ** **                            | ** ** | **on Cash**        | ** ** | **on Securites**   | ** ** | **Currency**    | ** ** | **Pension**    | ** ** | **Other**              | ** ** |
| ** **                            | ** ** | **Flow**                | ** ** | **Available**           | ** ** | **Translation** | ** ** | **Liability**  | ** ** | **Comprehensive**      | ** ** |
| **(Dollars in thousands)**  | ** ** | **Hedges**              | ** ** | **For Sale**       | ** ** | **Adjustment**  | ** ** | **Adjustment** | ** ** | **Income (Loss)** | ** ** |
| **Balance,  December 31, 2004**  |       |                    | $          | 1,429                   |       |            |       | $              | (31,696    | )                      |       |   | $ | (7,870 | ) |   | $ | (6,690 | ) |   | $ | (44,827 | ) |   |
| Change during the  period             |       |                    | (29,476    | )                       |       |            | (48,846    | )              |       |                   | 79         |   |   | (16 | ) |   | (78,259 | ) |   |
| **Balance,  September 30, 2005** |       |                    | $          | (28,047                 | )          |            |       | $              | (80,542    | )                      |       |   | $ | (7,791 | ) |   | $ | (6,706 | ) |   | $ | (123,086 | ) |   |
| **Balance,  December 31, 2005**  |       |                    | $          | (34,308                 | )          |            |       | $              | (74,099    | )                      |       |   | $ | 264 |   |   | $ | (10,250 | ) |   | $ | (118,393 | ) |   |
| Change during the  period             |       |                    | 5,295      |                    |       |            | 8,824      |           |       |                   | 62         |   |   | — |   |   | 14,181 |   |   |
| **Balance, September 30,  2006** |       |                    | $          | (29,013                 | )          |            |       | $              | (65,275    | )                      |       |   | $ | 326 |   |   | $ | (10,250 | ) |   | $ | (104,212 | ) |   |

 

**Note 6—Goodwill and IntangibleAssets**

The tablebelow reflects the Company’s identifiable intangible assets and accumulatedamortization at September 30, 2005 and 2006.

| ** **                           | ** ** | **September 30, 2005** | ** ** | **September 30, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization**    | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Core Deposit  Intangibles            |       | $                                | 67,237     |                             |       | $ | (41,198 | ) |   | $ | 26,039 |   | $ | 67,237 |   |   | $ | (52,152 | ) |   | $ | 15,085 |   |
| Rights-to-Expiration                 |       | 35,808                           |       |                             | (16,530    | ) |   | 19,278 |   | 36,608 |   |   | (20,409 | ) |   | 16,199 |   |
| Other                                |       | 2,100                            |       |                             | (636       | ) |   | 1,464 |   | 2,100 |   |   | (1,053 | ) |   | 1,047 |   |
| Total                                |       | $                                | 105,145    |                             |       | $ | (58,364 | ) |   | $ | 46,781 |   | $ | 105,945 |   |   | $ | (73,614 | ) |   | $ | 32,331 |   |

 

Totalamortization expense for the three months ended September 30, 2005 and2006 was $5.0 million and $3.4 million, respectively. For the nine months endedSeptember 30, 2005 and 2006, the expense was $15.0 million and $10.3million, respectively.

| ** **                                                | ** ** | **Core Deposit  Intangibles** | ** ** | **Rights-to-  Expiration** | ** ** | **Other** | ** ** | **Total Identifiable  Intangibles** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|-----------|------------|------------------------------------------|------------|
| Estimated  amortization expense for the years ending:     |       |                               |       |                       |       |      |       |                                     |       |   |   |   |   |
| Remaining 2006                                            |       |                               | $          | 2,392                      |       |      | $          | 910                                      |       | $ | 98 |   |   | $ | 3,400 |   |   |
| 2007                                                      |       |                               | 5,471      |                       |       | 3,166     |       | 299                                      |       |   | 8,936 |   |   |
| 2008                                                      |       |                               | 3,245      |                       |       | 2,675     |       | 230                                      |       |   | 6,150 |   |   |
| 2009                                                      |       |                               | 1,764      |                       |       | 2,242     |       | 178                                      |       |   | 4,184 |   |   |
| 2010                                                      |       |                               | 807        |                       |       | 1,859     |       | 137                                      |       |   | 2,803 |   |   |
| 2011                                                      |       |                               | 443        |                       |       | 1,519     |       | 105                                      |       |   | 2,067 |   |   |
| thereafter                                                |       |                               | 963        |                       |       | 3,828     |       | —                                   |       |   | 4,791 |   |   |
| Total amortization expense  after September 30, 2006 |       |                               | $          | 15,085                     |       |      | $          | 16,199                                   |       | $ | 1,047 |   |   | $ | 32,331 |   |   |

 

19

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

The changes in the carryingamount of goodwill during the nine months ended September 30, 2005 and2006 are shown below.

| **(Dollars in thousands)**      | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Balance,  January 1,                 |       | $        | 450,961    |     | $          | 454,015 |   |
| Contingent period  adjustments            |       | (2,285   | )          | —   |       |
| Adjustment for  contingent considerations |       | 1,414    |       | (526     | )          |
| Correction of errors                      |       | 2,527    |       | —   |       |
| Balance, September 30,               |       | $        | 452,617    |     | $          | 453,489 |   |

 

**Note 7—Business Segments**

In July 2006, theCompany formally reorganized its operating segments by disaggregating thebusinesses that were formerly managed and reported under the Community Bankingand Investment Services Group or the Commercial Financial Services Group. Managementbelieves that this new organizational structure will enhance the Company’sfocus on target markets and enterprise wide sales and service. The variousoperating segments reporting under the Chief Operating Officer and the GroupHead of Pacific Rim Corporate Group have been aggregated into two reportablebusiness segments entitled “Retail Banking” and “Wholesale Banking” based uponthe aggregation criteria prescribed in the SFAS No. 131, *Disclosures about Segments of an Enterprise and RelatedInformation*.

·       Retail Banking aggregatesthose operating segments that offer a range of banking services, primarily toindividuals and small businesses, delivered generally through a network ofbranches and ATMs located in the western United States. These services includemortgages, home equity lines of credit, consumer and commercial loans, depositservices and cash management, as well as fiduciary, private banking, investmentand asset management services for individuals and institutions, and riskmanagement for small businesses and individuals. At September 30, 2005 and2006, Retail Banking had $235.2 million and $222.2 million, respectively, ofgoodwill assigned to the operating segments.

·       Wholesale Bankingaggregates those operating segments that provide credit, depository and cashmanagement services, insurance, investment and risk management products tobusinesses, individuals and target specialty niches. Services includecommercial and project loans, real estate financing, asset-based financing,trade finance and letters of credit, lease financing, customized cashmanagement services and capital markets products. At September 30, 2005and 2006, Wholesale Banking had $217.4 million and $231.2 million,respectively, of goodwill assigned to the operating segments.

The information, set forth in the tables that follow,reflects selected income statement and balance sheet items by reportablebusiness segment. The information presented does not necessarily represent thebusiness units’ financial condition and results of operations were theyindependent entities. Unlike financial accounting, there is no authoritativebody of guidance for management accounting equivalent to US GAAP. Consequently,reported results are not necessarily comparable with those presented by othercompanies. Included in the tables, within total assets, are the amounts ofgoodwill for each reportable business segment as of September 30, 2005 and2006.

20

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 7—BusinessSegments (Continued)**

The information in the tables is derived from theinternal management reporting system used by management to measure theperformance of the individual segments and the Company overall. The managementreporting system assigns balance sheet and income statement items to eachoperating segment based on internal management accounting policies. Netinterest income is determined by the Company’s internal funds transfer pricingsystem, which assigns a cost of funds or a credit for funds to assets orliabilities based on their type, maturity or repricing characteristics. Noninterestincome and expense directly attributable to an operating segment are assignedto that operating segment. Certain indirect costs, such as operations andtechnology expense, are allocated to the segments based on studies of billableunit costs for product or data processing. Other indirect costs, such ascorporate overhead, are allocated to the operating segment based on a predeterminedpercentage of usage. Under the Company’s risk-adjusted return on capital(RAROC) methodology, credit expense is charged to an operating segment basedupon expected losses arising from credit risk. In addition, the attribution ofeconomic capital is related to unexpected losses arising from credit, marketand operational risks.

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

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

21

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 7—BusinessSegments (Continued)**

The reportable businesssegment results for the prior periods have been restated to reflect changes inthe transfer pricing methodology, the organizational changes that haveoccurred, discontinued operations and the market view contribution.

| ** **                                                                     | ** ** | **Retail Banking**                                                                     | ** ** | **Wholesale Banking**                                                                  | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **As of and for the  Three Months Ended  September 30,** | ** ** | **As of and for the  Three Months Ended  September 30,** | ** ** |
| ** **                                                                     | ** ** | **2005**                                                                                    | ** ** | **2006**                                                                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results of operations—Market  View   (dollars in thousands):**     | ** ** | ** **                                                                                  | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income (expense)                                                  |       | $                                                                                           | 222,693    |                                                                                        | $          | 240,794 |   | $ | 255,686 |   | $ | 265,886 |   |
| Noninterest income (expense)                                                   |       | 124,848                                                                                     |       | 127,266                                                                                     |       | 105,220 |   | 105,330 |   |
| Total revenue                                                                  |       | 347,541                                                                                     |       | 368,060                                                                                     |       | 360,906 |   | 371,216 |   |
| Noninterest expense (income)                                                   |       | 220,323                                                                                     |       | 240,289                                                                                     |       | 157,620 |   | 168,804 |   |
| Credit expense (income)                                                        |       | 6,437                                                                                       |       | 6,249                                                                                       |       | 26,860 |   | 23,169 |   |
| Income from continuing operations before   income taxes                        |       | 120,781                                                                                     |       | 121,522                                                                                     |       | 176,426 |   | 179,243 |   |
| Income tax expense (income)                                                    |       | 46,199                                                                                      |       | 46,482                                                                                      |       | 60,603 |   | 59,983 |   |
| Income from continuing operations                                              |       | 74,582                                                                                      |       | 75,040                                                                                      |       | 115,823 |   | 119,260 |   |
| Income (loss) from discontinued operations, net of  income taxes          |       | —                                                                                      |       | —                                                                                      |       | — |   | — |   |
| Net income                                                                     |       | $                                                                                           | 74,582     |                                                                                        | $          | 75,040 |   | $ | 115,823 |   | $ | 119,260 |   |
| **Total assets, end of period—Market View   (dollars in millions):** |       | $                                                                                           | 15,800     |                                                                                        | $          | 17,054 |   | $ | 21,805 |   | $ | 24,354 |   |

 

| ** **                                                                    | ** ** | **Other**                                                                                   | ** ** | **Reconciling Items**                                                                  | ** ** | **UnionBanCal  Corporation**                                                                      | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **As of and for the  Three Months Ended  September 30,** | ** ** | **As of and for the  Three Months Ended  September 30,** | ** ** | **As of and for the  Three Months Ended   September 30,** | ** ** |
| ** **                                                                    | ** ** | **2005**                                                                                    | ** ** | **2006**                                                                                    | ** ** | **2005**                                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results of operations—Market  View   (dollars in thousands):**         | ** ** | ** **                                                                                  | ** ** | ** **                                                                                  | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest income  (expense)                                                |       | $                                                                                           | (13,683    | )                                                                                           | $          | (45,510                                                                                           | )          | $ | (554 | ) | $ | (2,446 | ) | $ | 464,142 |   | $ | 458,724 |   |
| Noninterest income  (expense)                                                 |       | (551                                                                                        | )          | 700                                                                                         |       | (17,329                                                                                           | )          | (16,041 | ) | 212,188 |   | 217,255 |   |
| Total revenue                                                                 |       | (14,234                                                                                     | )          | (44,810                                                                                     | )          | (17,883                                                                                           | )          | (18,487 | ) | 676,330 |   | 675,979 |   |
| Noninterest expense  (income)                                                 |       | 28,217                                                                                      |       | 16,912                                                                                      |       | (9,464                                                                                            | )          | (8,984 | ) | 396,696 |   | 417,021 |   |
| Credit expense  (income)                                                      |       | (48,174                                                                                     | )          | (29,394                                                                                     | )          | (123                                                                                              | )          | (24 | ) | (15,000 | ) | — |   |
| Income from continuing  operations   before income taxes                      |       | 5,723                                                                                       |       | (32,328                                                                                     | )          | (8,296                                                                                            | )          | (9,479 | ) | 294,634 |   | 258,958 |   |
| Income tax expense  (income)                                                  |       | (10,240                                                                                     | )          | (15,792                                                                                     | )          | (3,174                                                                                            | )          | (3,625 | ) | 93,388 |   | 87,048 |   |
| Income from continuing  operations                                            |       | 15,963                                                                                      |       | (16,536                                                                                     | )          | (5,122                                                                                            | )          | (5,854 | ) | 201,246 |   | 171,910 |   |
| Income (loss) from  discontinued operations, net of income taxes              |       | (15,961                                                                                     | )          | (1,204                                                                                      | )          | —                                                                                            |       | — |   | (15,961 | ) | (1,204 | ) |
| Net income                                                                    |       | $                                                                                           | 2          |                                                                                        | $          | (17,740                                                                                           | )          | $ | (5,122 | ) | $ | (5,854 | ) | $ | 185,285 |   | $ | 170,706 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                                                                           | 13,727     |                                                                                        | $          | 10,630                                                                                            |       | $ | (33 | ) | $ | (25 | ) | $ | 51,299 |   | $ | 52,013 |   |

 

22

----

**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 7—BusinessSegments (Continued)**

| ** **                                                                   | ** ** | **Retail Banking**                                                                    | ** ** | **Wholesale Banking**                                                                 | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **As of and for the  Nine Months Ended  September 30,** | ** ** | **As of and for the  Nine Months Ended  September 30,** | ** ** |
| ** **                                                                   | ** ** | **2005**                                                                                   | ** ** | **2006**                                                                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Results  of operations—Market View****(dollars in  thousands):** |       |                                                                                       |       |                                                                                       |       |   |   |   |   |
| Net interest income (expense)                                                |       | $                                                                                          | 655,709    |                                                                                       | $          | 708,683 |   | $ | 731,048 |   | $ | 781,013 |   |
| Noninterest income (expense)                                                 |       | 360,964                                                                                    |       | 393,239                                                                                    |       | 323,403 |   | 309,291 |   |
| Total revenue                                                                |       | 1,016,673                                                                                  |       | 1,101,922                                                                                  |       | 1,054,451 |   | 1,090,304 |   |
| Noninterest expense (income)                                                 |       | 677,129                                                                                    |       | 720,694                                                                                    |       | 463,244 |   | 501,180 |   |
| Credit expense (income)                                                      |       | 19,242                                                                                     |       | 19,221                                                                                     |       | 79,417 |   | 71,472 |   |
| Income from continuing operations before income taxes                        |       | 320,302                                                                                    |       | 362,007                                                                                    |       | 511,790 |   | 517,652 |   |
| Income tax expense (income)                                                  |       | 122,516                                                                                    |       | 138,468                                                                                    |       | 174,534 |   | 174,871 |   |
| Income from continuing operations                                            |       | 197,786                                                                                    |       | 223,539                                                                                    |       | 337,256 |   | 342,781 |   |
| Income (loss) from discontinued operations,   net of income taxes            |       | —                                                                                     |       | —                                                                                     |       | — |   | — |   |
| Net income                                                                   |       | $                                                                                          | 197,786    |                                                                                       | $          | 223,539 |   | $ | 337,256 |   | $ | 342,781 |   |
| **Total  assets, end of period—Market View (dollars in millions):**     |       | $                                                                                          | 15,800     |                                                                                       | $          | 17,054 |   | $ | 21,805 |   | $ | 24,354 |   |

 

| ** **                                                                                   | ** ** | ** **                                                                                 | ** ** | ** **                                                                                 | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | **UnionBanCal** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                   | ** ** | **Other**                                                                                  | ** ** | **Reconciling Items**                                                                 | ** ** | **Corporation**                                                                            | ** ** |
| ** **                                                                                   | ** ** | **As of and for the  Nine Months Ended  September 30,** | ** ** | **As of and for the  Nine Months Ended  September 30,** | ** ** | **As of and for the  Nine Months Ended  September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2005**                                                                                   | ** ** | **2006**                                                                                   | ** ** | **2005**                                                                                   | ** ** | **2006**   | ** ** | **2005**        | ** ** | **2006** | ** ** |
| **Results **of operations—Market  View (dollars in thousands):****                 |       |                                                                                       |       |                                                                                       |       |                                                                                       |       |       |       |            |       |   |   |
| Net interest income (expense)                                                                |       | $                                                                                          | (26,848    | )                                                                                          | $          | (90,954                                                                                    | )          | $          | (1,395     | )               | $          | (7,283 | ) | $ | 1,358,514 |   | $ | 1,391,459 |   |
| Noninterest income (expense)                                                                 |       | (12,427                                                                                    | )          | 6,757                                                                                      |       | (50,573                                                                                    | )          | (54,894    | )          | 621,367         |       | 654,393 |   |
| Total revenue                                                                                |       | (39,275                                                                                    | )          | (84,197                                                                                    | )          | (51,968                                                                                    | )          | (62,177    | )          | 1,979,881       |       | 2,045,852 |   |
| Noninterest expense (income)                                                                 |       | 65,576                                                                                     |       | 55,475                                                                                     |       | (27,901                                                                                    | )          | (32,754    | )          | 1,178,048       |       | 1,244,595 |   |
| Credit expense (income)                                                                      |       | (139,166                                                                                   | )          | (98,625                                                                                    | )          | (176                                                                                       | )          | (68        | )          | (40,683         | )          | (8,000 | ) |
| Income from continuing operations before income  taxes                                  |       | 34,315                                                                                     |       | (41,047                                                                                    | )          | (23,891                                                                                    | )          | (29,355    | )          | 842,516         |       | 809,257 |   |
| Income tax expense (income)                                                                  |       | (13,871                                                                                    | )          | (28,857                                                                                    | )          | (9,138                                                                                     | )          | (11,227    | )          | 274,041         |       | 273,255 |   |
| Income from continuing operations                                                            |       | 48,186                                                                                     |       | (12,190                                                                                    | )          | (14,753                                                                                    | )          | (18,128    | )          | 568,475         |       | 536,002 |   |
| Income (loss) from discontinued operations, net  of income taxes                        |       | (14,031                                                                                    | )          | (9,440                                                                                     | )          | —                                                                                     |       | —     |       | (14,031         | )          | (9,440 | ) |
| Net income                                                                                   |       | $                                                                                          | 34,155     |                                                                                       | $          | (21,630                                                                                    | )          | $          | (14,753    | )               | $          | (18,128 | ) | $ | 554,444 |   | $ | 526,562 |   |
| **Total  assets, end of period—Market View (dollars in millions):** |       | $                                                                                          | 13,727     |                                                                                       | $          | 10,630                                                                                     |       | $          | (33        | )               | $          | (25 | ) | $ | 51,299 |   | $ | 52,013 |   |

 

23

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

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

*Cash Flow Hedges*

*Hedging Strategies forVariable Rate Loans and Certificates of Deposit and Other Time Deposits*

The Company engages in several types of cash flowhedging strategies for which the hedged transactions are forecasted future loaninterest payments, and the hedged risk is the variability in those payments dueto changes in the designated benchmark rate, i.e. U.S. dollar LIBOR. In thesestrategies, the hedging instruments are matched with groups of variable rateloans such that the tenor of the variable rate loans and that of the hedginginstrument are identical. Cash flow hedging strategies include the utilizationof purchased floor, cap and corridor options and interest rate swaps. At September 30,2006, the weighted average remaining life of the currently active (excludingany forward positions) cash flow hedges was approximately 1.6 years.

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

The Company uses interest rate floor corridors tohedge the variable cash flows associated with 1-month LIBOR or 3-monthLIBOR indexed loans. Net payments to be received under the floor corridorcontracts offset the decline in loan interest income caused by the relevantLIBOR index falling below the corridor’s upper strike rate, but only to theextent the index falls to the lower strike rate. The corridor will not provideprotection from declines in the relevant LIBOR index to the extent it fallsbelow the corridor’s lower strike rate.

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

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

The Company uses purchased interest rate caps to hedge the variableinterest cash flows associated with the forecasted issuance and rollover ofshort-term, fixed rate CDs. In these hedging relationships, the Company hedgesthe LIBOR component of the CD rates, which is 3-month LIBOR, based on theCDs’ original term to maturity, which reflects their repricing frequency. Netpayments to be

24

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

received under the capcontract offset the increase in interest expense caused by the relevant LIBORindex rising above the cap’s strike rate.

The Company uses interest rate cap corridors to hedgethe variable cash flows associated with the forecasted issuance and rollover ofshort-term, fixed rate CDs. In these hedging relationships, the Company hedgesthe LIBOR component of the CD rates, either 1-month LIBOR, 3-month LIBOR, or 6-monthLIBOR, based on the original term to maturity of the CDs, which reflects theirrepricing frequency. Net payments to be received under the cap corridorcontract offset the increase in deposit interest expense caused by the relevantLIBOR index rising above the corridor’s lower strike rate, but only to theextent the index rises to the upper strike rate. The corridor will not provideprotection from increases in the relevant LIBOR index to the extent it risesabove the corridor’s upper strike rate.

Hedging transactions arestructured at inception so that the notional amounts of the hedge are matchedwith an equal principal amount of loans or CDs, the index and repricingfrequencies of the hedge matches those of the loans or CDs, and the period inwhich the designated hedged cash flows occurs is equal to the term of the hedge.As such, most of the ineffectiveness in the hedging relationship results fromthe mismatch between the timing of reset dates on the hedge versus those of theloans or CDs. In the third quarter of 2006, the Company recognized a net gainof $0.2 million due to ineffectiveness, which is recognized in othernoninterest expense, compared to a net loss of $0.1 million in the thirdquarter of 2005.

*Fair Value Hedges*

*Hedging Strategy forMedium-Term Notes*

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

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

*Hedging Strategy forSubordinated Debt*

The Company engages in an interest rate hedgingstrategy in which an interest rate swap is associated with a specified interestbearing liability, UnionBanCal Corporation’s ten-year, subordinated debt issuance,and in a separate transaction, Union Bank of California, N.A.’s ten-year,subordinated debt issuance, in order to convert these liabilities from fixedrate to floating rate instruments. This strategy mitigates the changes in fairvalue of the hedged liability caused by changes in the designated benchmarkinterest rate, U.S. dollar LIBOR.

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

25

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

**Note 8—Derivative Instruments and Other Financial InstrumentsUsed For Hedging (Continued)**

*Other*

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

*Economic Hedging Strategy for “MarketPath”Certificates of Deposit*

The Company engages in aneconomic hedging strategy in which interest bearing certificates of deposit issuedto customers, which are tied to the changes in the Standard and Poor’s 500Index, are exchanged for a fixed rate of interest. The Company accounts for theembedded derivative in the certificates of deposit at fair value. A totalreturn swap that encompasses the value of a series of options that hadindividually hedged each certificate of deposit is valued at fair value. Thechanges in the fair value of the embedded derivative and the hedge instrumentare recognized as interest expense.

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

Standby and commercial lettersof credit are conditional commitments issued to guarantee the performance of acustomer to a third party. Standby letters of credit generally are contingentupon the failure of the customer to perform according to the terms of theunderlying contract with the third party, while commercial letters of creditare issued specifically to facilitate foreign or domestic trade transactions. Themajority of these types of commitments have terms of one year or less. As of September 30,2006, the Company’s maximum exposure to loss for standby and commercial lettersof credit was $3.6 billion and $88.9 million, respectively. At September 30,2006, the carrying value of the Company’s standby and commercial letters ofcredit totaled $6.7 million. Exposure to loss related to these commitments iscovered by the allowance for losses on off-balance sheet commitments. Thecarrying value of the standby and commercial letters of credit and theallowance for losses on off-balance sheet commitments are included in otherliabilities on the condensed consolidated balance sheet. In addition, at September 30,2006, the Company’s maximum exposure to loss for standby and commercial lettersof credit related to discontinued operations had declined to $0.6 million andzero, respectively, with no corresponding carrying value of these standby andcommercial letters of credit.

The credit risk involved inissuing loan commitments and standby and commercial letters of credit isessentially the same as that involved in extending loans to customers and isrepresented by the contractual amount of these instruments. Collateral may beobtained based on management’s credit assessment of the customer.

Principal investments includedirect investments in private and public companies and indirect investments inprivate equity funds. The Company issues commitments to provide equity andmezzanine capital financing to private and public companies through eitherdirect investments in specific companies or through investment funds andpartnerships. The timing of future cash requirements to fund such commitmentsis generally dependent on the investment cycle. This cycle, the period overwhich privately-held companies are funded by private equity investors andultimately sold, merged, or taken public through an initial offering, can varybased on overall market conditions as well as the nature and type of industryin which the companies operate. At September 30, 2006, the Company hadcommitments to fund principal investments of $90.7 million.

26

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

The Company has a contingent consideration agreementthat guarantees additional payments to an acquired insurance agency’sstockholders based on the agency’s future performance in excess of establishedrevenue and/or earnings before interest, taxes, depreciation and amortization(EBITDA) thresholds. If the insurance agency’s future performance exceeds thesethresholds during a three-year period, the Company will be liable to makepayments to former stockholders. As of September 30, 2006, the Company hadno obligation to make any payments under this agreement, which expires in December 2006.

The Company is fund manager for limited liabilitycompanies issuing low-income housing credit (LIHC) investments. LIHCinvestments provide tax benefits to investors in the form of tax deductionsfrom operating losses and tax credits. To facilitate the sale of these LIHCinvestments, the Company guarantees the timely completion of projects anddelivery of tax benefits throughout the investment term. Guarantees may includea minimum rate of return, the availability of tax credits, and operatingdeficit thresholds over an eleven-year weighted average period. Additionally,the Company receives project completion and tax credit guarantees from thelimited liability companies issuing the LIHC investments that reduce theCompany’s ultimate exposure to loss. As of September 30, 2006, the Company’smaximum exposure to loss under these guarantees is limited to a return ofinvestor capital and minimum investment yield, or $150.0 million. The Companymaintains a reserve of $6.0 million for these guarantees.

The Company has guarantees that obligate it to performif its affiliates are unable to discharge their obligations. These obligationsinclude guarantees of commercial paper obligations and leveraged leasetransactions. The guarantee issued by the Bank for an affiliate’s commercialpaper program is done in order to facilitate the sale of the commercial paper. Asof September 30, 2006, the Bank had a maximum exposure to loss under thecommercial paper program guarantee of $1.9 billion. The Bank’s guarantee has anaverage term of less than nine months and is fully collateralized by a pledgeddeposit. The Company guarantees its subsidiaries’ leveraged lease transactionswith terms ranging from fifteen to thirty years. Following the original fundingof these leveraged lease transactions, the Company has no material obligationto be satisfied. As of September 30, 2006, the Company had no exposure toloss for these agreements.

The Company conducts securities lending transactionsfor institutional customers as a fully disclosed agent. At times, securitieslending indemnifications are issued to guarantee that a security lending customerwill be made whole in the event the borrower does not return the securitysubject to the lending agreement and collateral held is insufficient to coverthe market value of the security. All lending transactions are collateralized,primarily by cash. The amount of securities lent with indemnifications was $2.4billion at September 30, 2006. The market value of the associatedcollateral was $2.5 billion at September 30, 2006.

The Company occasionally enters into financialguarantee contracts where a premium is received from another financialinstitution counterparty to guarantee a portion of the credit risk on interestrate swap contracts entered into between the financial institution and itscustomer. The Company becomes liable to pay the financial institution only ifthe financial institution is unable to collect amounts owed to them by theircustomer. As of September 30, 2006, the maximum exposure to loss underthese contracts totaled $2.5 million. At September 30, 2006, the Companymaintained a reserve of $0.1 million for losses related to these guarantees.

27

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

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

For further discussion of theCompany’s commitments, contingencies and guarantees, see Note 24 to theConsolidated Financial Statements in the Company’s 2005 Form 10-K.

**Note 10—Pension and OtherPostretirement Benefits**

Thefollowing tables summarize the components of net periodic benefit cost for thethree and nine months ended September 30, 2005 and 2006.

| ** **                                   | ** ** | **Pension Benefits**                                              | ** ** | **Other Benefits**                                                | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Three Months  Ended September 30,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2005**                                                               | ** ** | **2006**                                                               | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Components  of net periodic benefit cost** |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Service cost                                 |       | $                                                                      | 11,383     |                                                                   | $          | 13,501 |   | $ | 1,551 |   | $ | 1,850 |   |
| Interest cost                                |       | 14,587                                                                 |       | 16,287                                                                 |       | 2,115 |   | 2,418 |   |
| Expected return on  plan assets              |       | (23,966                                                                | )          | (28,359                                                                | )          | (2,626 | ) | (3,034 | ) |
| Amortization of prior  service cost          |       | 267                                                                    |       | 266                                                                    |       | (24 | ) | (28 | ) |
| Amortization of  transition amount           |       | —                                                                 |       | —                                                                 |       | 508 |   | 512 |   |
| Recognized net  actuarial loss               |       | 6,656                                                                  |       | 8,090                                                                  |       | 699 |   | 1,052 |   |
| Total net periodic  benefit cost             |       | $                                                                      | 8,927      |                                                                   | $          | 9,785 |   | $ | 2,223 |   | $ | 2,770 |   |

 

| ** **                                   | ** ** | **Pension Benefits**                                             | ** ** | **Other Benefits**                                               | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **For the Nine Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
| **(Dollars in thousands)**         | ** ** | **2005**                                                              | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Components  of net periodic benefit cost** |       |                                                                  |       |                                                                  |       |   |   |   |   |
| Service cost                                 |       | $                                                                     | 34,148     |                                                                  | $          | 40,505 |   | $ | 4,653 |   | $ | 5,420 |   |
| Interest cost                                |       | 43,763                                                                |       | 48,860                                                                |       | 6,345 |   | 6,898 |   |
| Expected return on  plan assets              |       | (71,899                                                               | )          | (85,079                                                               | )          | (7,801 | ) | (8,719 | ) |
| Amortization of prior  service cost          |       | 800                                                                   |       | 800                                                                   |       | (72 | ) | (73 | ) |
| Amortization of  transition amount           |       | —                                                                |       | —                                                                |       | 1,526 |   | 1,527 |   |
| Recognized net  actuarial loss               |       | 19,968                                                                |       | 24,271                                                                |       | 2,096 |   | 3,182 |   |
| Total net periodic  benefit cost             |       | $                                                                     | 26,780     |                                                                  | $          | 29,357 |   | $ | 6,747 |   | $ | 8,235 |   |

 

**Note 11—Management Stock Plans**

The Company has two management stock plans. The Year 2000 UnionBanCalCorporation Management Stock Plan, as amended (the 2000 Stock Plan), and theUnionBanCal Corporation 

28

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

Management Stock Plan,restated effective June 1, 1997 (the 1997 Stock Plan), have 20.0 millionand 6.6 million shares, respectively, of the Company’s common stock authorizedto be awarded to key employees, outside directors and consultants of theCompany at the discretion of the Executive Compensation and Benefits Committeeof the Board of Directors (the Committee). Employees on rotational assignment fromBTMU are not eligible for stock awards.

The Committee determines the term of each stock optiongrant, up to a maximum of ten years from the date of grant. The exercise priceof the options issued under the stock plans may not be less than the fair marketvalue on the date the option is granted. Starting in 2006, the value of optionsis recognized as compensation expense over the vesting period during which theemployees are required to provide service. Prior to January 1, 2006, theCompany’s unrecognized compensation expense for nonvested restricted stockreduced retained earnings. With the adoption of SFAS No. 123R, $19 millionwas reclassified from retained earnings to additional paid-in capital. Thevalue of the restricted stock at the date of grant is recognized ascompensation expense over its vesting period with a corresponding creditadjustment to additional paid-in capital. All cancelled or forfeited optionsand restricted stock become available for future grants.

Under the 2000 Stock Plan, the Company grants stockoptions and restricted stock and issues shares of common stock upon vesting ofperformance shares and restricted stock units that are settled in common stock.Under the 1997 Stock Plan, the Company issues shares of common stock upon exerciseof outstanding stock options. The Company issues new shares of common stock forall awards under the stock plans. At September 30, 2005 and September 30,2006, a total of 5,628,550 shares and 4,181,512 shares, respectively, wereavailable for future grants under the 2000 Stock Plan as stock options,restricted stock or shares of common stock issued upon vesting of performanceshares and restricted stock units settled in common stock. The remaining sharesunder the 1997 Stock Plan are not available for future grants.

In the first quarter of 2006,the Committee determined that performance share awards granted in 2006 are tobe redeemed in shares.

*Stock Options*

Under the 2000 Stock Plan, the Company granted optionsto various key employees, including policy-making officers, and to non-employeedirectors for selected years. Under both stock plans, options granted toemployees vest pro-rata on each anniversary of the grant date and become fullyexercisable three years from the grant date, provided that the employee hascompleted the specified continuous service requirement. The options vestearlier if the employee dies, is permanently disabled, or retires under certaingrant, age, and service conditions or terminates employment under certainconditions. Options granted to non-employee directors are fully vested on thegrant date and exercisable 33 1/3 percent on each anniversary under the 1997Stock Plan, and are fully vested and exercisable on the grant date under the2000 Stock Plan.

29

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

The following is a summary ofstock option transactions under the stock plans for the nine months ended September 30,2006.

| ** **                                    | ** ** | **For the Nine Months Ended September 30, 2006** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of  Shares**                                                          | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                    | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Options outstanding, beginning  of the period |       | 8,696,589                                                                           |       |   | $ | 45.26 |   |   |   |   |   |   |   |   |   |   |
| Granted                                       |       | 1,101,240                                                                           |       |   | 69.89 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                     |       | (1,192,874                                                                          | )          |   | 40.22 |   |   |   |   |   |   |   |   |   |   |
| Forfeited                                     |       | (29,290                                                                             | )          |   | 61.63 |   |   |   |   |   |   |   |   |   |   |
| Options outstanding, end of the period        |       | 8,575,665                                                                           |       |   | $ | 49.07 |   |   |   | 5.72 |   |   |   | $ | 112,038 |   |   |
| Options exercisable, end  of the period       |       | 6,066,775                                                                           |       |   | $ | 43.46 |   |   |   | 5.40 |   |   |   | $ | 106,186 |   |   |

 

The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model that uses the assumptions noted in thefollowing table. Because the Black-Scholes option pricing model uses tranchesbased on expected terms that result in ranges of input assumptions, such rangesare disclosed below. Expected volatilities are based on historical data andimplied volatilities from trade options on the Company’s stock, and otherfactors. The Company uses historical data to estimate option exercise andemployee terminations within the valuation model. The expected term of anoption granted is derived from the output of the option valuation model, whichis based on historical data and represents the period of time that the optiongranted is expected to be outstanding. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant based on the expected term.

| ** **                                                 | ** ** | **For the Nine Months Ended  September 30, 2006** | ** **  |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------|-------------|
| Weighted-average fair  value—per share                |       |                                                                            | $           | 12.31 |   |   |
| Risk-free interest  rates (a range for 1 to 7 year tenors) |       |                                                                            | 4.3 - 5.05  | % |   |
| Expected volatility                                        |       |                                                                            | 16.6 - 22.9 | % |   |
| Weighted-average  expected volatility                      |       |                                                                            | 19.4        | % |   |
| Expected term (in  years)                                  |       |                                                                            | 3.4 - 5.4   |   |   |
| Expected dividend yield                                    |       |                                                                            | 2.7         | % |   |

 

The weighted-average fair value of options grantedduring the nine months ended September 30, 2005 and 2006 was $13.38 and$12.31 per share, respectively. The total intrinsic value of options exercisedduring the nine months ended September 30, 2005 and 2006 was $40.5 millionand $33.7 million, respectively.

As of September 30, 2006,the total unrecognized compensation cost related to nonvested stock optionawards was $20.6 million and the weighted-average period over which it isexpected to be recognized was 1.0 year.

30

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

*Restricted Stock*

In general, restricted shares are granted under the2000 Stock Plan to key employees, and in 2005, to non-employee directors. Theawards of restricted stock granted to employees vest pro-rata on eachanniversary of the grant date and become fully vested four years from the grantdate, provided that the employee has completed the specified continuous servicerequirement. They vest earlier if the employee dies, is permanently and totallydisabled, retires under certain grant, age, and service conditions orterminates employment under certain conditions. The awards of restricted stockgranted to existing non-employee directors in 2005 vested in full in July 2006.Restricted stockholders have the right to vote their restricted shares andreceive dividends.

Thefollowing is a summary of the Company’s nonvested restricted stock awards as ofSeptember 30, 2006 and changes during the period ended September 30,2006.

| ** **                                            | ** ** | **For the Nine Months Ended  September 30, 2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Number of  Shares**                                                      | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
| Nonvested restricted  awards, beginning of the period |       | 397,957                                                                         |       |   | $ | 64.06 |   |   |
| Granted                                               |       | 204,393                                                                         |       |   | 69.84 |   |   |
| Vested                                                |       | (69,033                                                                         | )          |   | 61.52 |   |   |
| Forfeited                                             |       | (11,876                                                                         | )          |   | 66.36 |   |   |
| Nonvested restricted  awards, end of the period       |       | 521,441                                                                         |       |   | $ | 66.61 |   |   |

 

The total fair value of the restricted stock awardsthat vested during the nine months ended September 30, 2005 and 2006 was$1.0 million and $4.2 million, respectively.

The Company recognized $10.7million of compensation cost for share-based payment arrangements related torestricted stock awards with $4.1 million of corresponding tax benefit for thenine months ended September 30, 2006. As of September 30, 2006, thetotal unrecognized compensation cost related to nonvested restricted awards was$21.8 million, and the weighted-average period over which it is expected to berecognized was 1.5 years.

*Restricted Stock Units*

In July 2006, the Company granted 12,150restricted stock units to non-employee directors with a weighted average grantdate fair value of $63.65 per share. These restricted stock units consist of aregular grant, and in the case of new non-employee directors, a regular grantand an initial grant. In general, the regular grant vests in full on the firstanniversary of the grant date, and the initial grant vests in three equalinstallments on each of the first three anniversaries of the grant date. Atgrant date, it was estimated that 7 percent of the shares would forfeit by thevesting date. For the nine months ended September 30, 2006, the Companyrecognized $0.2 million of compensation cost with a corresponding $0.1 millionin tax benefits related to this year’s grants. The restricted stock unitparticipants do not have voting or other stockholder rights. However, theparticipants’ stock unit accounts receive dividend equivalents, reflecting theaggregate dividends earned based on the total number of restricted stock unitsoutstanding, in the form of additional restricted stock units. Participants mayelect to defer the delivery of vested shares of common 

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**UnionBanCal Corporation and Subsidiaries**

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

 

 

 

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

stock atpredetermined dates as defined in the plan agreements. The Company will issuenew shares under the 2000 Stock Plan upon vesting of these grants, which areredeemable only in shares.

*Performance Share Plan*

Effective January 1, 1997, the Company establisheda Performance Share Plan. At the discretion of the Committee, eligibleparticipants may earn performance share awards to be redeemed in cash and/orshares three years after the date of grant. Performance shares are linked tostockholder value in two ways: (1) the market price of the Company’scommon stock; and (2) return on equity, a performance measure closelylinked to value creation. Eligible participants generally receive grants ofperformance shares annually. The plan was amended in 2004 increasing the totalnumber of shares that can be granted under the plan to 2.6 million shares. Therewere 2,132,333 performance shares remaining for future awards as of September 30,2006. All performance shares granted prior to 2006 are redeemable in cash andare therefore being accounted for as liabilities. There were 1,050 of theseperformance shares forfeited for the nine months ended September 30, 2006.The value of a performance share under the liability method is equal to theaverage month-end closing price of the Company’s common stock for the final sixmonths of the performance period. All cancelled or forfeited performance sharesbecome available for future grants. At September 30, 2005 and 2006, theCompany’s liability for the cash settlement of the performance shares was $13.2million and $12.5 million, respectively.

Under the Performance SharePlan, the Company granted 62,100 units with a weighted-average grant date fairvalue of $69.96 per share during the nine months ended September 30, 2006.These units will be settled in stock at the vesting date of December 31,2008. At grant date, it was estimated that 6 percent of the shares wouldforfeit by the vesting date. For the nine months ended September 30, 2006,the Company recognized $2.4 million of compensation cost with a corresponding$0.9 million in tax benefits related to this year’s grants. The Company willissue new shares under the 2000 Stock Plan upon vesting of these grants thatare redeemable in shares.

**Note 12—Subsequent Events**

On October 25, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.47 per share of common stock.The dividend will be paid on January 5, 2007 to stockholders of record asof December 1, 2006.

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

*This report includesforward-looking statements, which include forecasts of our financial resultsand condition, expectations for our operations and business, and ourassumptions for those forecasts and expectations. Do not rely unduly onforward-looking statements. Actual results might differ significantly from ourforecasts and expectations. Please refer to Part II Item 1A “Risk Factors”of our Quarterly Report on Form 10-Q (this Form 10-Q) andPart I, Item 1A “Risk Factors” of our Annual Report on Form 10-Kfor the year ended December 31, 2005 (2005 Form 10-K) for adiscussion of some factors that may cause results to differ.*

You should read the following discussion and analysisof our condensed consolidated financial condition and results of operations forthe period ended September 30, 2006 in this Form 10-Q togetherwith our Consolidated Financial Statements and the Notes to ConsolidatedFinancial Statements included in our 2005 Form 10-K. Averages, aspresented in the following tables, are substantially all based upon dailyaverage balances.

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

**Introduction**

We are a California-based,commercial bank holding company and have, as our major subsidiary, a bankingsubsidiary, Union Bank of California, N.A. (the Bank). We had consolidatedassets of $52 billion at September 30, 2006. At September 30, 2006,The Bank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately64 percent of our outstanding common stock.

**Executive Overview**

We are providing you with an overview of what webelieve are the most significant factors and developments that impacted ourthird quarter 2006 results and that could impact our future results. We askthat you carefully read this entire document and any other reports that werefer to in this Quarterly Report, for more detailed information that willcomplete your understanding of trends, events and uncertainties that impact us.

Our average loans grew by 12 percent in the thirdquarter 2006 compared to the third quarter 2005. This growth has beenconcentrated in our commercial and residential mortgage lending areas, althoughwe expect that the growth rate in residential mortgage loans will slow ifinterest rates continue to rise.

Although our deposit base continues to be relativelystrong compared to our peers, our average noninterest bearing deposits declinedby $2.4 billion in the third quarter 2006 compared to the third quarter of 2005as deposit pricing pressures, caused by rising short-term interest rates,resulted in customer transfers of funds from noninterest bearing to interestbearing deposits or other investments. Further shifts between noninterest andinterest bearing deposits are expected to continue in the near term. We believethat despite these shifts, our high percentage of average noninterest bearingdeposits to average total deposits continues to provide us with a fundingadvantage compared to most of our peers.

Overall credit quality remained strong during thethird quarter 2006. Our nonperforming assets totaled $48 million at September 30,2006 compared to $62 million at December 31, 2005 and $38 million at September 30,2005. While such low levels of nonperforming assets are not sustainable, webelieve that our responsible lending and monitoring practices will help usmaintain high credit quality in our loan portfolios.

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During the third quarter 2006, we had no provision forcredit losses compared with a reversal of $15 million in the third quarter2005. We expect that we may need to provide for credit losses during the fourthquarter of 2006 as a result of our additional loan growth and any adversechanges from our current economic environment.

In the third quarter 2006, our net interest income was$459 million compared to $464 million in the third quarter 2005, as our strongloan growth was offset by higher funding costs.

Noninterest income grew 2 percent in the third quarter2006 compared with the third quarter 2005, primarily from higher trust andinvestment management fees related to growth in trust assets and higher gainson private capital investments, partially offset by a decline in servicecharges on deposit accounts stemming from lower account analysis fees and lowerdemand deposit balances.

In the third quarter 2006, our noninterest expensegrew to $417 million compared to $397 million in the third quarter 2005. Mostof this increase was related to salaries and employee benefits, of which $7 millionrelated to both our adoption of the new share-based compensation accounting rules andhigher costs for restricted stock awards.

Our effective tax rate increased to 33.6 percent inthe third quarter 2006 from 31.7 percent during the third quarter 2005. Thelower rate in 2005 was due primarily to reductions in California tax expensefrom the recognition of lower taxes on our 2004 tax return filed on theworldwide unitary basis and Enterprise Zone tax credits, primarily from prioryears but for which we qualified in the third quarter 2005.

In the third quarter 2006, wereturned a significant amount of capital to our stockholders in the form ofdividends and common stock repurchases. During the third quarter 2006, we paid$67 million in dividends and we repurchased $143 million in shares of commonstock. At September 30, 2006, we had $259 million remaining under ourcurrent board authorization for the repurchase of our common stock.

**Discontinued Operations**

During the third quarter 2005, we committed to a planto exit our international correspondent banking business and entered into adefinitive agreement to sell this business to Wachovia Bank, N.A. This businessconsisted of international payment and trade processing along with the relatedlending activities. The principal legal closing of the transaction occurred on October 6,2005 and we received $245 million. During the second quarter 2006, we receivedan additional $4 million as a contingent purchase price payment.

This transaction has been accounted for as adiscontinued operation and all prior periods, except where specifically mentioned,have been restated to reflect this accounting treatment. All of the assets andliabilities of the discontinued operations have been separately identified onour condensed consolidated balance sheet and the assets are shown at the lowerof cost or fair value less costs to dispose. The average net assets orliabilities of our discontinued operations are reflected in our analysis of netinterest margin. All of our offices designated for disposal were closed as of June 30,2006. The remaining assets include deposits with banks awaiting approval ofrepatriation of capital and unremitted profits and loans that are maturing by January 2008.The remaining liabilities primarily consist of accrued expenses, which will besettled when due. For the detailed components of our assets and liabilitiesfrom discontinued operations, see Note 3 “Discontinued Operations” to theCondensed Consolidated Financial Statements of this Form 10-Q.

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Includedin our net income are the net results of our discontinued operations. For thethree and nine months ended September 30, 2005 and 2006, loss fromdiscontinued operations included the following:

| ** **                                              | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(Dollars in thousands)**                    | ** ** | **2005**                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net interest income  (expense)                          |       |                                               | $          | 5,400                                             |       |   |   | $ | (501 | ) |   | $ | 15,683 |   | $ | 1,138 |   |
| Provision for loan  losses                              |       |                                               | —     |                                              |       |   | — |   |   | 6,683 |   | — |   |
| Noninterest income                                      |       |                                               | 21,233     |                                              |       |   | 268 |   |   | 56,165 |   | 13,184 |   |
| Noninterest expense                                     |       |                                               | 52,245     |                                              |       |   | 1,828 |   |   | 87,550 |   | 29,555 |   |
| Loss from discontinued  operations before  income taxes |       |                                               | (25,612    | )                                                 |       |   | (2,061 | ) |   | (22,385 | ) | (15,233 | ) |
| Income tax benefit                                      |       |                                               | (9,651     | )                                                 |       |   | (857 | ) |   | (8,354 | ) | (5,793 | ) |
| Loss from discontinued  operations                      |       |                                               | $          | (15,961                                           | )          |   |   | $ | (1,204 | ) |   | $ | (14,031 | ) | $ | (9,440 | ) |

 

For the three months ended September 30,2005 and 2006, net interest income included the allocation of interest expensefrom continuing operations to discontinued operations of approximately $4.9 millionand $0.5 million, respectively. For the nine months ended September 30, 2005and 2006, the interest expense allocated to discontinued operations was $11.5million and $1.5 million, respectively. Interest expense allocated todiscontinued operations is calculated based on its average net assets and thecorresponding cost of funds rate equivalent to the average federal fundspurchased rate for the period.

Noninterest income for thenine months ended September 30, 2006 included a $4 million payment fromWachovia Bank, N.A. received in the second quarter of 2006, reflecting thefinal settlement upon the conversion of our international correspondent bankingcustomer base. Included in noninterest expense were compliance related expensesof $14.0 million and $1.4 million for the three months ended September 30,2005 and 2006, respectively, and $25.0 million and $8.5 million for the ninemonths ended September 30, 2005 and 2006, respectively. We recorded $1.4million of expenses related to the termination of lease contracts in the secondquarter 2006.

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

**Critical Accounting Policies**

UnionBanCal Corporation’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (US GAAP) and thegeneral practices of the banking industry. The financial information containedwithin our statements is, to a significant extent, financial information thatis based on approximate measures of the financial effects of transactions andevents that have already occurred. A variety of factors could affect theultimate value that is obtained either when earning income, recognizing anexpense, recovering an asset or relieving a liability. In many instances, weuse a discount factor to determine the present value of assets and liabilities.A change in the discount factor could increase or decrease the values of thoseassets and liabilities and such a change would result in either a beneficial oradverse impact to our financial results. We use historical loss factors,adjusted for current conditions, to determine the inherent loss that may bepresent in our loan and lease portfolio. Actual losses could differsignificantly from the loss factors that we use. Other significant estimatesthat we use are employee turnover factors for pension purposes, residual valuesin our leasing portfolio, fair value of our derivatives and securities,expected useful lives of our depreciable assets and assumptions regarding oureffective income tax rates. We enter into derivative contracts to accommodateour customers and for our own risk management purposes. The derivativecontracts are generally swaps and option contracts indexed to energycommodities, interest rates or foreign currencies, 

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although wecould enter into other types of derivative contracts. We value these contractsat fair value, using either readily available, market quoted prices orinformation that can be extrapolated to approximate a market price. We aresubject to US GAAP that may change from one previously acceptable method toanother method. Although the economics of our transactions would be the same,the timing of events that would impact our transactions could change.

Our most significant estimatesare approved by our Chief Executive Officer Forum (CEO Forum), which iscomprised of our most senior officers. For each financial reporting period, areview of these estimates is presented to and discussed with the AuditCommittee of our Board of Directors.

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

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**Financial Performance**

**Summary of Financial Performance**

| ** **                                                         | ** ** | **For the Three Months** | ** ** | ** ** | **Increase (Decrease)**   | ** ** | **For the Nine Months** | ** ** | ** **  | **Increase (Decrease)**   | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|------------|--------------------------------|------------|----------------------------------------|------------|-------------|--------------------------------|------------|
| ** **                                                         | ** ** | **Ended September 30,**       | ** ** | ** ** | **2006 versus 2005** | ** ** | **Ended September 30,**      | ** ** | ** **  | **2006 versus 2005** | ** ** |
| **(Dollars in thousands)**                               | ** ** | **2005**                                | ** ** | **2006**   | ** **                     | ** ** | **Amount**                             | ** ** | **Percent** | ** **                     | **2005**   | ** ** | **2006** | ** ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of Operations**                                          | ** ** | ** **                              | ** ** | ** ** | ** **                     | ** ** | ** **                             | ** ** |        | ** **                     | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income(1)                                             |       | $                                       | 464,142    |       | $                              | 458,724    |                                   |       | $           | (5,418                         | )          |   | (1.2 | )% |   | $ | 1,358,514 |   | $ | 1,391,459 |   |   | $ | 32,945 |   |   | 2.4 | % |   |
| Noninterest income                                                 |       |                                    |       |       |                           |       |                                   |       |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on  deposit accounts                               |       | 84,822                                  |       | 79,083     |                           |       | (5,739                                 | )          |        | (6.8                           | )          |   | 243,835 |   | 242,555 |   |   | (1,280 | ) |   | (0.5 | ) |   |
| Trust and investment  management fees                              |       | 43,500                                  |       | 47,555     |                           |       | 4,055                                  |       |        | 9.3                            |       |   | 127,053 |   | 146,050 |   |   | 18,997 |   |   | 15.0 |   |   |
| Insurance commissions                                              |       | 17,819                                  |       | 17,301     |                           |       | (518                                   | )          |        | (2.9                           | )          |   | 59,176 |   | 54,571 |   |   | (4,605 | ) |   | (7.8 | ) |   |
| Merchant banking fees                                              |       | 11,257                                  |       | 11,655     |                           |       | 398                                    |       |        | 3.5                            |       |   | 35,637 |   | 28,280 |   |   | (7,357 | ) |   | (20.6 | ) |   |
| Brokerage commissions  and fees                                    |       | 5,290                                   |       | 8,531      |                           |       | 3,241                                  |       |        | 61.3                           |       |   | 22,867 |   | 26,656 |   |   | 3,789 |   |   | 16.6 |   |   |
| Securities gains  (losses), net                                    |       | (320                                    | )          | 43         |                           |       | 363                                    |       |        | nm                             |       |   | (13,289 | ) | 1,822 |   |   | 15,111 |   |   | nm |   |   |
| Gain on private  capital investments, net                          |       | 5,692                                   |       | 7,681      |                           |       | 1,989                                  |       |        | 34.9                           |       |   | 18,888 |   | 14,210 |   |   | (4,678 | ) |   | (24.8 | ) |   |
| Other noninterest  income                                          |       | 44,128                                  |       | 45,406     |                           |       | 1,278                                  |       |        | 2.9                            |       |   | 127,200 |   | 140,249 |   |   | 13,049 |   |   | 10.3 |   |   |
| Total noninterest  income                                          |       | 212,188                                 |       | 217,255    |                           |       | 5,067                                  |       |        | 2.4                            |       |   | 621,367 |   | 654,393 |   |   | 33,026 |   |   | 5.3 |   |   |
| Total revenue                                                      |       | 676,330                                 |       | 675,979    |                           |       | (351                                   | )          |        | (0.1                           | )          |   | 1,979,881 |   | 2,045,852 |   |   | 65,971 |   |   | 3.3 |   |   |
| Reversal of allowance  for  loan losses                            |       | (15,000                                 | )          | —     |                           |       | (15,000                                | )          |        | nm                             |       |   | (40,683 | ) | (8,000 | ) |   | (32,683 | ) |   | (80.3 | ) |   |
| Noninterest expense                                                |       |                                    |       |       |                           |       |                                   |       |        |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee  benefits                                    |       | 236,124                                 |       | 244,613    |                           |       | 8,489                                  |       |        | 3.6                            |       |   | 701,858 |   | 745,745 |   |   | 43,887 |   |   | 6.3 |   |   |
| Outside services                                                   |       | 28,533                                  |       | 31,890     |                           |       | 3,357                                  |       |        | 11.8                           |       |   | 76,248 |   | 91,203 |   |   | 14,955 |   |   | 19.6 |   |   |
| Professional services                                              |       | 11,240                                  |       | 12,169     |                           |       | 929                                    |       |        | 8.3                            |       |   | 36,131 |   | 43,754 |   |   | 7,623 |   |   | 21.1 |   |   |
| Advertising and public  relations                                  |       | 9,114                                   |       | 11,726     |                           |       | 2,612                                  |       |        | 28.7                           |       |   | 25,657 |   | 33,228 |   |   | 7,571 |   |   | 29.5 |   |   |
| Foreclosed asset  income                                           |       | (3,435                                  | )          | (183       | )                              |       | 3,252                                  |       |        | (94.7                          | )          |   | (5,606 | ) | (15,332 | ) |   | (9,726 | ) |   | nm |   |   |
| Reversal of allowance  for losses on off-balance sheet commitments |       | —                                  |       | —     |                           |       | —                                 |       |        | —                         |       |   | (1,000 | ) | (7,000 | ) |   | (6,000 | ) |   | nm |   |   |
| Other noninterest  expense                                         |       | 115,120                                 |       | 116,806    |                           |       | 1,686                                  |       |        | 1.5                            |       |   | 344,760 |   | 352,997 |   |   | 8,237 |   |   | 2.4 |   |   |
| Total noninterest  expense                                         |       | 396,696                                 |       | 417,021    |                           |       | 20,325                                 |       |        | 5.1                            |       |   | 1,178,048 |   | 1,244,595 |   |   | 66,547 |   |   | 5.6 |   |   |
| Income from continuing  operations before income taxes             |       | 294,634                                 |       | 258,958    |                           |       | (35,676                                | )          |        | (12.1                          | )          |   | 842,516 |   | 809,257 |   |   | (33,259 | ) |   | (3.9 | ) |   |
| Income tax expense                                                 |       | 93,388                                  |       | 87,048     |                           |       | (6,340                                 | )          |        | (6.8                           | )          |   | 274,041 |   | 273,255 |   |   | (786 | ) |   | (0.3 | ) |   |
| Income from continuing  operations                                 |       | $                                       | 201,246    |       | $                              | 171,910    |                                   |       | $           | (29,336                        | )          |   | (14.6 | )% |   | $ | 568,475 |   | $ | 536,002 |   |   | $ | (32,473 | ) |   | (5.7 | )% |   |

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(1)          Net interest income does not include anyadjustments for fully taxable equivalence.

nm = not meaningful

*The primarycontributors to our financial performance for the third quarter of 2006compared to the third quarter of 2005 are presented below.*

·       Therewas no provision for loan losses in the third quarter of 2006 as creditquality, primarily in our commercial loan portfolio, remained stable. However,we believe that the trend of improving credit quality could be at its peak.(See our discussion under “Allowances for Credit Losses.”)

·       Ournet interest income was favorably influenced by higher earning asset volumes(including higher volume for commercial, financial and industrial loans,residential mortgages and construction loans) and higher average yields on ourearning assets. Offsetting these positive influences to our net 

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interest income were higherrates on interest bearing liabilities, lower hedge income and lower noninterestbearing deposit volumes. (See our discussion under “Net Interest Income.”)

The increase in ournoninterest income was due to several factors:

—              Servicecharges on deposits decreased primarily due to lower account analysis feesstemming from an increase in the earnings credit rates on deposit balances, aswell as from lower demand deposit balances;

—              Trustand investment management fees were higher primarily due to higher sales,growth in trust assets and a change in the administration structure of ourHighMark funds resulting in additional fees, which were offset by higheroutside service expenses (see noninterest expense discussion below). Managedassets decreased by approximately 5 percent, while non-managed assetsincreased by approximately 5 percent from September 30, 2005 to September 30,2006. Total assets under administration increased by approximately 4 percent,to $218.0 billion, for the same period;

—              Net gains on private capital investments werehigher compared to the prior year due to higher sales and capital distributions;and

—              Included in other noninterest income was a $3.0million settlement in the third quarter of 2006 associated with an eminentdomain action taken by a municipality to take possession of land used by one ofour branches.

Our higher noninterest expense was due to severalfactors:

—              Salariesand employee benefits increased primarily as a result of:

·       annualmerit increases and higher staff levels; and

·       additionalcontract labor staff for compliance-related activities; partly offset by

·       lowerbonuses and other performance-related incentives, partially offset by increasedexpenses for stock options and for higher levels of restricted stock grants;

—              Outsideservices expense increased mainly dueto higher trust administration expenses, which were offset by increased trustand investment management fee revenue (see noninterest income discussionabove);

—              Advertisingexpense was higher mainly due to increased advertising and marketing activitiesin response to the competitive deposit market; and

—              Foreclosedasset income reflected higher gains on the sale of foreclosed properties in thethird quarter of 2005.

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

·       Thereversal of our allowance for loan losses for the first nine months of 2006 isdue to sustained improvement in credit quality, primarily in our commercialloan portfolio. (See our discussion under “Allowances for Credit Losses.”)

·       Ournet interest income was favorably influenced by higher earning asset volumes(including higher volumes for commercial, financial and industrial loans,residential mortgages and construction loans) and higher average yields on ourearning assets. Offsetting these positive influences to our net interest incomewere higher rates on interest bearing liabilities, lower hedge income and lowernoninterest bearing deposits. (See our discussion under “Net Interest Income.”)

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The increase in our noninterest income was due to severalfactors:

—              Trust and investment management fees benefitedfrom higher sales, growth in trust assets, a one-time $3.8 million increase intrust fees resulting from a refinement in our accrual accounting methodologyand a change in the administration structure of our HighMark funds resulting inadditional fees, which were offset by higher outside services expenses (seenoninterest expense discussion below);

—              Insurance commissions decreased mainly due tolower revenues from construction-related projects, which slowed in 2006, andlower contingent revenues;

—              Merchant banking fees decreased due to a lowervolume of syndication transactions than in the same period last year;

—              Securities gains were higher mainly due to a $13.3million loss on the sale of government agency securities in 2005 compared togains on collateralized loan obligations (CLOs) in 2006;

—              Netgains on private capital investments were lower compared to the prior year dueto lower sales and capital distributions; and

—              Higher other noninterest income, which includedgains of $4.2 million from the sales of leased equipment, a $3.0 millionsettlement associated with an eminent domain action, a $1.8 million gainthat resulted from the share redemption by MasterCard Incorporated and lowertrading provision adjustments to our reserve for losses on customer derivativecontracts.

Our higher noninterest expense was due to severalfactors:

—              Salaries and employee benefits increased primarilyas a result of:

·       annualmerit increases and higher staff levels;

·       additionalcontract labor staff for compliance related activities;

·       higherincentive expenses related to stock options and higher levels of restrictedstock grants in the first nine months of 2006, partly offset by lower bonuses andother performance-related incentives; and

·       higheremployee benefits expense mainly due to increased employee taxes and pensionand other postretirement benefits expense due to actuarial adjustments, partlyoffset by a decrease in workers compensation expense;

—              Outside services expense increased mainlydue to higher trust administration expenses, which were offset by increasedtrust and investment management fee revenue (see noninterest income discussionabove) and higher cost of services related to title and escrow deposit balancesstemming from a higher earnings credit rate in the first nine months of 2006;

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

—              Advertisingexpense was higher mainly due to increased advertising and marketing activitiesin response to the competitive deposit market;

—              Foreclosedasset income reflected higher gains on the sale of foreclosed properties in thefirst nine months of 2006;

—              Provision for losseson off-balance sheet commitments, which declined by $6.0 million compared tothe first nine months of 2005 as a result of improvements in the credit qualityof our borrowers; and

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—              Higher othernoninterest expense, which included higher software costs, business developmentcosts and charitable contributions, partly offset by declining amortization ofidentifiable intangibles.

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**Net Interest Income**

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

| ** **                                                                    | ** ** | **For the Three Months Ended** | ** ** | ** **             | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **     | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|----------------------------|------------|-------------|------------|----------------|------------|
| ** **                                                                    | ** ** | **September 30, 2005**         | ** ** | **September 30, 2006** | ** ** | **Increase (Decrease) in** | ** ** |
| ** **                                                                    | ** ** | ** **                     | ** ** | **Interest**           | ** ** | **Average**                | ** ** | ** **  | ** ** | **Interest**   | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** |
| ** **                                                                    | ** ** | **Average**                    | ** ** | **Income/**            | ** ** | **Yield/**                 | ** ** | **Average** | ** ** | **Income/**    | ** ** | **Yield/** | ** ** | **Balance** | ** ** | **Expense** (1) | ** ** |
| **(Dollars in thousands)**                                          | ** ** | **Balance**                    | ** ** | **Expense**(1)         | ** ** | **Rate**(1)(2)             | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                                    |       |                           |       |                   |       |                       |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:(3)                                                                     |       | $                              | 32,177,816 |                   | $          | 461,892                    |       |        | 5.71       | %              |       | $ | 35,965,823 |   | $ | 575,799 |   |   | 6.37 | % |   | $ | 3,788,007 |   |   | 11.8 | % |   | $ | 113,907 |   |   | 24.7 | % |   |
| Securities—taxable                                                       |       | 9,971,085                      |       | 96,706                 |       |                       | 3.88       |        |       | 8,548,420      |       | 107,378 |   |   | 5.02 |   |   | (1,422,665 | ) |   | (14.3 | ) |   | 10,672 |   |   | 11.0 |   |   |
| Securities—tax-exempt                                                    |       | 65,800                         |       | 1,350                  |       |                       | 8.21       |        |       | 59,644         |       | 1,231 |   |   | 8.26 |   |   | (6,156 | ) |   | (9.4 | ) |   | (119 | ) |   | (8.8 | ) |   |
| Interest bearing deposits in banks                                            |       | 57,042                         |       | 303                    |       |                       | 2.11       |        |       | 37,351         |       | 411 |   |   | 4.37 |   |   | (19,691 | ) |   | (34.5 | ) |   | 108 |   |   | 35.6 |   |   |
| Federal funds sold and securities purchased under  resale agreements     |       | 770,116                        |       | 6,777                  |       |                       | 3.49       |        |       | 894,039        |       | 12,024 |   |   | 5.34 |   |   | 123,923 |   |   | 16.1 |   |   | 5,247 |   |   | 77.4 |   |   |
| Trading account assets                                                        |       | 329,318                        |       | 1,115                  |       |                       | 1.34       |        |       | 349,368        |       | 1,832 |   |   | 2.08 |   |   | 20,050 |   |   | 6.1 |   |   | 717 |   |   | 64.3 |   |   |
| Total earning assets                                                          |       | 43,371,177                     |       | 568,143                |       |                       | 5.21       |        |       | 45,854,645     |       | 698,675 |   |   | 6.06 |   |   | 2,483,468 |   |   | 5.7 |   |   | 130,532 |   |   | 23.0 |   |   |
| Allowance for loan losses                                                     |       | (392,651                       | )          |                   |       |                       |       |        |       | (328,399       | )          |   |   |   |   |   |   | 64,252 |   |   | (16.4 | ) |   |   |   |   |   |   |   |
| Cash and due from banks                                                       |       | 2,232,281                      |       |                   |       |                       |       |        |       | 2,063,653      |       |   |   |   |   |   |   | (168,628 | ) |   | (7.6 | ) |   |   |   |   |   |   |   |
| Premises and equipment, net                                                   |       | 514,156                        |       |                   |       |                       |       |        |       | 497,957        |       |   |   |   |   |   |   | (16,199 | ) |   | (3.2 | ) |   |   |   |   |   |   |   |
| Other assets                                                                  |       | 2,487,066                      |       |                   |       |                       |       |        |       | 2,689,563      |       |   |   |   |   |   |   | 202,497 |   |   | 8.1 |   |   |   |   |   |   |   |   |
| Total assets                                                                  |       | $                              | 48,212,029 |                   |       |                       |       |        |       |           | $          | 50,777,419 |   |   |   |   |   |   |   | $ | 2,565,390 |   |   | 5.3 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                               |       |                           |       |                   |       |                       |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                     |       |                           |       |                   |       |                       |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing                                                              |       | $                              | 13,157,103 |                   | $          | 44,318                     |       |        | 1.34       |           |       | $ | 12,405,367 |   | $ | 73,826 |   |   | 2.36 |   |   | $ | (751,736 | ) |   | (5.7 | )% |   | $ | 29,508 |   |   | 66.6 |   |   |
| Savings and consumer time                                                     |       | 4,642,782                      |       | 15,668                 |       |                       | 1.34       |        |       | 4,493,082      |       | 25,682 |   |   | 2.27 |   |   | (149,700 | ) |   | (3.2 | ) |   | 10,014 |   |   | 63.9 |   |   |
| Large time                                                                    |       | 3,105,857                      |       | 22,810                 |       |                       | 2.91       |        |       | 6,692,874      |       | 82,790 |   |   | 4.91 |   |   | 3,587,017 |   |   | nm |   |   | 59,980 |   |   | nm |   |   |
| Total interest bearing deposits                                               |       | 20,905,742                     |       | 82,796                 |       |                       | 1.57       |        |       | 23,591,323     |       | 182,298 |   |   | 3.07 |   |   | 2,685,581 |   |   | 12.8 |   |   | 99,502 |   |   | nm |   |   |
| Federal funds purchased and securities sold  under repurchase agreements |       | 630,272                        |       | 5,158                  |       |                       | 3.25       |        |       | 419,665        |       | 5,345 |   |   | 5.05 |   |   | (210,607 | ) |   | (33.4 | ) |   | 187 |   |   | 3.6 |   |   |
| Net funding allocated from (to) discontinued  operations(4)                   |       | (593,732                       | )          | (4,864                 | )          |                       | 3.25       |        |       | (34,738        | )          | (454 | ) |   | 5.18 |   |   | 558,994 |   |   | (94.1 | ) |   | 4,410 |   |   | (90.7 | ) |   |
| Commercial paper                                                              |       | 1,207,822                      |       | 9,394                  |       |                       | 3.09       |        |       | 1,645,428      |       | 20,835 |   |   | 5.02 |   |   | 437,606 |   |   | 36.2 |   |   | 11,441 |   |   | nm |   |   |
| Other borrowed funds                                                          |       | 173,853                        |       | 1,707                  |       |                       | 3.89       |        |       | 577,533        |       | 7,842 |   |   | 5.39 |   |   | 403,680 |   |   | nm |   |   | 6,135 |   |   | nm |   |   |
| Medium and long-term debt                                                     |       | 817,602                        |       | 8,520                  |       |                       | 4.13       |        |       | 1,496,207      |       | 21,974 |   |   | 5.83 |   |   | 678,605 |   |   | 83.0 |   |   | 13,454 |   |   | nm |   |   |
| Trust notes                                                                   |       | 15,506                         |       | 239                    |       |                       | 6.15       |        |       | 15,054         |       | 239 |   |   | 6.33 |   |   | (452 | ) |   | (2.9 | ) |   | — |   |   | — |   |   |
| Total borrowed funds                                                          |       | 2,251,323                      |       | 20,154                 |       |                       | 3.55       |        |       | 4,119,149      |       | 55,781 |   |   | 5.37 |   |   | 1,867,826 |   |   | 83.0 |   |   | 35,627 |   |   | nm |   |   |
| Total interest bearing liabilities                                            |       | 23,157,065                     |       | 102,950                |       |                       | 1.76       |        |       | 27,710,472     |       | 238,079 |   |   | 3.41 |   |   | 4,553,407 |   |   | 19.7 |   |   | 135,129 |   |   | nm |   |   |
| Noninterest bearing deposits                                                  |       | 19,387,786                     |       |                   |       |                       |       |        |       | 16,990,816     |       |   |   |   |   |   |   | (2,396,970 | ) |   | (12.4 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                             |       | 1,392,056                      |       |                   |       |                       |       |        |       | 1,497,496      |       |   |   |   |   |   |   | 105,440 |   |   | 7.6 |   |   |   |   |   |   |   |   |
| Total liabilities                                                             |       | 43,936,907                     |       |                   |       |                       |       |        |       | 46,198,784     |       |   |   |   |   |   |   | 2,261,877 |   |   | 5.1 |   |   |   |   |   |   |   |   |
| **Stockholders’ Equity**                                                 |       |                           |       |                   |       |                       |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                                 |       | 4,275,122                      |       |                   |       |                       |       |        |       | 4,578,635      |       |   |   |   |   |   |   | 303,513 |   |   | 7.1 |   |   |   |   |   |   |   |   |
| Total stockholders’ equity                                               |       | 4,275,122                      |       |                   |       |                       |       |        |       | 4,578,635      |       |   |   |   |   |   |   | 303,513 |   |   | 7.1 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                               |       | $                              | 48,212,029 |                   |       |                       |       |        |       |           | $          | 50,777,419 |   |   |   |   |   |   |   | $ | 2,565,390 |   |   | 5.3 | % |   |   |   |   |   |   |   |
| **Net Interest Income/Margin**                                                |       |                           |       |                   |       |                       |       |        |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent basis)                         |       |                           |       | 465,193                |       |                       | 4.27       | %           |       |           |       | 460,596 |   |   | 4.00 | % |   |   |   |   |   |   |   | (4,597 | ) |   | (1.0 | ) |   |
| Less: taxable-equivalent adjustment                                           |       |                           |       | 1,051                  |       |                       |       |        |       |           |       | 1,872 |   |   |   |   |   |   |   |   |   |   |   | 821 |   |   | 78.1 |   |   |
| Net interest income                                                           |       |                           |       | $                      | 464,142    |                       |       |        |       |           |       |   | $ | 458,724 |   |   |   |   |   |   |   |   |   |   |   | $ | (5,418 | ) |   | (1.2 | )% |   |

 

| ** ** | **Average Assets and  Liabilities of Discontinued Operations for the Three Months Ended:** | ** ** | ** ** | ** ** | **September 30,  2005**                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,**

**2006**                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|--------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | **Assets**                                                                                 | ** ** | ** ** | ** ** | **$     1,978,255**                       | ** ** | ** ** | ** ** | ** ** | ** ** | **$              41,135**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | **Liabilities**                                                                            | ** ** | ** ** | ** ** | **$     1,384,523**                       | ** ** | ** ** | ** ** | ** ** | ** ** | **$                 6,397** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | **Net  assets**                                                                            | ** ** | ** ** | ** ** | **$         593,732** | ** ** | ** ** | ** ** | ** ** | ** ** | **$              34,738**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

----

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

(2)                Annualized.

(3)                Average balances on loans outstanding include allnonperforming loans. The amortized portion of net loan origination fees (costs)is included in interest income on loans, representing an adjustment to theyield.

(4)                Net funding allocated from (to) discontinued operationsrepresents the shortage (excess) of assets over liabilities of discontinuedoperations. The expense (earnings) on funds allocated from (to) discontinuedoperations are calculated by taking the net balance and applying an earningsrate or a cost of funds equivalent to the corresponding period’s Federal fundspurchased rate.

nm - notmeaningful

41

----

 

| ** **                                                               | ** ** | **For the Nine Months Ended** | ** ** | **Increase (Decrease) in** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **September 30, 2005**                  | ** ** | **September 30, 2006**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                                                               | ** ** | ** **                                        | ** ** | **Interest**                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** |
| ** **                                                               | ** ** | **Average**                                       | ** ** | **Income/**                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** |
| **(Dollars in thousands)**                                     | ** ** | **Balance**                                       | ** ** | **Expense**(1)                       | ** ** | **Rate**(1)(2) | ** ** | **Balance** | ** ** | **Expense**(1) | ** ** | **Rate**(1)(2) | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Assets**                                                               |       |                                              |       |                                 |       |   |   | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Loans:(3)                                                                |       | $                                                 | 30,843,202 |                                 | $          | 1,305,807 |   |   | 5.66 | % |   | $ | 35,100,506 |   | $ | 1,636,804 |   |   | 6.23 | % |   | $ | 4,257,304 |   |   | 13.8 | % |   | $ | 330,997 |   |   | 25.3 | % |   |
| Securities—taxable                                                  |       | 10,678,358                                        |       | 298,317                              |       |   | 3.72 |   |   | 8,378,496 |   | 306,164 |   |   | 4.87 |   |   | (2,299,862 | ) |   | (21.5 | ) |   | 7,847 |   |   | 2.6 |   |   |
| Securities—tax-exempt                                               |       | 66,379                                            |       | 4,022                                |       |   | 8.08 |   |   | 62,670 |   | 3,804 |   |   | 8.09 |   |   | (3,709 | ) |   | (5.6 | ) |   | (218 | ) |   | (5.4 | ) |   |
| Interest bearing deposits in banks                                       |       | 96,961                                            |       | 1,432                                |       |   | 1.97 |   |   | 43,804 |   | 1,570 |   |   | 4.79 |   |   | (53,157 | ) |   | (54.8 | ) |   | 138 |   |   | 9.6 |   |   |
| Federal funds sold and securities purchased under  resale agreements     |       | 615,967                                           |       | 14,406                               |       |   | 3.13 |   |   | 541,607 |   | 20,594 |   |   | 5.08 |   |   | (74,360 | ) |   | (12.1 | ) |   | 6,188 |   |   | 43.0 |   |   |
| Trading account assets                                                   |       | 275,087                                           |       | 3,072                                |       |   | 1.49 |   |   | 354,134 |   | 5,047 |   |   | 1.91 |   |   | 79,047 |   |   | 28.7 |   |   | 1,975 |   |   | 64.3 |   |   |
| Total earning assets                                                     |       | 42,575,954                                        |       | 1,627,056                            |       |   | 5.10 |   |   | 44,481,217 |   | 1,973,983 |   |   | 5.93 |   |   | 1,905,263 |   |   | 4.5 |   |   | 346,927 |   |   | 21.3 |   |   |
| Allowance for loan losses                                                |       | (398,404                                          | )          |                                 |       |   |   |   |   | (337,145 | ) |   |   |   |   |   |   | 61,259 |   |   | (15.4 | ) |   |   |   |   |   |   |   |
| Cash and due from banks                                                  |       | 2,240,948                                         |       |                                 |       |   |   |   |   | 2,096,935 |   |   |   |   |   |   |   | (144,013 | ) |   | (6.4 | ) |   |   |   |   |   |   |   |
| Premises and equipment, net                                              |       | 519,915                                           |       |                                 |       |   |   |   |   | 510,416 |   |   |   |   |   |   |   | (9,499 | ) |   | (1.8 | ) |   |   |   |   |   |   |   |
| Other assets                                                             |       | 2,404,271                                         |       |                                 |       |   |   |   |   | 2,675,245 |   |   |   |   |   |   |   | 270,974 |   |   | 11.3 |   |   |   |   |   |   |   |   |
| Total assets                                                             |       | $                                                 | 47,342,684 |                                 |       |   |   |   |   |   | $ | 49,426,668 |   |   |   |   |   |   |   | $ | 2,083,984 |   |   | 4.4 | % |   |   |   |   |   |   |   |
| **Liabilities**                                                          |       |                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                |       |                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing                                                         |       | $                                                 | 12,614,932 |                                 | $          | 101,752 |   |   | 1.08 |   |   | $ | 12,757,571 |   | $ | 201,641 |   |   | 2.11 |   |   | $ | 142,639 |   |   | 1.1 | % |   | $ | 99,889 |   |   | 98.2 |   |   |
| Savings and consumer time                                                |       | 4,707,515                                         |       | 42,841                               |       |   | 1.22 |   |   | 4,477,251 |   | 65,672 |   |   | 1.96 |   |   | (230,264 | ) |   | (4.9 | ) |   | 22,831 |   |   | 53.3 |   |   |
| Large time                                                               |       | 3,190,094                                         |       | 61,455                               |       |   | 2.58 |   |   | 5,133,186 |   | 173,971 |   |   | 4.53 |   |   | 1,943,092 |   |   | 60.9 |   |   | 112,516 |   |   | nm |   |   |
| Total interest bearing   deposits                                        |       | 20,512,541                                        |       | 206,048                              |       |   | 1.34 |   |   | 22,368,008 |   | 441,284 |   |   | 2.64 |   |   | 1,855,467 |   |   | 9.0 |   |   | 235,236 |   |   | nm |   |   |
| Federal funds purchased and securities sold under  repurchase agreements |       | 1,021,123                                         |       | 20,829                               |       |   | 2.73 |   |   | 678,926 |   | 23,657 |   |   | 4.66 |   |   | (342,197 | ) |   | (33.5 | ) |   | 2,828 |   |   | 13.6 |   |   |
| Net funding allocated from (to) discontinued  operations(4)              |       | (535,998                                          | )          | (11,499                              | )          |   | 2.87 |   |   | (42,570 | ) | (1,509 | ) |   | 4.74 |   |   | 493,428 |   |   | (92.1 | ) |   | 9,990 |   |   | (86.9 | ) |   |
| Commercial paper                                                         |       | 1,078,558                                         |       | 21,761                               |       |   | 2.70 |   |   | 1,514,196 |   | 52,420 |   |   | 4.63 |   |   | 435,638 |   |   | 40.4 |   |   | 30,659 |   |   | nm |   |   |
| Other borrowed funds                                                     |       | 183,997                                           |       | 5,053                                |       |   | 3.67 |   |   | 319,096 |   | 12,233 |   |   | 5.13 |   |   | 135,099 |   |   | 73.4 |   |   | 7,180 |   |   | nm |   |   |
| Medium and long-term debt                                                |       | 808,686                                           |       | 22,511                               |       |   | 3.72 |   |   | 1,164,090 |   | 49,246 |   |   | 5.66 |   |   | 355,404 |   |   | 43.9 |   |   | 26,735 |   |   | nm |   |   |
| Trust notes                                                              |       | 15,618                                            |       | 715                                  |       |   | 6.10 |   |   | 15,166 |   | 715 |   |   | 6.28 |   |   | (452 | ) |   | (2.9 | ) |   | — |   |   | — |   |   |
| Total borrowed funds                                                     |       | 2,571,984                                         |       | 59,370                               |       |   | 3.09 |   |   | 3,648,904 |   | 136,762 |   |   | 5.01 |   |   | 1,076,920 |   |   | 41.9 |   |   | 77,392 |   |   | nm |   |   |
| Total interest bearing   liabilities                                     |       | 23,084,525                                        |       | 265,418                              |       |   | 1.54 |   |   | 26,016,912 |   | 578,046 |   |   | 2.97 |   |   | 2,932,387 |   |   | 12.7 |   |   | 312,628 |   |   | nm |   |   |
| Noninterest bearing deposits                                             |       | 18,792,219                                        |       |                                 |       |   |   |   |   | 17,348,964 |   |   |   |   |   |   |   | (1,443,255 | ) |   | (7.7 | ) |   |   |   |   |   |   |   |
| Other liabilities                                                        |       | 1,256,056                                         |       |                                 |       |   |   |   |   | 1,508,382 |   |   |   |   |   |   |   | 252,326 |   |   | 20.1 |   |   |   |   |   |   |   |   |
| Total liabilities                                                        |       | 43,132,800                                        |       |                                 |       |   |   |   |   | 44,874,258 |   |   |   |   |   |   |   | 1,741,458 |   |   | 4.0 |   |   |   |   |   |   |   |   |
| **Stockholders’ Equity**                                            |       |                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common equity                                                            |       | 4,209,884                                         |       |                                 |       |   |   |   |   | 4,552,410 |   |   |   |   |   |   |   | 342,526 |   |   | 8.1 |   |   |   |   |   |   |   |   |
| Total stockholders’ equity                                          |       | 4,209,884                                         |       |                                 |       |   |   |   |   | 4,552,410 |   |   |   |   |   |   |   | 342,526 |   |   | 8.1 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                          |       | $                                                 | 47,342,684 |                                 |       |   |   |   |   |   | $ | 49,426,668 |   |   |   |   |   |   |   | $ | 2,083,984 |   |   | 4.4 | % |   |   |   |   |   |   |   |
| **Net Interest Income/Margin**                                           |       |                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income/margin (taxable-equivalent basis)                    |       |                                              |       | 1,361,638                            |       |   | 4.27 | % |   |   |   | 1,395,937 |   |   | 4.19 | % |   |   |   |   |   |   |   | 34,299 |   |   | 2.5 |   |   |
| Less: taxable-equivalent   adjustment                                    |       |                                              |       | 3,124                                |       |   |   |   |   |   |   | 4,478 |   |   |   |   |   |   |   |   |   |   |   | 1,354 |   |   | 43.3 |   |   |
| Net interest income                                                      |       |                                              |       | $                                    | 1,358,514  |   |   |   |   |   |   |   | $ | 1,391,459 |   |   |   |   |   |   |   |   |   |   |   | $ | 32,945 |   |   | 2.4 | % |   |

 

| ** ** | **Average Assets and  Liabilities of Discontinued Operations for the Nine Months Ended:** | ** ** | ** ** | ** ** | **September 30, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|-------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|------------|------------|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | Assets                                                                                    |       |       |       | $                      | 1,974,884  |       |       |       | ** ** |                   | ** ** | ** ** | $          | 244,210    | ** ** |       | ** ** | ** ** |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
|       | Liabilities                                                                               |       |       |       | $                      | 1,438,886  |       |       |       |       |                   |       |       | $          | 201,640    |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
|       | Net assets                                                                                |       |       |       | $                      | 535,998    |       |       |       |       |                   |       |       | $          | 42,570     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
|            |                                                                                           |            |            |            |                        |            |            |            |            |            |                        |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

(2)                Annualized.

(3)                Average balances on loans outstanding include allnonperforming loans. The amortized portion of net loan origination fees (costs)is included in interest income on loans, representing an adjustment to theyield.

(4)                Net funding allocated from (to) discontinued operationsrepresents the shortage (excess) of assets over liabilities of discontinuedoperations. The expense (earnings) on funds allocated from (to) discontinuedoperations are calculated by taking the net balance and applying an earningsrate or a cost of funds equivalent to the corresponding period’s Federal fundspurchased rate. The year-to-date expense (earnings) amount is the sum of thequarterly amounts.

nm - not meaningful

Net interest income inthe third quarter 2006, on a taxable equivalent basis, decreased 1 percent fromthe third quarter 2005. Our net interest margin decreased by 27 basis points.These results were primarily due to the following:

·       Averageearning assets increased $2.5 billion, or 6 percent, primarily due to anincrease in average loans, partly offset by a decline in average securities.The increase in average loans was largely due 

42

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to a $1.8 billionincrease in average commercial loans and a $1.2 billion increase in averageresidential mortgages, while average securities declined by $1.4 billion as aresult of sales of approximately $1.5 billion in lower yielding agencysecurities between September 2005 and December 2005 and maturities offset bypurchases of $1.4 billion in higher yielding mortgage securities betweenDecember 2005 and September 2006;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 85basis points, despite being negatively impacted by lower hedge income, whichdecreased by $14.8 million;

·       Averagenoninterest bearing deposits decreased $2.4 billion, or 12 percent, including adecrease of $1.0 billion, or 30 percent, in average title and escrow depositsdue to lower residential real estate activity. Average business demanddeposits, excluding title and escrow deposits, declined $1.1 billion, or 8percent, primarily due to deposit pricing pressures resulting from risingshort-term interest rates. Consumer demand deposits decreased $311 million, or10 percent. Average noninterest bearing deposits represented 42 percent ofaverage total deposits in third quarter 2006 compared to 48 percent in thethird quarter of 2005; and

·       Inthe third quarter 2006, the annualized average all-in cost of funds, whichincluded lower hedge income of $3.1 million, was 2.11 percent, reflecting ouraverage deposit-to-loan ratio of 113 percent and the relatively highproportion of noninterest bearing deposits to total deposits. In the thirdquarter 2005, the annualized all-in cost of funds was 0.96 percent and ouraverage deposit-to-loan ratio was 125 percent.

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term certificatesof deposit and other time deposits (CDs), and to convert our long-term,fixed-rate borrowings to floating rate. For 2006, these derivative positionsare expected to provide less net interest income than in 2005, as positionsmature and, to a lesser extent, as interest rates rise. However, as weexpected, the declines in hedge income have been offset by increased yields onthe underlying variable rate loans. For loans, we had hedge expense of less than$0.1 million and $14.8 million for the quarters ended September 30, 2005 and2006, respectively. For deposits and long-term fixed rate borrowings, we hadhedge income of $2.9 million and hedge expense of $0.2 million for the quartersended September 30, 2005 and 2006, respectively.

Netinterest income in the first nine months of 2006, on a taxable equivalentbasis, increased 3 percent from the first nine months of 2005. Our net interestmargin decreased by 8 basis points. These results were primarily due to thefollowing:

·       Averageearning assets increased $1.9 billion, or 5 percent, primarily due to anincrease in average loans, partly offset by a decline in average securities.The increase in average loans was largely due to a $2.1 billion increase inaverage commercial loans and a $1.4 billion increase in average residentialmortgages, while average securities declined by $2.3 billion;

·       Yieldson our earning assets were favorably impacted by the increasing interest rateenvironment resulting in a higher average yield on average earning assets of 83basis points, despite being negatively impacted by lower hedge income, whichdecreased by $43.8 million;

·       Averagenoninterest bearing deposits decreased $1.4 billion, or 8 percent, including adecrease of $723 million, or 23 percent, in average title and escrow depositsdue to lower residential real estate activity. Average business demanddeposits, excluding title and escrow deposits, declined $602 million, or 5percent, primarily due to deposit pricing pressures resulting from risingshort-term interest rates. Consumer demand deposits decreased $118 million, or4 percent. Average noninterest bearing deposits represented 44 percent ofaverage total deposits in the first nine months of 2006 compared to 48 percentof average total deposits in the first nine months of 2005; and

43

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·       Inthe first nine months of 2006, the annualized average all-in cost of funds,which included lower hedge income of $10.0 million, was 1.78 percent,reflecting our average deposit-to-loan ratio of 113 percent and the relativelyhigh proportion of noninterest bearing deposits to total deposits. In the firstnine months of 2005, the annualized all-in-cost of funds was 0.85 percent andthe average deposit-to-loan ratio was 127 percent.

We use derivatives to hedgeexpected changes in the yields on our variable rate loans and term CDs, and toconvert our long-term, fixed-rate borrowings to floating rate. For our loans,we had hedge income of $9.2 million and hedge expense of $34.6 million for the ninemonths ended September 30, 2005 and 2006, respectively. For deposits andlong-term fixed rate borrowings, hedge income was $10.6 million and $0.6million for the first nine months of September 30, 2005 and 2006,respectively.

**Noninterest Income**

| ** **                               | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** | **Increase (Decrease)** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**     | ** ** | **2005**                                           | ** ** | **2006**                                          | ** ** | ** Amount ** | ** ** | **  Percent  ** | ** ** | **2005** | ** ** | **2006** | ** ** | ** Amount ** | ** ** | **  Percent  ** | ** ** |
| Service charges on deposit accounts      |       |                                               | $          | 84,822                                            |       |   |   | $ | 79,083 |   |   |   | $ | (5,739 | ) |   |   | (6.8 | )% |   |   | $ | 243,835 |   |   |   | $ | 242,555 |   |   |   | $ | (1,280 | ) |   |   | (0.5 | )% |   |
| Trust and investment management fees     |       |                                               | 43,500     |                                              |       |   | 47,555 |   |   |   | 4,055 |   |   |   | 9.3 |   |   |   | 127,053 |   |   |   | 146,050 |   |   |   | 18,997 |   |   |   | 15.0 |   |   |
| Insurance commissions                    |       |                                               | 17,819     |                                              |       |   | 17,301 |   |   |   | (518 | ) |   |   | (2.9 | ) |   |   | 59,176 |   |   |   | 54,571 |   |   |   | (4,605 | ) |   |   | (7.8 | ) |   |
| Merchant banking fees                    |       |                                               | 11,257     |                                              |       |   | 11,655 |   |   |   | 398 |   |   |   | 3.5 |   |   |   | 35,637 |   |   |   | 28,280 |   |   |   | (7,357 | ) |   |   | (20.6 | ) |   |
| Brokerage commissions and fees           |       |                                               | 5,290      |                                              |       |   | 8,531 |   |   |   | 3,241 |   |   |   | 61.3 |   |   |   | 22,867 |   |   |   | 26,656 |   |   |   | 3,789 |   |   |   | 16.6 |   |   |
| Foreign exchange gains, net              |       |                                               | 8,849      |                                              |       |   | 8,179 |   |   |   | (670 | ) |   |   | (7.6 | ) |   |   | 25,570 |   |   |   | 24,304 |   |   |   | (1,266 | ) |   |   | (5.0 | ) |   |
| Card processing fees, net                |       |                                               | 6,597      |                                              |       |   | 7,241 |   |   |   | 644 |   |   |   | 9.8 |   |   |   | 18,668 |   |   |   | 21,144 |   |   |   | 2,476 |   |   |   | 13.3 |   |   |
| Securities gains (losses), net           |       |                                               | (320       | )                                                 |       |   | 43 |   |   |   | 363 |   |   |   | nm |   |   |   | (13,289 | ) |   |   | 1,822 |   |   |   | 15,111 |   |   |   | nm |   |   |
| Gain on private capital investments, net |       |                                               | 5,692      |                                              |       |   | 7,681 |   |   |   | 1,989 |   |   |   | 34.9 |   |   |   | 18,888 |   |   |   | 14,210 |   |   |   | (4,678 | ) |   |   | (24.8 | ) |   |
| Other                                    |       |                                               | 28,682     |                                              |       |   | 29,986 |   |   |   | 1,304 |   |   |   | 4.5 |   |   |   | 82,962 |   |   |   | 94,801 |   |   |   | 11,839 |   |   |   | 14.3 |   |   |
| Total noninterest  income                |       |                                               | $          | 212,188                                           |       |   |   | $ | 217,255 |   |   |   | $ | 5,067 |   |   |   | 2.4 | % |   |   | $ | 621,367 |   |   |   | $ | 654,393 |   |   |   | $ | 33,026 |   |   |   | 5.3 | % |   |

----

nm - not meaningful

**Noninterest Expense**

| ** **                                                         | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** | **Increase (Decrease)** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| **(Dollars in thousands)**                               | ** ** | **2005**                                           | ** ** | **2006**                                          | ** ** | **Amount** | ** ** | **Percent** | ** ** | **2005** | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries and other compensation                                    |       |                                               | $          | 190,293                                           |       |   |   | $ | 200,591 |   |   | $ | 10,298 |   |   | 5.4 | % |   |   | $ | 556,249 |   |   |   | $ | 596,539 |   |   | $ | 40,290 |   |   | 7.2 | % |   |
| Employee benefits                                                  |       |                                               | 45,831     |                                              |       |   | 44,022 |   |   | (1,809 | ) |   | (3.9 | ) |   |   | 145,609 |   |   |   | 149,206 |   |   | 3,597 |   |   | 2.5 |   |   |
| Salaries and employee benefits                                     |       |                                               | 236,124    |                                              |       |   | 244,613 |   |   | 8,489 |   |   | 3.6 |   |   |   | 701,858 |   |   |   | 745,745 |   |   | 43,887 |   |   | 6.3 |   |   |
| Net occupancy                                                      |       |                                               | 34,336     |                                              |       |   | 35,753 |   |   | 1,417 |   |   | 4.1 |   |   |   | 100,251 |   |   |   | 103,109 |   |   | 2,858 |   |   | 2.9 |   |   |
| Outside services                                                   |       |                                               | 28,533     |                                              |       |   | 31,890 |   |   | 3,357 |   |   | 11.8 |   |   |   | 76,248 |   |   |   | 91,203 |   |   | 14,955 |   |   | 19.6 |   |   |
| Equipment                                                          |       |                                               | 15,828     |                                              |       |   | 17,387 |   |   | 1,559 |   |   | 9.8 |   |   |   | 50,164 |   |   |   | 52,155 |   |   | 1,991 |   |   | 4.0 |   |   |
| Software                                                           |       |                                               | 14,378     |                                              |       |   | 15,334 |   |   | 956 |   |   | 6.6 |   |   |   | 43,084 |   |   |   | 47,001 |   |   | 3,917 |   |   | 9.1 |   |   |
| Professional services                                              |       |                                               | 11,240     |                                              |       |   | 12,169 |   |   | 929 |   |   | 8.3 |   |   |   | 36,131 |   |   |   | 43,754 |   |   | 7,623 |   |   | 21.1 |   |   |
| Advertising and public relations                                   |       |                                               | 9,114      |                                              |       |   | 11,726 |   |   | 2,612 |   |   | 28.7 |   |   |   | 25,657 |   |   |   | 33,228 |   |   | 7,571 |   |   | 29.5 |   |   |
| Communications                                                     |       |                                               | 10,808     |                                              |       |   | 9,942 |   |   | (866 | ) |   | (8.0 | ) |   |   | 30,950 |   |   |   | 30,555 |   |   | (395 | ) |   | (1.3 | ) |   |
| Data processing                                                    |       |                                               | 7,406      |                                              |       |   | 7,933 |   |   | 527 |   |   | 7.1 |   |   |   | 24,703 |   |   |   | 23,175 |   |   | (1,528 | ) |   | (6.2 | ) |   |
| Intangible asset amortization                                      |       |                                               | 4,985      |                                              |       |   | 3,427 |   |   | (1,558 | ) |   | (31.3 | ) |   |   | 14,956 |   |   |   | 10,284 |   |   | (4,672 | ) |   | (31.2 | ) |   |
| Foreclosed asset income                                            |       |                                               | (3,435     | )                                                 |       |   | (183 | ) |   | 3,252 |   |   | (94.7 | ) |   |   | (5,606 | ) |   |   | (15,332 | ) |   | (9,726 | ) |   | nm |   |   |
| Reversal of allowance for losses on off-balance sheet  commitments |       |                                               | —     |                                              |       |   | — |   |   | — |   |   | — |   |   |   | (1,000 | ) |   |   | (7,000 | ) |   | (6,000 | ) |   | nm |   |   |
| Other                                                              |       |                                               | 27,379     |                                              |       |   | 27,030 |   |   | (349 | ) |   | (1.3 | ) |   |   | 80,652 |   |   |   | 86,718 |   |   | 6,066 |   |   | 7.5 |   |   |
| Total noninterest expense                                          |       |                                               | $          | 396,696                                           |       |   |   | $ | 417,021 |   |   | $ | 20,325 |   |   | 5.1 | % |   |   | $ | 1,178,048 |   |   |   | $ | 1,244,595 |   |   | $ | 66,547 |   |   | 5.6 | % |   |

----

nm - not meaningful

44

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**Income Tax Expense**

Income tax expense on continuing operations in thethird quarter 2006 resulted in a 33.6 percent effective income tax ratecompared with an effective tax rate of 31.7 percent for the third quarter 2005.The lower effective tax rate in 2005 was due primarily to reductions in incometax expense of approximately $9.0 million related to an adjustment of 2004California tax expense to reflect the tax as reported on the tax return filedon the worldwide unitary basis, and to California Enterprise Zone Credits,primarily from prior years, for which we qualified during the third quarter of2005. Income tax expense in the first nine months of 2006 resulted in a 33.8percent effective tax rate compared with an effective tax rate of 32.5 percentfor the first nine months of 2005. The lower tax rate in 2005 was due primarilyto a reduction in reserves of $10.0 million in the first quarter of 2005 forestimated amounts owed to the Internal Revenue Service with respect to certainleveraged leasing transactions and the $9.0 million adjustment in the thirdquarter of 2005 as discussed above.

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

**Loans**

Thefollowing table shows loans outstanding by loan type.

| ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **Increase (Decrease)**                | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **September 30, 2006 From:** | ** ** |
| ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **September 30,**                      | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **2005**                                    | ** ** | **2005** | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** | **Amount**                                  | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Domestic:                            |       |                   |       |                  |       |                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial |       |                   | $          | 10,997,018            |       |                   |       | $                                           | 11,450,955 |   |   |   | $ | 12,513,749 |   |   | $ | 1,516,731 |   |   | 13.8 | % |   | $ | 1,062,794 |   |   | 9.3 | % |   |
| Construction                         |       |                   | 1,366,413  |                  |       |                   | 1,447,292  |                                        |       |   | 2,074,320 |   |   | 707,907 |   |   | 51.8 |   |   | 627,028 |   |   | 43.3 |   |   |
| Mortgage:                            |       |                   |       |                  |       |                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                          |       |                   | 10,976,681 |                  |       |                   | 11,380,728 |                                        |       |   | 12,101,517 |   |   | 1,124,836 |   |   | 10.2 |   |   | 720,789 |   |   | 6.3 |   |   |
| Commercial                           |       |                   | 5,590,774  |                  |       |                   | 5,682,624  |                                        |       |   | 5,760,046 |   |   | 169,272 |   |   | 3.0 |   |   | 77,422 |   |   | 1.4 |   |   |
| Total mortgage                       |       |                   | 16,567,455 |                  |       |                   | 17,063,352 |                                        |       |   | 17,861,563 |   |   | 1,294,108 |   |   | 7.8 |   |   | 798,211 |   |   | 4.7 |   |   |
| Consumer:                            |       |                   |       |                  |       |                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Installment                          |       |                   | 834,653    |                  |       |                   | 891,062    |                                        |       |   | 1,078,671 |   |   | 244,018 |   |   | 29.2 |   |   | 187,609 |   |   | 21.1 |   |   |
| Revolving lines of credit            |       |                   | 1,653,275  |                  |       |                   | 1,610,680  |                                        |       |   | 1,428,317 |   |   | (224,958 | ) |   | (13.6 | ) |   | (182,363 | ) |   | (11.3 | ) |   |
| Total consumer                       |       |                   | 2,487,928  |                  |       |                   | 2,501,742  |                                        |       |   | 2,506,988 |   |   | 19,060 |   |   | 0.8 |   |   | 5,246 |   |   | 0.2 |   |   |
| Lease financing                      |       |                   | 574,798    |                  |       |                   | 579,593    |                                        |       |   | 573,516 |   |   | (1,282 | ) |   | (0.2 | ) |   | (6,077 | ) |   | (1.0 | ) |   |
| Total loans held to maturity         |       |                   | 31,993,612 |                  |       |                   | 33,042,934 |                                        |       |   | 35,530,136 |   |   | 3,536,524 |   |   | 11.1 |   |   | 2,487,202 |   |   | 7.5 |   |   |
| Total loans held for sale            |       |                   | 11,135     |                  |       |                   | 52,661     |                                        |       |   | 143,333 |   |   | 132,198 |   |   | nm |   |   | 90,672 |   |   | nm |   |   |
| Total loans                          |       |                   | $          | 32,004,747            |       |                   |       | $                                           | 33,095,595 |   |   |   | $ | 35,673,469 |   |   | $ | 3,668,722 |   |   | 11.5 | % |   | $ | 2,577,874 |   |   | 7.8 | % |   |

----

nm = not meaningful

*Commercial, Financialand Industrial Loans*

Commercial, financial and industrial loans representone of the largest categories in the loan portfolio. These loans are extended principallyto corporations, middle-market businesses, and small businesses, with noindustry concentration exceeding 10 percent of total loans. Although many ofour customers are located in California, the portfolio has a high degree ofgeographic diversification based upon our customers’ revenue bases, which webelieve lowers our vulnerability to changes in the economic outlook of anyparticular region of the U.S.

Our commercial market lending originates primarilythrough our commercial banking offices. These offices, which rely extensivelyon relationship-oriented banking, provide a variety of services including cashmanagement services, lines of credit, accounts receivable and inventoryfinancing. Separately, we originate or participate in a wide variety offinancial services to major corporations. These services include traditionalcommercial banking and specialized financing tailored to the needs of eachcustomer’s specific industry. 

45

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Presently, we are active in,among other sectors, the oil and gas, communications, entertainment, retailing,power and utilities and financial services industries.

The commercial, financial andindustrial loan portfolio increased in the third quarter 2006 from the thirdquarter 2005 mainly due to increased loan demand primarily in the oil and gasand national corporate segments as well as the California middle market.

*Construction andCommercial Mortgage Loans*

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

The construction loan portfolio increase in the thirdquarter 2006 from the third quarter 2005 was due to increased demand for residentialconstruction projects with apartment financing representing the largestcomponent.

The commercial mortgage loanportfolio consists of loans on commercial income properties primarily inCalifornia. The increase in commercial mortgages between the third quarter of2006 and the third quarter of 2005 was mainly due to increased demand in the California middle market forreal estate related financing.

*Residential MortgageLoans*

We originate residential mortgage loans, secured byone-to-four family residential properties, through our multiple channel network(including branches, mortgage brokers, and loan-by-phone) throughoutCalifornia, Oregon and Washington, and we periodically purchase loans in ourmarket area. At September 30, 2006, 62 percent of our residential mortgageloans were interest only, of which none are negative amortizing. Atorigination, these interest only loans had relatively high credit scores andhad weighted average loan-to-value (LTV) ratios of approximately 65 percent. Theremainder of the portfolio consists of balloon or regular amortizing loans.

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

*Consumer Loans*

We originate consumer loans,such as auto loans and home equity loans and lines, through our branch network.The primary driver of the increase in consumer loans was our “Flex EquityLine/Loan” product. The “Flex Equity Line/Loan” allows our customers theflexibility to manage a line of credit with as many as four fixed rate loansunder a single product. We offer a “Flex Equity High LTV” product, which allowsour customers to draw up to 100 percent of the value of their real estate or$150 thousand, whichever is less. 

*Lease Financing*

We offer two types of leasesto our customers: direct financing leases, where the assets leased are acquiredwithout additional financing from other sources; and leveraged leases, where asubstantial portion of the financing is provided by debt with no recourse to us.Included in our lease portfolio are leveraged leases of $553 million, which arenet of non-recourse debt of approximately $1.1 billion. We utilize a number ofspecial purpose entities for our leveraged leases. These entities serve legaland tax purposes and do not function as vehicles to shift liabilities to otherparties or to deconsolidate affiliates for financial reporting purposes. Asallowed by US GAAP and by law, the gross lease receivable is offset by the 

46

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qualifyingnon-recourse debt. In leveraged lease transactions, the third-party lender mayonly look to the collateral value of the leased assets for repayment. 

**Cross-BorderOutstandings**

Our cross-borderoutstandings, including those that are part of our discontinued operations,reflect certain additional economic and political risks that are not reflectedin domestic outstandings. These risks include those arising from exchange ratefluctuations and restrictions on the transfer of funds. The following tablesets forth our cross-border outstandings as of September 30, 2005,for any country where such outstandings exceeded 1 percent of total assets. Forthe periods ended December 31, 2005 and September 30, 2006 there wereno countries where such cross-border outstandings exceeded 1 percent of totalassets. The cross-border outstandings were compiled based upon category anddomicile of ultimate risk and are comprised of balances with banks, tradingaccount assets, securities available for sale, securities purchased underresale agreements, loans, accrued interest receivable, acceptances outstandingand investments with foreign entities. For any country shown in the tablebelow, any significant local currency outstandings are either hedged or fundedby local currency borrowings. 

| ** **                          | ** ** | ** **       | ** ** | **Public**   | ** ** | **Corporations**   | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|--------------|------------|--------------------|------------|------------------|------------|
| ** **                          | ** ** | **Financial**    | ** ** | **Sector**   | ** ** | **and Other** | ** ** | **Total**        | ** ** |
| **(Dollars in millions)** | ** ** | **Institutions** | ** ** | **Entities** | ** ** | **Borrowers**      | ** ** | **Outstandings** | ** ** |
| September 30, 2005             |       |             |       |         |       |               |       |             |       |   |   |   |   |   |   |   |   |
| South Korea                         |       |             | $          | 656          |       |               |       | $                | —     |   |   |   | $ | 10 |   |   |   | $ | 666 |   |   |
|                                     |            |                  |            |              |            |                    |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Provision for LoanLosses**

We had no provision for loan lossesin the third quarter of 2006, compared with a reversal of the allowance forloan losses of $15 million in the third quarter of 2005. The $15 millionreversal in the third quarter of 2005 included a $10 million reversal ofallowance for loan losses related to the sale of our internationalcorrespondent banking business. Provisions for loan losses are charged toincome to bring our allowance for loan losses to a level deemed appropriate bymanagement based on the factors discussed under “Allowances for Credit Losses”below. We also did not record a provision for losses on off-balance sheetcommitments in either of the quarters ended September 30, 2005 or 2006.

**Allowances for CreditLosses**

*Allowance Policy andMethodology*

We maintain allowances forcredit losses (defined as both the allowance for loan losses and the allowancefor off-balance sheet commitment losses) to absorb losses inherent in the loanportfolio as well as for leases and off-balance sheet commitments. Understandingour policies on the allowances for credit losses is fundamental tounderstanding our consolidated financial condition and consolidated results ofoperations. Accordingly, our significant policies and methodology on theallowances for credit losses are discussed in detail in Note 1 to ourConsolidated Financial Statements and in the section “Allowances for CreditLosses” included in our “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in our 2005 Form 10-K.

*Comparison of the Total Allowances and RelatedProvision for Credit Losses from December 31, 2005*

At September 30, 2006, our total allowances forcredit losses was $406 million, which consisted of $327 million related toloans and $79 million related to off-balance sheet commitments. The allowancesfor credit losses consisted of $343 million and $63 million of allocated andunallocated allowance, respectively. At September 30, 2006, our allowancesfor credit loss coverage ratios were 1.14 percent of 

47

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total loans and 850 percent oftotal nonaccrual loans. At December 31, 2005, our total allowances forcredit losses was $438 million, or 1.32 percent of the total loan portfolio and744 percent of total nonaccrual loans.

In addition, the allowances incorporate the results ofmeasuring impaired loans as provided in SFAS No. 114, “Accounting byCreditors for Impairment of a Loan” as amended by SFAS No. 118, “Accountingby Creditors for Impairment of a Loan—Income Recognition and Disclosures.” Theseaccounting standards prescribe the measurement methods, income recognition anddisclosures related to impaired loans. At September 30, 2006, totalimpaired loans were $33 million, and the associated impairment allowance was $3million, compared with $59 million and $13 million, respectively, at December 31,2005.

At September 30, 2006 and December 31, 2005,the allowance for losses related to off-balance sheet commitments includedwithin our total allowances for credit losses, was $79 million and $86 million,respectively. In determining the adequacy of our allowances for credit losses,we consider both the allowance for loan losses and for off-balance sheetcommitment losses.

We had no provision for loan losses in the thirdquarter 2006, as a result of management’s assessment of factors, including thecontinuing good quality of our loan portfolio, growth in the U.S. economy andstable conditions in domestic markets in which we operate, offset by the growthin the loan portfolio.

During the third quarter of2006, there were no material changes in estimation methods or assumptions thataffected our methodology for assessing the appropriateness of the formula andspecific allowances for credit losses. 

*Changes in theAllocated (Formula and Specific) Allowance*

At September 30, 2006, the formula allowancedecreased to $336 million, compared to $356 million at December 31, 2005. Thisnet decrease was due primarily to the impact of a decrease in criticized loans,partially offset by growth in the commercial loan portfolio. 

At September 30, 2006,the specific allowance decreased to $7 million, compared to $17 million at December 31,2005. This decrease was primarily reflective of lower nonaccrual loans. 

*Changes in theUnallocated Allowance*

At September 30, 2006, the unallocated allowancedecreased to $63 million from $65 million at December 31, 2005, reflectingmanagement’s belief that the current level of our unallocated allowance isappropriate based on continuing uncertainty associated with our principalportfolio segments as we approach a turning point in credit quality trends. Additionally,the reasons for which we believe an unallocated allowance is warranted aredetailed below.

In our assessment as of September 30, 2006,management focused, in particular, on the factors and conditions set out below.There can be no assurance that the adverse impact of any of these conditions onus will not be in excess of the ranges set forth. 

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

48

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

The following describessome of the specific conditions we considered:

·       Withrespect to commercial real estate, we considered the improvement in thecommercial real estate sector, partly offset by weakness in the residentialconstruction market, which could be in the range of $8 million to $20 million.

·       Withrespect to fuel prices, we considered the ability of borrowers to absorb higheroil prices without anticipated negative effects, the decline in the costs ofoil and petroleum products and the impact across virtually all sectors of theeconomy, which could be in a range of $4 million to $19 million.

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

·       Withrespect to contractors, we considered the decline in new home sales, partiallyoffset by the impact of lower commodity prices on contractor margins, whichcould be in the range of $5 million to $7 million. 

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

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

49

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*Change in the TotalAllowances for Credit Losses*

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

| ** **                                                                                  | ** ** | **For the Three Months**                              | ** ** | ** **                                                           | ** ** | ** **                        | ** ** | **For the Nine Months** | ** ** | ** **                                                           | ** ** | ** **                                                           | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Ended September 30,**                                    | ** ** | **Increase (Decrease)**                                         | ** ** | **Ended September 30,** | ** ** | **Increase (Decrease)**           | ** ** |
| **(Dollars in thousands)**                                                        | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** | **Amount**                        | ** ** | **Percent**                            | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Balance, beginning of period                                                                |       |                                                                 | $          | 394,972                                                              |       |                              |       | $                                      | 328,338    |                                                                 |       | $                                                                    | (66,634    | ) |   | (16.9 | )% |   |   | $ | 399,156 |   |   |   | $ | 351,532 |   |   | $ | (47,624 | ) |   | (11.9 | )% |   |
| Loans charged off:                                                                          |       |                                                                 |       |                                                                 |       |                              |       |                                   |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and industrial                                                        |       |                                                                 | 8,629      |                                                                 |       |                              | 4,105      |                                   |       | (4,524                                                               | )          |                                                                 | (52.4      | ) |   |   | 15,992 |   |   |   | 33,274 |   |   | 17,282 |   |   | nm |   |   |
| Construction                                                                                |       |                                                                 | —     |                                                                 |       |                              | —     |                                   |       | —                                                               |       |                                                                 | —     |   |   |   | 118 |   |   |   | — |   |   | (118 | ) |   | (100.0 | ) |   |
| Commercial mortgage                                                                         |       |                                                                 | 8          |                                                                 |       |                              | —     |                                   |       | (8                                                                   | )          |                                                                 | (100.0     | ) |   |   | 1,315 |   |   |   | 336 |   |   | (979 | ) |   | (74.4 | ) |   |
| Consumer                                                                                    |       |                                                                 | 1,136      |                                                                 |       |                              | 929        |                                   |       | (207                                                                 | )          |                                                                 | (18.2      | ) |   |   | 3,238 |   |   |   | 2,723 |   |   | (515 | ) |   | (15.9 | ) |   |
| Lease financing                                                                             |       |                                                                 | 19,656     |                                                                 |       |                              | —     |                                   |       | (19,656                                                              | )          |                                                                 | (100.0     | ) |   |   | 19,857 |   |   |   | 22 |   |   | (19,835 | ) |   | (99.9 | ) |   |
| Total loans charged off                                                                     |       |                                                                 | 29,429     |                                                                 |       |                              | 5,034      |                                   |       | (24,395                                                              | )          |                                                                 | (82.9      | ) |   |   | 40,520 |   |   |   | 36,355 |   |   | (4,165 | ) |   | (10.3 | ) |   |
| Recoveries of loans  previously charged off:                                           |       |                                                                 |       |                                                                 |       |                              |       |                                   |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial, financial and  industrial                                                       |       |                                                                 | 12,632     |                                                                 |       |                              | 3,179      |                                   |       | (9,453                                                               | )          |                                                                 | (74.8      | ) |   |   | 44,073 |   |   |   | 14,025 |   |   | (30,048 | ) |   | (68.2 | ) |   |
| Construction                                                                                |       |                                                                 | —     |                                                                 |       |                              | —     |                                   |       | —                                                               |       |                                                                 | —     |   |   |   | 34 |   |   |   | — |   |   | (34 | ) |   | (100.0 | ) |   |
| Commercial mortgage                                                                         |       |                                                                 | —     |                                                                 |       |                              | —     |                                   |       | —                                                               |       |                                                                 | —     |   |   |   | 48 |   |   |   | 2 |   |   | (46 | ) |   | (95.8 | ) |   |
| Consumer                                                                                    |       |                                                                 | 361        |                                                                 |       |                              | 456        |                                   |       | 95                                                                   |       |                                                                 | 26.3       |   |   |   | 1,362 |   |   |   | 1,332 |   |   | (30 | ) |   | (2.2 | ) |   |
| Lease financing                                                                             |       |                                                                 | 12         |                                                                 |       |                              | 20         |                                   |       | 8                                                                    |       |                                                                 | 66.7       |   |   |   | 149 |   |   |   | 4,258 |   |   | 4,109 |   |   | nm |   |   |
| Total recoveries of loans previously charged off                                       |       |                                                                 | 13,005     |                                                                 |       |                              | 3,655      |                                   |       | (9,350                                                               | )          |                                                                 | (71.9      | ) |   |   | 45,666 |   |   |   | 19,617 |   |   | (26,049 | ) |   | (57.0 | ) |   |
| Net loans charged off (recovered)                                                           |       |                                                                 | 16,424     |                                                                 |       |                              | 1,379      |                                   |       | (15,045                                                              | )          |                                                                 | (91.6      | ) |   |   | (5,146 | ) |   |   | 16,738 |   |   | 21,884 |   |   | nm |   |   |
| Reversal of allowance for loan losses                                                       |       |                                                                 | (15,000    | )                                                                    |       |                              | —     |                                   |       | 15,000                                                               |       |                                                                 | (100.0     | ) |   |   | (40,683 | ) |   |   | (8,000 | ) |   | 32,683 |   |   | (80.3 | ) |   |
| Foreign translation adjustment and other net  additions (deductions)                   |       |                                                                 | 123        |                                                                 |       |                              | (4         | )                                      |       | (127                                                                 | )          |                                                                 | nm         |   |   |   | 52 |   |   |   | 161 |   |   | 109 |   |   | nm |   |   |
| Ending balance of allowance for loan losses                                                 |       |                                                                 | 363,671    |                                                                 |       |                              | 326,955    |                                   |       | (36,716                                                              | )          |                                                                 | (10.1      | )% |   |   | 363,671 |   |   |   | 326,955 |   |   | (36,716 | ) |   | (10.1 | )% |   |
| Allowance for losses on off balance sheet  commitments                                 |       |                                                                 | 81,375     |                                                                 |       |                              | 79,374     |                                   |       | (2,001                                                               | )          |                                                                 | (2.5       | ) |   |   | 81,375 |   |   |   | 79,374 |   |   | (2,001 | ) |   | (2.5 | ) |   |
| Allowances for credit losses                                                                |       |                                                                 | $          | 445,046                                                              |       |                              |       | $                                      | 406,329    |                                                                 |       | $                                                                    | (38,717    | ) |   | (8.7 | )% |   |   | $ | 445,046 |   |   |   | $ | 406,329 |   |   | $ | (38,717 | ) |   | (8.7 | )% |   |
| Allowances for credit losses to total loans                                            |       |                                                                 | 1.39       | %                                                                    |       |                              | 1.14       | %                                      |       |                                                                 |       |                                                                 |       |   |   |   | 1.39 | % |   |   | 1.14 | % |   |   |   |   |   |   |   |
| Reversal of allowance for loan losses to net  loans charged off  (recovered)           |       |                                                                 | nm         |                                                                 |       |                              | 0.00       |                                   |       |                                                                 |       |                                                                 |       |   |   |   | 790.58 |   |   |   | nm |   |   |   |   |   |   |   |   |
| Net loans charged off (recovered) to average  loans outstanding for the period(1) |       |                                                                 | 0.20       |                                                                 |       |                              | 0.02       |                                   |       |                                                                 |       |                                                                 |       |   |   |   | (0.02 | ) |   |   | 0.06 |   |   |   |   |   |   |   |   |

----

(1)                   Annualized.

nm - not meaningful

Total loans charged off in thethird quarter 2006 decreased from the third quarter 2005, primarily due to the charge off of a singlecommercial aircraft lease in the third quarter of 2005. Charge offsreflect the realization of losses in the portfolio that were recognizedpreviously through the provision for credit losses. In addition, third quarter2006 recoveries of loans previously charged off decreased from the thirdquarter of 2005 primarily as a result of a single large commercial loanrecovery in the third quarter of 2005 totaling over $9 million. Suchfluctuations in loan recoveries from year-to-year are due to variability intiming of recoveries and tend to trail the periods in which charge offs are recorded.

50

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**Nonperforming Assets**

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

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

Thefollowing table sets forth an analysis of nonperforming assets.

| ** **                                                      | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **Increase (Decrease)  September 30, 2006 From:** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **September 30, 2005**                                      | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                            | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** | **Amount**                                                            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial                            |       |                   | $          | 24,654                |       |                   |       | $                                                                     | 50,073     |   |   |   | $ | 14,171 |   |   | $ | (10,483 | ) |   | (42.5 | )% |   | $ | (35,902 | ) |   | (71.7 | )% |   |
| Commercial mortgage                                             |       |                   | 10,326     |                  |       |                   | 8,819      |                                                                  |       |   | 18,538 |   |   | 8,212 |   |   | 79.5 |   |   | 9,719 |   |   | nm |   |   |
| Lease financing                                                 |       |                   | —     |                  |       |                   | —     |                                                                  |       |   | 15,094 |   |   | 15,094 |   |   | nm |   |   | 15,094 |   |   | nm |   |   |
| Total nonaccrual loans                                          |       |                   | 34,980     |                  |       |                   | 58,892     |                                                                  |       |   | 47,803 |   |   | 12,823 |   |   | 36.7 |   |   | (11,089 | ) |   | (18.8 | ) |   |
| Foreclosed assets                                               |       |                   | 2,527      |                  |       |                   | 2,753      |                                                                  |       |   | — |   |   | (2,527 | ) |   | (100.0 | ) |   | (2,753 | ) |   | (100.0 | ) |   |
| Total nonperforming  assets                                     |       |                   | $          | 37,507                |       |                   |       | $                                                                     | 61,645     |   |   |   | $ | 47,803 |   |   | $ | 10,296 |   |   | 27.5 |   |   | $ | (13,842 | ) |   | (22.5 | ) |   |
| Allowances for credit  losses(1)                                |       |                   | $          | 445,046               |       |                   |       | $                                                                     | 437,907    |   |   |   | $ | 406,329 |   |   | $ | (38,717 | ) |   | (8.7 | )% |   | $ | (31,578 | ) |   | (7.2 | )% |   |
| Nonaccrual loans to total loans                            |       |                   | 0.11       | %                     |       |                   | 0.18       | %                                                                     |       |   | 0.13 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowances for credit losses to nonaccrual  loans          |       |                   | 1,272.29   |                  |       |                   | 743.58     |                                                                  |       |   | 850.01 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets to total loans and  foreclosed assets |       |                   | 0.12       |                  |       |                   | 0.19       |                                                                  |       |   | 0.13 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets  to total assets                      |       |                   | 0.07       |                  |       |                   | 0.12       |                                                                  |       |   | 0.09 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

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

nm = not meaningful

The increase in nonaccrualloans from the third quarter 2005 was primarily due to a moderate increase innonaccruing commercial mortgage and lease financing loans partially offset bypay-downs, note sales, and charge offs. During the third quarter 2006, we hadno sales of nonperforming loans compared to $4.0 million in sales in the thirdquarter 2005. Losses and recoveries that result when the sale decision is madeare reflected in our net charge offs.

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

| ** **                                                         | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **Increase (Decrease)  September 30, 2006 From:** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **September 30, 2005**                                      | ** ** | **December 31, 2005** | ** ** |
| **(Dollars in thousands)**                               | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** | ** Amount **                                                | ** ** | ** Percent ** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial, financial and industrial                               |       |                   | $          | 778                   |       |                   |       | $                                                                     | 187        |   |   |   | $ | 563 |   |   |   | $ | (215 | ) |   |   | (27.6 | )% |   | $ | 376 |   |   | nm |   |   |
| Construction                                                       |       |                   | —     |                  |       |                   | 677        |                                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   | (677 | ) |   | (100.0 | )% |   |
| Mortgage:                                                          |       |                   |       |                  |       |                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                        |       |                   | 3,042      |                  |       |                   | 2,784      |                                                                  |       |   | 2,259 |   |   |   | (783 | ) |   |   | (25.7 | ) |   | (525 | ) |   | (18.9 | ) |   |
| Commercial                                                         |       |                   | —     |                  |       |                   | 499        |                                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   | (499 | ) |   | (100.0 | ) |   |
| Total mortgage                                                     |       |                   | 3,042      |                  |       |                   | 3,283      |                                                                  |       |   | 2,259 |   |   |   | (783 | ) |   |   | (25.7 | ) |   | (1,024 | ) |   | (31.2 | ) |   |
| Consumer and other                                                 |       |                   | 883        |                  |       |                   | 819        |                                                                  |       |   | 1,342 |   |   |   | 459 |   |   |   | 52.0 |   |   | 523 |   |   | 63.9 |   |   |
| Total loans 90 days or  more past due and still accruing |       |                   | $          | 4,703                 |       |                   |       | $                                                                     | 4,966      |   |   |   | $ | 4,164 |   |   |   | $ | (539 | ) |   |   | (11.5 | )% |   | $ | (802 | ) |   | (16.1 | )% |   |

----

nm = not meaningful

**Quantitative andQualitative Disclosures About Market Risk**

Our exposure to market risk exists primarily ininterest rate risk in our non-trading balance sheet and, to a much lesserdegree, in price risk in our trading portfolio for our customer-focused tradingand sales activities. The objective of market risk management is to mitigateany undue adverse impact on earnings and capital arising from changes ininterest rates and other market variables and to ensure the Bank has adequatesources of liquidity. This risk management objective supports our broadobjective of enhancing shareholder value, which encompasses stable earningsgrowth over time and capital stability. During the second quarter 2006, theBank’s structure for governing market risk was enhanced by expanding theinvolvement of Executive Management in the process.

The Board of Directors, through its Finance andCapital Committee, approves our Asset and Liability Management (ALM),Investment and Derivatives Policy, which governs the management of market riskand guides our investment and derivatives activities. The ALM Committee (ALCO)is comprised of the members of the CEO Forum and our Treasurer. ALCO providesthe broad and strategic guidance of market risk management. ALCO is alsoresponsible for ongoing management of market risk and approves specific riskmanagement programs. The Treasurer is primarily responsible for theimplementation of risk management strategies approved by ALCO and for operatingmanagement of market risk through the funding, investment, and derivativeshedging activities of Corporate Treasury. The manager of the Global MarketsDivision is responsible for operating management of price risk through thetrading activities conducted in that division. The Market Risk Monitoring unitis responsible for the monitoring of market risk and functions independently ofall operating and management units.

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

*Interest Rate Risk Management (Other Than Trading)*

During the first nine months of 2006, our interestrate risk shifted from asset sensitive to a neutral to slightly liabilitysensitive profile as a result of several factors. In January and September 2006,we added $1 billion and $900 million, respectively, of new floor hedges toreduce our downside asset-sensitivity (see our discussion of “ALM Derivatives”below). In May 2006, we added $700 million notional amount of interestrate swaps to convert the Bank’s $700 million fixed rate debt issuance tofloating rates. Additionally, changes in our balance sheet composition andrefinements to our deposit price sensitivity model continued to reduce ourasset sensitivity.

52

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At September 30, 2006,Economic Net Interest Income (NII) sensitivity was neutral to slightlyliability sensitive to parallel rate shifts. A +200 basis point parallel shiftwould reduce 12-month Economic NII by 1.02 percent, while a similardownward shift would increase it by 0.18 percent. This compares with an estimated1.04 percent increase and 2.22 percent decrease, respectively, at September 30,2005. We caution that ongoing enhancements to our interest rate risk modelingmay make prior-year comparisons of Economic NII less meaningful. Economic NIIadjusts our reported NII for the effect of certain non-interest bearing depositrelated fee and expense items. Those adjustment items are innatelyliability-sensitive, meaning that reported NII is more asset-sensitive than isEconomic NII.

EconomicNII

| ** **                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| **(Dollars in millions)** | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| +200basis points                    |       |                   | $          | 20.40                 |       |                   |       | $ | 18.90 |   |   |   | $ | (19.60 | ) |   |
| as a percentage of  base case NII   |       |                   | 1.04       | %                     |       |                   | 0.93       | % |   |   | 1.02 | % |   |
| -200  basis points                  |       |                   | $          | (43.30                | )          |                   |       | $ | (40.20 | ) |   |   | $ | 3.40 |   |   |
| as a percentage of base case  NII   |       |                   | 2.22       | %                     |       |                   | 1.97       | % |   |   | 0.18 | % |   |

 

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

*ALM Activities*

During the first nine monthsof 2006, our balance sheet shifted from an asset sensitive profile to a neutralto slightly liability sensitive profile, meaning that the current mix of assetsreprices less quickly than our current mix of liabilities. The change inprofile resulted primarily from increased asset growth funded by proportionallymore short-term wholesale liabilities and increased deposit pricing sensitivityduring the third quarter. In managing the interest rate sensitivity of ourbalance sheet, we use the ALM investment securities portfolio and derivativespositions as the primary tools to adjust our interest rate risk profile, ifnecessary. During the first nine months of 2006, we reinvested proceeds frommaturing ALM securities into securities with like terms and asset allocation.New derivative hedges were also added during the year as described below.

*ALM Investments*

At December 31, 2005 and September 30, 2006,our securities available for sale portfolio included $6.4 billion and $6.6billion, respectively, of securities for ALM purposes. During the first ninemonths of 2006, we purchased approximately $1.4 billion of securities, whichincluded the impact of our portfolio rebalancing strategy completed in thefirst quarter of 2006. Approximately $1.1 billion of ALM securities matured orwere called during this period. The composition of the portfolio is expected toremain relatively stable for the remainder of 2006. The estimated ALM portfolioeffective duration was 2.0 at September 30, 2006, compared to 2.2 at December 31,2005.

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

53

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*ALM Derivatives*

In January and September 2006, we purchased$1 billion and $900 million notional amount, respectively, of LIBOR floors inorder to moderate the downside asset-sensitivity of our overall risk positionwhile retaining the upside sensitivity should rates rise further. Additionally,in May 2006, the Bank initiated a $4 billion Bank Note program and issued$700 million principal amount of ten-year, fixed-rate subordinated notes, whichwere converted to a floating rate through the use of interest rate swapcontracts. During the first nine months of 2006, the ALM derivatives portfoliodeclined by a net $350 million notional, as $3.0 billion of notional amountcontracts matured, offset partially by $2.6 billion notional of purchases.

The fair value of the ALM derivative contractsdeclined throughout the year as several “in-the-money” interest rate swapcontracts matured and as the value of our remaining receive fixed interest rateswaps and floor option contracts declined with rising interest rates. Foradditional discussion of derivative instruments and our hedging strategies, seeNote 8 to our Condensed Consolidated Financial Statements included in thisreport and Note 19 to our Consolidated Financial Statements included in ourAnnual Report on Form 10-K for the year ended December 31,2005.

Thefollowing table provides the notional value and the fair value of our ALMderivatives portfolio as of September 30, 2005, December 31, 2005,and September 30, 2006 and the change in fair value between December 31,2005 and September 30, 2006.

| **(Dollars in thousands)**                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** | **Increase / (Decrease)  From December 31, 2005  to September 30, 2006** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| Total gross notional  amount of positions held for purposes other than trading: |       | $                            | 8,150,000  |                        | $          | 7,550,000                    |       | $                                                                                                                | 7,200,000  |   |   | $ | (350,000 | ) |   |
| Of which, interest rate swaps pay fixed rates of interest:                      |       | $                            | —     |                        | $          | —                       |       | $                                                                                                                | —     |   |   | $ | — |   |   |
| Fair value of positions held  for purposes other than trading:                  |       |                         |       |                        |       |                         |       |                                                                                                             |       |   |   |
| Gross positive fair value                                                       |       | $                            | 15,690     |                        | $          | 5,721                        |       | $                                                                                                                | 31,956     |   |   | $ | 26,235 |   |   |
| Gross negative fair value                                                       |       | $                            | (48,118    | )                           | $          | (55,943                      | )          | $                                                                                                                | (46,890    | ) |   | $ | 9,053 |   |   |
| Positive (Negative)  Fair value of positons, net                      |       | $                            | (32,428    | )                           | $          | (50,222                      | )          | $                                                                                                                | (14,934    | ) |   | $ | 35,288 |   |   |

 

*Trading Activities*

We market energy derivatives contracts to existingenergy industry customers, primarily oil and gas producers, in order to meettheir hedging needs. Volume increased from $1.5 billion in notional amount ofcontracts outstanding at December 31, 2005 to $3.0 billion notional amountat September 30, 2006. Consistent with our customer interest ratederivatives business, all transactions are fully matched to remove our exposureto market risk, with income produced from the credit spread earned.

For information about themarket risk in our trading activities, please see “Quantitative and QualitativeDisclosures about Market Risk” in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2005 Form 10-K.

**Liquidity Risk**

Liquidity risk is the undue risk to the Bank’searnings and capital, which would result from the Bank’s inability to meet itsobligations as they come due without incurring unacceptable costs. Liquidityrisk management is governed by the ALM Policy, which is approved by the Financeand Capital Committee of 

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the Board. The approval of ourLiquidity Contingency Plan by ALCO is dependent on the outcome of our monthlyongoing reviews of our liquidity situation. Liquidity is managed through thisALCO coordination process on an entity-wide basis, encompassing all majorbusiness units. Our liquidity management is implemented through our threeprimary sources of liquidity: core deposits, drawing upon the strengths of ourextensive retail and commercial core deposit franchise; asset liquidation,including securities sold under repurchase agreements; and treasury funding,which includes funds raised from interbank and other sources, both domestic andoffshore.

Core deposits provide us with a sizable source ofrelatively stable and low-cost funds. Our average core deposits, which includedemand deposits, money market demand accounts, and savings and consumer timedeposits, combined with average common stockholders’ equity, funded over 76percent of average total assets of approximately $50.8 billion in the thirdquarter of 2006. Most of the remaining funding was provided by short-termborrowings in the form of certificates of deposit, large time deposits, foreigndeposits, federal funds purchased, securities sold under repurchase agreements,commercial paper, and other borrowings.

Our securities portfolioprovides additional enhancement to our liquidity position, which may be createdthrough either securities sales or repurchase agreements. At September 30,2006, we could have sold or transferred under repurchase agreementsapproximately $4.5 billion of our available for sale securities. Liquidity mayalso be provided by the sale or maturity of other assets such asinterest-bearing deposits in banks, federal funds sold, and trading accountsecurities. The aggregate balance of these assets averaged $1.3 billion in thethird quarter of 2006. Additional liquidity may be provided through loanmaturities and sales.

**Regulatory Capital**

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

**UnionBanCal Corporation**

| ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **Minimum**     | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **Regulatory**  | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** | **Requirement** | ** ** |
| **Capital  Components**              |       |                   |       |                  |       |                   |       |            |       |
| Tier 1 capital                       |       | $                      | 3,963,712  |                  | $          | 4,178,160              |       | $               | 4,261,221  |   |   |   |
| Tier 2 capital                       |       | 883,832                |       | 876,713               |       | 1,502,587              |       |            |       |
| Total risk-based capital             |       | $                      | 4,847,544  |                  | $          | 5,054,873              |       | $               | 5,763,808  |   |   |   |
| Risk-weighted assets                 |       | $                      | 44,630,199 |                  | $          | 45,540,448             |       | $               | 49,079,079 |   |   |   |
| Quarterly average  assets            |       | $                      | 49,819,315 |                  | $          | 49,789,877             |       | $               | 50,324,270 |   |   |   |

 

| **Capital Ratios**                       | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**      | ** ** | **Ratio** | ** **       |
|-----------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------|------------|-----------|------------------|
| Total capital (to risk-weighted assets)  |       | $          | 4,847,544  |      | 10.86      | %          | $          | 5,054,873 |       | 11.10      | %          | $         | 5,763,808  |            | 11.74      | %         | 3$3,926,326 |   |   | 8.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 3,963,712  |       | 8.88      |       | 4,178,160  |       | 9.17      |       | 4,261,221  |       | 8.68      |       | 31,963,163 |       |      | 4.0              |   |   |
| Leverage(1)                                   |       | 3,963,712  |       | 7.96      |       | 4,178,160  |       | 8.39      |       | 4,261,221  |       | 8.47      |       | 32,012,971 |       |      | 4.0              |   |   |
|                                               |            |            |            |           |            |            |            |           |            |            |            |           |            |                 |            |           |                  |  |  |  |  |  |

----

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

55

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

| ** **                           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **             | ** ** | **Minimum**     | ** ** | **“Well-Capitalized”** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **Regulatory**  | ** ** | **Regulatory**                   | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**               | ** ** | **2005**              | ** ** | **2006**               | ** ** | **Requirement** | ** ** | **Requirement**                  | ** ** |
| **Capital  Components**              |       |                   |       |                  |       |                   |       |            |       |                             |       |
| Tier 1 capital                       |       | $                      | 4,068,332  |                  | $          | 4,315,471              |       | $               | 4,261,541  |                             |       |   |   |   |
| Tier 2 capital                       |       | 441,350                |       | 433,353               |       | 1,093,876              |       |            |       |                             |       |
| Total risk-based capital             |       | $                      | 4,509,682  |                  | $          | 4,748,824              |       | $               | 5,355,417  |                             |       |   |   |   |
| Risk-weighted assets                 |       | $                      | 43,966,515 |                  | $          | 44,851,154             |       | $               | 48,472,149 |                             |       |   |   |   |
| Quarterly average  assets            |       | $                      | 49,138,592 |                  | $          | 49,127,241             |       | $               | 49,674,643 |                             |       |   |   |   |

 

| ** **                               | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount**                  | ** ** | **Ratio** | ** **       | **Amount** | ** ** | **Ratio**                   | ** ** |
|------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|-----------------------------|------------|-----------|------------------|------------|------------|-----------------------------|------------|
| **Capital  Ratios**                      |       |       |       |      |       |       |       |      |       |       |       |      |       |                        |       |      |             |       |       |                        |       |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 4,509,682  |      | 10.26      | %          | $          | 4,748,824 |       | 10.59      | %          | $         | 5,355,417  |                        | 11.05      | %         | 3$3,877,772 |       |       | 8.0                         | %          |   | 3$4,847,215 |   |   | 10.0 | % |   |
| Tier 1 capital (to risk-weighted assets) |       | 4,068,332  |       | 9.25      |       | 4,315,471  |       | 9.62      |       | 4,261,541  |       | 8.79      |       | 3  1,938,886 |       |      | 4.0              |       |       | 3  2,908,329 |       |   | 6.0 |   |   |
| Leverage(1)                              |       | 4,068,332  |       | 8.28      |       | 4,315,471  |       | 8.78      |       | 4,261,541  |       | 8.58      |       | 3  1,986,986 |       |      | 4.0              |       |       | 3  2,483,732 |       |   | 5.0 |   |   |
|                                          |            |            |            |           |            |            |            |           |            |            |            |           |            |                             |            |           |                  |            |            |                             |            |  |  |  |  |  |  |  |

----

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

We and Union Bank ofCalifornia, N.A. are subject to various regulations of the federal bankingagencies, including minimum capital requirements. We both are required tomaintain minimum ratios of Total and Tier 1 capital to risk-weightedassets and of Tier 1 capital to quarterly average assets (the Leverage ratio).

The increase in the Totalcapital ratios from September 30, 2005 was primarily due to an increase inour total risk-based capital, which resulted from our net income and the Bank’sissuance of $700 million of subordinated notes in May 2006, less dividendsand stock repurchases, offset by an increase in risk-weighted assetsstemming from growth in our loan portfolio and unfunded commitments. Theincrease in our leverage ratios from September 30, 2005 was primarily dueto the increase in our Tier 1 capital.

As of September 30, 2006,management believes the capital ratios of Union Bank of California, N.A. metall regulatory requirements of “well-capitalized” institutions, which are10 percent for the Total risk-based capital ratio, 6 percent for the Tier1 risk-based capital ratio and 5 percent for the Leverage ratio.

**Business Segments**

In July 2006, we formallyreorganized our operating segments by disaggregating the businesses that wereformerly managed and reported under the Community Banking and InvestmentServices Group or the Commercial Financial Services Group. We believe that thisnew organizational structure will enhance our focus on target markets andenterprise wide sales and service. The various operating segments reportingunder our Chief Operating Officer and the Group Head of Pacific Rim CorporateGroup have been aggregated into two reportable business segments entitled “RetailBanking” and “Wholesale Banking” based upon the aggregation criteria prescribedin SFAS No. 131, *Disclosures aboutSegments of an Enterprise and Related Information*(SFAS No. 131).

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

56

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The following tables reflect the condensed income statements,selected average balance sheet items, and selected financial ratios, includingchanges from the prior year, for each of our reportable business segments. Theinformation presented does not necessarily represent the businesses’ financialcondition and results of operations as if they were independent entities. In2006, we changed our reporting to reflect a “market view” perspective inmeasuring our operating segments. The market view is a measurement of ourcustomer markets aggregated to show all revenues generated and expensesincurred from all products and services sold to those customers regardless ofwhere product areas organizationally report. Therefore, revenues and expensesare included in both the operating segment that provides the service and theoperating segment that manages the customer relationship. The duplicativeresults from this internal management accounting view are reflected in “ReconcilingItems.” The market view approach fosters cross-selling with a totalprofitability view of the products and services being managed. For example, theSecurities Trading and Sales unit within the Global Markets Division is abusiness unit that manages the fixed income securities activities for allretail and corporate customers throughout the Bank. This unit retains and alsoallocates revenues and expenses to divisions responsible for such retail andcommercial customer relationships.

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

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

However, over an economic cycle, the cumulativeprovision for credit losses and credit expense for expected losses should besubstantially the same. Business unit results are based on an internalmanagement reporting system used by management to measure the performance ofthe units and UnionBanCal Corporation as a whole. Our management reportingsystem identifies balance sheet and income statement items for each businessunit based on internal management accounting policies. Net interest income is determinedusing our internal funds transfer pricing system, which assigns a cost of fundsto assets or a credit for funds to liabilities and capital, based on theirtype, maturity or repricing characteristics. Noninterest income and expensedirectly or indirectly attributable to a business unit are assigned to thatbusiness. The business units are assigned the costs of products and servicesdirectly attributable to their business activity through standard unit costaccounting based on volume of usage. All other corporate expenses (overhead)are allocated to the business units based on a predetermined percentage ofusage.

The reportable business segment results for the priorperiods have been adjusted to reflect changes in the transfer pricingmethodology, the organizational changes that have occurred, our discontinuedoperations and the market view contribution.

57

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| ** **                                                          | ** ** | **Retail Banking**                                                                           | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** | **Wholesale Banking** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the   Three Months  Ended September 30,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Three Months  Ended September 30,** | ** ** | **Increase/(decrease)**    | ** ** |
| ** **                                                          | ** ** | **2005**                                                                                          | ** ** | **2006**                | ** ** | **Amount**                                                                                  | ** ** | **Percent**                | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                                                        | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income (expense)                                       |       | $                                                                                                 | 222,693    |                    | $          | 240,794                                                                                     |       | $                          | 18,101     |       |       | 8          | %          |   | $ | 255,686 |   | $ | 265,886 |   | $ | 10,200 |   |   | 4 | % |   |
| Noninterest income (expense)                                        |       | 124,848                                                                                           |       | 127,266                 |       | 2,418                                                                                       |       |                       | 2          |       |       | 105,220    |       | 105,330 |   | 110 |   |   | nm |   |   |
| Total revenue                                                       |       | 347,541                                                                                           |       | 368,060                 |       | 20,519                                                                                      |       |                       | 6          |       |       | 360,906    |       | 371,216 |   | 10,310 |   |   | 3 |   |   |
| Noninterest expense (income)                                        |       | 220,323                                                                                           |       | 240,289                 |       | 19,966                                                                                      |       |                       | 9          |       |       | 157,620    |       | 168,804 |   | 11,184 |   |   | 7 |   |   |
| Credit expense                                                      |       | 6,437                                                                                             |       | 6,249                   |       | (188                                                                                        | )          |                       | (3         | )          |       | 26,860     |       | 23,169 |   | (3,691 | ) |   | (14 | ) |   |
| Income from continuing operations before income taxes               |       | 120,781                                                                                           |       | 121,522                 |       | 741                                                                                         |       |                       | 1          |       |       | 176,426    |       | 179,243 |   | 2,817 |   |   | 2 |   |   |
| Income tax expense (income)                                         |       | 46,199                                                                                            |       | 46,482                  |       | 283                                                                                         |       |                       | 1          |       |       | 60,603     |       | 59,983 |   | (620 | ) |   | (1 | ) |   |
| Income from continuing operations                                   |       | 74,582                                                                                            |       | 75,040                  |       | 458                                                                                         |       |                       | 1          |       |       | 115,823    |       | 119,260 |   | 3,437 |   |   | 3 |   |   |
| Income (loss) from discontinued operations, net of  income taxes    |       | —                                                                                            |       | —                  |       | —                                                                                      |       |                       | na         |       |       | —     |       | — |   | — |   |   | na |   |   |
| Net income (loss)                                                   |       | $                                                                                                 | 74,582     |                    | $          | 75,040                                                                                      |       | $                          | 458        |       |       | 1          |       |   | $ | 115,823 |   | $ | 119,260 |   | $ | 3,437 |   |   | 3 |   |   |
| **Average  balances—Market View (dollars in millions):**       | ** ** | ** **                                                                                        | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                                                                 | 14,514     |                    | $          | 15,810                                                                                      |       | $                          | 1,296      |       |       | 9          |       |   | $ | 17,609 |   | $ | 20,123 |   | $ | 2,514 |   |   | 14 |   |   |
| Total assets                                                        |       | 15,414                                                                                            |       | 16,664                  |       | 1,250                                                                                       |       |                       | 8          |       |       | 21,867     |       | 24,737 |   | 2,870 |   |   | 13 |   |   |
| Total deposits                                                      |       | 19,837                                                                                            |       | 18,886                  |       | (951                                                                                        | )          |                       | (5         | )          |       | 19,057     |       | 18,338 |   | (719 | ) |   | (4 | ) |   |
| **Financial  ratios—Market View**                              | ** ** | ** **                                                                                        | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return on capital(1)                                  |       | 49                                                                                                | %          | 45                      | %          |                                                                                        |       |                       |       |       |       | 21         | %          | 23 | % |   |   |   |   |   |   |
| Return on average assets(1)                                         |       | 1.92                                                                                              |       | 1.79                    |       |                                                                                        |       |                       |       |       |       | 2.10       |       | 1.91 |   |   |   |   |   |   |   |
| Efficiency ratio(2)                                                 |       | 63.37                                                                                             |       | 65.29                   |       |                                                                                        |       |                       |       |       |       | 44.65      |       | 45.52 |   |   |   |   |   |   |   |

 

| ** **                                                          | ** ** | **Other**                                                                                   | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** | **Reconciling Items**                                                                  | ** ** | **UnionBanCal  Corporation** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the  Three Months  Ended September 30,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Three Months  Ended September 30,** | ** ** | **As of and for the  Three Months  Ended September 30,** | ** ** | **Increase/(decrease)**      | ** ** |
| ** **                                                          | ** ** | **2005**                                                                                    | ** ** | **2006**                | ** ** | **Amount**                                                                                  | ** ** | **Percent**                                                                                 | ** ** | **2005**                     | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                                                  | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                                                                                        | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                      |       | $                                                                                           | (13,683    | )                       | $          | (45,510                                                                                     | )          | $                                                                                           | (31,827    | )                            |       | nm         |       |       | $          | (554 | ) | $ | (2,446 | ) | $ | 464,142 |   | $ | 458,724 |   | $ | (5,418 | ) |   | (1 | )% |   |
| Noninterest income  (expense)                                       |       | (551                                                                                        | )          | 700                     |       | 1,251                                                                                       |       |                                                                                        | nm         |                         |       | (17,329    | )          | (16,041    | )          | 212,188 |   | 217,255 |   | 5,067 |   |   | 2 |   |   |
| Total revenue                                                       |       | (14,234                                                                                     | )          | (44,810                 | )          | (30,576                                                                                     | )          |                                                                                        | nm         |                         |       | (17,883    | )          | (18,487    | )          | 676,330 |   | 675,979 |   | (351 | ) |   | nm |   |   |
| Noninterest expense  (income)                                       |       | 28,217                                                                                      |       | 16,912                  |       | (11,305                                                                                     | )          |                                                                                        | (40        | )%                           |       | (9,464     | )          | (8,984     | )          | 396,696 |   | 417,021 |   | 20,325 |   |   | 5 |   |   |
| Credit expense                                                      |       | (48,174                                                                                     | )          | (29,394                 | )          | 18,780                                                                                      |       |                                                                                        | 39         |                         |       | (123       | )          | (24        | )          | (15,000 | ) | — |   | 15,000 |   |   | nm |   |   |
| Income from continuing  operations before income taxes              |       | 5,723                                                                                       |       | (32,328                 | )          | (38,051                                                                                     | )          |                                                                                        | nm         |                         |       | (8,296     | )          | (9,479     | )          | 294,634 |   | 258,958 |   | (35,676 | ) |   | (12 | ) |   |
| Income tax expense  (income)                                        |       | (10,240                                                                                     | )          | (15,792                 | )          | (5,552                                                                                      | )          |                                                                                        | (54        | )                            |       | (3,174     | )          | (3,625     | )          | 93,388 |   | 87,048 |   | (6,340 | ) |   | (7 | ) |   |
| Income from continuing  operations                                  |       | 15,963                                                                                      |       | (16,536                 | )          | (32,499                                                                                     | )          |                                                                                        | nm         |                         |       | (5,122     | )          | (5,854     | )          | 201,246 |   | 171,910 |   | (29,336 | ) |   | (15 | ) |   |
| Income (loss) from  discontinued operations, net of income taxes    |       | (15,961                                                                                     | )          | (1,204                  | )          | 14,757                                                                                      |       |                                                                                        | 92         |                         |       | —     |       | —     |       | (15,961 | ) | (1,204 | ) | 14,757 |   |   | 92 |   |   |
| Net income (loss)                                                   |       | $                                                                                           | 2          |                    | $          | (17,740                                                                                     | )          | $                                                                                           | (17,742    | )                            |       | nm         |       |       | $          | (5,122 | ) | $ | (5,854 | ) | $ | 185,285 |   | $ | 170,706 |   | $ | (14,579 | ) |   | (8 | ) |   |
| **Average balances—Market View (dollars  in millions):**       | ** ** | ** **                                                                                  | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                                                                                        | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                                                           | 81         |                    | $          | 55                                                                                          |       | $                                                                                           | (26        | )                            |       | (32        | )          |       | $          | (26 | ) | $ | (22 | ) | $ | 32,178 |   | $ | 35,966 |   | $ | 3,788 |   |   | 12 |   |   |
| Total assets                                                        |       | 10,961                                                                                      |       | 9,402                   |       | (1,559                                                                                      | )          |                                                                                        | (14        | )                            |       | (30        | )          | (26        | )          | 48,212 |   | 50,777 |   | 2,565 |   |   | 5 |   |   |
| Total deposits                                                      |       | 1,435                                                                                       |       | 3,931                   |       | 2,496                                                                                       |       |                                                                                        | nm         |                         |       | (35        | )          | (573       | )          | 40,294 |   | 40,582 |   | 288 |   |   | 1 |   |   |
| **Financial  ratios—Market View**                              | ** ** | ** **                                                                                  | ** ** | ** **              | ** ** | ** **                                                                                  | ** ** |                                                                                        | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return  on capital(1)                                 |       | na                                                                                          |       | na                      |       |                                                                                        |       |                                                                                        |       |                         |       | na         |       | na         |       | na |   | na |   |   |   |   |   |   |   |
| Return on average  assets(1)                                        |       | na                                                                                          |       | na                      |       |                                                                                        |       |                                                                                        |       |                         |       | na         |       | na         |       | 1.66 | % | 1.34 | % |   |   |   |   |   |   |
| Efficiency ratio(2)                                                 |       | na                                                                                          |       | na                      |       |                                                                                        |       |                                                                                        |       |                         |       | na         |       | na         |       | 59.07 |   | 61.55 |   |   |   |   |   |   |   |

----

(1)                    Annualized.

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

na = not applicable

nm = not meaningful

58

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| ** **                                                          | ** ** | **Retail Banking**                                                                          | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** | **Wholesale Banking** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the  Nine Months   Ended September 30,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Nine Months   Ended September 30,** | ** ** | **Increase/(decrease)**    | ** ** |
| ** **                                                          | ** ** | **2005**                                                                                         | ** ** | **2006**                | ** ** | **Amount**                                                                                       | ** ** | **Percent**                | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income (expense)                                       |       | $                                                                                                | 655,709    |                    | $          | 708,683                                                                                          |       | $                          | 52,974     |       |       | 8          | %          |   | $ | 731,048 |   | $ | 781,013 |   | $ | 49,965 |   |   | 7 | % |   |
| Noninterest income (expense)                                        |       | 360,964                                                                                          |       | 393,239                 |       | 32,275                                                                                           |       |                       | 9          |       |       | 323,403    |       | 309,291 |   | (14,112 | ) |   | (4 | ) |   |
| Total revenue                                                       |       | 1,016,673                                                                                        |       | 1,101,922               |       | 85,249                                                                                           |       |                       | 8          |       |       | 1,054,451  |       | 1,090,304 |   | 35,853 |   |   | 3 |   |   |
| Noninterest expense (income)                                        |       | 677,129                                                                                          |       | 720,694                 |       | 43,565                                                                                           |       |                       | 6          |       |       | 463,244    |       | 501,180 |   | 37,936 |   |   | 8 |   |   |
| Credit expense                                                      |       | 19,242                                                                                           |       | 19,221                  |       | (21                                                                                              | )          |                       | nm         |       |       | 79,417     |       | 71,472 |   | (7,945 | ) |   | (10 | ) |   |
| Income from continuing operations before income taxes               |       | 320,302                                                                                          |       | 362,007                 |       | 41,705                                                                                           |       |                       | 13         |       |       | 511,790    |       | 517,652 |   | 5,862 |   |   | 1 |   |   |
| Income tax expense (income)                                         |       | 122,516                                                                                          |       | 138,468                 |       | 15,952                                                                                           |       |                       | 13         |       |       | 174,534    |       | 174,871 |   | 337 |   |   | nm |   |   |
| Income from continuing operations                                   |       | 197,786                                                                                          |       | 223,539                 |       | 25,753                                                                                           |       |                       | 13         |       |       | 337,256    |       | 342,781 |   | 5,525 |   |   | 2 |   |   |
| Income (loss) from discontinued operations, net of  income taxes    |       | —                                                                                           |       | —                  |       | —                                                                                           |       |                       | na         |       |       | —     |       | — |   | — |   |   | na |   |   |
| Net income (loss)                                                   |       | $                                                                                                | 197,786    |                    | $          | 223,539                                                                                          |       | $                          | 25,753     |       |       | 13         |       |   | $ | 337,256 |   | $ | 342,781 |   | $ | 5,525 |   |   | 2 |   |   |
| **Average  balances—Market View (dollars in millions):**       | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                                                                | 14,009     |                    | $          | 15,559                                                                                           |       | $                          | 1,550      |       |       | 11         |       |   | $ | 16,766 |   | $ | 19,509 |   | $ | 2,743 |   |   | 16 |   |   |
| Total assets                                                        |       | 14,912                                                                                           |       | 16,423                  |       | 1,511                                                                                            |       |                       | 10         |       |       | 20,756     |       | 24,169 |   | 3,413 |   |   | 16 |   |   |
| Total deposits                                                      |       | 19,857                                                                                           |       | 19,022                  |       | (835                                                                                             | )          |                       | (4         | )          |       | 17,958     |       | 18,299 |   | 341 |   |   | 2 |   |   |
| **Financial  ratios—Market View**                              | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                       | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return on capital (1)                                 |       | 44                                                                                               | %          | 46                      | %          |                                                                                             |       |                       |       |       |       | 23         | %          | 22 | % |   |   |   |   |   |   |
| Return on average assets (1)                                        |       | 1.77                                                                                             |       | 1.82                    |       |                                                                                             |       |                       |       |       |       | 2.17       |       | 1.90 |   |   |   |   |   |   |   |
| Efficiency ratio (2)                                                |       | 66.63                                                                                            |       | 65.40                   |       |                                                                                             |       |                       |       |       |       | 44.45      |       | 47.37 |   |   |   |   |   |   |   |

 

| ** **                                                          | ** ** | **Other**                                                                                        | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** | **Reconciling Items**                                                                       | ** ** | **UnionBanCal  Corporation** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **As of and for the  Nine Months   Ended September 30,** | ** ** | **Increase/(decrease)** | ** ** | **As of and for the  Nine Months   Ended September 30,** | ** ** | **As of and for the  Nine Months   Ended September 30,** | ** ** | **Increase/(decrease)**      | ** ** |
| ** **                                                          | ** ** | **2005**                                                                                         | ** ** | **2006**                | ** ** | **Amount**                                                                                       | ** ** | **Percent**                                                                                      | ** ** | **2005**                     | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2006** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Results of operations—Market  View (dollars in thousands):** | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                                                                                             | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Net interest income  (expense)                                      |       | $                                                                                                | (26,848    | )                       | $          | (90,954                                                                                          | )          | $                                                                                                | (64,106    | )                            |       | nm         |       |       | $          | (1,395 | ) | $ | (7,283 | ) | $ | 1,358,514 |   | $ | 1,391,459 |   | $ | 32,945 |   |   | 2 | % |   |
| Noninterest income  (expense)                                       |       | (12,427                                                                                          | )          | 6,757                   |       | 19,184                                                                                           |       |                                                                                             | nm         |                         |       | (50,573    | )          | (54,894    | )          | 621,367 |   | 654,393 |   | 33,026 |   |   | 5 |   |   |
| Total revenue                                                       |       | (39,275                                                                                          | )          | (84,197                 | )          | (44,922                                                                                          | )          |                                                                                             | nm         |                         |       | (51,968    | )          | (62,177    | )          | 1,979,881 |   | 2,045,852 |   | 65,971 |   |   | 3 |   |   |
| Noninterest expense  (income)                                       |       | 65,576                                                                                           |       | 55,475                  |       | (10,101                                                                                          | )          |                                                                                             | (15        | )                            |       | (27,901    | )          | (32,754    | )          | 1,178,048 |   | 1,244,595 |   | 66,547 |   |   | 6 |   |   |
| Credit expense                                                      |       | (139,166                                                                                         | )          | (98,625                 | )          | 40,541                                                                                           |       |                                                                                             | 29         |                         |       | (176       | )          | (68        | )          | (40,683 | ) | (8,000 | ) | 32,683 |   |   | 80 |   |   |
| Income from continuing  operations before income taxes              |       | 34,315                                                                                           |       | (41,047                 | )          | (75,362                                                                                          | )          |                                                                                             | nm         |                         |       | (23,891    | )          | (29,355    | )          | 842,516 |   | 809,257 |   | (33,259 | ) |   | (4 | ) |   |
| Income tax expense  (income)                                        |       | (13,871                                                                                          | )          | (28,857                 | )          | (14,986                                                                                          | )          |                                                                                             | nm         |                         |       | (9,138     | )          | (11,227    | )          | 274,041 |   | 273,255 |   | (786 | ) |   | nm |   |   |
| Income from continuing  operations                                  |       | 48,186                                                                                           |       | (12,190                 | )          | (60,376                                                                                          | )          |                                                                                             | nm         |                         |       | (14,753    | )          | (18,128    | )          | 568,475 |   | 536,002 |   | (32,473 | ) |   | (6 | ) |   |
| Income (loss) from  discontinued operations, net of income taxes    |       | (14,031                                                                                          | )          | (9,440                  | )          | 4,591                                                                                            |       |                                                                                             | nm         |                         |       | —     |       | —     |       | (14,031 | ) | (9,440 | ) | 4,591 |   |   | nm |   |   |
| Net income (loss)                                                   |       | $                                                                                                | 34,155     |                    | $          | (21,630                                                                                          | )          | $                                                                                                | (55,785    | )                            |       | nm         |       |       | $          | (14,753 | ) | $ | (18,128 | ) | $ | 554,444 |   | $ | 526,562 |   | $ | (27,882 | ) |   | (5 | ) |   |
| **Average  balances—Market View (dollars in millions):**       | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                                                                                             | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total loans                                                         |       | $                                                                                                | 89         |                    | $          | 52                                                                                               |       | $                                                                                                | (37        | )                            |       | (42        | )          |       | $          | (21 | ) | $ | (19 | ) | $ | 30,843 |   | $ | 35,101 |   | $ | 4,258 |   |   | 14 |   |   |
| Total assets                                                        |       | 11,700                                                                                           |       | 8,858                   |       | (2,842                                                                                           | )          |                                                                                             | (24        | )                            |       | (25        | )          | (23        | )          | 47,343 |   | 49,427 |   | 2,084 |   |   | 4 |   |   |
| Total deposits                                                      |       | 1,522                                                                                            |       | 2,979                   |       | 1,457                                                                                            |       |                                                                                             | 96         |                         |       | (32        | )          | (583       | )          | 39,305 |   | 39,717 |   | 412 |   |   | 1 |   |   |
| **Financial  ratios—Market View**                              | ** ** | ** **                                                                                       | ** ** | ** **              | ** ** | ** **                                                                                       | ** ** |                                                                                             | ** ** | ** **                   |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Risk adjusted return  on capital (1)                                |       | na                                                                                               |       | na                      |       |                                                                                             |       |                                                                                             |       |                         |       | n/a        |       | n/a        |       | na |   | na |   |   |   |   |   |   |   |
| Return on average  assets (1)                                       |       | na                                                                                               |       | na                      |       |                                                                                             |       |                                                                                             |       |                         |       | n/a        |       | n/a        |       | 1.61 | % | 1.45 | % |   |   |   |   |   |   |
| Efficiency ratio (2)                                                |       | na                                                                                               |       | na                      |       |                                                                                             |       |                                                                                             |       |                         |       | n/a        |       | n/a        |       | 59.74 | % | 61.79 | % |   |   |   |   |   |   |

----

(1)                    Annualized.

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

na = not applicable

nm = not meaningful

*Retail Banking*

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

During the nine months ended September 30, 2006,net income of Retail Banking increased by 13 percent, compared to the sameperiod in 2005, reflecting this segment’s continued focus on growing theconsumer asset portfolio and attracting retail and small business deposits. Netinterest income increased by 8 percent during the first nine months of 2006,compared to the same period in 2005, primarily due to higher transfer pricingcredits received on deposits.

59

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The Retail Banking strategy is to grow assets througha focused small business sales effort, increased emphasis on realestate-secured and Small Business Administration (SBA) guaranteed loans, and anetwork of residential real estate brokers. The focus on home equity loans andmore effective cross-selling efforts have led to an overall growth in consumerloans. We expect a larger branch network, created from new branches andacquired branches, to improve growth prospects when combined with more robustefforts in the telephone and internet channels.

Despite the decrease in the first nine months of 2006of 4 percent in average total deposits, compared to the same period in 2005(which primarily reflects increased competition for interest bearing deposits),Retail Banking continues to focus on attracting consumer and small businessdeposits through marketing activities, relationship management, increased andimproved sales resources, new locations, and new products.

Of the 9 percent increase in Retail Bankingnoninterest income for the first nine months of 2006, compared to the sameperiod in 2005, trust fees contributed 5 percent of the growth, primarily dueto growth in trust assets and a refinement in accrual methodology implementedin the first quarter of 2006. In addition, deposit fees contributed 1 percentto the increase.

The increase in noninterest expenses during the firstnine months of 2006, compared to the same period in 2005, was mainly due tohigher staff expenses, as well as higher compliance related activities.

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

·       RetailBanking Branches serves its customers through 316 full-service branches inCalifornia, 4 full-service branches in Oregon and Washington, and a network of606 proprietary ATMs. Customers also access our services 24 hours a day bytelephone or through our website at www.unionbank.com. In addition, thebranches offer automated teller and point-of-sale merchant services.

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

—    throughconveniently located banking branches, which serve consumers and businesseswith checking and deposit services, as well as various types of consumerfinancing; and investment services;

—    through ourinternet banking services, which augment our physical delivery channels byproviding an array of customer transaction, bill payment and loan paymentservices;

—    throughbusiness banking centers, which serve small businesses; and

—    throughin-store branches.

·       *Consumer Asset Management* provides the centralized origination, underwriting, processing,servicing, collection and administration for consumer assets includingresidential mortgages.

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

Our Retail Banking Branches and Consumer AssetManagement divisions compete with larger banks by attempting to provide servicequality superior to that of our major competitors. The primary means ofcompeting with community banks include our branch network and our technology todeliver banking services. We also offer convenient banking hours to consumersthrough our drive-through banking locations and selected branches that are openseven days a week.

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These divisions competewith a number of commercial banks, internet banks, savings associations andcredit unions, as well as more specialized financial service providers such asinvestment brokerage companies, consumer finance companies, and residentialreal estate lenders.

·       *Wealth Management* provides comprehensive private banking services to our affluentclientele. The Private Bank focuses primarily on delivering financial servicesto high net worth individuals with sophisticated financial needs as well as toprofessional service firms. Specific products and services include trust andestate services, investment account management services, and deposit and creditproducts. A key strategy of The Private Bank is to expand its business byleveraging existing Bank client relationships. Through 15 existing locations,The Private Bank relationship managers offer all of our available products andservices.

·       *InstitutionalServices and Asset Management* provides investment management and administrationservices for a broad range of individuals and institutions.

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

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

*Wholesale Banking*

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

During the nine months ended September 30, 2006,net income of Wholesale Banking increased by 2 percent, compared to thesame period in 2005, due to higher net interest income partially offset bylower noninterest income and higher noninterest expense. Net interest incomeincreased by 7 percent during the first nine months of 2006, compared to thesame period in 2005, primarily due to higher transfer pricing credits receivedon deposits and continued strong growth in loans.

61

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During the first nine months of 2006, average loansincreased by 16 percent, compared to the same period in 2005. This wasprimarily due to increased commercial loan demand in the oil and gas andnational corporate segments, as well as the California middle market.

Noninterest income decreased by 4 percent, compared tothe same period in 2005, primarily due to a lower volume of syndicationtransactions and lower deposit fees resulting from higher earnings credit rateson deposit balances. The increase in noninterest expense during the first ninemonths of 2006, compared to the same period in 2005, was mainly due to higherperformance-related incentive expense, including the impact of stock optionsand restricted stock expenses, which prior to 2006 had not been allocated tothe business units.

Wholesale Banking initiatives continue to includeexpanding deposit activities and loan strategies that include originating,underwriting and syndicating loans in core competency markets, such as theCalifornia middle-market, corporate banking, commercial real estate, energy,equipment leasing and commercial finance. Commercial Deposit and TreasuryManagement Division is particularly strong in processing services, includingservices such as Automated Clearing House (ACH), check processing, and cashvault services.

*Wholesale Banking* iscomprised of the following main divisions:

·       the *Commercial Banking Division*, which servesCalifornia middle-market and large corporate companies with commercial lending,trade financing, and asset-based loans;

·       the *Real Estate Industries Division*, whichprovides real estate lending products such as construction loans, commercialmortgages and bridge financing;

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

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

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

·       the *Commercial Deposit and Treasury Management Division*,which provides deposit and cash management expertise to middle-market and largecorporate clients, government agencies and specialized industries. Thisdivision also manages Union Bank of California, N.A.’s web strategies forretail, small business, wealth management and commercial clients, as well ascommercial product development;

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

·       *Global Markets* serves our customers with their insurance,foreign exchange and interest rate risk management and investment needs. TheGlobal Markets Division offers energy derivative contracts, on a limited basis,to serve our energy sector client base. The division takes market risk whenbuying and selling securities and foreign exchange contracts for its ownaccount, but takes no market risk when providing insurance or derivativecontracts, since the market risk for these products is offset with third parties.The division also includes UnionBanc Investment Services LLC, which is asubsidiary of Union Bank of California, N.A.;

62

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·       *Insurance Services* products are sold through UnionBancInsurance Services, Inc., the insurance agency subsidiary of UBOCInsurance, Inc. UBOC Insurance, Inc. is a subsidiary of Union Bank ofCalifornia, N.A.; and

·       *Pacific Rim Corporate Group* offers a range of credit,deposit, and investment management products and services to companies in theU.S., which are affiliated with companies headquartered in Japan.

The main strategy of ourWholesale Banking business units is to target industries and companies forwhich we can reasonably expect to be one of a customer’s primary banks. Consistentwith this strategy, Wholesale Banking business units attempt to serve a largepart of the targeted customers’ credit and depository needs. The WholesaleBanking business units compete with other banks primarily on the basis of thequality of our relationship managers, the level of industry expertise, the deliveryof quality customer service, and our reputation as a “business bank.”  We also compete with a variety of otherfinancial services companies as well as non-bank companies. Competitors includeother major California banks, as well as regional, national and internationalbanks. In addition, we compete with investment banks, commercial financecompanies, leasing companies and insurance companies.

*Other*

During the nine months ended September 30, 2006,net income decreased by $56 million over the same period in 2005 and by $18million in the third quarter 2006 over the same period in the prior year, dueto lower net interest income primarily related to the net impact of fundstransfer pricing as market rates increased. Also contributing to the declinewas a lower credit to the loan loss provision compared with the prior year. Thedecrease was partially offset by higher noninterest income resulting from a $13million loss on the sale of securities in 2005 compared to a gain oncollateralized loan obligations (CLO’s) in 2006.

“Other” includes thefollowing items:

·       the funds transfer pricingresults for the entire company, which allocates to the other business segmentstheir cost of funds on all asset categories and credit for funds on allliability categories;

·       Corporate Treasury, whichis responsible for our ALM, wholesale funding, and the ALM Investment andderivatives hedging portfolios. These treasury management activities arecarried out to counter-balance the residual risk positions of our balance sheetand to manage those risks within the guidelines established by ALCO. (Foradditional discussion regarding these risk management activities, see“Quantitative and Qualitative Disclosures About Market Risk.”);

·       the adjustment between thecredit expense under RAROC and the provision for credit losses under US GAAPand earnings associated with unallocated equity capital;

·       the residual costs ofsupport groups;

·       corporate activities thatare not directly attributable to one of the two business segments. Included inthis category are certain other items suchas the results of operations of certain non-bank subsidiaries ofUnionBanCal Corporation and the elimination of the fully taxable-equivalentbasis amount;

·       the discontinued operationsresulting from the sale of our international correspondent banking business;and

·       the adjustment between thetax expense calculated under RAROC using a tax rate of 38.25 percent and oureffective tax rates.

63

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The financial resultsfor the nine months ended September 30, 2006 were impacted by thefollowing factors:

·       netinterest income is the result of differences between the credit for equity forthe reportable segments under RAROC and the net interest income earned byUnionBanCal Corporation and transfer pricing results. Net interest incomedeclined $64.1 million compared to the nine months ended September 30,2005 primarily as a result of the net impact of changes in transfer pricingrates over the prior period as market rates increased;

·       creditexpense (income) of ($98.6) million was due to the difference between the $8.0million reversal of allowance for loan losses calculated under our US GAAPmethodology and the $90.6 million in expected losses for the reportable businesssegments, which utilizes the RAROC methodology;

·       noninterestincome of $6.8 million;

·       noninterestexpense of $55.5 million related to residual costs of support groups andcorporate activities not directly related to either of the two businesssegments; and

·       lossfrom discontinued operations of $9.4 million.

The financial resultsfor the nine months ended September 30, 2005 were impacted by thefollowing factors:

·       netinterest income is the result of differences between the credit for equity forthe reportable segments under RAROC, the net transfer pricing results and thenet interest income earned by UnionBanCal Corporation;

·       creditexpense (income) of ($139.2) million was due to the difference between the$40.7 million reversal of provision for loan losses calculated under our USGAAP methodology and the $98.5 million in expected losses for the reportablebusiness segments, which utilizes the RAROC methodology;

·       noninterestincome (expense) of ($12.4) million;

·       noninterest expense of$65.6 million related to residual costs of support groups and corporateactivities not directly related to either of the two business segments; and

·       income tax expense includeda credit adjustment of $19.0 million: $10.0 million to reflect a reduction inreserves for estimated amounts owed to the Internal Revenue Service withrespect to the tax treatment of certain leveraged lease transactions andapproximately $9.0 million related to an adjustment of 2004 California taxexpense to reflect the taxes reported on the tax return filed on the worldwideunitary basis, and to CaliforniaEnterprise Zone Credits, for which we qualified during the third quarter 2005.

**Regulatory Matters**

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

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

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

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

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

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

A discussion of our marketrisk exposure is incorporated by reference to Part I, Item 2 of this Form 10-Qunder the captions “Quantitative and Qualitative Disclosures About Market Risk,”“Liquidity Risk,” and Part II, Item 1A “Risk Factors” and in Item 1A “RiskFactors” of our 2005 Form 10-K.

**Item 4.**            Controls andProcedures

Our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer) haveconcluded that the design and operation of our disclosure controls andprocedures are effective as of September 30, 2006. This conclusion isbased on an evaluation conducted under the supervision and with theparticipation of management. Disclosure controls and procedures are thosecontrols and procedures which ensure that information required to be disclosedin this filing is accumulated and communicated to management and is recorded,processed, summarized and reported in a timely manner and in accordance withSecurities and Exchange Commission rules and regulations.

During the quarter ended September 30, 2006,there were no changes in our internal controls over financial reporting thatmaterially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1. Legal Proceedings**

For a discussion of the action filed by DataTreasuryCorporation, please refer to Item 1 of Part II of our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2006.

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

**Item 1A. Risk Factors**

We are subject to numerous risks and uncertaintiesincluding, but not limited to, those risks set forth in Item 1A of Part Iof our 2005 Form 10-K, which is incorporated by reference herein, inaddition to “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Regulatory Matters” in Item 2 of Part I of this Form 10-Q,as well as risks associated with reputational damage from negative publicity,operational or risk management failures from technological or other factors,and the following information.

*Our deposit customers may pursue alternatives to bank deposits or seekhigher yielding deposits, causing us to incur increased funding costs*

We are facingincreasing deposit-pricing pressures. Checking and savings account balances andother forms of deposits can decrease when our deposit customers perceivealternative investments, such as the stock market, other non-depository investmentsor higher yielding deposits, as providing superior expected returns. Technologyand other changes have made it more convenient for bank customers to transferfunds into alternative investments or other deposit accounts, includingproducts offered by other financial institutions or non-bank service providers.Additional increases in short-term interest rates could increase such transfersof deposits to higher yielding deposits or other investments. Efforts andinitiatives we undertake to retain and increase deposits, including depositpricing, can increase our costs. When bank customers move money out of bankdeposits in favor of alternative investments or into higher yielding deposits,we can lose a relatively inexpensive source of funds, increasing our fundingcost.

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

Deposits of Union Bank of California, N.A. areinsured up to statutory limits by the Federal Deposit Insurance Corporation, orFDIC, and, accordingly, are subjected to deposit insurance assessments tomaintain the Deposit Insurance Fund. Union Bank of California, N.A.currently pays no insurance assessments on these deposits under the FDIC’s risk-relatedassessment system. However, in November 2006, the FDIC issued a final ruleto be effective January 1, 2007 that creates a new assessment system designedto more closely tie what banks pay for deposit insurance to the risks they poseand adopts a new base schedule of rates that the FDIC can adjust up or down,depending on the revenue needs of the insurance fund. This new assessmentsystem is expected to result in increased annual assessments on deposits of UnionBank of California, N.A. of 5 to 7 basis points. An FDIC credit for priorcontributions is expected to offset the assessment for 2007 and may offset aportion of the assessment for 2008. Significant increases in the insuranceassessments Union Bank of California, N.A. pays will increase our costs oncethe credit is exceeded.

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**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

*Repurchases of EquitySecurities*

Thefollowing table presents repurchases by us of our equity securities during thethird quarter 2006.

| ** **                                         | ** ** | ** **                    | ** ** | ** **                       | ** ** | ** **                             | ** ** | **Approximate **                   | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | ** **                    | ** ** | ** **                       | ** ** | ** **                             | ** ** | **Dollar**                              | ** ** |
| ** **                                         | ** ** | ** **                    | ** ** | ** **                       | ** ** | **Total Number**                  | ** ** | **Value of Shares that** | ** ** |
| ** **                                         | ** ** | ** **                    | ** ** | ** **                       | ** ** | **of Shares Purchased**      | ** ** | **May Yet Be**                | ** ** |
| ** **                                         | ** ** | **Total Number of** | ** ** | **Average Price Paid** | ** ** | **as Part of Publicly** | ** ** | **Purchased**                           | ** ** |
| **Period**                                         | ** ** | **Shares Purchased**(2)  | ** ** | **per Share**               | ** ** | **Announced Programs**            | ** ** | **Under the Programs**        | ** ** |
| **July 2006**(July 3-31, 2006)           |       |                          | 400,452    | ** **                       |       |                                   | $     | 61.68                                   | ** ** |   |   | 400,000 | ** ** |   |   | $  | 376,893,788 |   |   |
| **August 2006**(August 1-31, 2006)       |       |                          | 1,398,218  | ** **                       |       |                                   | $     | 60.85                                   | ** ** |   |   | 1,397,300 | ** ** |   |   | $  | 291,849,598 |   |   |
| **September 2006**(September 1-28, 2006) |       |                          | 543,626    | ** **                       |       |                                   | $     | 61.05                                   | ** ** |   |   | 543,600 | ** ** |   |   | $  | 258,679,695 | (1) |   |
| **Total**                                          |       |                          | 2,342,296  | ** **                       |       |                                   | $     | 61.04                                   | ** ** |   |   | 2,340,900 | ** ** |   |   |   |   |   |

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(1)                   Inthe third quarter of 2006, UnionBanCal Corporation used $142.9 million from the$500 million repurchase program announced onApril 26, 2006.

(2)                   Includes 452shares, 918 shares and 26 shares of common stock repurchased during July, August andSeptember 2006, respectively, from employeesfor required personal income tax withholdings on the vesting of restrictedstock issued under the Year 2000 UnionBanCal Corporation Management Stock Plan.These purchases are not considered in arriving at the approximate dollar valueof shares that may yet be purchased under the Board of Directors’ repurchaseprogram authorization.

**Item 6. Exhibits**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Forms of Restricted Stock Unit Agreement for  Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management  Stock Plan(1)                           |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(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) |

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(1)                   Incorporatedby reference to Exhibit 10.1 to UnionBanCal Corporation’s Current Reporton Form 8-K dated July 1, 2006 (SEC File No. 001-15081).

(2)                   Filedherewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                              | UNIONBANCAL CORPORATION (Registrant) |
|------------------------------|--------------------------------------|
|                         |                                 |   |
| Date: November 7,  2006 | By:                                  | /s/ TAKASHI MORIMURA |
|                         |                                 | Takashi Morimura |
| *** ***                 | * *                             | *President  and Chief Executive Officer* |
|                         |                                 | *(Principal  Executive Officer)* |
| Date: November 7,  2006 | By:                                  | /s/ DAVID I. MATSON |
|                         |                                 | David I. Matson |
| * *                     | * *                             | *Vice  Chairman and Chief Financial Officer* |
| * *                     |                                 | *(Principal  Financial Officer)* |
|                         |                                 |   |
| Date: November 7,  2006 | By:                                  | /s/ DAVID A. ANDERSON |
|                         |                                 | David A. Anderson |
| * *                     | * *                             | *Executive  Vice President and Controller* |
|                         |                                 | *(Chief  Accounting Officer)* |

 

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**EXHIBITINDEX**
| No.  | ** ** | **Description**                                                                                                                                                      |
|------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |       | Forms of Restricted Stock  Unit Agreement for Non-Employee Directors under the Year 2000 UnionBanCal Corporation  Management Stock Plan(1)                           |
| 31.1 |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002(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) |

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(1)                   Incorporated byreference to Exhibit 10.1 to UnionBanCal Corporation’s Current Report on Form 8-Kdated July 1, 2006 (SEC File No. 001-15081).

(2)                   Filed herewith.

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