Table of Contents



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

FORM 10-Q

ý

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

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


Commission
file number 1-15081

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

Delaware

94-1234979(State of Incorporation)

(I.R.S. Employer Identification No.)400 California Street
San Francisco, California 94104-1302(Address and zip code of principal executive offices)Registrant's telephone number: (415) 765-2969


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

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

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

Large accelerated filer o

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

Smaller reporting company o


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

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

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



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Table of Contents



UnionBanCal Corporation and Subsidiaries    TABLE OF CONTENTS



Page
NumberPART IFinancial InformationCondensed Consolidated Financial Highlights

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

8Condensed Consolidated Balance Sheets

9Condensed Consolidated Statements of Changes in Stockholder's
Equity

10Condensed Consolidated Statements of Cash Flows

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

12Note 2Recently Issued Accounting Pronouncements

12Note 3Privatization

16Note 4Securities

18Note 5Loans and Allowance for Loan Losses

23Note 6Goodwill and Intangible Assets

24Note 7Employee Pension and Other Postretirement
Benefits

26Note 8Other Noninterest Income and Noninterest Expense

27Note 9Income Taxes

28Note 10Borrowed Funds

29Note 11Medium- and Long-Term Debt

30Note 12Fair Value Measurement and Fair Value of Financial
Instruments

31Note 13Derivative Instruments and Other Financial Instruments Used
For Hedging

38Note 14Accumulated Other Comprehensive Loss

44Note 15Discontinued Operations

45Note 16Commitments, Contingencies and Guarantees

48Note 17Business Segments

50Note 18Subsequent Events

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

54Executive Overview

54Critical Accounting Estimates

56Financial Performance

58Net Interest Income

61Noninterest Income and Noninterest Expense

64Income Tax Expense

65Discontinued Operations

66Securities

66Loans

68Cross-Border Outstandings

70Provision for Credit Losses

70Allowances for Credit Losses

71Nonperforming Assets

74


2

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Table of Contents

Page
NumberLoans 90 Days or More Past Due and Still Accruing

76Fair Value of Financial Instruments

76Quantitative and Qualitative Disclosures About Market Risk

77Liquidity Risk

80Regulatory Capital

82Business Segments

83ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

90ITEM 4. CONTROLS AND PROCEDURES

91PART IIOther InformationITEM 1. LEGAL PROCEEDINGS

92ITEM 1A. RISK FACTORS

92ITEM 6. EXHIBITS

99SIGNATURES

100


3

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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



4

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Table of Contents



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

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

5

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Table of Contents



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

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

September 30,
2008

September 30,
2009

Percent
ChangeResults of operations:Net interest income(1)

$
522,296

$
564,296


8.04
%Provision for loan losses


117,000


314,000


nmNoninterest income


198,721


183,929


(7.44
)Noninterest expense


443,812


505,815


13.97Income (loss) before income taxes(1)


160,205


(71,590
)

nmTaxable-equivalent adjustment


2,550


3,260


27.84Income tax expense (benefit)


47,549


(57,821
)

nmIncome (loss) from continuing operations


110,106


(17,029
)

nmLoss from discontinued operations, net of taxes


(5,276
)




100.00Net income (loss)

$
104,830

$
(17,029
)

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

$
62,599,753

$
78,153,207


24.85
%Total loans


48,306,118


48,169,508


(0.28
)Nonperforming assets


304,246


1,367,691


nmTotal deposits


42,355,853


60,691,368


43.29Medium- and long-term debt


3,827,164


5,121,553


33.82Stockholder's equity


4,692,648


9,475,004


nmBalance sheet (period average):Total assets

$
61,145,251

$
74,352,649


21.60
%Total loans


47,196,204


48,764,826


3.32Earning assets


56,920,548


68,235,083


19.88Total deposits


41,661,224


59,453,936


42.71Stockholder's equity


4,588,441


7,358,773


60.38Financial ratios(4):Return on average assets(3):From continuing operations


0.72
%

(0.09
)%Net income (loss)


0.68


(0.09
)Return on average stockholder's equity(3):From continuing operations


9.55


(0.92
)Net income (loss)


9.09


(0.92
)Efficiency ratio(5)


58.76


65.07Net interest margin(1)(3)


3.67


3.31Tangible equity ratio(6)


6.96


8.94Tier 1 common capital ratio(7)


8.00


11.58Tier 1 risk-based capital ratio(2)


8.02


11.60Total risk-based capital ratio(2)


10.94


14.42Leverage ratio(2)


7.97


10.39Allowance for loan losses to(8):Total loans


1.20


2.62Nonaccrual loans


200.94


95.15Allowance for credit losses to(9):Total loans


1.43


2.97Nonaccrual loans


239.50


108.16Net loans charged off to average total loans(3)


0.53


1.11Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


0.63


2.84Nonperforming assets to total assets(2)


0.49


1.75


(1)Amounts
are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)End
of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.(3)Annualized.(4)Average
balances presented and used to calculate our financial ratios are based on continuing operations data only, unless otherwise
indicated.(5)The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments and low income housing credit (LIHC) investment amortization expense, as a percentage of net interest income (taxable-equivalent basis) and noninterest income, and is calculated for
continuing operations only.(6)The
tangible equity ratio is calculated as tangible equity (stockholder's equity less goodwill and intangible assets net of deferred tax on
total intangibles) divided by tangible assets (total assets less goodwill and intangible assets net of deferred tax on total intangibles). The tangible equity ratio, while not required by
US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.(7)The
Tier 1 common capital ratio is the ratio of Tier 1 common capital to risk weighted assets. The Tier 1 common capital
ratio, while not required by US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.(8)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonaccrual
loans, as appropriate. These ratios relate to continuing operations only.(9)The
allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate. These ratios relate to continuing operations only.nm=
not meaningful


6

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Table of Contents

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

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

September 30,
2008

September 30,
2009

Percent
ChangeResults of operations:Net interest income(1)

$
1,498,287

$
1,680,010


12.13
%Provision for loan losses


284,000


923,000


nmNoninterest income


593,743


541,858


(8.74
)Noninterest expense


1,266,330


1,559,256


23.13Income (loss) before income taxes(1)


541,700


(260,388
)

nmTaxable-equivalent adjustment


7,405


8,625


16.48Income tax expense (benefit)


167,493


(162,169
)

nmIncome (loss) from continuing operations


366,802


(106,844
)

nmLoss from discontinued operations, net of taxes


(12,037
)




100.00Net income (loss)

$
354,765

$
(106,844
)

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

$
62,599,753

$
78,153,207


24.85
%Total loans


48,306,118


48,169,508


(0.28
)Nonperforming assets


304,246


1,367,691


nmTotal deposits


42,355,853


60,691,368


43.29Medium- and long-term debt


3,827,164


5,121,553


33.82Stockholder's equity


4,692,648


9,475,004


nmBalance sheet (period average):Total assets

$
59,023,615

$
71,000,250


20.29
%Total loans


45,138,144


49,366,280


9.37Earning assets


54,689,402


64,593,827


18.11Total deposits


42,821,802


53,526,802


25.00Stockholder's equity


4,640,908


7,332,747


58.00Financial ratios(4):Return on average assets(3):From continuing operations


0.83
%

(0.20
)%Net income (loss)


0.80


(0.20
)Return on average stockholder's equity(3):From continuing operations


10.56


(1.95
)Net income (loss)


10.21


(1.95
)Efficiency ratio(5)


58.10


66.34Net interest margin(1)(3)


3.65


3.47Tangible equity ratio(6)


6.96


8.94Tier 1 common capital ratio(7)


8.00


11.58Tier 1 risk-based capital ratio(2)


8.02


11.60Total risk-based capital ratio(2)


10.94


14.42Leverage ratio(2)


7.97


10.39Allowance for loan losses to(8):Total loans


1.20


2.62Nonaccrual loans


200.94


95.15Allowance for credit losses to(9):Total loans


1.43


2.97Nonaccrual loans


239.50


108.16Net loans charged off to average total loans(3)


0.31


1.10Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


0.63


2.84Nonperforming assets to total assets(2)


0.49


1.75


(1)Amounts
are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)End
of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.(3)Annualized.(4)Average
balances presented and used to calculate our financial ratios are based on continuing operations data only, unless otherwise
indicated.(5)The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments and low income housing credit (LIHC) investment amortization expense, as a percentage of net interest income (taxable-equivalent basis) and noninterest income, and is calculated for
continuing operations only.(6)The
tangible equity ratio is calculated as tangible equity (stockholder's equity less goodwill and intangible assets net of deferred tax on
total intangibles) divided by tangible assets (total assets less goodwill and intangible assets net of deferred tax on total intangibles). The tangible equity ratio, while not required by
US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.(7)The
Tier 1 common capital ratio is the ratio of Tier 1 common capital to risk weighted assets. The Tier 1 common capital
ratio, while not required by US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.(8)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonaccrual
loans, as appropriate. These ratios relate to continuing operations only.(9)The
allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate. These ratios relate to continuing operations only.nm=
not meaningful


7

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Table of Contents

Item 1.   Financial Statements

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

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,(Amounts in thousands)

2008

2009

2008

2009Interest IncomeLoans

$
636,870

$
576,166

$
1,884,112

$
1,762,540Securities


100,265


109,279


303,843


310,561Interest bearing deposits in banks


147


4,956


503


9,406Federal funds sold and securities purchased under resale agreements


1,787


110


5,573


348Trading account assets


1,200


250


4,701


610Total interest income


740,269


690,761


2,198,732


2,083,465Interest ExpenseDeposits


135,736


101,374


500,905


306,598Federal funds purchased and securities sold under repurchase agreements


15,630


41


44,402


113Commercial paper


8,056


355


26,127


2,901Medium- and long-term debt


25,989


27,112


65,138


84,056Trust notes


239


239


715


715Other borrowed funds


34,873


604


70,563


17,697Total interest expense


220,523


129,725


707,850


412,080Net Interest Income


519,746


561,036


1,490,882


1,671,385Provision for loan losses


117,000


314,000


284,000


923,000Net interest income after provision for loan losses


402,746


247,036


1,206,882


748,385Noninterest IncomeService charges on deposit accounts


77,079


74,888


229,521


218,053Trust and investment management fees


40,638


34,506


127,828


102,543Trading account activities


12,397


10,513


40,096


49,456Merchant banking fees


12,789


14,601


35,667


48,357Brokerage commissions and fees


9,520


8,611


30,014


25,424Card processing fees, net


8,129


8,559


24,060


24,219Securities gains, net


50


12,694


48


12,522Other


38,119


19,557


106,509


61,284Total noninterest income


198,721


183,929


593,743


541,858Noninterest ExpenseSalaries and employee benefits


238,129


233,981


723,098


710,601Net occupancy


38,574


43,146


113,008


128,289Intangible asset amortization


671


40,641


2,011


121,809Regulatory agencies


8,572


30,739


16,078


101,513Outside services


20,741


22,219


58,045


64,001Professional services


17,236


17,647


47,764


53,074Equipment


14,437


17,838


44,925


49,853Software


14,812


16,502


44,016


45,745Foreclosed asset expense (income)


524


(144
)

696


4,024Provision for losses on off-balance sheet commitments


8,000


6,000


21,000


47,000Privatization-related expense


6,193


6,649


6,193


40,901Other


75,923


70,597


189,496


192,446Total noninterest expense


443,812


505,815


1,266,330


1,559,256Income (loss) from continuing operations before income taxes


157,655


(74,850
)

534,295


(269,013
)Income tax expense (benefit)


47,549


(57,821
)

167,493


(162,169
)Income (Loss) from Continuing Operations


110,106


(17,029
)

366,802


(106,844
)Loss from discontinued operations before income taxes


(8,175
)




(22,692
)

Income tax benefit


(2,899
)




(10,655
)

Loss from Discontinued Operations


(5,276
)




(12,037
)

Net Income (Loss)

$
104,830

$
(17,029
)
$
354,765

$
(106,844
)


See accompanying notes to condensed consolidated financial statements.

8

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Table of Contents

UnionBanCal Corporation and Subsidiaries  Condensed Consolidated Balance Sheets  (Unaudited)

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009AssetsCash and due from banks

$
1,959,484

$
1,568,578

$
1,155,497Interest bearing deposits in banks


16,029


2,872,698


2,659,460Federal funds sold and securities purchased under resale agreements


488,014


63,069


437,328Total cash and cash equivalents


2,463,527


4,504,345


4,252,285Trading account assets:Pledged as collateral


18,124


6,283


60,816Held in portfolio


711,293


1,210,496


879,734Securities available for sale:Pledged as collateral


1,404,463


54,525


Held in portfolio


6,890,891


8,140,013


18,210,574Securities held to maturity (Fair value: September 30, 2009, $1,269,934)








1,193,337Loans (net of allowance for loan losses: September 30, 2008, $580,474;December 31, 2008, $737,767; September 30, 2009, $1,260,307)


47,725,644


48,847,783


46,909,201Due from customers on acceptances


21,562


23,131


12,842Premises and equipment, net


474,519


680,004


667,005Intangible assets


4,447


713,485


601,140Goodwill


355,287


2,369,326


2,369,326Other assets


2,524,839


3,571,995


2,996,947Assets of discontinued operations to be disposed or sold


5,157


4


Total assets

$
62,599,753

$
70,121,390

$
78,153,207LiabilitiesNoninterest bearing

$
13,694,272

$
13,566,873

$
14,472,375Interest bearing


28,661,581


32,482,896


46,218,993Total deposits


42,355,853


46,049,769


60,691,368Federal funds purchased and securities sold under repurchase agreements


1,760,442


172,758


229,268Commercial paper


1,659,935


1,164,327


423,499Other borrowed funds


6,718,935


8,196,597


164,861Trading account liabilities


506,890


1,034,663


715,075Acceptances outstanding


21,562


23,131


12,842Other liabilities


1,020,085


1,685,412


1,306,097Medium- and long-term debt


3,827,164


4,288,488


5,121,553Junior subordinated debt payable to subsidiary grantor trust


14,093


13,980


13,640Liabilities of discontinued operations to be extinguished or assumed


22,146


7,960


Total liabilities


57,907,105


62,637,085


68,678,203Commitments, contingencies and guaranteesSee Note 16Stockholder's EquityPreferred stock:Authorized 5,000,000 shares; no shares issued or outstanding as of September 30, 2008, December 31, 2007 and September 30, 2009








Common stock, par value $1 per share:Authorized 300,000,000 shares; issued 159,834,897 shares as of September 30, 2008, 136,330,829 shares as of December 31, 2008 and September 30,
 2009


159,835


136,331


136,331Additional paid-in capital


1,299,045


3,195,023


5,195,023Treasury stock18,748,501 shares as of September 30, 2008, no shares as of December 31, 2008 and September 30, 2009


(1,204,759
)




Retained earnings


5,050,682


4,964,802


4,857,958Accumulated other comprehensive loss


(612,155
)

(811,851
)

(714,308
)Total stockholder's equity


4,692,648


7,484,305


9,475,004$
62,599,753

$
70,121,390

$
78,153,207


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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

(In thousands, except shares)

Number of
shares

Common
stock

Additional
paid-in
capital

Treasury
stock

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Total
stockholder's
equityBALANCE DECEMBER 31, 2007


157,559,521

$
157,559

$
1,153,737

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

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














354,765





354,765Other comprehensive income (loss), net of tax:Net change in unrealized gains on cash flow hedges

















11,417


11,417Net change in unrealized losses on securities available for sale

















(346,866
)

(346,866
)Foreign currency translation adjustment

















(625
)

(625
)Net change in pension and other benefits

















7,042


7,042Total comprehensive income, net of tax




















25,733Split-Dollar Life Insurance adjustment














(236
)




(236
)Income tax benefit on dividends on share-based payment awards adjustment








162











162Stock options exercised


2,255,373


2,256


104,941











107,197Restricted stock granted, net of forfeitures


20,003


20


(20
)










Excess tax benefitstock-based compensation








11,910











11,910Compensation expensestock options








9,848











9,848Compensation expenserestricted stock








12,731











12,731Compensation expenserestricted stock units, performance share units and other share-based compensation








5,736











5,736Common stock repurchased(1)











(2,175
)







(2,175
)Dividends declared on common stock, $1.04 per share(2)














(216,239
)




(216,239
)Net change





2,276


145,308


(2,175
)

138,290


(329,032
)

(45,333
)BALANCE SEPTEMBER 30, 2008


159,834,897

$
159,835

$
1,299,045

$
(1,204,759
)
$
5,050,682

$
(612,155
)
$
4,692,648BALANCE DECEMBER 31, 2008


136,330,829

$
136,331

$
3,195,023

$


$
4,964,802

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














(106,844
)




(106,844
)Other comprehensive income (loss), net of tax:Net change in unrealized gains on cash flow hedges(3)

















(34,492
)

(34,492
)Net change in unrealized losses on securities(3)

















120,758


120,758Foreign currency translation adjustment

















1,085


1,085Net change in pension and other benefits

















10,192


10,192Total comprehensive loss, net of tax




















(9,301
)Capital contribution from Bank of Tokyo-Mitsubishi UFJ, Ltd.








2,000,000











2,000,000Net change








2,000,000





(106,844
)

97,543


1,990,699BALANCE SEPTEMBER 30, 2009


136,330,829

$
136,331

$
5,195,023

$


$
4,857,958

$
(714,308
)
$
9,475,004


(1)Common
stock repurchased includes commission costs.(2)Dividends
are based on UnionBanCal Corporation's shares outstanding as of the declaration date.(3)Includes
amortization of privatization adjustments. See Note 3 to these condensed consolidated financial statements for additional
information on the Company's privatization transaction.


See accompanying notes to condensed consolidated financial statements.

10

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Table of Contents

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

For the Nine Months
Ended September 30,(Dollars in thousands)

2008

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

$
354,765

$
(106,844
)Loss from discontinued operations, net of taxes


(12,037
)

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


366,802


(106,844
)Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for loan losses


284,000


923,000Provision for losses on off-balance sheet commitments


21,000


47,000Depreciation, amortization and accretion


85,125


133,428Stock-based compensationstock options and other share-based compensation


28,315


Provision for (reversal of) deferred income taxes


74,771


(123,938
)Net gains on sales of securities


(48
)

(12,522
)Net decrease in accrued expenses


(427,084
)

(251,218
)Net (increase) decrease in trading account assets


(126,084
)

276,229Net increase (decrease) in trading account liabilities


155,833


(319,588
)Net increase in prepaid expenses


(12,824
)

(27,199
)Net increase in fees and other receivables


(63,740
)

(79,607
)Net increase (decrease) in other liabilities


461,277


(200,736
)Net increase in other assets


(59,916
)

(276,914
)Loans originated for resale


(430,650
)

(65,337
)Net proceeds from sale of loans originated for resale


392,551


37,915Excess tax benefitstock-based compensation


(11,910
)

Other, net


4,725


28,211Discontinued operations, net


80,143


(6,027
)Total adjustments


455,484


82,697Net cash provided by (used in) operating activities


822,286


(24,147
)Cash Flows from Investing Activities:Proceeds from sales of securities available for sale


11,388


3,164,329Proceeds from matured and called securities available for sale


1,185,604


1,738,034Purchases of securities available for sale


(1,592,482
)

(15,882,619
)Proceeds from matured securities held to maturity





3,768Purchases of premises and equipment, net


(53,924
)

(83,825
)Net (increase) decrease in loans


(7,185,181
)

1,034,102Other, net


(5,054
)

(1,576
)Discontinued operations, net


3,732


Net cash used in investing activities


(7,635,917
)

(10,027,787
)Cash Flows from Financing Activities:Net increase (decrease) in deposits


(324,338
)

14,641,599Net increase in federal funds purchased and securities sold under repurchase agreements


128,840


56,510Net increase (decrease) in commercial paper and other borrowed funds


5,236,595


(7,772,564
)Capital contribution from the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU)





2,000,000Proceeds from issuance of medium- and long-term debt


1,901,000


1,625,000Repayment of medium-term debt





(750,000
)Common stock repurchased


(2,175
)

Payments of cash dividends


(215,246
)

Stock options exercised


119,107


Other, net


(625
)

1,085Discontinued operations, net


(87,460
)

(1,929
)Net cash provided by financing activities


6,755,698


9,799,701Net decrease in cash and cash equivalents


(57,933
)

(252,233
)Cash and cash equivalents at beginning of period


2,521,633


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


(173
)

173Cash and cash equivalents at end of period

$
2,463,527

$
4,252,285Cash Paid During the Period For:Interest

$
703,335

$
416,511Income taxes, net


235,156


208,972Supplemental Schedule of Noncash Investing and Financing Activities:Securities available for sale transferred to securities held to maturity

$


$
1,144,036Loans transferred to foreclosed assets (OREO) and/or distressed loans held for sale


17,750


55,367


See accompanying notes to condensed consolidated financial statements.

11

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Table of Contents

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

Note 1Basis of Presentation and Nature of Operations

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

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

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

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

Note 2Recently Issued Accounting Pronouncements



In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-01,
"Topic-105-Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles." The new guidance establishes the FASB Accounting Standards Codification (FASB ASC) as the single
source of authoritative US GAAP. The FASB ASC does not significantly change current US GAAP and merely restructures the information in a topical format. The FASB ASC was effective
July 1, 2009 and the technical references to US GAAP included in these condensed consolidated financial statements are provided under the new FASB ASC structure with the prior
terminology included parenthetically within this note. At adoption, there was no impact from this change on the Company's financial position or results of operations.

12

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In December 2007, the FASB issued new guidance impacting FASB ASC 805, "Business Combinations" (formerly Statement of Financial
Accounting Standards (SFAS) No. 141R, "Business Combinations"). The guidance requires that all business combinations be accounted for under the "acquisition method." The guidance requires that
the assets, liabilities and noncontrolling interests of a business combination be measured at fair value at the acquisition date. The acquisition date is defined as the date an acquirer obtains
control of the entity, which is typically the closing date. The guidance requires that all acquisition and restructuring related costs be expensed as incurred and that any contingent consideration be
measured at fair value and recorded as either equity or a liability with the
liability remeasured at fair value in subsequent periods. The guidance was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of
operations.



In December 2007, the FASB issued new guidance impacting FASB ASC 810-10, "Consolidations" (formerly SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statementsan amendment to ARB No. 51"). The guidance requires that a noncontrolling interest (formerly minority interest) be
measured at fair value at the acquisition date and be presented in the equity section on the balance sheet. The guidance requires that purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions with no resulting gain or loss. If control is lost, the noncontrolling interest is remeasured to fair value and a gain or loss is recorded.
The guidance was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.



In March 2008, the FASB issued new guidance impacting FASB ASC 815-10, "Derivatives and Hedging" (formerly SFAS
No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"). The guidance requires expanded qualitative, quantitative
and credit-risk disclosures of derivative instruments and hedging activities. These disclosures include more detailed information about gains and losses, location of derivative instruments
in financial statements, and credit-risk-related contingent features in derivative instruments. The guidance also requires the disclosure of all significant concentrations of
credit risks arising from derivative instruments. The guidance, which applies only to disclosures, was effective January 1, 2009. Disclosures required under this Statement are included in
Note 13 to these condensed consolidated financial statements.



In April 2008, the FASB issued new guidance impacting FASB ASC 350-30, "IntangiblesGoodwill and Other"
(formerly Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible Assets"). The guidance requires that an entity consider its own assumptions about the
renewal or extension period, adjusted for entity-specific factors, when determining the useful life of a recognized intangible asset. In the absence of
that experience, an entity should consider market participant assumptions. The guidance was effective January 1, 2009. At adoption there was no impact on the Company's financial position or
results of operations.

13

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In December 2008, the FASB issued new guidance impacting FASB ASC 715-20-50, "Compensation Retirement
BenefitsDefined Benefit PlansDisclosure" (formerly FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets"), which expands the
disclosure requirements related to an employer's defined benefit pension or other postretirement plan. The guidance requires additional disclosure information, including how a company makes investment
allocation decisions, the fair value of each major category of plan assets and the nature and amount of concentration risk within or across those plan asset categories. Additionally, the guidance
requires disclosures about the valuation of plan assets, including the level within the fair value hierarchy in which fair value measurements of plan assets fall and information about the inputs and
valuation techniques used to measure the fair value of plan assets. The guidance, which applies only to disclosures, is effective December 31, 2009.



In April 2009, the FASB issued new guidance impacting FASB ASC 805-10, "Business Combinations" (formerly FSP
FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies"). The guidance requires that an asset or liability
assumed in a business combination that arises from a contingency be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot
be determined during the measurement period, the accounting for the acquired contingency should follow existing accounting guidance. The guidance was effective January 1, 2009. At adoption,
there was no impact on the Company's financial position or results of operations.



In April 2009, the FASB issued new guidance impacting FASB ASC 825-10-50, "Financial
InstrumentsDisclosure" (formerly FSP FAS 107-1 and Accounting Principles Board Opinion (APB) 28-1, "Interim Disclosures about Fair Value of Financial
Instruments"). The guidance requires disclosure of the fair value of financial instruments to be reported for interim periods. The guidance, which applies only to disclosures, was effective
April 1, 2009. Disclosures required under this guidance are included in Note 12 to these condensed consolidated financial statements.



In April 2009, the FASB issued new guidance impacting FASB ASC 820-10, "Fair Value Measurements and Disclosures" (formerly
FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly"). The guidance provides additional information for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased. The guidance provides
factors to consider when determining whether there has been a significant decline in volume or level of activity. The guidance also affirms that the objective of a fair value measurement is the price
that would be received to sell an asset in an orderly transaction under current market conditions, even if the market is inactive. The guidance was effective April 1, 2009. At adoption, there
was no impact on the Company's financial position or results of operations.

14

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In April 2009, the FASB issued new guidance impacting FASB ASC 320-10, "Investments-Debt and Equity Securities"
(formerly FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments"). The guidance amends the
determination and recognition of other-than-temporary impairment criteria related to debt securities. The guidance establishes new criteria for determining whether impairment
is other-than-temporary and what portion of any such impairment is recognized in earnings. A company is required to assert whether it intends or it is more likely than not that
it will need to sell a security with an unrealized loss before full recovery of the amortized cost basis. If it is likely that a security will be sold prior to full recovery, the security must be
written down to its current fair value and the entire loss recognized in earnings immediately. If it is likely that the security will not be sold prior to recovery, but the amortized cost basis will
not be collected, the security must be written down to its current fair value. However, in that case, only the credit loss component shall be recognized in earnings immediately with the remaining
non-credit related loss portion recorded in other comprehensive income. The guidance was effective April 1, 2009. At adoption, there was no impact on the Company's financial
position or results of operations.



In May 2009, the FASB issued FASB ASC 855-10, "Subsequent Events" (formerly SFAS No. 165, "Subsequent Events"),
which requires an evaluation of events or transactions that occur after the balance sheet date through the date that the financial statements are issued or available to be issued. The guidance also
provides information about when such a subsequent event should be recognized in the financial statements and requires the disclosure of the date through which subsequent events were evaluated and
whether that represents the date the financial statements were issued or available to be issued. The guidance was effective June 30, 2009. At adoption, there was no impact on the Company's
financial position or results of operations. Disclosures required under this guidance are included in Note 18 to these condensed consolidated financial statements.



In June 2009, the FASB issued new guidance amending SFAS No. 166, "Accounting for Transfers of Financial Assetsan
amendment of FASB Statement 140". (This guidance has not yet been integrated into the FASB ASC.) The guidance eliminates the concept of qualifying special purpose entities (QSPEs) and modifies
financial asset derecognition criteria. The elimination of the exception for QSPEs will likely result in many sponsors that transferred financial assets to such vehicles to consolidate them. The
derecognition modifications require that companies consider all arrangements such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates
when determining whether derecognition is appropriate for a transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a
participating interest. The guidance also requires that all beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are amended to require
description of a company's continuing involvement with transferred financial assets and details regarding financial or other support provided. The guidance is effective January 1, 2010.
Management is currently evaluating the impact this guidance may have on the Company's financial position and results of operations.

15

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2Recently Issued Accounting Pronouncements (Continued)



In June 2009, the FASB issued new guidance amending SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)". (This
guidance has not yet been integrated into the FASB ASC.) The guidance changes the method of analyzing which party shall consolidate a variable interest entity (VIE) by providing revised criteria for
determining the primary beneficiary. A company would be required to determine the primary beneficiary of a VIE on a continual basis based on a qualitative assessment of which party, if any, has the
power to direct activities and the right to receive benefits or the obligation to absorb losses. The guidance also states that if power is shared by multiple parties such that no one party has the
power to direct the activities, then no party shall consolidate the VIE. Disclosures are also amended to require disclosure of continuing involvement with VIEs and judgments used in the consolidation
analysis such as the method, significant judgments and assumptions used for determining the primary beneficiary. The guidance is effective January 1, 2010. Management is currently evaluating
the impact this guidance may have on the Company's financial position and results of operations.



In August 2009, the FASB issued ASU 2009-05, "Measuring Liabilities at Fair Value." This guidance amends FASB ASC
820-10, "Fair Value Measurements and Disclosures" to clarify that, if available, an entity should measure the fair value of a liability using a quoted price in an active market. If such
information is not available, an entity should use a valuation technique based on the quoted price when the liability or similar liabilities are traded as assets, if available, which should not be
adjusted for any transfer restrictions. The guidance also emphasizes that an entity should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The guidance is
effective October 1, 2009. Management does not believe that this guidance will have a material effect on the Company's financial position or results of operations.



In October 2009, the FASB issued ASU 2009-12, "Investments in Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent)." This guidance amends FASB ASC 820-10, "Fair Value Measurements and Disclosures" to state that if an investment does not have a readily determinable fair value and has all
the attributes of an investment company, a reporting entity is permitted, as a practical expedient, to estimate fair value using the investment's net asset per share (NAV). The NAV should be
calculated as of the reporting entity's measurement date and, if not, the NAV must be adjusted for significant market events since its calculation. This guidance also precludes a reporting entity from
using this practical expedient if it is probable that it will sell the investment at a price other than NAV. The guidance also requires enhanced disclosures about the nature and risk of such
investments. The guidance is effective for reporting periods ending after December 15, 2009. Management is currently evaluating the impact this guidance will have on the Company's financial
position and results of operations.

Note 3Privatization

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

16

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3Privatization (Continued)

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

The
amortization (accretion) of the fair value adjustments by category for the three and nine months ended September 30, 2009, respectively, were $40 million and
$120 million for intangibles, $2 million and $6 million for premises and equipment, ($21) million and ($75) million for loans, $4 million and $11 million for cash
flow hedges, ($7) million and ($24) million for securities, and $1 million and $3 million for debt.

During
the three and nine months ended September 30, 2009, the Company recorded expenses for the privatization transaction of $7 million and $41 million,
respectively, which primarily consisted of compensation expense for amortization of bridge award compensation.

17

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities

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

Securities Available for Sale

December 31, 2008

September 30, 2009(Dollars in thousands)

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueU.S. Treasury

$


$


$


$


$
299,247

$
12

$


$
299,259Other U.S. government


761,000


17,988





778,988


6,063,641


18,218


3,883


6,077,976Residential mortgage-backed securitiesagency


5,371,181


87,803


12,038


5,446,946


10,918,439


223,749


3,966


11,138,222Residential mortgage-backed securitiesnon-agency


639,679





124,592


515,087


492,025


93


60,192


431,926State and municipal


52,749


2,185


87


54,847


47,640


2,409


9


50,040Asset-backed and debt securities


1,837,287


48,921


597,310


1,288,898


113,017


1,290


8,117


106,190Equity securities


109,919


126


355


109,690


106,882


415


336


106,961Foreign securities


82








82











Total securities available for sale

$
8,771,897

$
157,023

$
734,382

$
8,194,538

$
18,040,891

$
246,186

$
76,503

$
18,210,574


Securities Held to Maturity

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



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

Amortized
Cost(1)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Carrying
Value

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueCollateralized loan obligations (CLOs)

$
1,741,408

$


$
548,166

$
1,193,242

$
101,055

$
24,458

$
1,269,839Foreign securities


95








95








95Total securities held to maturity

$
1,741,503

$


$
548,166

$
1,193,337

$
101,055

$
24,458

$
1,269,934


(1)Amortized
cost reflects fair value adjustments as a result of the Company's privatization. Refer to Note 3 to these condensed
consolidated financial statements.(2)The
amount recognized in OCI reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization,
while the amount not recognized in OCI reflects the incremental change in value after such transfer.


For the three and nine months ended September 30, 2009, interest income included $2.1 million and $3.4 million, respectively,
from non-taxable securities.

Transfer of Securities from Available for Sale to Held to Maturity

The Company's collateralized loan obligations (CLOs) consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that
securitizes a diversified pool of loan assets into multiple classes of notes from

18

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

the
cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note
holders through the trading and sale of underlying collateral. During the first quarter of 2009, management reassessed the classification of its CLOs. On February 28, 2009, the Company
reclassified its CLOs, which totaled $1.1 billion at fair value, from available for sale to held to maturity. The related unrealized pre-tax loss of $589 million included in
accumulated OCI at the date of
reclassification remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the CLOs. However, there is no impact on earnings, as an equal fair value
discount on the securities is being accreted through earnings over the remaining terms of the CLOs. No gain or loss was recognized at the time of reclassification. Accordingly, no change was recorded
in the amortized cost basis of the securities as a result of the transfer. The Company considers the held to maturity classification to be more appropriate because the Company has the ability and the
intent to hold these securities to maturity.

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

Maturity Schedule of Securities

Securities Available for Sale(1)

September 30, 2009(Dollars in thousands)

Amortized
Cost(3)

Fair
ValueDue in one year or less

$
3,815,062

$
3,816,293Due after one year through five years


2,829,981


2,850,132Due after five years through ten years


1,736,478


1,787,888Due after ten years


9,552,488


9,649,300Equity securities(2)


106,882


106,961Total securities available for sale

$
18,040,891

$
18,210,574


Securities Held to Maturity

September 30, 2009(Dollars in thousands)

Amortized
Cost(3)

Fair
ValueDue in one year or less

$
95

$
95Due after one year through five years


12,263


8,849Due after five years through ten years


1,261,357


948,966Due after ten years


467,788


312,024Total securities held to maturity

$
1,741,503

$
1,269,934


(1)The
remaining contractual maturities of residential mortgage-backed securities are classified without regard to prepayments. The contractual
maturity of these securities is not a reliable indicator of their expected life since borrowers have the right to repay their obligations at any time.(2)Equity
securities do not have a stated maturity.(3)Amortized
cost reflects fair value adjustments as a result of the Company's privatization. Refer to Note 3 to these condensed
consolidated financial statements.


19

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)




For the three months ended September 30, 2008, proceeds from sales of securities available for sale were $1.1 million with both
gross realized gains and gross realized losses of less than $0.1 million. For the three months ended September 30, 2009, proceeds from sales of securities available for sale were
$3.1 billion with gross realized gains of $12.7 million and no gross realized losses. For the nine months ended September 30, 2008, proceeds from sales of securities available for
sale were $11.4 million with both gross realized gains and gross realized losses of less than $0.1 million. For the nine months ended September 30, 2009, proceeds from sales of
securities available for sale were $3.2 billion with gross realized gains of $13.3 million and no gross realized losses. The specific identification method is used to calculate realized
gains and losses.

Analysis of Unrealized Losses on Securities

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

Securities Available for Sale

December 31, 2008Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountResidential mortgage-backed securitiesagency

$
188,741

$
2,035


25

$
607,171

$
10,004


84

$
795,912

$
12,039


109Residential mortgage-backed securitiesnon-agency


331,124


52,532


10


183,964


72,059


9

$
515,088

$
124,591


19State and municipal


3,242


74


5


1,669


13


7


4,911


87


12Asset-backed and debt securities


38,221


9,261


3


1,088,480


588,049


218


1,126,701


597,310


221Equity securities


5,085


355


3











5,085


355


3Total securities available for sale

$
566,413

$
64,257


46

$
1,881,284

$
670,125


318

$
2,447,697

$
734,382


364




September 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountOther U.S. government

$
3,363,942

$
3,883


48

$


$





$
3,363,942

$
3,883


48Residential mortgage-backed securitiesagency


295,365


948


12


297,647


3,018


42


593,012


3,966


54Residential mortgage-backed securitiesnon-agency











399,413


60,192


17


399,413


60,192


17State and municipal


524





2


685


9


4


1,209


9


6Asset-backed and debt securities


2,647


839


1


77,687


7,277


10


80,334


8,117


11Equity securities











119


336


2


119


336


2Total securities available for sale

$
3,662,478

$
5,670


63

$
775,551

$
70,832


75

$
4,438,029

$
76,503


138


Securities Held to Maturity

September 30, 2009Less than 12 months

12 months or more

Total(Dollars in thousands)

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

CountCLOs

$
82,208

$
30,199


20

$
1,187,631

$
542,425


201

$
1,269,839

$
572,624


221Total securities held to maturity

$
82,208

$
30,199


20

$
1,187,631

$
542,425


201

$
1,269,839

$
572,624


221


20

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

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

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

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



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



Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie
Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from
higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at September 30, 2009.



Non-agency residential mortgage backed securities are issued by financial institutions with no guarantee from GSEs. These
securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on
non-agency residential mortgage-backed securities resulted from higher interest rates subsequent to purchase and additional credit spreads widening since purchase. The Company estimated
loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the
underlying collateral provided by a third-party vendor using industry consensus

21

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

estimates
of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, the Company concluded these
securities were not other-than-temporarily impaired at September 30, 2009.



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



Asset-backed and debt securities in a loss position at September 30, 2009 consist of $74.9 million in privately placed
debt securities issued by power and utilities companies and $5.4 million in commercial mortgage-backed securities. Expected cash flows of debt securities to power and utilities companies are
assessed to determine if the amortized cost basis of the securities is recoverable. Based on this assessment, the Company concluded that these securities were not
other-than-temporarily impaired as of September 30, 2009.



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



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

22

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4Securities (Continued)

The
Company reports securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. Trading securities pledged
as collateral, which totaled $60.8 million at September 30, 2009, have been separately identified in the condensed consolidated balance sheet. If the secured party cannot resell or
repledge the securities that have been placed as collateral, those securities are not separately identified. At September 30, 2009, the Company had $3.9 billion of securities available
for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($0.4 billion), to
support unrealized losses on derivative transactions reported in trading liabilities ($0.3 billion) and to secure public and trust department deposits ($3.2 billion).

At
September 30, 2008, December 31, 2008, and September 30, 2009, the Company accepted securities as collateral that it is permitted by contract to sell or repledge
of $400.0 million ($296.4 million of which has been repledged to secure public agency or bankruptcy deposits), none and $294.9 million (none of which has been repledged),
respectively. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.

Note 5Loans and Allowance for Loan Losses

A summary of loans, net of unearned interest and deferred fees (costs) of $(9) million, $14 million and
$46 million, at September 30, 2008, December 31, 2008 and September 30, 2009, respectively, is as follows:

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009Commercial, financial and industrial

$
17,700,604

$
18,469,023

$
15,994,997Construction


2,653,945


2,744,062


2,691,515Mortgage:Residential


15,691,872


15,880,835


16,576,052Commercial


8,032,010


8,186,388


8,320,374Total mortgage


23,723,882


24,067,223


24,896,426Consumer:Installment


2,166,912


2,201,602


2,303,897Revolving lines of credit


1,361,784


1,435,494


1,599,112Total consumer


3,528,696


3,637,096


3,903,009Lease financing


642,642


645,765


658,708Total loans held to maturity


48,249,769


49,563,169


48,144,655Total loans held for sale


56,349


22,381


24,853Total loans


48,306,118


49,585,550


48,169,508Allowance for loan losses


580,474


737,767


1,260,307Loans, net

$
47,725,644

$
48,847,783

$
46,909,201


23

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

Changes in the allowance for loan losses were as follows:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,(Dollars in thousands)

2008

2009

2008

2009Allowance for loan losses, beginning of period

$
526,401

$
1,081,633

$
402,726

$
737,767Loans charged off


64,548


143,280


111,093


414,330Recoveries of loans previously charged off


1,993


6,607


5,404


9,700Total net loans charged off


62,555


136,673


105,689


404,630Provision for loan losses


117,000


314,000


284,000


923,000Adjustments related to privatization











2,062Foreign translation adjustment


(372
)

1,347


(563
)

2,108Allowance for loan losses, end of period


580,474


1,260,307


580,474


1,260,307Allowance for losses on off-balance sheet commitments


111,374


172,374


111,374


172,374Allowances for credit losses, end of period

$
691,848

$
1,432,681

$
691,848

$
1,432,681


The provision for loan losses increased by $197 million to $314 million for the third quarter of 2009 from $117 million for
the third quarter of 2008, primarily due to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans and increases in loss factors related to several
portfolio sectors, including the consumer and small business portfolios.

Nonaccrual
loans totaled $288.9 million and $1.3 billion at September 30, 2008 and 2009, respectively. There were $1.4 million and $17.8 million (none
and $1.9 million of which were on accrual status at September 30, 2008 and 2009, respectively) of troubled debt restructured loans at September 30, 2008 and 2009, respectively.
Effective January 1, 2009, consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent
90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was
charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans
totaling $195.1 million ($9.0 million of which are restructured loans) have been placed
on nonaccrual status as of September 30, 2009. Loans 90 days or more past due and still accruing totaled $49.2 million and $5.4 million at September 30, 2008 and
2009, respectively.

Note 6Goodwill and Intangible Assets

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



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

24

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Goodwill and Intangible Assets (Continued)

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

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

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

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



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

September 30, 2008

December 31, 2008

September 30, 2009(Dollars in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
AmountCore deposit intangibles

$
43,114

$
(38,667
)
$
4,447

$
619,398

$
(79,585
)
$
539,813

$
619,397

$
(194,677
)
$
424,720Trade name











108,733


(683
)

108,050


108,733


(2,744
)

105,989Customer relationships











53,761


(1,323
)

52,438


53,761


(4,479
)

49,282Other











9,555





9,555


9,555


(1,500
)

8,055Subtotalintangibles with a definite useful life

$
43,114

$
(38,667
)
$
4,447

$
791,447

$
(81,591
)
$
709,856

$
791,446

$
(203,400
)
$
588,046Other intangibles with an indefinite useful life











3,629





3,629


13,094





13,094Total intangibles

$
43,114

$
(38,667
)
$
4,447

$
795,076

$
(81,591
)
$
713,485

$
804,540

$
(203,400
)
$
601,140


Total amortization expense for the three months ended September 30, 2008 and 2009 was $0.7 million and $40.6 million,
respectively. Total amortization expense for the nine months ended September 30, 2008 and 2009 was $2.0 million and $121.8 million, respectively.

25

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6Goodwill and Intangible Assets (Continued)

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

(Dollars in thousands)

Core Deposit
Intangibles (CDI)

Trade Name

Customer
Relationships

Other

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

$
38,364

$
686

$
1,052

$
375

$
40,4772010


114,029


2,747


4,246


1,497


122,5192011


88,016


2,747


3,968


1,490


96,2212012


69,259


2,747


3,679


1,490


77,1752013


44,743


2,747


3,436


1,490


52,416Thereafter


70,309


94,315


32,901


1,713


199,238Total estimated amortization expense

$
424,720

$
105,989

$
49,282

$
8,055

$
588,046


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

Note 7Employee Pension and Other Postretirement Benefits

The following tables summarize the components of net periodic benefit cost for the three and nine months ended September 30, 2008 and 2009.

Pension Benefits

Other Benefits

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

For the Three Months
Ended September 30,

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

2008

2009

2008

2009

2008

2009Components of net periodic benefit costService cost

$
12,784

$
13,094

$
2,018

$
1,614

$
235

$
256Interest cost


19,411


20,767


2,821


2,353


896


941Expected return on plan assets


(33,411
)

(35,153
)

(3,369
)

(2,501
)




Amortization of prior service cost








(22
)

(16
)

51


Amortization of transition amount








509


328





Recognized net actuarial loss


2,483


3,045


816


936


424


305Total net periodic benefit cost

$
1,267

$
1,753

$
2,773

$
2,714

$
1,606

$
1,502


26

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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



Pension Benefits

Other Benefits

Superannuation, SERP and ESBPFor the Nine Months
Ended September 30,

For the Nine Months
Ended September 30,

For the Nine Months
Ended September 30,(Dollars in thousands)

2008

2009

2008

2009

2008

2009Components of net periodic benefit costService cost

$
38,351

$
39,282

$
6,055

$
6,278

$
705

$
767Interest cost


58,234


62,300


8,463


8,462


2,757


2,823Expected return on plan assets


(100,232
)

(105,458
)

(10,108
)

(7,500
)




Amortization of prior service cost








(70
)

(47
)

151


Amortization of transition amount








1,527


983





Recognized net actuarial loss


7,449


9,136


2,497


5,241


1,271


1,476Total net periodic benefit cost

$
3,802

$
5,260

$
8,364

$
13,417

$
4,884

$
5,066


Note 8Other Noninterest Income and Noninterest Expense

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

Other Noninterest Income

For the Three Months Ended

For the Nine Months Ended(Dollars in thousands)

September 30,
2008

September 30,
2009

September 30,
2008

September 30,
2009Standby letters of credit fees

$
6,458

$
7,916

$
17,822

$
22,929Private capital and other investment income


12,426


2,967


25,192


4,323Gain on the VISA IPO redemption








14,211


Other


19,235


8,674


49,284


34,032Total other noninterest income

$
38,119

$
19,557

$
106,509

$
61,284


Other Noninterest Expense

For the Three Months Ended

For the Nine Months Ended(Dollars in thousands)

September 30,
2008

September 30,
2009

September 30,
2008

September 30,
2009Advertising and public relations

$
12,624

$
14,562

$
33,579

$
36,532Low income housing credit investment amortization


11,616


13,064


29,248


34,256Communications


9,204


9,494


27,690


27,404Data processing


8,945


7,975


23,805


24,592Printing and office supplies


4,124


7,287


13,557


16,243Travel


6,014


4,552


17,789


15,453Other


23,396


13,663


43,828


37,966Total other noninterest expense

$
75,923

$
70,597

$
189,496

$
192,446


27

---



Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9Income Taxes

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,2008

2009

2008

2009Federal income tax rate


35
%

(35
)%

35
%

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


5


(5
)

3


(1
)Tax credits


(9
)

(24
)

(8
)

(19
)Tax-exempt interest income


(1
)

(3
)

(1
)

(2
)Adjustment to 2008 taxes





(7
)




(2
)Other, net





(3
)

2


(1
)Effective tax rate


30
%

(77
)%

31
%

(60
)%


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

The
change in the effective tax rate from the third quarter of 2008 was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current
year, as well as the impact of tax credits and state income taxes. A tax benefit of $4.6 million was recognized in the third quarter of 2009 with respect to certain privatization costs incurred
in 2008, after a study was conducted to determine the tax-deductible portion of those costs. The deductions were taken in our 2008 tax return.

The
quarterly effective tax rate for the first and second quarters of 2009 was computed on an individual quarterly basis, while the rate for the third quarter and for the nine months
ended September 30, 2009, was based on an estimated average effective tax rate for the year.

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

28

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 10Borrowed Funds

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

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 1.90%, 0.53% and 0.12% at
September 30, 2008, December 31, 2008 and September 30, 2009, respectively(1)

$
1,760,442

$
172,758

$
229,268Commercial paper, with weighted average interest rates of 2.26%, 1.48%, and 0.29% at September 30, 2008, December 31, 2008 and September 30,
2009, respectively


1,659,935


1,164,327


423,499Other borrowed funds:Federal Home Loan Bank borrowings, with weighted average interest rates of 2.63% and 2.22% at September 30, 2008 and December 31, 2008,
respectively


2,600,000


1,850,000


Term federal funds purchased, with weighted average interest rates of 2.63%, 2.60% and 0.19% at September 30, 2008, December 31, 2008 and
September 30, 2009, respectively


807,730


1,230,060


50,000Federal Reserve Bank Term Borrowings, with weighted average interest rate of 3.14% and 0.79% at September 30, 2008 and December 31, 2008,
respectively


3,000,000


5,000,000


Borrowings from Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), with weighted average interest rate of 5.59% at September 30, 2008


200,000





All other borrowed, with weighted average interest rates of 2.49%, 5.42% and 1.45% at September 30, 2008, December 31, 2008 and September 30,
 2009, respectively


111,205


116,537


114,861Total borrowed funds

$
10,139,312

$
9,533,682

$
817,628


(1)Weighted
average interest rates provided relate to external funding and do not reflect expense (earning) allocated on net funding to (from)
discontinued operations. For further information, see Note 15 to these condensed consolidated financial statements.


29

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)




Note 11Medium- and Long-Term Debt

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

(Dollars in thousands)

September 30,
2008

December 31,
2008

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

$
750,000

$
750,000

$
Federal Home Loan Bank Advances: Floating, which is at a spread above 3-month LIBOR, or fixed rate, at a weighted average rate of 3.13% at
September 30, 2008, 3.21% at December 31, 2008 and 2.19% at September 30, 2009


1,901,000


2,276,000


2,901,000Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.38% at September 30,
2009








500,000Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.50% at September 30,
2009








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


415,004


451,930


437,859Fixed rate 5.95% notes due May 2016


761,160


810,558


782,694Total medium- and long-term debt

$
3,827,164

$
4,288,488

$
5,121,553


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

As
of September 30, 2008, December 31, 2008 and September 30, 2009, the Company had pledged loans and securities of $37.6 billion, $40.2 billion, and
$38.6 billion, respectively, as collateral for short-and medium-term advances from the Federal Reserve Bank and Federal Home Loan Bank.

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

Under
the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity of more than 30 days and issued between October 14, 2008 and
October 31, 2009 is guaranteed by the full faith and credit of the United States. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the
maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or
December 31, 2012.

30

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

Effective January 1, 2008, the Company adopted FASB ASC 820-10, "Fair Value Measurements and Disclosures" (formerly SFAS No. 157, "Fair Value Measurements") for
most fair value measurements required for financial assets and liabilities. The Company deferred application of this guidance for one year and adopted the guidance effective January 1, 2009 for
nonrecurring measurements of fair value for non-financial assets and liabilities, such as goodwill, intangible assets and other real estate owned. At adoption, there was no effect on the
Company's financial position or results of operations.



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



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



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

31

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

Recurring
Fair Value Measurements:



Nonrecurring
Fair Value Measurements:



32

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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



The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of
September 30, 2008, December 31, 2008 and September 30, 2009, by major category and by valuation hierarchy level.

33

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

September 30, 2008(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets

$
77,751

$
679,181

$


$
(27,515
)
$
729,417Securities available for sale


866,544


6,154,518


1,274,292





8,295,354Other assets(2)





128,876





(23,360
)

105,516Total assets

$
944,295

$
6,962,575

$
1,274,292

$
(50,875
)
$
9,130,287LiabilitiesTrading account liabilities

$
5,343

$
552,422

$


$
(50,875
)
$
506,890Total liabilities

$
5,343

$
552,422

$


$
(50,875
)
$
506,890




December 31, 2008(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets

$
72,860

$
1,203,697

$


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


888,675


6,102,771


1,203,092





8,194,538Other assets(2)





317,569





(93,599
)

223,970Total assets

$
961,535

$
7,624,037

$
1,203,092

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

$
56,470

$
1,131,570

$


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

$
56,470

$
1,131,570

$


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




September 30, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

Netting
Adjustment(1)

Fair ValueAssetsTrading account assets:U.S. Treasury

$
53,592

$


$


$


$
53,592Other U.S. government


50,847











50,847State and municpal





46,617








46,617Commercial paper





56,519








56,519Derivatives


471


779,330





(46,826
)

732,975Total trading account assets


104,910


882,466





(46,826
)

940,550Securities available for sale:U.S. Treasury


299,259











299,259Other U.S. government


6,077,976











6,077,976Residential mortgage-backed securitiesagency





11,138,222








11,138,222Residential mortgage-backed securitiesnon-agency





431,926








431,926State and municpal





44,813


5,227





50,040Asset-backed and debt securities





106,190








106,190Equity securities


105,542





1,419





106,961Total securities available for sale


6,482,777


11,721,151


6,646





18,210,574Other assets(2)





118,666





(55,267
)

63,399Total assets

$
6,587,687

$
12,722,283

$
6,646

$
(102,093
)
$
19,214,523LiabilitiesTrading account liabilities:Derivatives

$
6,560

$
767,183

$


$
(102,093
)
$
671,650Securities sold, not yet purchased


43,425











43,425Total trading account liabilities


49,985


767,183





(102,093
)

715,075Total liabilities

$
49,985

$
767,183

$


$
(102,093
)
$
715,075


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


34

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

For the Three Months Ended(Dollars in thousands)

September 30, 2008

September 30, 2009Balance, beginning of period

$
1,514,836

$
6,308Total gains/(losses) (realized/unrealized):Included in income before taxes


61


44Included in other comprehensive income


(241,154
)

(10
)Purchases, sales, issuances and settlements


549


304Transfers in (out) Level 3





Balance, end of period

$
1,274,292

$
6,646Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$
29

$





For the Nine Months Ended(Dollars in thousands)

September 30, 2008

September 30, 2009Balance, beginning of period

$
1,765,497

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


183


64Included in other comprehensive income


(492,323
)

(54,721
)Purchases, sales, issuances and settlements


935


2,025Transfers in (out) Level 3(1)





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

$
1,274,292

$
6,646Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

$
87

$



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




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

35

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

September 30, 2008(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Loss for the
Three Months Ended
September 30, 2008

Loss for the
Nine Months Ended
September 30, 2008Loans

$
41,133

$


$


$
41,133

$
(3,304
)
$
(9,141
)Other Assets


1,000








1,000


(1,000
)

(1,000
)Total

$
42,133

$


$


$
42,133

$
(4,304
)
$
(10,141
)




September 30, 2009(Dollars in thousands)

Carrying
Value

Level 1

Level 2

Level 3

Loss for the
Three Months Ended
September 30, 2009

Loss for the
Nine Months Ended
September 30, 2009Securities:Held to maturity Investments

$
1,670

$


$


$
1,670

$


$
(767
)Loans:Loans Held for Sale


13,320





4,635


8,685


(5,487
)

(5,572
)Impaired Loans


590,593








590,593


(74,009
)

(189,644
)Other Assets:OREO


13,082








13,082


(1,529
)

(4,413
)CRA Investments


7,595








7,595


(1,879
)

(7,372
)Private Equity Investments


26,769








26,769


(520
)

(5,347
)Total

$
653,029

$


$
4,635

$
648,394

$
(83,424
)
$
(213,115
)


Securities held to maturity consists of one investment that was written down to fair value during the period due to other than temporary
impairment (OTTI). Fair value was determined using a pricing model and broker quotes. The model uses internally developed assumptions and available market data obtained from market participants and
credit rating agencies.

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

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

36

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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



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

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

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

Although
off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are not required to be recorded at fair value
on the consolidated balance sheet, they are carried at amounts that approximate fair value. The carrying value of these off-balance sheet instruments represents the unamortized fee income
assessed based on the credit quality and other covenants imposed on the borrower. Since the amount assessed represents the market rate that would be charged for similar agreements, management believes
that the carrying value approximates the fair value of these instruments.

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

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

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

37

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

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

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

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

December 31, 2008

September 30, 2009(Dollars in thousands)

Carrying
Value

Fair
Value

Carrying
Value

Fair
ValueAssetsSecurities held to maturity

$


$


$
1,193,337

$
1,269,934Loans, net of allowance for loan losses


48,205,818


47,507,685


46,255,093


46,327,744LiabilitiesInterest bearing deposits


32,482,896


32,528,349


46,218,993


46,247,951Other borrowed funds


8,196,597


8,203,032


164,861


164,867Medium- and long-term debt


4,288,488


4,067,878


5,121,553


5,048,379Junior subordinated debt payable to subsidiary grantor trust


13,980


11,700


13,640


13,045Off-Balance Sheet InstrumentsCommitments to extend credit


92,644


92,644


123,356


123,356Standby and commercial letters of credit


6,465


6,465


5,461


5,461


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

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

Credit
and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance
with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting agreements in order to reduce its exposure to credit risk. Master
netting agreements mitigate credit risk by permitting the

38

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

offset
of amounts due from and to individual counterparties in the event of default. Additionally, the Company establishes a credit reserve for potential losses in the event of counterparty default.
This reserve is reflected in the fair value amount of the derivative instrument. Market risk is the possibility that future changes in market conditions may make the financial instrument less
valuable.

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

The
table below presents the notional amounts, and the location and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheet, segregated
between derivative instruments designated and qualifying as hedging instruments under US GAAP and all other derivative instruments as of September 30, 2009.

September 30, 2009Asset Derivatives(1)

Liability Derivatives(1)(Dollars in thousands)

Notional
Amount

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

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

$
7,050,000

Other assets

$
118,666

Other liabilities

$
Total derivatives designated as hedging instruments under US GAAP:

$
7,050,000



$
118,666



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

$
2,981,215

Trading account assets

$
27,625

Trading account liabilities

$
43,707Energy contracts


3,544,518

Trading account assets


193,972

Trading account liabilities


199,677Interest rate contracts


24,941,719

Trading account assets


547,988

Trading account liabilities


520,143Equity contracts


193,158

Trading account assets


10,216

Trading account liabilities


10,216Other contracts


5,636

Other assets


352

Other liabilities


(885
)Total derivatives not designated as hedging instruments under US GAAP

$
31,666,246



$
780,153



$
772,858


(1)Asset
and liability values are presented gross, excluding the impact of legally enforceable master netting agreements.(2)The
fair value includes unamortized premium of $4.4 million related to terminated contracts.


Certain of the Company's derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the
Company's credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and
ongoing full overnight collateralization for those derivative instruments in net liability positions. At September 30, 2009, the aggregate fair value and net interest payable (receivable) of
all derivative

39

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

instruments
with credit-risk mitigated contingent features that are in a liability position was $94.4 million. The Company has pledged securities of $52.9 million for
collateral in the normal course of business. If all of the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2009,
the Company would have been required to provide additional collateral of $41.5 million to settle these contracts.



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



The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged
risk being the variability in those payments due to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of
similar variable rate instruments such that the reset
tenor of the variable rate instruments and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of purchased floor, cap, collars and corridor options and
interest rate swaps. At September 30, 2009, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 2.3 years.

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

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

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

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

40

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

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

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

For
cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the
same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness or hedge components excluded from the assessment of
hedge effectiveness are recognized in noninterest expense in the period in which they arise. Based upon amounts included in accumulated other comprehensive income at September 30, 2009, the
Company expects to realize approximately $65.3 million in net interest income during the twelve months ending September 30, 2010. This amount could differ from amounts actually realized
due to changes in interest rates and the addition of other hedges subsequent to September 30, 2009.

41

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

Location

Amount

Location

AmountDerivatives in Cash Flow Hedging RelationshipsInterest Income

$
34,110Interest rate contracts

$
6,715

Interest Expense




Noninterest Expense

$
2Total

$
6,715



$
34,110



$
2




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

Location

Amount

Location

AmountDerivatives in Cash Flow Hedging RelationshipsInterest Income

$
99,446Interest rate contracts

$
42,372

Interest Expense


15

Noninterest Expense

$
77Total

$
42,372



$
99,461



$
77




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



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

42

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

include
CDs tied to the changes in the Standard and Poor's 500 Index (S&P 500) and in the Dow-Jones UBS Commodity Index.

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

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

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

For the Nine Months Ended
September 30, 2009(Dollars in thousands)

Location

Amount

AmountTrading Derivatives and Economic Hedges:Interest rate contracts

Trading account activities

$
(3,972
)
$
4,561Foreign exchange contracts

Trading account activities


9,171


26,618Energy contracts

Trading account activities


(824
)

(371
)Equity contracts

Trading account activities


659


1,767Other contracts

Interest expense


(24
)

(106
)Total



$
5,010

$
32,469


43

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Accumulated Other Comprehensive Loss

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

(Dollars in thousands)

Before
Tax
Amount

Tax
Effect

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

$
80,007

$
(30,603
)
$
49,404Less: reclassification adjustment for net gains on hedges included in net income


(61,517
)

23,530


(37,987
)Net change in unrealized gains on hedges


18,490


(7,073
)

11,417Securities:Unrealized holding losses arising during the period on securities available for sale


(561,678
)

214,842


(346,836
)Less: reclassification adjustment for net gains on securities available for sale included in net income


(48
)

18


(30
)Net change in unrealized losses on securities


(561,726
)

214,860


(346,866
)Foreign currency translation adjustment


(1,012
)

387


(625
)Reclassification adjustment for pension and other benefits included in net income:Amortization of prior service costs


(70
)

27


(43
)Amortization of transition amount


1,527


(584
)

943Recognized net actuarial loss


9,946


(3,804
)

6,142Net change in pension and other benefits


11,403


(4,361
)

7,042Net change in accumulated other comprehensive loss

$
(532,845
)
$
203,813

$
(329,032
)For the Nine Months Ended September 30, 2009:Cash flow hedge activities:Unrealized net gains on hedges arising during the period

$
42,372

$
(16,648
)
$
25,724Less: accretion of fair value adjustment


10,829


(4,088
)

6,741Less: Reclassification adjustment for net gains on hedges included in net income


(110,290
)

43,333


(66,957
)Net change in unrealized gains on hedges


(57,089
)

22,597


(34,492
)Securities:Unrealized holding gains arising during the period on securities available for sale


182,191


(71,583
)

110,608Reclassification adjustment for net gains on securities available for sale included in net income


(13,303
)

5,227


(8,076
)Less: accretion of fair value adjustment on securities available for sale


(10,567
)

4,152


(6,415
)Less: accretion of fair value adjustment on held-to-maturity securities


(13,021
)

5,116


(7,905
)Less: accretion of net unrealized losses on held-to-maturity securities


53,609


(21,063
)

32,546Net change in unrealized losses on securities


198,909


(78,151
)

120,758Foreign currency translation adjustment


1,787


(702
)

1,085Reclassification adjustment for pension and other benefits included in net income:Amortization of prior service costs


(47
)

18


(29
)Amortization of transition amount


983


(386
)

597Recognized net actuarial loss


15,853


(6,229
)

9,624Net change in pension and other benefits


16,789


(6,597
)

10,192Net change in accumulated other comprehensive loss

$
160,396

$
(62,853
)
$
97,543


44

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14Accumulated Other Comprehensive Loss (Continued)

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

(Dollars in thousands)

Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges

Net
Unrealized
Gains (Losses)
on Securities

Foreign
Currency
Translation
Adjustment

Pension and
Other
Benefits
Adjustment

Accumulated
Other
Comprehensive
LossBalance, December 31, 2007

$
23,563

$
(129,163
)
$
740

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


11,417


(346,866
)

(625
)

7,042


(329,032
)Balance, September 30, 2008

$
34,980

$
(476,029
)
$
115

$
(171,221
)
$
(612,155
)Balance, December 31, 2008

$
73,308

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


(34,492
)

120,758


1,085


10,192


97,543Balance, September 30, 2009

$
38,816

$
(231,952
)
$
(28
)
$
(521,144
)
$
(714,308
)


Note 15Discontinued Operations

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

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

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

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

45

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Discontinued Operations (Continued)



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

(Dollars in thousands)

September 30,
2008

December 31,
2008AssetsOther assets

$
5,157

$
Assets of discontinued operations to be disposed or sold

$
5,157

$
LiabilitiesInterest bearing deposits

$
11,060

$
1,929Other liabilities


9,269


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

$
20,329

$
7,146


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

(Dollars in thousands)

For the Three Months Ended
September 30, 2008

For the Nine Months Ended
September 30, 2008Net interest income

$
226

$
1,540Noninterest income


891


18,419Noninterest expense


9,037


31,217Loss from discontinued operations before income taxes


(7,920
)

(11,258
)Income tax benefit


(2,809
)

(3,973
)Loss from discontinued operations

$
(5,111
)
$
(7,285
)


The RRB's net interest income for the three and nine months ended September 30, 2008 included the allocation of interest income (based on
its average net liabilities) of $0.3 million and $1.8 million, respectively. Noninterest income for the three and nine months ended September 30, 2008 included trust fees of
$0.9 million and $7.3 million, respectively. Noninterest income for the nine months ended September 30, 2008 also included $11.8 million of servicing revenues from
Prudential. For the three and nine months ended September 30, 2008, noninterest expense included salaries and benefits expense of $4.7 million and $16.0 million, respectively.

46

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15Discontinued Operations (Continued)



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

(Dollars in thousands)

September 30,
2008

December 31,
2008AssetsOther assets

$


$
4Assets of discontinued operations to be disposed or sold

$


$
4LiabilitiesOther liabilities

$
1,817

$
814Liabilities of discontinued operations to be extinguished or assumed

$
1,817

$
814


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

(Dollars in thousands)

For the
Three Months Ended
September 30, 2008

For the
Nine Months Ended
September 30, 2008Net interest expense

$


$
(993
)Noninterest income


249


35,840Noninterest expense


504


46,281Loss from discontinued operations before income taxes


(255
)

(11,434
)Income tax benefit


(90
)

(6,682
)Loss from discontinued operations

$
(165
)
$
(4,752
)


The IBB's net interest expense for the three and nine months ended September 30, 2008 was mainly comprised of the allocation of interest
expense (based on its average net assets). Noninterest income for the nine months ended September 30, 2008 included insurance commissions of $25.7 million. Noninterest income for the
nine months ended September 30, 2008 also included a $9.8 million pre-tax gain from the sale of the IBB and $0.2 million in subsequent gain adjustments for the three
and nine months ended September 30, 2008. Noninterest expense for the three and nine months ended September 30, 2008 included salaries and benefits expense of $0.5 million and
$21.2 million, respectively. For the nine months ended September 30, 2008, noninterest expense also included an $18.7 million goodwill impairment charge. This charge was recorded
in the first quarter of 2008, when the Company determined that the value of the net assets was greater than the fair value of the IBB, which was based on indicative prices for insurance agencies.

47

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees

The following table summarizes the Company's significant commitments.

(Dollars in thousands)

September 30, 2009Commitments to extend credit

$
22,139,784Standby letters of credit


5,034,533Commercial letters of credit


53,020Risk participations in bankers' acceptances


68Commitments to fund principal investments


95,516Commitments to fund low-income housing credit (LIHC) investments


145,979


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

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

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

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

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

48

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees (Continued)

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

The
Company is a fund manager for LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate
the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company
receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC
investments that reduce the Company's ultimate exposure to loss. As of September 30, 2009, the Company's maximum exposure to loss under these guarantees is limited to a return of investor
capital and minimum investment yield, or $196.1 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory
performance of the underlying properties. The Company has a reserve of $7.0 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee
fees that were recognized at inception.

The
Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantees of commercial paper obligations
and leveraged lease transactions. The guarantee issued by the Bank for an affiliate's commercial paper program facilitates the sale of the commercial paper. As of September 30, 2009, the Bank
had a maximum exposure to loss under the commercial paper program guarantee of $262.4 million. The Bank's guarantee has an average term of less than nine months and is fully collateralized by a
pledged deposit placed with the Bank. The Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these
leveraged lease transactions, the Company does not have
any material obligation to be satisfied. As of September 30, 2009, the Company did not have any exposure to loss for these agreements.

The
Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a
security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of
the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $2.0 billion at September 30, 2009. The market value
of the associated collateral was $2.1 billion at September 30, 2009. As of September 30, 2009, the Company had no exposure that would require it to pay under this securities
lending indemnification, since the collateral market value exceeds the securities lent.

The
Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk
on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable
to collect amounts owed to them by their customer. As of September 30, 2009, the maximum exposure to loss under these contracts totaled $57.2 million. The risk that the Company would be
required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by the Company based on the estimated
probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those
considered special mention, substandard, doubtful and loss. Based on these criteria, at September 30, 2009, the Company had a maximum exposure to loss under these contracts with a low,
moderate, and high

49

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16Commitments, Contingencies and Guarantees (Continued)

risk
of payment exposure of $12.9 million, $34.6 million, and $9.7 million, respectively. At September 30, 2009, the Company maintained a reserve of $1.7 million for
losses related to these guarantees.

The
Company is a member of the Visa USA network (Visa). Visa's bylaws obligate its members to indemnify Visa for losses in connection with the settlement of certain antitrust lawsuits.
The Company's indemnification obligation is limited to its proportionate share. The Company had a liability of $4.3 million and $3.4 million at December 31, 2008 and
September 30, 2009, respectively, representing the estimated fair value of the Company's obligations under the indemnity provisions. The decrease in this liability from December 31, 2008
to September 30, 2009 was primarily due to a $700 million contribution Visa made on behalf of members to the litigation escrow account in the second quarter of 2009, offset by the
Company's revised assessment of the likely settlement amount for one of the cases. The $3.4 million liability represents the Company's estimate of the fair value of its proportionate share of
the sum of Visa's remaining amount owed to American Express under the previously executed settlement agreement plus the Company's estimate of Visa's future settlements under pending lawsuits, after
subtracting the balance in Visa's escrow account. The Company's maximum exposure to loss for the remaining pending Visa antitrust lawsuits is not determinable, as it is dependent on the outcome of the
litigation, but any loss will be proportionate to the Company's ownership interest in Visa. At September 30, 2009, the risk that
the Company would be required to pay as a result of this guarantee is considered to be low, based on Visa's continued cash funding of the escrow account to pay its antitrust lawsuit settlements.

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

Note 17Business Segments

The various operating segments reporting under the Chief Operating Officer and the Group Head of Pacific Rim Corporate Group are aggregated into two reportable business segments entitled
"Retail Banking" and "Wholesale Banking."

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



50

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)



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

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

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

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

51

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)

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

Retail Banking

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

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

2009

2008

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

$
214,614

$
280,461

$
243,504

$
379,369Noninterest income (expense)


122,546


110,565


92,484


86,224Total revenue


337,160


391,026


335,988


465,593Noninterest expense (income)


251,519


290,182


158,016


207,842Credit expense (income)


7,056


7,361


49,094


92,027Income (loss) from continuing operations before income taxes


78,585


93,483


128,878


165,724Income tax expense (benefit)


30,059


36,552


30,508


43,314Income (loss) from continuing operations


48,526


56,931


98,370


122,410Loss from discontinued operations, net of income taxes











Net income (loss)

$
48,526

$
56,931

$
98,370

$
122,410Total assets, end of periodMarket View (dollars in millions):

$
21,577

$
24,211

$
32,783

$
33,215




Other

Reconciling Items

UnionBanCal
CorporationAs 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 30,2008

2009

2008

2009

2008

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

$
63,388

$
(86,874
)
$
(1,760
)
$
(11,920
)
$
519,746

$
561,036Noninterest income (expense)


2,973


9,275


(19,282
)

(22,135
)

198,721


183,929Total revenue


66,361


(77,599
)

(21,042
)

(34,055
)

718,467


744,965Noninterest expense (income)


45,833


21,647


(11,556
)

(13,856
)

443,812


505,815Credit expense (income)


60,870


214,641


(20
)

(29
)

117,000


314,000Income (loss) from continuing operations before income taxes


(40,342
)

(313,887
)

(9,466
)

(20,170
)

157,655


(74,850
)Income tax expense (benefit)


(9,397
)

(129,800
)

(3,621
)

(7,887
)

47,549


(57,821
)Income (loss) from continuing operations


(30,945
)

(184,087
)

(5,845
)

(12,283
)

110,106


(17,029
)Loss from discontinued operations, net of income taxes


(5,276
)










(5,276
)

Net income (loss)

$
(36,221
)
$
(184,087
)
$
(5,845
)
$
(12,283
)
$
104,830

$
(17,029
)Total assets, end of periodMarket View (dollars in millions):

$
8,258

$
20,777

$
(18
)
$
(50
)
$
62,600

$
78,153


52

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Table of Contents

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17Business Segments (Continued)



Retail Banking

Wholesale BankingAs of and for the
Nine Months Ended
September 30,

As of and for the
Nine Months Ended
September 30,2008

2009

2008

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

$
612,996

$
760,379

$
689,330

$
1,014,642Noninterest income (expense)


369,293


325,956


258,254


271,435Total revenue


982,289


1,086,335


947,584


1,286,077Noninterest expense (income)


725,082


828,190


457,275


566,180Credit expense (income)


20,337


22,505


135,634


247,057Income (loss) from continuing operations before income taxes


236,870


235,640


354,675


472,840Income tax expense (benefit)


90,603


92,135


83,850


120,609Income (loss) from continuing operations


146,267


143,505


270,825


352,231Loss from discontinued operations, net of income taxes











Net income (loss)

$
146,267

$
143,505

$
270,825

$
352,231Total assets, end of periodMarket View (dollars in millions):

$
21,577

$
24,211

$
32,783

$
33,215




Other

Reconciling Items

UnionBanCal CorporationAs 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 30,2008

2009

2008

2009

2008

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

$
193,854

$
(82,188
)
$
(5,298
)
$
(21,448
)
$
1,490,882

$
1,671,385Noninterest income (expense)


23,516


3,535


(57,320
)

(59,068
)

593,743


541,858Total revenue


217,370


(78,653
)

(62,618
)

(80,516
)

2,084,625


2,213,243Noninterest expense (income)


118,222


201,972


(34,249
)

(37,086
)

1,266,330


1,559,256Credit expense (income)


128,082


653,514


(53
)

(76
)

284,000


923,000Income (loss) from continuing operations before income taxes


(28,934
)

(934,139
)

(28,316
)

(43,354
)

534,295


(269,013
)Income tax expense (benefit)


3,871


(357,962
)

(10,831
)

(16,951
)

167,493


(162,169
)Income (loss) from continuing operations


(32,805
)

(576,177
)

(17,485
)

(26,403
)

366,802


(106,844
)Loss from discontinued operations, net of income taxes


(12,037
)










(12,037
)

Net income (loss)

$
(44,842
)
$
(576,177
)
$
(17,485
)
$
(26,403
)
$
354,765

$
(106,844
)Total assets, end of periodMarket View (dollars in millions):

$
8,258

$
20,777

$
(18
)
$
(50
)
$
62,600

$
78,153


Note 18Subsequent Events

The Company has evaluated the potential disclosure of subsequent events through November 12, 2009, the filing date of this Form 10-Q, and has determined that
there are no subsequent events required to be disclosed.

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Table of Contents

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

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

You
should read the following discussion and analysis of our consolidated financial condition and results of operations for the period ended September 30, 2009 in this
Form 10-Q together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2008 (2008 Form 10-K). Averages, as presented in the following tables, are substantially all based upon daily average balances.

In
June 2009, the Financial Accounting Standards Board (FASB) issued new guidance establishing the FASB Accounting Standards Codification (FASB ASC) as the single source of
authoritative US GAAP. The FASB ASC does not significantly change current US GAAP and merely restructures the information in a topical format. The FASB ASC was effective July 1,
2009 and the technical references to US GAAP included in the condensed consolidated financial statements in this Form 10-Q are provided under the new FASB ASC structure with
the prior terminology included parenthetically. At adoption, there was no impact on the Company's financial position or results of operations.

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

Introduction

We are a California-based financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a
commercial bank. We had consolidated assets of approximately $78.2 billion at September 30, 2009.

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

Executive Overview

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

Weakness
in the U.S. and global economies and deteriorating credit quality continued to challenge the banking industry in the third quarter of 2009. Despite the continued uncertain
economic environment, we continued to generate deposit growth, as well as grow net interest income. In the third quarter of 2009, our average total loans grew 3 percent from the third quarter
of 2008 to $48.8 billion. This growth was spread across residential real estate, construction, consumer and commercial real estate, due to increased loan demand and reduced competition.
However, overall loan levels declined 1.6 percent during the current quarter as compared to the second quarter 2009 due to continued recessionary market conditions, combined with reduced
borrower demand.

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Table of Contents

During
the third quarter of 2009, we provided $320 million for our allowances for credit losses compared to $125 million in the third quarter of 2008. The increase was
primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in loss factors related to several portfolio sectors,
including our consumer and small business portfolios. We anticipate that the economic environment will remain weak and will result in further deterioration in our loan portfolio. See further
discussion below in "Allowances for Credit Losses."

Our
nonperforming assets totaled $437 million and $1.4 billion at December 31, 2008 and September 30, 2009, respectively. The increase in nonperforming assets
was primarily due to increases in the commercial, financial and industrial portfolio of $120 million, construction portfolio of $289 million, commercial real estate portfolio of
$299 million and residential mortgage portfolio of $165 million. (See discussion below in "Nonperforming Assets" regarding our accounting policy change related to nonaccrual status of
residential mortgage loans.) Net charge offs were $137 million in the third quarter of 2009, compared to $63 million in the third quarter of 2008.

At
December 31, 2008 and September 30, 2009, our allowances for credit losses as a percent of total loans were 1.74 percent and 2.97 percent, respectively. At
December 31, 2008 and September 30, 2009, our allowances for credit losses as a percent of nonaccrual loans were 208 percent and 108 percent, respectively. At
December 31, 2008 and September 30, 2009, our allowance for loan losses as a percent of total loans was 1.49 percent and 2.62 percent, respectively. At December 31,
2008 and September 30, 2009, our allowance for loan losses as a percent of nonaccrual loans was 178 percent and 95 percent, respectively.

In
the third quarter of 2009, our average noninterest bearing deposits increased 17 percent compared to the third quarter of 2008 to $14.5 billion. Average interest bearing
deposits increased by 54 percent in the third quarter of 2009 compared to the third quarter of 2008 to $45.0 billion. The increase reflects deposit-gathering marketing initiatives in
both the retail and commercial lines of business, as well as significant increases in money market account deposits from government agencies and institutional escrow clients. Average noninterest
bearing deposits represented 24 percent of average total deposits in the third quarter of 2009, compared to 30 percent in the third quarter of 2008. The annualized average
all-in-cost of funds improved to 0.79 percent in the third quarter of 2009, compared to 1.60 percent in the third quarter of 2008.

In
the third quarter of 2009, our net interest income (on a taxable-equivalent basis) increased 8 percent from the third quarter of 2008 to $561 million, primarily due to
lower rates paid on interest bearing liabilities, investment securities and loan growth, and purchase price accounting accretions related to our privatization, partially offset by lower yields on
earning assets.

In
the third quarter of 2009, our noninterest income declined 7 percent from the third quarter of 2008 to $184 million, primarily due to lower trust and investment
management fees, lower gains on private capital investments, a write down of a loan held for sale in the third quarter of 2009, and a gain on the sale of real estate recorded in the third quarter of
2008. These decreases were partially offset by a gain on the sale of U.S. Treasury securities in the third quarter of 2009.

In
the third quarter of 2009, our noninterest expense grew by 14 percent from the third quarter of 2008 to $506 million. The increase was primarily due to
privatization-related expenses and related intangible asset amortization, and higher regulatory agencies expenses resulting from an industry-wide FDIC deposit insurance assessment rate
increase.

Our
effective tax rate was (77.3) percent in the third quarter of 2009, compared to 30.2 percent in the third quarter of 2008. The change in the effective tax rate was primarily
due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes.

On
September 29, 2009, we received a $2.0 billion capital contribution from BTMU. The contribution was made to provide us with sufficient capital to offset potential future
credit losses consistent with a highly adverse economic scenario. To the extent actual credit losses are lower than those that would be incurred in the

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Table of Contents

highly
adverse scenario, we will have excess capital that could be deployed to support incremental organic growth and acquisitions.

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

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

Critical Accounting Estimates

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

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

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

Understanding
our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical
Accounting Policies and our significant accounting policies are discussed in detail in our 2008 Form 10-K filed with the Securities and Exchange Commission (the SEC). Other than the
changes noted below, there have been no material changes to these critical accounting estimates during the nine months ended September 30, 2009.



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

Significant
judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying
relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. Additionally, significant judgment is involved in determining if an
indicator of impairment has

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occurred.
Such indicators may include: a significant decline in expected future cash flows, a significant adverse change in the business climate, unanticipated competition and/or slower than expected
growth rates.

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

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

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

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

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



On April 1, 2009, the Company adopted new accounting guidance related to the determination and recognition of
other-than-temporary impairment related to debt securities. (FASB ASC 320-10, "InvestmentsDebt and Equity Securities"). The new guidance establishes
new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. At adoption, there was no impact on
our financial position or results of operations.

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

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Table of Contents

Financial Performance

Summary of Financial Performance

Increase (Decrease)





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

For the Nine Months Ended September 30,2009 versus 2008

2009 versus 2008(Dollars in thousands)

2008

2009

Amount

Percent

2008

2009

Amount

PercentResults of OperationsNet interest income(1)

$
519,746

$
561,036

$
41,290


7.9
%
$
1,490,882

$
1,671,385

$
180,503


12.1
%Noninterest incomeService charges on deposit accounts


77,079


74,888


(2,191
)

(2.8
)

229,521


218,053


(11,468
)

(5.0
)Trust and investment management fees


40,638


34,506


(6,132
)

(15.1
)

127,828


102,543


(25,285
)

(19.8
)Trading account activities


12,397


10,513


(1,884
)

(15.2
)

40,096


49,456


9,360


23.3Merchant banking fees


12,789


14,601


1,812


14.2


35,667


48,357


12,690


35.6Securities gains, net


50


12,694


12,644


nm


48


12,522


12,474


nmGains (losses) on private capital investments, net


5,597


(18
)

(5,615
)

nm


7,949


(3,262
)

(11,211
)

nmGain on the VISA IPO redemption














14,211





(14,211
)

(100.0
)Other noninterest income


50,171


36,745


(13,426
)

(26.8
)

138,423


114,189


(24,234
)

(17.5
)Total noninterest income


198,721


183,929


(14,792
)

(7.4
)

593,743


541,858


(51,885
)

(8.7
)Total revenue


718,467


744,965


26,498


3.7


2,084,625


2,213,243


128,618


6.2Provision for loan losses


117,000


314,000


197,000


nm


284,000


923,000


639,000


nmNoninterest expenseSalaries and other compensation


204,389


198,768


(5,621
)

(2.8
)

600,477


578,095


(22,382
)

(3.7
)Employee benefits


33,740


35,213


1,473


4.4


122,621


132,506


9,885


8.1Salaries and employee benefits


238,129


233,981


(4,148
)

(1.7
)

723,098


710,601


(12,497
)

(1.7
)Net occupancy


38,574


43,146


4,572


11.9


113,008


128,289


15,281


13.5Intangible asset amortization


671


40,641


39,970


nm


2,011


121,809


119,798


nmRegulatory agencies


8,572


30,739


22,167


nm


16,078


101,513


85,435


nmEquipment


14,437


17,838


3,401


23.6


44,925


49,853


4,928


11.0Provision for losses on off-balance sheet commitments


8,000


6,000


(2,000
)

(25.0
)

21,000


47,000


26,000


nmPrivatization-related expense


6,193


6,649


456


7.4


6,193


40,901


34,708


nmOther noninterest expense


129,236


126,821


(2,415
)

(1.9
)

340,017


359,290


19,273


5.7Total noninterest expense


443,812


505,815


62,003


14.0


1,266,330


1,559,256


292,926


23.1Income (loss) from continuing operations before income taxes


157,655


(74,850
)

(232,505
)

nm


534,295


(269,013
)

(803,308
)

nmIncome tax expense (benefit)


47,549


(57,821
)

(105,370
)

nm


167,493


(162,169
)

(329,662
)

nmIncome (loss) from continuing operations

$
110,106

$
(17,029
)
$
(127,135
)

nm
%
$
366,802

$
(106,844
)
$
(473,646
)

nm
%


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


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



58

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Table of Contents



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



The
increase in noninterest expense was due to several factors:



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



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



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The
increase in noninterest expense was due to several factors:



60

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Table of Contents

Net Interest Income

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

For the Three Months Ended

Increase (Decrease) inSeptember 30, 2008

September 30, 2009





Interest
Income/
Expense(1)Average BalanceAverage
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

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

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
17,262,407

$
229,377


5.29
%
$
16,805,449

$
188,974


4.46
%
$
(456,958
)

(3
)%
$
(40,403
)

(18
)%Construction


2,579,582


30,352


4.68


2,772,804


20,828


2.98


193,222


7


(9,524
)

(31
)MortgageResidential


15,285,171


211,965


5.55


16,380,014


230,210


5.62


1,094,843


7


18,245


9MortgageCommercial


8,008,618


111,816


5.58


8,261,161


88,998


4.31


252,543


3


(22,818
)

(20
)Consumer


3,421,338


49,286


5.73


3,882,929


44,042


4.50


461,591


13


(5,244
)

(11
)Lease financing


639,088


6,066


3.80


662,469


5,462


3.30


23,381


4


(604
)

(10
)Total Loans


47,196,204


638,862


5.40


48,764,826


578,514


4.73


1,568,622


3


(60,348
)

(9
)Securitiestaxable


8,348,785


99,614


4.77


10,590,200


107,171


4.05


2,241,415


27


7,557


8Securitiestax-exempt


51,831


1,045


8.06


184,772


2,999


6.49


132,941


nm


1,954


nmInterest bearing deposits in banks


13,642


147


4.27


7,496,380


4,956


0.26


7,482,738


nm


4,809


nmFederal funds sold and securities purchased under resale agreements


361,361


1,787


1.97


282,457


110


0.15


(78,904
)

(22
)

(1,677
)

(94
)Trading account assets


948,725


1,364


0.57


916,448


271


0.12


(32,277
)

(3
)

(1,093
)

(80
)Total earning assets


56,920,548


742,819


5.21


68,235,083


694,021


4.06


11,314,535


20


(48,798
)

(7
)Allowance for loan losses


(506,452
)







(1,044,533
)







(538,081
)

nmCash and due from banks


1,606,632








1,135,794








(470,838
)

(29
)Premises and equipment, net


475,408








668,699








193,291


41Other assets


2,649,115








5,357,606








2,708,491


nmTotal assets

$
61,145,251







$
74,352,649







$
13,207,398


22
%LiabilitiesDeposits:Transaction accounts

$
15,552,783

$
61,636


1.58

$
33,064,944

$
72,837


0.87

$
17,512,161


nm
%
$
11,201


18Savings and consumer time


3,899,687


13,237


1.35


4,486,545


12,572


1.11


586,858


15


(665
)

(5
)Large time


9,847,584


60,863


2.46


7,430,960


15,965


0.85


(2,416,624
)

(25
)

(44,898
)

(74
)Total interest bearing deposits


29,300,054


135,736


1.84


44,982,449


101,374


0.89


15,682,395


54


(34,362
)

(25
)Federal funds purchased and securities sold under repurchase agreements


3,496,184


15,365


1.75


169,267


41


0.09


(3,326,917
)

(95
)

(15,324
)

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


55,121


265


1.91











(55,121
)

(100
)

(265
)

(100
)Commercial paper


1,432,207


8,056


2.24


472,246


355


0.30


(959,961
)

(67
)

(7,701
)

(96
)Other borrowed funds(5)


4,886,263


34,873


2.84


262,441


604


0.91


(4,623,822
)

(95
)

(34,269
)

(98
)Medium- and long-term debt


3,300,675


25,989


3.13


5,098,821


27,112


2.11


1,798,146


54


1,123


4Trust notes


14,148


239


6.73


13,696


239


6.96


(452
)

(3
)




Total borrowed funds


13,184,598


84,787


2.56


6,016,471


28,351


1.87


(7,168,127
)

(54
)

(56,436
)

(67
)Total interest bearing liabilities


42,484,652


220,523


2.06


50,998,920


129,725


1.01


8,514,268


20


(90,798
)

(41
)Noninterest bearing deposits


12,361,170








14,471,487








2,110,317


17Other liabilities


1,710,988








1,523,469








(187,519
)

(11
)Total liabilities


56,556,810








66,993,876








10,437,066


18Stockholder's EquityCommon equity


4,588,441








7,358,773








2,770,332


60Total stockholder's equity


4,588,441








7,358,773








2,770,332


60Total liabilities and stockholder's equity

$
61,145,251







$
74,352,649







$
13,207,398


22
%Net Interest Income/MarginNet interest income/margin (taxable-equivalent basis)





522,296


3.67
%




564,296


3.31
%







42,000


8Less: taxable-equivalent adjustment





2,550








3,260











710


28Net interest income




$
519,746







$
561,036










$
41,290


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

September 30, 2008

September 30, 2009Assets




$
5,738







$
Liabilities




$
60,859







$
Net liabilities




$
(55,121
)






$



(1)Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)Annualized.(3)Average
balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination
fees (costs) is included in interest income on loans, representing an adjustment to the yield.(4)Net
funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued
operations. The expense (earning) on funds allocated from (to) discontinued operations is calculated by taking the net balance and applying an earnings rate or a cost of funds equivalent to the
corresponding period's Federal funds purchased rate.(5)Includes
interest bearing trading liabilities.nm=
not meaningful


61

---



Table of Contents

For the Nine Months Ended

Increase (Decrease) inSeptember 30, 2008

September 30, 2009

Average
Balance

Interest
Income/
Expense(1)Average
Balance

Interest
Income/
Expense(1)

Average
Yield/
Rate(1)(2)

Average
Balance

Interest
Income/
Expense(1)

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

Amount

Percent

Amount

PercentAssetsLoans:(3)Commercial, financial and industrial

$
16,623,490

$
697,292


5.60
%
$
17,737,052

$
577,321


4.35
%
$
1,113,562


7
%
$
(119,971
)

(17
)%Construction


2,551,348


97,763


5.12


2,765,178


60,747


2.94


213,830


8


(37,016
)

(38
)Residential mortgage


14,593,755


604,506


5.52


16,132,655


694,917


5.74


1,538,900


11


90,411


15Commercial mortgage


7,694,956


336,508


5.83


8,256,389


283,076


4.57


561,433


7


(53,432
)

(16
)Consumer


3,030,042


140,129


6.18


3,816,050


134,697


4.72


786,008


26


(5,432
)

(4
)Lease financing


644,553


13,534


2.80


658,956


18,713


3.79


14,403


2


5,179


38Total Loans


45,138,144


1,889,732


5.59


49,366,280


1,769,471


4.78


4,228,136


9


(120,261
)

(6
)Securitiestaxable


8,332,647


301,810


4.83


9,166,395


307,165


4.47


833,748


10


5,355


2Securitiestax-exempt


52,641


3,232


8.19


94,947


5,040


7.08


42,306


80


1,808


56Interest bearing deposits in banks


36,936


503


1.82


4,664,896


9,406


0.27


4,627,960


nm


8,903


nmFederal funds sold and securitiespurchased under resale agreements


301,153


5,573


2.47


227,832


348


0.20


(73,321
)

(24
)

(5,225
)

(94
)Trading account assets


827,881


5,287


0.85


1,073,477


660


0.08


245,596


30


(4,627
)

(88
)Total earning assets


54,689,402


2,206,137


5.38


64,593,827


2,092,090


4.32


9,904,425


18


(114,047
)

(5
)Allowance for loan losses


(454,191
)







(865,208
)







(411,017
)

(90
)Cash and due from banks


1,675,293








1,244,981








(430,312
)

(26
)Premises and equipment, net


480,705








670,884








190,179


40Other assets


2,632,406








5,355,766








2,723,360


nmTotal assets

$
59,023,615







$
71,000,250







$
11,976,635


20
%LiabilitiesDeposits:Transaction accounts

$
15,323,611

$
204,064


1.78

$
28,397,683

$
200,483


0.94

$
13,074,072


85
%
$
(3,581
)

(2
)Savings and consumer time


3,974,976


50,684


1.70


4,394,706


42,057


1.28


419,730


11


(8,627
)

(17
)Large time


10,909,525


246,157


3.01


7,090,250


64,058


1.21


(3,819,275
)

(35
)

(182,099
)

(74
)Total interest bearing deposits


30,208,112


500,905


2.21


39,882,639


306,598


1.03


9,674,527


32


(194,307
)

(39
)Federal funds purchased and securitiessold under repurchase agreements


2,628,257


43,628


2.22


194,562


113


0.08


(2,433,695
)

(93
)

(43,515
)

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


45,520


774


2.27











(45,520
)

(100
)

(774
)

(100
)Commercial paper


1,375,789


26,127


2.54


586,754


2,901


0.66


(789,035
)

(57
)

(23,226
)

(89
)Other borrowed funds(5)


3,224,146


70,563


2.92


2,472,324


17,697


0.96


(751,822
)

(23
)

(52,866
)

(75
)Medium- and long-term debt


2,594,875


65,138


3.35


4,994,660


84,056


2.25


2,399,785


92


18,918


29Trust notes


14,261


715


6.68


13,808


715


6.90


(453
)

(3
)




Total borrowed funds


9,882,848


206,945


2.80


8,262,108


105,482


1.71


(1,620,740
)

(16
)

(101,463
)

(49
)Total interest bearing liabilities


40,090,960


707,850


2.36


48,144,747


412,080


1.14


8,053,787


20


(295,770
)

(42
)Noninterest bearing deposits


12,613,690








13,644,163








1,030,473


8Other liabilities


1,678,057








1,878,593








200,536


12Total liabilities


54,382,707








63,667,503








9,284,796


17Stockholder's EquityCommon equity


4,640,908








7,332,747








2,691,839


58Total stockholder's equity


4,640,908








7,332,747








2,691,839


58Total liabilities and stockholder's equity

$
59,023,615







$
71,000,250







$
11,976,635


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





1,498,287


3.65
%




1,680,010


3.47
%







181,723


12Less: taxable-equivalent adjustment





7,405








8,625











1,220


16Net interest income




$
1,490,882







$
1,671,385










$
180,503


12
%Average Assets and Liabilities of
Discontinued Operations for the
Nine Months Ended:

September 30, 2008

September 30, 2009Assets




$
74,723







$
Liabilities




$
120,243







$
Net liabilities




$
(45,520
)






$



(1)Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.(2)Annualized.(3)Average
balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination
fees (costs) is included in interest income on loans, representing an adjustment to the yield.(4)Net
funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued
operations. The expense (earning) on funds allocated from (to) discontinued operations is calculated by taking the net balance and applying an earnings rate or a cost of funds equivalent to the
corresponding period's Federal funds purchased rate. The year-to-date expense (earnings) amount is the sum of the quarterly amounts.(5)Includes
interest bearing trading liabilities.nm=
not meaningful


62

---





Table of Contents

Net interest income in the third quarter of 2009, on a taxable-equivalent basis, increased $42.0 million, or 8 percent, compared to the third
quarter of 2008. Our net interest margin in the third quarter of 2009 decreased by 36 basis points to 3.31 percent compared to the third quarter of 2008. These results were primarily due to the
following:



We
use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit and other time deposits (CDs) and LIBOR-indexed borrowings, and to
convert certain fixed-rate debt to floating rate. For loans, we had hedge income of $21.4 million and $28.6 million for the third quarters of 2008 and 2009, respectively. For
long-term fixed rate debt and LIBOR-indexed CDs and borrowings, we had hedge income of $6.9 million and $10.5 million for the third quarters of 2008 and 2009, respectively.
In the first quarter of 2009, we terminated all of our fair value swaps, which were used to hedge our long-term fixed rate debt. These swaps were not replaced.

Net
interest income in the nine months ended September 30, 2009, on a taxable-equivalent basis, increased $181.7 million, or 12 percent, compared to the nine months
ended September 30, 2008. Our net interest margin in the nine months ended September 30, 2009 decreased by 18 basis points to 3.47 percent compared to the nine months ended
September 30, 2008. These results were primarily due to the following:



63

---



Table of Contents



We
use derivatives to hedge expected changes in the yields on our variable rate loans and term CDs and LIBOR-indexed borrowings, and to convert certain fixed-rate debt to
floating rate, when
appropriate. For loans, we had hedge income of $49.5 million and $83.3 million for the nine months ended September 30, 2008 and 2009, respectively. For long-term fixed
rate debt and LIBOR-indexed CDs and borrowings, we had hedge income of $19.2 million and $31.5 million for the nine months ended September 30, 2008 and 2009, respectively. In the
first quarter of 2009, we terminated all of our fair value swaps, which were used to hedge our long-term fixed rate debt. These swaps were not replaced.

Noninterest Income and Noninterest Expense

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

Noninterest Income

For the Three Months Ended

For the Nine Months EndedIncrease
(Decrease)





Increase
(Decrease)September 30,
2008

September 30,
2009

September 30,
2008

September 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentService charges on deposit accounts

$
77,079

$
74,888

$
(2,191
)

(2.8
)%
$
229,521

$
218,053

$
(11,468
)

(5.0
)%Trust and investment management fees


40,638


34,506


(6,132
)

(15.1
)

127,828


102,543


(25,285
)

(19.8
)Trading account activities


12,397


10,513


(1,884
)

(15.2
)

40,096


49,456


9,360


23.3Merchant banking fees


12,789


14,601


1,812


14.2


35,667


48,357


12,690


35.6Brokerage commissions and fees


9,520


8,611


(909
)

(9.5
)

30,014


25,424


(4,590
)

(15.3
)Card processing fees, net


8,129


8,559


430


5.3


24,060


24,219


159


0.7Securities gains, net


50


12,694


12,644


nm


48


12,522


12,474


nmGains (losses) on private capital investments, net


5,597


(18
)

(5,615
)

nm


7,949


(3,262
)

(11,211
)

nmGain on the VISA IPO redemption














14,211





(14,211
)

(100.0
)Other


32,522


19,575


(12,947
)

(39.8
)

84,349


64,546


(19,803
)

(23.5
)Total noninterest income

$
198,721

$
183,929

$
(14,792
)

(7.4
)%
$
593,743

$
541,858

$
(51,885
)

(8.7
)%


nm = not meaningful


64

---



Table of Contents




Noninterest Expense

For the Three Months Ended

For the Nine Months EndedIncrease
(Decrease)





Increase
(Decrease)September 30,
2008

September 30,
2009

September 30,
2008

September 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentSalaries and other compensation

$
204,389

$
198,768

$
(5,621
)

(2.8
)%
$
600,477

$
578,095

$
(22,382
)

(3.7
)%Employee benefits


33,740


35,213


1,473


4.4


122,621


132,506


9,885


8.1Salaries and employee benefits


238,129


233,981


(4,148
)

(1.7
)

723,098


710,601


(12,497
)

(1.7
)Net occupancy


38,574


43,146


4,572


11.9


113,008


128,289


15,281


13.5Intangible asset amortization


671


40,641


39,970


nm


2,011


121,809


119,798


nmRegulatory agencies


8,572


30,739


22,167


nm


16,078


101,513


85,435


nmOutside services


20,741


22,219


1,478


7.1


58,045


64,001


5,956


10.3Professional services


17,236


17,647


411


2.4


47,764


53,074


5,310


11.1Equipment


14,437


17,838


3,401


23.6


44,925


49,853


4,928


11.0Software


14,812


16,502


1,690


11.4


44,016


45,745


1,729


3.9Advertising and public relations


12,624


14,562


1,938


15.4


33,579


36,532


2,953


8.8Low income housing credit investment amortization


11,616


13,064


1,448


12.5


29,248


34,256


5,008


17.1Communications


9,204


9,494


290


3.2


27,690


27,404


(286
)

(1.0
)Data processing


8,945


7,975


(970
)

(10.8
)

23,805


24,592


787


3.3Foreclosed asset expense (income)


524


(144
)

(668
)

nm


696


4,024


3,328


nmProvision for losses on off-balance sheet commitments


8,000


6,000


(2,000
)

(25.0
)

21,000


47,000


26,000


nmPrivatization-related expense


6,193


6,649


456


7.4


6,193


40,901


34,708


nmOther


33,534


25,502


(8,032
)

(24.0
)

75,174


69,662


(5,512
)

(7.3
)Total noninterest expense

$
443,812

$
505,815

$
62,003


14.0
%
$
1,266,330

$
1,559,256

$
292,926


23.1
%


nm = not meaningful


Income Tax Expense

Our effective tax rate in the third quarter of 2009 was (77.3) percent, compared to 30.2 percent for the third quarter of
2008. Our effective tax rate in the nine months ended September 30, 2009 was (60.3) percent, compared to 31.4 percent for the nine months ended September 30, 2008. A
negative effective tax rate indicates a net income tax benefit. The change in the effective tax rate was primarily due to pre-tax income in the prior year compared to pre-tax
loss in the current year, as well as the impact of tax credits and state income taxes. A tax benefit of $4.6 million was recognized in the third quarter of 2009 with respect to certain
privatization costs incurred in 2008, after a study was conducted to determine the tax-deductible portion of those costs. The deductions were taken in our 2008 tax return.

The
quarterly effective tax rate for the first and second quarters of 2009 was computed on an individual quarterly basis, while the rate for the third quarter and for the nine months
ended September 30, 2009, was based on an estimated average effective tax rate for the year.

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

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

65

---



Table of Contents

Discontinued Operations

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

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

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

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

Securities

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

Our
securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. The largest component of our securities
available for sale is $18.0 billion for Asset and Liability Management (ALM) purposes. ALM securities are valued at fair value by a pricing service whose prices can be corroborated by recent
security trading activities.

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

At
September 30, 2009, the fair value of our CLO securities had increased by $71.3 million from December 31, 2008, primarily due to an increase in liquidity in the
marketplace. We estimate the fair value of our CLOs using an external pricing model, as well as broker quotes. The model is based on internally-developed assumptions, utilizing market data derived
from market participants and credit rating agencies. These

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assumptions
include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates. At September 30, 2009, 21 percent of our CLO securities
were rated single-A or better by two major rating agencies.

We
conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). Since no observable credit
quality issues were present in the CLO portfolio at September 30, 2009, the securities were not other-than-temporarily impaired.

Analysis of Securities

The following tables show the remaining contractual maturities and expected yields of the securities based upon amortized cost at
September 30, 2009.

Included
in our securities available for sale portfolio at September 30, 2009 were securities used for ALM purposes of $18.0 billion. These securities had an expected
weighted average maturity of 3.0 years.

Securities Available For Sale

September 30, 2009MaturityOne Year
or Less

Over One Year
Through
Five Years

Over Five Years
Through
Ten Years

Over
Ten Years

Total
Amortized Cost(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldU.S. Treasury

$
299,247


0.32
%
$




%
$




%
$




%
$
299,247


0.32
%Other U.S. government


3,513,833


0.58


2,549,808


1.91














6,063,641


1.14Residential mortgage-backed securitiesagency(1)(2)


1


6.83


247,061


4.07


1,686,130


3.77


8,985,247


4.10


10,918,439


4.05Residential mortgage-backed securitiesnon-agency(1)(2)














15,469


5.07


476,556


5.38


492,025


5.37State and municipal


1,981


7.43


9,708


6.94


13,575


3.34


22,376


5.22


47,640


5.13Asset-backed and debt securities








23,404


7.25


21,304


3.94


68,309


7.03


113,017


6.49Equity securities(3)


























106,882


Total securities available for sale

$
3,815,062


0.56
%
$
2,829,981


2.16
%
$
1,736,478


3.78
%
$
9,552,488


4.19
%
$
18,040,891


3.04
%


Securities Held to Maturity

September 30, 2009MaturityOne Year
or Less

Over One Year
Through
Five Years

Over Five Years
Through
Ten Years

Over
Ten Years

Total
Amortized Cost(Dollars in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldCollateralized loan obligations

$




%
$
12,263


4.09
%
$
1,261,357


1.29
%
$
467,788


1.18
%
$
1,741,408


1.28
%Foreign securities


95


1.58




















95


1.58Total securities held to maturity

$
95


1.58
%
$
12,263


4.09
%
$
1,261,357


1.29
%
$
467,788


1.18
%
$
1,741,503


1.28
%


(1)Although
the residential mortgage-backed securities have been ascribed to periods based upon their contractual maturities, principal payments
are received prior to maturity because borrowers have the right to repay their obligations at any time.(2)See
discussion of expected duration in "Quantitative and Qualitative Disclosures About Market Risk."(3)Equity
securities do not have a stated maturity and are included in the total column only.


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Loans

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

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

December 31,
2008September 30,
2008

December 31,
2008

September 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
17,700,604

$
18,469,023

$
15,994,997

$
(1,705,607
)

(9.6
)%
$
(2,474,026
)

(13.4
)%Construction


2,653,945


2,744,062


2,691,515


37,570


1.4


(52,547
)

(1.9
)Mortgage:Residential


15,691,872


15,880,835


16,576,052


884,180


5.6


695,217


4.4Commercial


8,032,010


8,186,388


8,320,374


288,364


3.6


133,986


1.6Total mortgage


23,723,882


24,067,223


24,896,426


1,172,544


4.9


829,203


3.4Consumer:Installment


2,166,912


2,201,602


2,303,897


136,985


6.3


102,295


4.6Revolving lines of credit


1,361,784


1,435,494


1,599,112


237,328


17.4


163,618


11.4Total consumer


3,528,696


3,637,096


3,903,009


374,313


10.6


265,913


7.3Lease financing


642,642


645,765


658,708


16,066


2.5


12,943


2.0Total loans held to maturity


48,249,769


49,563,169


48,144,655


(105,114
)

(0.2
)

(1,418,514
)

(2.9
)Total loans held for sale


56,349


22,381


24,853


(31,496
)

(55.9
)

2,472


11.0Total loans

$
48,306,118

$
49,585,550

$
48,169,508

$
(136,610
)

(0.3
)%
$
(1,416,042
)

(2.9
)%




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

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

The
commercial, financial and industrial loan portfolio decreased from September 30, 2008 to September 30, 2009 mainly due to a decline in the utilization rate of revolving
credit lines by existing customers, our aggressive and proactive portfolio management, and our tighter underwriting standards.



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

Construction
loans are extended primarily to commercial property developers and to residential builders. As of September 30, 2009, the construction loan portfolio consisted of
approximately 86 percent in the commercial income producing real estate industry and 14 percent with residential homebuilders. The construction loan portfolio increased slightly from
September 30, 2008 to September 30, 2009 primarily due to loan advances for income property projects with apartment financing representing the largest component. During the same period,
the homebuilder portfolio fell by approximately 42 percent, or $265 million.

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

Geographically,
the outstanding construction loan portfolio was concentrated 49 percent in California and 51 percent out of state as of September 30, 2009. The
largest out of state concentration was 12 percent in Washington. The California outstandings are distributed as follows: 40 percent in the Los Angeles/Orange County region, including the
Inland Empire, 26 percent in the San Francisco Bay Area, 14 percent in Sacramento and the Central Valley, 14 percent in San Diego, and 6 percent in the Central Coast
region.

The
commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio increased from
September 30, 2008 to September 30, 2009 due to continued moderate originations and a reduced rate of early loan repayments associated with the tightening of the credit markets.



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

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

We
do not have a program for originating or purchasing subprime loan products. However, we do have loan products that allow a customer to move more quickly through the loan origination
process by reducing the need to verify the income or assets of the customer. We refer to these as portfolio express loans. Portfolio express loans are only available to existing clients for
no-cash-out/rate and term refinance of existing residential mortgages with the Bank and eliminate the verification of both income and assets. "Low doc" and "no doc"
(discontinued in 2008) loans comprise less than half of our residential loan portfolio, and the delinquency rates relative to the outstanding balances at September 30, 2009 were slightly less
than fully documented loans. At September 30, 2009, the total amount of "no doc" and "low doc" loans past due 30 days or more was $153 million, compared to $44.0 million at
September 30, 2008. The total amount of residential mortgages delinquent 30 days or more was $311.9 million at September 30, 2009, compared to $114.7 million at
September 30, 2008. Although delinquencies have risen since September 30, 2008 as a result of the declining real estate market and downturn in the economy, the delinquency rate remains
low compared to the industry average for California prime loans. We believe that our underwriting standards remain conservative and as described above, programs with higher risk have been
discontinued.

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



We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network, Private Banking Offices
and via the internet. The increase in consumer loans from September 30, 2008 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to
manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are
classified as installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs
we offer. At origination, these loans had relatively high credit scores and had weighted-average loan-to-value (LTV) ratios of approximately 60 percent. Our total home
equity loans and lines delinquent 30 days or more were $42 million at

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September 30,
2009, compared to $15.5 million at September 30, 2008. Our annual review program reviews all equity secured lines with a commitment amount of $200,000 or more and an
origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. Action is taken to reduce or
freeze limits, as applicable and pursuant to applicable laws and regulations, to minimize additional exposure in a declining market. In addition, to help mitigate the overall effect of the declining
real estate market on new originations, we reduced by 5 percent the maximum LTV allowable for any owner or non owner occupied property valued over $250,000. The change was effective
January 1, 2009.



We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional
financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At September 30, 2009, we had leveraged leases of
$548.7 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities
serve legal and tax purposes and do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by
law, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased
assets for repayment.

Cross-Border Outstandings

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

(Dollars in millions)

Financial
Institutions

Public
Sector
Entities

Corporations
and Other
Borrowers

Total
OutstandingsSeptember 30, 2008
Canada

$
49

$


$
792

$
841December 31, 2008
Canada

$
111

$


$
796

$
907September 30, 2009
Canada

$
40

$


$
891

$
931


Provision for Credit Losses

We recorded a provision for loan losses of $117 million and $314 million in the third quarters of 2008 and 2009,
respectively. We recorded a provision for loan losses of $284 million and $923 million for the nine months ended September 30, 2008 and 2009, respectively. We recorded a provision
for losses on off-balance sheet commitments of $8 million and $6 million in the third quarters of 2008 and 2009, respectively. We recorded a provision for losses on
off-balance sheet commitments of $21 million and $47 million for the nine months ended September 30, 2008 and 2009, respectively. The provisions for loan losses and
for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level

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deemed
appropriate by management based on the factors discussed under "Allowances for Credit Losses" below.

Allowances for Credit Losses



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



At September 30, 2009, our total allowances for credit losses were $1.4 billion, which consisted of
$1,260.3 million for loan losses and $172.4 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $1,264.9 million and
$167.8 million of allocated and unallocated allowance, respectively. At September 30, 2009, our allowances for credit loss coverage ratios were 2.97 percent of total loans and
108 percent of total nonaccrual loans. At December 31, 2008, our total allowances for credit losses were $863 million, or 1.74 percent of total loans, and
208 percent of total nonaccrual loans.

In
addition, the allowances incorporate the results of measuring impairment for specifically identified impaired loans utilizing a methodology based on the present value of the remaining
expected cash flows or as a practical expedient, the loan's observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent). At
September 30, 2009 and December 31, 2008, total impaired loans were $1.3 billion and $416 million, respectively, and the associated impairment allowances were
$199 million and $107 million, respectively.

At
September 30, 2009 and December 31, 2008, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses
was $172 million and $125 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for
off-balance sheet commitment losses. Net charge offs were $136 million in the third quarter of 2009, compared to $63 million in the third quarter of 2008.

As
a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending
portfolios (especially our commercial real estate portfolio) and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $314 million in the third quarter
of 2009, compared to a provision for loan losses of $117 million in the third quarter of 2008. Overall, our loan portfolio experienced higher criticized assets, especially in the commercial
real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business portfolios, reflecting the continued deterioration in the economic
environment.

We
expect the elevated levels of quarterly provisions for credit losses, which we experienced in the first three quarters of 2009, to continue in the fourth quarter of 2009. The factors
driving the increase in our projected provision during 2009 include management's belief that the economic environment remains weak and will result in further deterioration in our loan portfolio.

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During
the first quarter of 2009, the loss confirmation period (LCP) for residential mortgages and home equity loans and lines of credit products was updated to better reflect the impact
of recent economic conditions on losses within these portfolios. As a result of our analyses and peer surveys, the LCP for consumer home equity loans and residential mortgages was changed from between
1.5 years and 2 years, to 1 year, which resulted in a lower provision for credit losses in the first quarter of 2009. In addition, during the second quarter of 2009, we reduced
our commercial loan portfolio loss factors based on past charge off experience over a slightly shorter economic time frame, further adjusted for an updated analysis of the severity of the economic
cycle.

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



At September 30, 2009, the formula allowance increased to $1,047 million, compared to $682 million at
December 31, 2008. The net increase was primarily due to an increase in criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and higher loss factors
for most our lending portfolios as a result of the prolonged negative impact of the weak economy. At September 30, 2009, the specific allowance was $218 million, compared to
$112 million at December 31, 2008.



At September 30, 2009, the unallocated allowance increased to $168 million, compared to $69 million at
December 31, 2008 primarily due to the increased uncertainty related to the timing and severity of losses to be realized in our commercial real estate portfolio resulting from deteriorating
conditions in commercial real estate. Management believes that the current level of unallocated allowance is appropriate based on the weakening credit cycle and the level of uncertainty of
the impact of the current economic conditions on our principal portfolio segments. Additionally, the reasons for which we believe an unallocated allowance is warranted are detailed below.

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

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

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



72

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73

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

For the Three Months Ended September 30,

Increase (Decrease)

For the Nine Months Ended September 30,

Increase (Decrease)(Dollars in thousands)

2008

2009

Amount

Percent

2008

2009

Amount

PercentBalance, beginning of period

$
526,401

$
1,081,633

$
555,232


105.5
%
$
402,726

$
737,767

$
335,041


83.2
%Loans charged off:Commercial, financial and industrial


42,004


77,996


35,992


85.7


70,184


259,634


189,450


269.9Construction


15,463


13,892


(1,571
)

(10.2
)

25,013


39,361


14,348


57.4Commercial mortgage


689


26,298


25,609


nm


1,186


54,167


52,981


nmResidential mortgage


2,129


13,960


11,831


555.7


3,907


28,893


24,986


639.5Consumer


4,263


11,134


6,871


161.2


10,803


32,275


21,472


198.8Total loans charged off


64,548


143,280


78,732


122.0


111,093


414,330


303,237


273.0Recoveries of loans previously charged off:Commercial, financial and industrial


1,811


6,129


4,318


238.4


4,288


8,405


4,117


96.0Construction











nm





150


150


nmCommercial mortgage





30


30


nm





255


255


nmResidential mortgage


2


2








2


22


20


nmConsumer


175


446


271


154.9


901


868


(33
)

(3.7
)Lease financing


5





(5
)

(100.0
)

213





(213
)

(100.0
)Total recoveries of loans previously charged off


1,993


6,607


4,614


231.5


5,404


9,700


4,296


79.5Net loans charged off


62,555


136,673


74,118


118.5


105,689


404,630


298,941


282.8Provision for loan losses


117,000


314,000


197,000


168.4


284,000


923,000


639,000


225.0Adjustments related to privatization











nm





2,062


2,062Foreign translation adjustment and other net additions


(372
)

1,347


1,719


462.1


(563
)

2,108


2,671


474.4Ending balance of allowance for loan losses

$
580,474

$
1,260,307

$
679,833


117.1
%
$
580,474

$
1,260,307

$
679,833


117.1
%Allowance for losses on off-balance sheet commitments


111,374


172,374


61,000


54.8


111,374


172,374


61,000


54.8Allowances for credit losses

$
691,848

$
1,432,681

$
740,833


107.1
%
$
691,848

$
1,432,681

$
740,833


107.1
%Allowance for loan losses to total loans(1)


1.20
%

2.62
%







1.20
%

2.62
%Allowances for credit losses to total loans(2)


1.43


2.97








1.43


2.97Provision for loan losses to net loans charged off


187.04


229.75








268.71


228.11Net loans charged off to average loans outstanding for the period(3)


0.53


1.11








0.31


1.10


(1)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total
nonperforming loans, as appropriate. These ratios relate to continuing operations only.(2)The
allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.(3)Annualized. nm = not meaningful


Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans that are nonperforming and foreclosed assets. Nonaccrual loans are
those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have
become contractually past due 90 days with respect to principal or interest. Effective on January 1, 2009, consumer home equity loans and one-to-four single
family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status.
However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting
policy change, home equity and one-to-four family residential loans totaling $195.1 million ($9.0 million of which is restructured) have been placed on nonaccrual
status as of September 30, 2009. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to the Consolidated Financial Statements included in our 2008
Form 10-K.

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Table of Contents

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

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

The
following table sets forth an analysis of nonperforming assets.

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

December 31,
2008September 30,
2008

December 31,
2008

September 30,
2009(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
162,294

$
260,272

$
380,117

$
217,823


nm

$
119,845


46.0
%Construction


93,028


98,934


387,523


294,495


nm


288,589


nmCommercial mortgage


33,553


55,750


354,815


321,262


nm


299,065


nmResidential mortgage








164,683


164,683


nm


164,683


nmConsumer








21,385


21,385


nm


21,385


nmLease financing








108


108


nm


108


nmRestructurednonaccrual








15,962


15,962


nm


15,962


nmTotal nonaccrual loans


288,875


414,956


1,324,593


1,035,718


nm


909,637


nmForeclosed assets


13,922


20,214


34,392


20,470


nm


14,178


70.1Distressed loans held for sale








8,706


8,706


nm


8,706


nmRestructurednonperforming


1,449


1,345





(1,449
)

(100.0
)%

(1,345
)

(100.0
)Total nonperforming assets

$
304,246

$
436,515

$
1,367,691

$
1,063,445


nm

$
931,176


nmRestructured loans that continue to accrue interest

$


$


$
1,867

$
1,867


nm

$
1,867


nmAllowance for loan losses

$
580,474

$
737,767

$
1,260,307

$
679,833


nm

$
522,540


70.8
%Allowances for credit losses

$
691,848

$
863,141

$
1,432,681

$
740,833


nm

$
569,540


66.0
%Nonaccrual loans to total loans


0.60
%

0.84
%

2.75
%Allowance for loan losses to nonaccrual loans(1)


200.94


177.79


95.15Allowances for credit losses to nonaccrual loans(2)


239.50


208.01


108.16Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale


0.63


0.88


2.84Nonperforming assets to total assets


0.49


0.62


1.75


(1)The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total
nonperforming loans, as appropriate. These ratios relate to continuing operations only.(2)The
allowances for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on
off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only. nm = not meaningful


The increase in nonaccrual loans from September 30, 2008 to September 30, 2009 was primarily due to an increase in commercial,
construction and commercial mortgage loans, primarily within the commercial real estate industry sector. Additionally, we had increases in residential and consumer home equity nonaccrual loans due to
the change in our nonaccrual accounting policy effective January 1, 2009. During the third quarters of 2008 and 2009, we had $3.6 million and $13.3 million in sales of
nonperforming loans, respectively. Losses from these sales were reflected in charge offs.

75

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Table of Contents

Loans 90 Days or More Past Due and Still Accruing

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

December 31,
2008September 30, 2008

December 31, 2008

September 30, 2009(Dollars in thousands)

Amount

Percent

Amount

PercentCommercial, financial and industrial

$
1,921

$
2,529

$
3,958

$
2,037


nm

$
1,429


56.5
%Construction








659


659


nm


659


Mortgage:Residential(1)


39,655


59,940


421


(39,234
)

(98.9
)%

(59,519
)

(99.3
)Commercial


1,781


181





(1,781
)

(100.0
)

(181
)

(100.0
)Total mortgage


41,436


60,121


421


(41,015
)

(99.0
)

(59,700
)

(99.3
)Consumer and other(1)


5,873


8,097


359


(5,514
)

(93.9
)

(7,738
)

(95.6
)Total loans 90 days or more past due and still accruing

$
49,230

$
70,747

$
5,397

$
(43,833
)

(89.0
)
$
(65,350
)

(92.4
)


nm = not meaningful (1)Effective
January 1, 2009, the Company changed its nonaccrual accounting policy to place consumer home equity loans and
one-to-four single family residential loans on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure.


Fair Value of Financial Instruments

The following table reflects financial instruments measured at fair value on a recurring basis as of September 30, 2008,
December 31, 2008 and September 30, 2009. For additional information on the fair value of financial instruments, see Note 12 to the condensed consolidated financial statements in
this Form 10-Q.

September 30, 2008

December 31, 2008

September 30, 2009(Dollars in thousands)

Fair Value

Percentage
of Total

Fair Value

Percentage
of Total

Fair Value

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

$
944,295


11
%
$
961,535


10
%
$
6,587,687


34
%Level 2


6,962,575


76


7,624,037


79


12,722,283


67Level 3


1,274,292


14


1,203,092


13


6,646


Netting Adjustment(1)


(50,875
)

(1
)

(153,377
)

(2
)

(102,093
)

(1
)Total

$
9,130,287


100
%
$
9,635,287


100
%
$
19,214,523


100
%As a percentage of total Company assets





15
%




14
%




25
%Liabilities:Level 1

$
5,343


1
%
$
56,470


6
%
$
49,985


7
%Level 2


552,422


109


1,131,570


109


767,183


107Level 3

















Netting Adjustment(1)


(50,875
)

(10
)

(153,377
)

(15
)

(102,093
)

(14
)Total

$
506,890


100
%
$
1,034,663


100
%
$
715,075


100
%As a percentage of total Company liabilities





1
%




2
%




1
%


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


76

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Table of Contents




Quantitative and Qualitative Disclosures About Market Risk

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

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

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

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

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



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

At
September 30, 2009, Economic Net Interest Income (NII) sensitivity was asset sensitive to parallel rate shifts. A +200 basis point parallel shift in rates would increase
12-month Economic NII by 1.69 percent, while a similar downward shift in rates would decrease it by 3.72 percent. At September 30, 2008, a +200 basis point parallel
shift in rates would reduce 12-month Economic NII by 0.62 percent, while a similar downward shift in rates would increase it by 0.67 percent. We caution that significant low
levels of current interest rates and ongoing enhancements to our interest rate risk modeling may make prior year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for
the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than
Economic NII.

77

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Table of Contents

Economic NII

(Dollars in millions)

September 30,
2008

December 31,
2008

September 30,
2009+200 basis points

$
(14.2
)
$
0.2

$
44.0as a percentage of base case NII


(0.62
)%

0.01
%

1.69
%-200 basis points

$
15.3

$
(40.8
)
$
(96.9
)as a percentage of base case NII


0.67
%

(1.75
)%

(3.72
)%


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

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



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



At September 30, 2008 and 2009, our available for sale securities portfolio included $6.8 billion and
$18.0 billion, respectively, of securities for ALM purposes. At September 30, 2009, approximately $3.9 billion of the portfolio was pledged to secure trust and public deposits and
for other purposes as required or permitted by law. During the third quarter of 2009, we purchased $14.0 billion and sold $3.0 billion par value of securities, as part of our investment
portfolio strategy, while $546 million par value of ALM securities matured or were called.

The
portfolio is expected to remain predominately comprised of agency mortgage-backed securities as our non-agency mortgage-backed securities continue to run-off
during the remainder of 2009. Based on current prepayment projections, the estimated ALM portfolio's effective duration was 1.8 at September 30, 2009, compared to 2.3 at September 30,
2008. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 1.8 suggests an expected price decrease of
approximately 1.8 percent for an immediate 1.0 percent parallel increase in interest rates.



During the first nine months of 2009, the ALM derivatives portfolio increased by $1.7 billion notional amount due to purchases
of $4.0 billion notional amount of LIBOR cap contracts, offset by maturities of $1.4 billion and terminations of $950 million notional amount of receive fixed interest rate swaps
and floors.

The
fair value of the ALM derivatives portfolio decreased primarily due to maturities of interest rate swaps and floor option contracts, terminations of interest rate swaps, and the
realization of interest income. The decrease was partially offset by the addition of cap option contracts, which benefit from the expectation of higher future interest rates. For additional discussion
of derivative instruments and our hedging strategies, see

78

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Table of Contents

Note 13
to the condensed consolidated financial statements in this Form 10-Q and Note 19 to our consolidated financial statements included in our 2008
Form 10-K.

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

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009

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

$
5,400,000

$
5,400,000

$
7,050,000

$
1,650,000of which, interest rate swaps pay fixed rates of interest











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

$
128,876

$
317,569

$
118,166

$
(199,403
)Gross negative fair value











Positive (negative) fair value of positions, net

$
128,876

$
317,569

$
118,166

$
(199,403
)


Trading Activities

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

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

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

79

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Table of Contents

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

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009

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

$
17,946,872

$
20,398,695

$
24,941,719

$
4,543,024Foreign exchange(1)


4,993,475


7,112,873


2,644,418


(4,468,455
)Equity





10,914


193,158


182,244Energy


4,808,754


3,757,674


3,544,518


(213,156
)Total

$
27,749,101

$
31,280,156

$
31,323,813

$
43,657Fair value of positions held for trading purposes:Gross positive fair value

$
552,179

$
1,145,208

$
779,376

$
(365,832
)Gross negative fair value


534,286


1,137,724


773,471


(364,253
)Positive fair value of positions, net

$
17,893

$
7,484

$
5,905

$
(1,579
)


(1)Excludes
spot contracts with notional amounts of $1.0 billion, $1.1 billion and $0.3 billion at September 30,
2008, December 31, 2008 and September 30, 2009, respectively.


Liquidity Risk

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

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

Core
deposits provide us with a sizable source of relatively stable and low-cost funds. Our $52.0 billion in average core deposits, which includes demand deposits,
money market accounts, savings and consumer time deposits, combined with average stockholder's equity, funded 80 percent of average total assets of $74.4 billion in the third quarter of
2009. Most of the remaining funding was provided by wholesale borrowings from secured and unsecured sources of varying maturities.

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

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Table of Contents

$2.9 billion
of borrowings outstanding with the FHLB. During the third quarter of 2009, the Bank did not borrow under the FRB Term Auction Facility program. As of September 30, 2009, the
Bank had a remaining combined unused borrowing capacity of $18.8 billion from the FHLB and the FRB.

Our
securities portfolio provides liquidity through either securities sales or repurchase agreements. During the third quarter of 2009, capacity under repurchase agreements increased
$10.5 billion from $3.2 billion at June 30, 2009 to $13.7 billion at September 30, 2009.

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

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

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

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

Union Bank, N.A.

UnionBanCal
CorporationStandard & Poor's

Long-term
Short-term

A+
A-1

A
A-1Moody's

Long-term
Short-term

A2
P-1


Fitch

Long-term
Short-term

A
F1

A
F1DBRS

Long-term
Short-term

A (high)
R-1 (middle)

A
R-1 (low)


81

---



Table of Contents

Regulatory Capital

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

UnionBanCal Corporation

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009

Minimum
Regulatory
RequirementCapital ComponentsTier 1 capital

$
4,923,929

$
5,466,713

$
7,416,069Tier 2 capital


1,788,995


1,773,391


1,804,532Total risk-based capital

$
6,712,924

$
7,240,104

$
9,220,601Risk-weighted assets

$
61,365,714

$
62,251,070

$
63,956,189Quarterly average assets

$
61,771,614

$
64,917,854

$
71,384,950




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
6,712,924


10.94
%
$
7,240,104


11.63
%
$
9,220,601


14.42
%
3$
5,116,495


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


4,923,929


8.02


5,466,713


8.78


7,416,069


11.60

3
2,558,248


4.0Leverage(1)


4,923,929


7.97


5,466,713


8.42


7,416,069


10.39

3
2,855,398


4.0


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


Union Bank, N.A.

(Dollars in thousands)

September 30,
2008

December 31,
2008

September 30,
2009

Minimum
Regulatory
Requirement

"Well-Capitalized"
Regulatory
RequirementCapital ComponentsTier 1 capital

$
5,012,492

$
5,380,075

$
6,906,944Tier 2 capital


1,378,628


1,451,024


1,484,451Total risk-based capital

$
6,391,120

$
6,831,099

$
8,391,395Risk-weighted assets

$
61,318,242

$
62,025,970

$
63,915,458Quarterly average assets

$
61,477,326

$
64,737,767

$
71,484,168




Capital Ratios

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

RatioTotal capital (to risk-weighted assets)

$
6,391,120


10.42
%
$
6,831,099


11.01
%
$
8,391,395


13.13
%
3$
5,113,237


8.0
%
3$
6,391,546


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


5,012,492


8.17


5,380,075


8.67


6,906,944


10.81

3
2,556,618


4.0

3
3,834,927


6.0Leverage(1)


5,012,492


8.15


5,380,075


8.31


6,906,944


9.66

3
2,859,367


4.0

3
3,574,208


5.0


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


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

The
increase in our and Union Bank's capital ratios primarily resulted from an increase in total capital driven by a $2.0 billion capital contribution from BTMU to UnionBanCal
Corporation on September 29, 2009 and a corresponding $1.8 billion capital contribution from UnionBanCal Corporation to Union Bank.

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

82

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Table of Contents

Business Segments

The various operating segments reporting under our Chief Operating Officer and the Group Head of Pacific Rim Corporate Group are
aggregated into two reportable business segments entitled "Retail Banking" and "Wholesale Banking."

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

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

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

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

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

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

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Table of Contents

The
reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred,
our discontinued operations and the market view contribution. Our discontinued operations consist of two separate businesses: retirement recordkeeping services and insurance brokerage business. For
further information on discontinued operations, see Note 15 to the condensed consolidated financial statements in this Form 10-Q.

Retail Banking





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

Increase/
(decrease)

As of and for the
Three Months Ended
September 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

Amount

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

$
214,614

$
280,461

$
65,847


31
%
$
243,504

$
379,369

$
135,865


56
%Noninterest income (expense)


122,546


110,565


(11,981
)

(10
)

92,484


86,224


(6,260
)

(7
)Total revenue


337,160


391,026


53,866


16


335,988


465,593


129,605


39Noninterest expense (income)


251,519


290,182


38,663


15


158,016


207,842


49,826


32Credit expense (income)


7,056


7,361


305


4


49,094


92,027


42,933


87Income (loss) from continuing operations before income taxes


78,585


93,483


14,898


19


128,878


165,724


36,846


29Income tax expense (benefit)


30,059


36,552


6,493


22


30,508


43,314


12,806


42Income (loss) from continuing operations


48,526


56,931


8,405


17


98,370


122,410


24,040


24Loss from discontinued operations, net of income taxes











na











naNet income (loss)

$
48,526

$
56,931

$
8,405


17

$
98,370

$
122,410

$
24,040


24Average balancesMarket View (dollars in millions):Total loans

$
20,089

$
21,696

$
1,607


8

$
27,124

$
27,083

$
(41
)

nmTotal assets


20,945


23,944


2,999


14


31,934


33,821


1,887


6Total deposits


18,842


27,118


8,276


44


17,647


31,316


13,669


77Financial ratiosMarket ViewRisk adjusted return on capital(1)


29
%

31
%







15
%

14
%Return on average assets(1)


0.92


0.94








1.23


1.44Efficiency ratio(2)


74.44


74.25








43.57


41.83




Other





Reconciling Items

UnionBanCal CorporationAs 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)2008

2009

Amount

Percent

2008

2009

2008

2009

Amount

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

$
63,388

$
(86,874
)
$
(150,262
)

nm

$
(1,760
)
$
(11,920
)
$
519,746

$
561,036

$
41,290


8
%Noninterest income (expense)


2,973


9,275


6,302


nm


(19,282
)

(22,135
)

198,721


183,929


(14,792
)

(7
)Total revenue


66,361


(77,599
)

(143,960
)

nm


(21,042
)

(34,055
)

718,467


744,965


26,498


4Noninterest expense (income)


45,833


21,647


(24,186
)

(53
)%

(11,556
)

(13,856
)

443,812


505,815


62,003


14Credit expense (income)


60,870


214,641


153,771


nm


(20
)

(29
)

117,000


314,000


197,000


nmIncome (loss) from continuing operations before income taxes


(40,342
)

(313,887
)

(273,545
)

nm


(9,466
)

(20,170
)

157,655


(74,850
)

(232,505
)

(147
)Income tax expense (benefit)


(9,397
)

(129,800
)

(120,403
)

nm


(3,621
)

(7,887
)

47,549


(57,821
)

(105,370
)

nmIncome (loss) from continuing operations


(30,945
)

(184,087
)

(153,142
)

nm


(5,845
)

(12,283
)

110,106


(17,029
)

(127,135
)

(115
)Loss from discontinued operations, net of income taxes


(5,276
)




5,276


100








(5,276
)




5,276


100Net income (loss)

$
(36,221
)
$
(184,087
)
$
(147,866
)

nm

$
(5,845
)
$
(12,283
)
$
104,830

$
(17,029
)
$
(121,859
)

(116
)Average balancesMarket View (dollars in millions):Total loans

$
1

$
7

$
6


nm

$
(18
)
$
(21
)
$
47,196

$
48,765

$
1,569


3Total assets


8,284


16,629


8,345


101


(18
)

(41
)

61,145


74,353


13,208


22Total deposits


5,704


2,956


(2,748
)

(48
)

(532
)

(1,936
)

41,661


59,454


17,793


43Financial ratiosMarket ViewRisk adjusted return on capital(1)


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


0.72
%

(0.09
)%Efficiency ratio(2)


na


na








na


na


58.76


65.07


(1)Annualized.(2)The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments, and low income housing investment credit (LIHC) amortization expense, as a percentage of net interest income and noninterest income. na = not applicable nm = not meaningful


84

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Table of Contents

Retail Banking





Wholesale BankingAs of and for the
Nine Months Ended
September 30,

Increase/
(decrease)

As of and for the
Nine Months Ended
September 30,

Increase/
(decrease)2008

2009

Amount

Percent

2008

2009

Amount

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

$
612,996

$
760,379

$
147,383


24
%
$
689,330

$
1,014,642

$
325,312


47
%Noninterest income (expense)


369,293


325,956


(43,337
)

(12
)

258,254


271,435


13,181


5Total revenue


982,289


1,086,335


104,046


11


947,584


1,286,077


338,493


36Noninterest expense (income)


725,082


828,190


103,108


14


457,275


566,180


108,905


24Credit expense (income)


20,337


22,505


2,168


11


135,634


247,057


111,423


82Income (loss) from continuing operations before income taxes


236,870


235,640


(1,230
)

(1
)

354,675


472,840


118,165


33Income tax expense (benefit)


90,603


92,135


1,532


2


83,850


120,609


36,759


44Income (loss) from continuing operations


146,267


143,505


(2,762
)

(2
)

270,825


352,231


81,406


30Loss from discontinued operations, net of income taxes











na











naNet income (loss)

$
146,267

$
143,505

$
(2,762
)

(2
)
$
270,825

$
352,231

$
81,406


30Average balancesMarket View (dollars in millions):Total loans

$
18,975

$
21,394

$
2,419


13

$
26,171

$
28,039

$
1,868


7Total assets


19,806


23,643


3,837


19


30,954


34,970


4,016


13Total deposits


18,577


25,376


6,799


37


18,076


27,011


8,935


49Financial ratiosMarket ViewRisk adjusted return on capital(1)


30
%

27
%







14
%

14
%Return on average assets(1)


0.99


0.81








1.17


1.35Efficiency ratio(2)


73.74


76.17








45.17


41.36




Other





Reconciling Items

UnionBanCal CorporationAs 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)2008

2009

Amount

Percent

2008

2009

2008

2009

Amount

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

$
193,854

$
(82,188
)
$
(276,042
)

(142
)%
$
(5,298
)
$
(21,448
)
$
1,490,882

$
1,671,385

$
180,503


12
%Noninterest income (expense)


23,516


3,535


(19,981
)

(85
)

(57,320
)

(59,068
)

593,743


541,858


(51,885
)

(9
)Total revenue


217,370


(78,653
)

(296,023
)

(136
)

(62,618
)

(80,516
)

2,084,625


2,213,243


128,618


6Noninterest expense (income)


118,222


201,972


83,750


71


(34,249
)

(37,086
)

1,266,330


1,559,256


292,926


23Credit expense (income)


128,082


653,514


525,432


nm


(53
)

(76
)

284,000


923,000


639,000


nmIncome (loss) from continuing operations before income taxes


(28,934
)

(934,139
)

(905,205
)

nm


(28,316
)

(43,354
)

534,295


(269,013
)

(803,308
)

nmIncome tax expense (benefit)


3,871


(357,962
)

(361,833
)

nm


(10,831
)

(16,951
)

167,493


(162,169
)

(329,662
)

nmIncome (loss) from continuing operations


(32,805
)

(576,177
)

(543,372
)

nm


(17,485
)

(26,403
)

366,802


(106,844
)

(473,646
)

(129
)Loss from discontinued operations, net of income taxes


(12,037
)




12,037


100








(12,037
)




12,037


100Net income (loss)

$
(44,842
)
$
(576,177
)
$
(531,335
)

nm

$
(17,485
)
$
(26,403
)
$
354,765

$
(106,844
)
$
(461,609
)

(130
)Average balancesMarket View (dollars in millions):Total loans

$
8

$
(47
)
$
(55
)

nm

$
(16
)
$
(20
)
$
45,138

$
49,366

$
4,228


9Total assets


8,280


12,420


4,140


50


(16
)

(33
)

59,024


71,000


11,976


20Total deposits


6,689


2,473


(4,216
)

(63
)

(520
)

(1,333
)

42,822


53,527


10,705


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


na


na








na


na


na


naReturn on average assets(1)


na


na








na


na


0.83
%

(0.20
)%Efficiency ratio(2)


na


na








na


na


58.10


66.34


(1)Annualized.(2)The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments, and low income housing investment credit (LIHC) amortization expense, as a percentage of net interest income and noninterest income. na = not applicable nm = not meaningful


85

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Retail Banking provides financial products including credit, deposit, trust, investment management and risk management delivered
through our branches, relationship managers, private bankers and trust administrators, to individuals, small businesses and institutional clients. Retail banking is focused on executing a strategy
that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target
markets. While the primary focus of Retail Banking's strategy is deposit growth, an additional focus continues to be consumer and small business loan generation.

During
the nine months ended September 30, 2009, net income of Retail Banking decreased compared to the same period in 2008, resulting from a 14 percent increase in
noninterest expense and a 12 percent decrease in noninterest income, partially offset by a 24 percent increase in net interest income. The increase in net interest income was primarily
due to the margin contribution relating to the growth in loans and interest bearing deposits.

Average
asset growth for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily driven by a 13 percent growth in average loans. The
growth in average loans was largely due to increases of 11 percent in our average residential loan portfolio and 26 percent in our average consumer loan portfolio.

Average
deposits increased 37 percent during the nine months ended September 30, 2009 compared to the same period in 2008. This increase was primarily due to the Retail
Banking's strategy which continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management,
increasing and improving sales resources, establishing new locations and new products as well as deposit growth in balances held by our institutional clients. We expect that a larger branch network,
along with this Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.

Noninterest
income decreased during the nine months ended September 30, 2009 compared to the same period in 2008 by 12 percent mainly as a result of lower service charges
on deposits and lower trust and investment management fees. Noninterest expense increased by 14 percent during the nine months ended September 30, 2009, compared to the same period in
2008. This increase was primarily due to intangible asset amortization related to our privatization, staff costs, FDIC deposit insurance assessment rate increase, and costs associated with an
increasing deposit base.

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



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



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

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

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





Wholesale Banking offers financing, depository and cash management services to middle market and large corporate businesses primarily
headquartered in the western U.S. Wholesale Banking continues to focus

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

During
the nine months ended September 30, 2009, net income of Wholesale Banking increased 30 percent, compared to the same period in 2008, resulting from a
47 percent increase in net interest income and a 5 percent increase in noninterest income, partially offset by a 24 percent increase in higher noninterest expense and higher
credit expense. The increase in net interest income was mainly due to the margin contribution relating to higher loan volume and higher interest bearing deposits.

For
the nine months ended September 30, 2009, average loans increased 7 percent compared to the same period in 2008 primarily in our commercial and industrial loan
portfolio. This increase was primarily in the Energy Capital Services and National Banking Divisions.

Average
deposit balances grew by 49 percent in the nine months ended September 30, 2009 compared to the same period in 2008 due to deposit initiatives and higher government
agency balances.

Noninterest
income increased 5 percent during the nine months ended September 30, 2009, compared to the same period in 2008, primarily due to higher trading revenues and
merchant banking fees. Noninterest expense increased 24 percent in the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to intangible asset
amortization related to our privatization and higher FDIC deposit insurance assessments.

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

Wholesale Bankingis comprised of the following main divisions:



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



Our net loss increased by $531.3 million in the nine months ended September 30, 2009, compared to the same period in
2008, primarily due to lower net interest income, a higher loan loss provision and higher noninterest expense.

"Other"
includes the following items:



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Table of Contents

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



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



Item 3.   Quantitative and Qualitative Disclosures About Market Risk

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

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Table of Contents

Item 4.   Controls and Procedures

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

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

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Table of Contents



PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

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



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

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

In
the third quarter of 2008, the volatility and disruption in the capital and credit markets reached unprecedented levels. On October 3, 2008, former President Bush signed into
law the Emergency Economic Stabilization Act of 2008 (the EESA) in response to the financial crises affecting the banking system and financial markets. The EESA was the result of a proposal by former
Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008, in response to the financial crises affecting the banking system and financial markets and going concern threats to
investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to the EESA, the maximum
deposit insurance amount was temporarily increased from $100,000 to $250,000 per depositor through December 31, 2013, as recently extended. On October 14, 2008, the FDIC announced the
establishment of a Temporary Liquidity Guarantee Program under which the FDIC will fully guarantee until December 31, 2009, all non-interest-bearing transaction accounts of insured
depository institutions that did

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not
opt out of the program by December 5, 2008. Pursuant to the Temporary Liquidity Guarantee Program, the FDIC will also guarantee newly issued senior unsecured debt of participating financial
institutions and their qualifying holding companies. All eligible institutions participated in the program without cost for the first 30 days of the program. After December 5, 2008,
institutions are assessed at the rate of ten basis points for transaction account balances in excess of $250,000 and at the rate, on an annualized basis, of 50 to 100 basis points of the amount of
debt issued (on a sliding scale, depending on length of maturity of the debt). Union Bank has elected to participate in the Temporary Liquidity Guarantee Program and during the first quarter of 2009,
Union Bank issued $1 billion principal amount of FDIC-guaranteed senior notes under this program. Further, pursuant to the EESA, on October 14, 2008, the U.S. Treasury
announced a voluntary Capital Purchase Program under its Troubled Asset Relief Program (TARP) pursuant to which the Treasury will purchase up to $250 billion in senior preferred stock of
qualifying U.S. financial institutions. Many banks and bank holding companies have participated in this program. UnionBanCal Corporation, as a wholly-owned subsidiary of a foreign bank, is not
eligible to participate in the Capital Purchase Program. On August 26, 2009, the FDIC issued its final rule amending the Temporary Liquidity Guarantee Program to extend the Transaction Account
Guarantee Program (TAG) for six months through June 2010. As an institution participating in the TAG, Union Bank decided not to continue to participate in the extension of the TAG.

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

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

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

It
cannot be predicted whether these recent governmental actions will result in significant improvement in financial and economic conditions affecting the banking industry and the U.S.
economy. If, notwithstanding the federal government's recent fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present
additional significant challenges for the U.S.

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banking
and financial services industry and for our company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not been eligible to participate in some federal programs such as TARP
and may not qualify for participation in future federal programs. While it is difficult to predict how long these conditions will exist and which markets and businesses of our company may be affected,
we have been experiencing adverse business conditions and these factors could continue to present risks for some time for the industry and our company.



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



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Deposits of Union Bank are insured up to statutory limits by the FDIC, and, accordingly, are subjected to deposit insurance assessments
to maintain the Deposit Insurance Fund. In November 2006, the FDIC issued a final rule, effective January 1, 2007, that created a new assessment system designed to more closely tie what banks
pay for deposit insurance to the risks they pose and adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the insurance fund. This assessment
system resulted in annual assessments on deposits of Union Bank of approximately 5 basis points through 2008. Prior to this change, Union Bank was not paying any insurance assessments on deposits
under the FDIC's risk-related assessment system. An FDIC credit for prior contributions offset the assessment for 2007 and part of 2008. Since this credit was exceeded in the second
quarter of 2008, the deposit insurance assessments Union Bank pays have increased our costs.

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

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On
February 27, 2009, the Board of Directors of the FDIC voted to amend the restoration plan for the Deposit Insurance Fund, adopt an interim rule (subject to comment) imposing an
emergency special assessment on insured institutions of 20 basis points on June 30, 2009 (to be collected on September 30, 2009), implement changes to the risk-based
assessment system, and set rates beginning the second quarter of 2009. The FDIC extended the restoration plan period to seven years, concluding that the problems facing the financial services sector
and the economy at large constitute extraordinary circumstances permitting such extension. The interim rule would also permit the FDIC to impose an emergency special assessment after June 30,
2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance or if the reserve ratio of the Deposit Insurance Fund falls to a level which shall be zero or
close to negative at the end of a calendar quarter. The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments designed to improve how the assessment
system differentiates for risk. Under the final rule, banks in Risk Category I will pay initial base assessment rates ranging from 12 to 16 basis points on an annual basis, beginning on
April 1, 2009, while the base annual assessment rates for institutions in Risk Categories II, III and IV will be adjusted to 22, 32 and 45 basis points, respectively. The final rule
provides incentives in the form of a reduction in assessment rates for institutions that hold long-term unsecured debt and provides for increases in the base assessment rates for
institutions that rely significantly on brokered deposits or secured liabilities.

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

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

On
September 29, 2009, the FDIC issued a proposed rule that would rescind the special assessment imposed by its May 22, 2009 action referred to above, extend the
restoration period for the Deposit Insurance Fund from seven to eight years and impose an increase in assessment rates on depository institutions of three basis points in 2011. The proposed rule would
also mandate that insured depository institutions prepay their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, on
December 30, 2009, when they pay their risk-based deposit insurance assessment for the third quarter of 2009.

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



We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our
customers and the Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will likely continue
in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also
change their

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interpretation
of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance
and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or fines.
International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these
jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely
affect our activities and investments and those of our subsidiaries in the future.

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

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

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

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



In particular, there have been proposals made by President Obama, members of Congress and others that could reduce the amount
distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution's ability to foreclose on mortgage collateral. For example, on February 18,
2009, President Obama announced "The Homeowner Affordability and Stability Plan" as part of a plan designed to help up to 7 to 9 million families restructure or refinance their mortgages to
avoid foreclosure. On April 28, 2009, the Obama Administration announced additional details of the "Making Home Affordable Program", a comprehensive three-part plan intended to
stabilize the U.S. housing market that includes aggressive measures to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; a Home Affordable Refinance Program, which
will provide new access to refinancing for up to 4 to 5 million homeowners; and a Home Affordable Modification Program, which will reduce monthly payments on existing first lien mortgages for
up to 3 to 4 million at-risk homeowners. The Administration has also published detailed guidelines for the Home Affordable Modification Program and authorized servicers to begin
modifications under the plan immediately. A Second Lien Program coordinates with the first mortgage

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modification
program to lower payments on second liens. Twelve servicers, including the five largest, have now signed contracts and begun modifications under the program. Between loans covered by
these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than 75 percent of all loans in the country are now covered by the Making Home Affordable Program. The
implementation of these proposals, or other proposals limiting our rights as a creditor, could increase our credit losses or increase our expense in pursuing our remedies as a creditor.



We are subject to certain industry-specific economic factors. For example, a significant and increasing portion of our total loan
portfolio is related to residential real estate,
especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could negatively impact
our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in California could have an adverse effect on our operations
and the quality of our real estate loan portfolio. Although we do not engage in subprime or negative amortization lending, effects of recent subprime market challenges, combined with the ongoing
deterioration in the U.S. and California real estate markets, could result in further price reductions in single family home prices and a lack of liquidity in refinancing markets. These factors could
adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. These
factors could also negatively affect the economy in general and thereby our overall loan portfolio.

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



The State of California currently faces economic and fiscal challenges, the long-term impact of which on the State's
economy cannot be predicted with any certainty. A substantial majority of our assets, deposits and fee income are generated in California. As a result, poor economic conditions in California may cause
us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time,
including significant deterioration in the residential real estate sector, especially the subprime housing markets, and the California state government's budgetary and fiscal difficulties. Under the
budget plan approved by the California Legislature and signed by Governor Arnold Schwarzenegger on February 20, 2009, the State of California will reduce services, increase sales and income
taxes and other fees and take other expense reduction measures. In addition, California will fund a portion of the deficit through additional borrowings, which may include revenue anticipation
warrants, a relatively high-cost form of financing. However, California voters did not approve ballot

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measures
required to enact the budget during a special election held on May 19, 2009. The rejection of all of the revenue-related ballot measures resulted in budget deficits which were
addressed, at least temporarily, in a California State Budget adopted on July 28, 2009.

On
June 25, 2009, the State Controller's Office announced that it would begin to issue IOUs in the form of registered warrants in July as the budget impasse has left the State
with insufficient cash. The registered warrants, with an annual interest rate for the IOUs at 3.75% for banks and other financial institutions willing to accept the warrants, are redeemable on
October 2, 2009, subject to the availability of funds. Union Bank announced that it would accept the registered warrants from customers until no later than July 10, 2009. On
July 24, 2009, the California legislature passed a new budget that Governor Schwarzenegger signed into law on July 28, 2009. This budget provides for significant spending cuts to
services, including education and healthcare. The financial and economic consequences of this situation cannot be predicted with any certainty at this time. On August 21, 2009, Union Bank
resumed accepting the registered warrants from customers after the legislature and the Governor reached an agreement on a plan to close the state budget deficit. After the agreement was reached the
State Controller's Office requested that the issuance of registered warrants end and that redemption would begin on September 4, 2009, a month earlier than originally planned. If the California
state government's budgetary and fiscal difficulties continue or economic conditions in California decline further, we expect that our level of problem assets could increase and our prospects for
growth could be impaired.

Item 6.   Exhibits

No.

Description31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)


(1)Filed
herewith.


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SIGNATURES

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

UNIONBANCAL CORPORATION (Registrant)Date:    November 12, 2009

By:

/s/ MASAAKI TANAKA Masaaki Tanaka President and Chief Executive Officer
(Principal Executive Officer)Date:    November 12, 2009

By:

/s/ DAVID I. MATSON David I. Matson Vice Chairman and Chief Financial Officer
(Principal Financial Officer)Date:    November 12, 2009

By:

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


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EXHIBIT INDEX

No.

Description31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)


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