10-Q 1 a2180636z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For 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 ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer ý Accelerated filer o Non-accelerated filer 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 ý

Number of shares of Common Stock outstanding at October 31, 2007: 138,537,819

UnionBanCal Corporation and Subsidiaries

TABLE OF CONTENTS

			Page Number
PART I
Financial Information
	Condensed Consolidated Financial Highlights		5
	ITEM 1. FINANCIAL STATEMENTS:
		Condensed Consolidated Statements of Income	7
		Condensed Consolidated Balance Sheets	8
		Condensed Consolidated Statements of Changes in Stockholders' Equity	9
		Condensed Consolidated Statements of Cash Flows	10
		Notes to Condensed Consolidated Financial Statements	11
	ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
		Introduction	31
		Executive Overview	31
		Discontinued Operations	32
		Critical Accounting Estimates	33
		Financial Performance	34
		Net Interest Income	37
		Noninterest Income and Noninterest Expense	40
		Income Tax Expense	42
		Loans	43
		Cross-Border Outstandings	45
		Provision for Credit Losses	45
		Allowances for Credit Losses	45
		Nonperforming Assets	49
		Loans 90 Days or More Past Due and Still Accruing	50
		Quantitative and Qualitative Disclosures About Market Risk	50
		Liquidity Risk	53
		Regulatory Capital	54
		Business Segments	55
		Regulatory Matters	63
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		64
	ITEM 4. CONTROLS AND PROCEDURES		64
PART II
Other Information
	ITEM 1. LEGAL PROCEEDINGS		65
	ITEM 1A. RISK FACTORS		65
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		73
	ITEM 6. EXHIBITS		74
	Signatures		75

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 from our forecasts and expectations. For a discussion of risk factors relating to the Company's business, please refer to Item 1A "Risk Factors" of Part II of this Quarterly Report on Form 10-Q (this Form 10-Q).

This document includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the 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, conference calls with analysts and stockholders 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:

•: Our business objectives, strategies and initiatives, the growth of our business and our competitive position
•: Our assessment of significant factors and developments that have affected and may affect our results
•: Pending and recent legal and regulatory actions, and future legislative and regulatory developments, including the effects of changes to the Federal Deposit Insurance Corporation's deposit insurance assessment policies, implementation of the SEC and the Federal Reserve Board's Regulation R and the U.S. implementation of the Basel II Capital Accord
•: Regulatory controls and processes and supervisory, enforcement or other governmental actions currently in effect against us regarding Bank Secrecy Act and anti-money laundering matters, and their impact on our business
•: The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, or adverse facts and developments related thereto
•: Our ability to meet regulatory requirements, including the supervisory, enforcement and governmental actions currently in effect with respect to us
•: Credit quality and provision for credit losses, including the expected need to continue to provide for credit losses due to anticipated loan growth and credit quality trends
•: Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance
•: Net interest income
•: The impact of changes in interest rates on our net interest margin
•: Loan growth rates, including growth in our residential mortgage loan portfolio
•: Fluctuations in our loan recoveries

•: Deposit pricing pressures and our deposit base, including trends in customers transferring funds from noninterest bearing deposits to interest bearing deposits or other investment alternatives and our belief that pricing has stabilized
•: Our relatively high proportion of average noninterest bearing deposits to total deposits compared to our peers
•: Our ability and intent to hold various securities
•: The formation of financial subsidiaries
•: Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook of any particular region of the U.S. including, in particular, California, Oregon and Washington
•: The composition and market sensitivity of our securities portfolios, our trading and hedging strategies and our management of the sensitivity of our balance sheet
•: Tax rates and taxes, including the possible effect of changes in Mitsubishi UFJ Financial Group's taxable profits on our California State tax obligations
•: Critical accounting policies and estimates and the impact of recent accounting pronouncements
•: Our insurance coverage
•: Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network or otherwise restructure, reorganize or change our business mix and their impact on our business
•: The relationship between our business and that of The Bank of Tokyo-Mitsubishi UFJ, Ltd., and Mitsubishi UFJ Financial Group, Inc. and actions that may or may not be taken by The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group, Inc.
•: Our strategies and expectations regarding capital levels
•: The impact of strategic investments or other acquisitions on our business and benefits of marketing alliances

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 stock price, 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 in 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.

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

			As of and for the Three Months Ended
(Dollars in thousands, except per share data)			September 30, 2006			September 30, 2007			Percent Change
Results of operations:
	Net interest income⁽¹⁾		$	460,596		$	428,834		(6.90	)%
	Provision for loan losses			—			16,000		nm
	Noninterest income			217,255			235,732		8.50
	Noninterest expense			417,021			408,420		(2.06	)

	Income before income taxes⁽¹⁾			260,830			240,146		(7.93	)
	Taxable-equivalent adjustment			1,872			2,389		27.62
	Income tax expense			87,048			87,662		0.71

	Income from continuing operations			171,910			150,095		(12.69	)
	Loss from discontinued operations, net of taxes			(1,204	)		(22,636	)	nm

	Net income		$	170,706		$	127,459		(25.33	)

Per common share:
	Basic earnings:
		From continuing operations	$	1.22		$	1.09		(10.66	)%
		Net income		1.21			0.93		(23.14	)
	Diluted earnings:
		From continuing operations		1.21			1.08		(10.74	)
		Net income		1.20			0.92		(23.33	)
	Dividends⁽²⁾			0.47			0.52		10.64
	Book value (end of period)			33.17			33.71		1.63
	Common shares outstanding (end of period)⁽³⁾			140,326,737			138,523,666		(1.28	)
	Weighted average common shares outstanding—basic⁽³⁾			140,941,823			137,667,976		(2.32	)
	Weighted average common shares outstanding—diluted⁽³⁾			142,566,089			139,067,952		(2.45	)
Balance sheet (end of period):
	Total assets⁽⁴⁾		$	52,013,256		$	54,343,045		4.48	%
	Total loans			35,673,469			39,745,341		11.41
	Nonperforming assets			47,803			52,562		9.96
	Total deposits			41,820,206			42,346,091		1.26
	Medium and long-term debt			1,517,977			1,871,726		23.30
	Stockholders' equity			4,654,789			4,669,454		0.32
Balance sheet (period average):
	Total assets		$	50,777,419		$	53,495,685		5.35	%
	Total loans			35,965,823			39,484,785		9.78
	Earning assets			45,854,645			48,901,507		6.64
	Total deposits			40,582,139			42,066,338		3.66
	Stockholders' equity			4,578,635			4,664,229		1.87
Financial ratios⁽⁵⁾:
	Return on average assets⁽⁶⁾:
		From continuing operations		1.34	%		1.11	%
		Net income		1.33			0.95
	Return on average stockholders' equity⁽⁶⁾:
		From continuing operations		14.90			12.77
		Net income		14.79			10.84
	Efficiency ratio⁽⁷⁾			61.55			60.85
	Net interest margin⁽¹⁾			4.00			3.50
	Dividend payout ratio			38.52			47.71
	Tangible common equity ratio			8.09			7.79
	Tier 1 risk-based capital ratio⁽⁴⁾			8.68			8.40
	Total risk-based capital ratio⁽⁴⁾			11.74			11.28
	Leverage ratio⁽⁴⁾			8.47			8.39
	Allowance for loan losses to:
		Total loans		0.92			0.88
		Nonaccrual loans		683.96			683.96
	Allowances for credit losses to⁽⁸⁾:
		Total loans		1.14			1.10
		Nonaccrual loans		850.01			852.52
	Net loans charged off to average total loans⁽⁶⁾			0.02			0.02
	Nonperforming assets to total loans and foreclosed assets			0.13			0.13
	Nonperforming assets to total assets⁽⁴⁾			0.09			0.10

⁽¹⁾: Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
⁽²⁾: Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date.
⁽³⁾: Common shares outstanding reflect common shares issued less treasury shares. Weighted average common shares outstanding—basic excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares.
⁽⁴⁾: End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.
⁽⁵⁾: Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.
⁽⁶⁾: Annualized.
⁽⁷⁾: The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the (reversal of) provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income and is calculated for continuing operations only.
⁽⁸⁾: The allowances for credit losses ratios include the allowances for loan losses and losses on off-balance sheet commitments. These ratios relate to continuing operations only.

nm = not meaningful

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, 2006			September 30, 2007			Percent Change
Results of operations:
	Net interest income⁽¹⁾		$	1,395,937		$	1,290,585		(7.55	)%
	(Reversal of) provision for loan losses			(8,000	)		25,000		nm
	Noninterest income			654,393			688,135		5.16
	Noninterest expense			1,244,595			1,242,376		(0.18	)

	Income before income taxes⁽¹⁾			813,735			711,344		(12.58	)
	Taxable-equivalent adjustment			4,478			6,755		50.85
	Income tax expense			273,255			239,529		(12.34	)

	Income from continuing operations			536,002			465,060		(13.24	)
	Loss from discontinued operations, net of taxes			(9,440	)		(22,636	)	nm

	Net income		$	526,562			442,424		(15.98	)

Per common share:
	Basic earnings:
		From continuing operations	$	3.76		$	3.38		(10.11	)%
		Net income		3.70			3.21		(13.24	)
	Diluted earnings:
		From continuing operations		3.71			3.34		(9.97	)
		Net income		3.65			3.18		(12.88	)
	Dividends⁽²⁾			1.35			1.51		11.85
	Book value (end of period)			33.17			33.71		1.63
	Common shares outstanding (end of period)⁽³⁾			140,326,737			138,523,666		(1.28	)
	Weighted average common shares outstanding—basic⁽³⁾			142,371,445			137,694,682		(3.28	)
	Weighted average common shares outstanding—diluted⁽³⁾			144,449,370			139,291,920		(3.57	)
Balance sheet (end of period):
	Total assets⁽⁴⁾		$	52,013,256		$	54,343,045		4.48	%
	Total loans			35,673,469			39,745,341		11.41
	Nonperforming assets			47,803			52,562		9.96
	Total deposits			41,820,206			42,346,091		1.26
	Medium and long-term debt			1,517,977			1,871,726		23.30
	Stockholders' equity			4,654,789			4,669,454		0.32
Balance sheet (period average):
	Total assets		$	49,426,668		$	53,196,591		7.63	%
	Total loans			35,100,506			38,931,283		10.91
	Earning assets			44,481,217			48,568,569		9.19
	Total deposits			39,716,972			42,079,944		5.95
	Stockholders' equity			4,552,410			4,588,063		0.78
Financial ratios⁽⁵⁾:
	Return on average assets⁽⁶⁾:
		From continuing operations		1.45	%		1.17	%
		Net income		1.42			1.11
	Return on average stockholders' equity⁽⁶⁾:
		From continuing operations		15.74			13.55
		Net income		15.46			12.89
	Efficiency ratio⁽⁷⁾			61.79			62.53
	Net interest margin⁽¹⁾			4.19			3.55
	Dividend payout ratio			35.90			44.67
	Tangible common equity ratio			8.09			7.79
	Tier 1 risk-based capital ratio⁽⁴⁾			8.68			8.40
	Total risk-based capital ratio⁽⁴⁾			11.74			11.28
	Leverage ratio⁽⁴⁾			8.47			8.39
	Allowance for loan losses to:
		Total loans		0.92			0.88
		Nonaccrual loans		683.96			683.96
	Allowances for credit losses to⁽⁸⁾:
		Total loans		1.14			1.10
		Nonaccrual loans		850.01			852.52
	Net loans charged off to average total loans⁽⁶⁾			0.06			0.02
	Nonperforming assets to total loans and foreclosed assets			0.13			0.13
	Nonperforming assets to total assets⁽⁴⁾			0.09			0.10

⁽¹⁾: Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
⁽²⁾: Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date.
⁽³⁾: Common shares outstanding reflect common shares issued less treasury shares. Weighted average common shares outstanding—basic excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares.
⁽⁴⁾: End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.
⁽⁵⁾: Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.
⁽⁶⁾: Annualized.
⁽⁷⁾: The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the (reversal of) provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income and is calculated for continuing operations only.
⁽⁸⁾: The allowances for credit losses ratios include the allowances for loan losses and losses on off-balance sheet commitments. These ratios relate to continuing operations only.

nm = not meaningful

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,
(Dollars in thousands, except per share data)			For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands, except per share data)			2006			2007			2006			2007
Interest Income
	Loans		$	574,543		$	638,779		$	1,634,122		$	1,857,269
	Securities			108,166			112,668			308,574			330,077
	Interest bearing deposits in banks			411			709			1,570			3,113
	Federal funds sold and securities purchased under resale agreements			12,024			4,683			20,594			23,644
	Trading account assets			1,659			1,657			4,645			4,661

		Total interest income		696,803			758,496			1,969,505			2,218,764

Interest Expense
	Deposits			182,298			259,497			441,284			727,929
	Federal funds purchased and securities sold under repurchase agreements			4,891			14,284			22,148			37,928
	Commercial paper			20,835			19,753			52,420			59,446
	Medium and long-term debt			21,974			26,957			49,246			75,625
	Trust notes			239			239			715			715
	Other borrowed funds			7,842			11,321			12,233			33,291

		Total interest expense		238,079			332,051			578,046			934,934

Net Interest Income				458,724			426,445			1,391,459			1,283,830
	(Reversal of) provision for loan losses			—			16,000			(8,000	)		25,000

		Net interest income after (reversal of) provision for loan losses		458,724			410,445			1,399,459			1,258,830

Noninterest Income
	Service charges on deposit accounts			79,083			76,210			242,555			228,373
	Trust and investment management fees			47,555			51,262			146,050			151,407
	Insurance commissions			17,301			15,988			54,571			52,739
	Trading account activities			14,311			21,795			41,495			50,473
	Brokerage commissions and fees			8,531			10,476			26,656			29,669
	Merchant banking fees			11,655			10,031			28,280			27,917
	Card processing fees, net			7,241			7,785			21,144			22,736
	Securities gains, net			43			171			1,822			1,621
	Other			31,535			42,014			91,820			123,200

		Total noninterest income		217,255			235,732			654,393			688,135

Noninterest Expense
	Salaries and employee benefits			244,613			236,575			745,745			746,520
	Net occupancy			35,753			39,017			103,109			109,398
	Outside services			31,890			21,394			91,203			60,081
	Equipment			17,387			15,964			52,155			48,885
	Professional services			12,169			18,162			43,754			47,219
	Software			15,334			15,325			47,001			44,657
	Communications			9,942			9,965			30,555			28,611
	Foreclosed asset expense (income)			(183	)		37			(15,332	)		55
	(Reversal of) provision for losses on off-balance sheet commitments			—			4,000			(7,000	)		5,000
	Other			50,116			47,981			153,405			151,950

		Total noninterest expense		417,021			408,420			1,244,595			1,242,376

	Income from continuing operations before income taxes			258,958			237,757			809,257			704,589
	Income tax expense			87,048			87,662			273,255			239,529

Income from Continuing Operations				171,910			150,095			536,002			465,060

	Loss from discontinued operations before income taxes			(2,061	)		(23,297	)		(15,233	)		(23,297	)
	Income tax benefit			(857	)		(661	)		(5,793	)		(661	)

Loss from Discontinued Operations				(1,204	)		(22,636	)		(9,440	)		(22,636	)

Net Income			$	170,706		$	127,459		$	526,562		$	442,424

Income from continuing operations per common share—basic			$	1.22		$	1.09		$	3.76		$	3.38

Net Income per common share—basic			$	1.21		$	0.93		$	3.70		$	3.21

Income from continuing operations per common share—diluted			$	1.21		$	1.08		$	3.71		$	3.34

Net Income per common share—diluted			$	1.20		$	0.92		$	3.65		$	3.18

Weighted average common shares outstanding—basic				140,942			137,668			142,371			137,695

Weighted average common shares outstanding—diluted				142,566			139,068			144,449			139,292

See accompanying notes to condensed consolidated financial statements.

UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(Dollars in thousands)			(Unaudited) September 30, 2006			December 31, 2006			(Unaudited) September 30, 2007
Assets
Cash and due from banks			$	2,168,245		$	2,213,782		$	1,715,745
Interest bearing deposits in banks				26,700			824,456			151,000
Federal funds sold and securities purchased under resale agreements				1,827,000			943,200			381,604

		Total cash and cash equivalents		4,021,945			3,981,438			2,248,349
Trading account assets				360,267			376,321			507,961
Securities available for sale:
	Securities pledged as collateral			58,877			89,184			77,732
	Held in portfolio			8,582,667			8,667,038			8,427,777
Loans (net of allowance for loan losses: September 30, 2006, $326,955; December 31, 2006, $331,077; September 30, 2007, $350,491)				35,346,514			36,340,646			39,394,850
Due from customers on acceptances				25,851			17,834			18,648
Premises and equipment, net				499,702			495,302			483,374
Intangible assets				32,331			28,930			22,201
Goodwill				453,489			453,489			453,489
Other assets				2,594,084			2,148,954			2,708,664
Assets of discontinued operations to be disposed or sold				37,529			20,440			—

		Total assets	$	52,013,256		$	52,619,576		$	54,343,045

Liabilities
	Noninterest bearing		$	17,446,321		$	17,113,890		$	13,675,887
	Interest bearing			24,373,885			24,855,478			28,670,204

		Total deposits		41,820,206			41,969,368			42,346,091
Federal funds purchased and securities sold under repurchase agreements				265,596			1,083,927			1,823,872
Commercial paper				1,859,747			1,661,163			1,706,135
Other borrowed funds				308,164			432,401			298,729
Trading account liabilities				223,332			258,136			251,051
Acceptances outstanding				25,851			17,834			18,648
Other liabilities				1,319,303			1,287,029			1,342,793
Medium and long-term debt				1,517,977			1,318,847			1,871,726
Junior subordinated debt payable to subsidiary grantor trust				14,998			14,885			14,546
Liabilities of discontinued operations to be extinguished or assumed				3,293			4,585			—

		Total liabilities		47,358,467			48,048,175			49,673,591

Commitments, contingencies and guarantees—See Note 9
Stockholders' Equity
Preferred stock:
	Authorized 5,000,000 shares; no shares issued or outstanding as of September 30, 2006, December 31, 2006 and September 30, 2007			—			—			—
Common stock, par value $1 per share:
	Authorized 300,000,000 shares; issued 155,854,756 shares as of September 30, 2006, 156,460,057 shares as of December 31, 2006 and 157,272,167 shares as of September 30, 2007			155,855			156,460			157,272
Additional paid-in capital				1,064,993			1,083,649			1,144,971
Treasury stock—15,528,019 shares as of September 30, 2006, 17,352,803 shares as of December 31, 2006 and 18,748,501 shares as of September 30, 2007				(956,545	)		(1,064,606	)		(1,152,157	)
Retained earnings				4,494,698			4,655,272			4,818,477
Accumulated other comprehensive loss				(104,212	)		(259,374	)		(299,109	)

		Total stockholders' equity		4,654,789			4,571,401			4,669,454

		Total liabilities and stockholders' equity	$	52,013,256		$	52,619,576		$	54,343,045

See accompanying notes to condensed consolidated financial statements.

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

(In thousands, except shares)			Number of shares	Common stock		Additional paid-in capital			Treasury stock			Retained earnings			Accumulated other comprehensive loss			Total stock- holders' equity
BALANCE—DECEMBER 31, 2005			154,469,215	$	154,469	$	994,956		$	(612,732	)	$	4,141,400		$	(118,393	)	$	4,559,700

Comprehensive income
	Net income—For the nine months ended September 30, 2006												526,562						526,562
	Other comprehensive loss, net of tax:
		Net change in unrealized losses on cash flow hedges														5,295			5,295
		Net change in unrealized losses on securities available for sale														8,824			8,824
		Foreign currency translation adjustment														62			62

Total comprehensive income																			540,743
Reclassifications due to adoption of SFAS No. 123(R)⁽¹⁾							(19,035	)					19,035						—
Stock options exercised			1,192,874		1,193		46,783												47,976
Restricted stock granted, net of forfeitures			192,667		193		(193	)											—
Excess tax benefit—stock-based compensation							11,823												11,823
Compensation expense—stock options							17,341												17,341
Compensation expense—restricted stock							10,728												10,728
Compensation expense—restricted stock units and performance share units							2,590												2,590
Common stock repurchased⁽²⁾										(343,813	)								(343,813	)
Dividends declared on common stock, $1.35 per share⁽³⁾													(192,299	)					(192,299	)

Net change					1,386		70,037			(343,813	)		353,298			14,181			95,089

BALANCE—SEPTEMBER 30, 2006			155,854,756	$	155,855	$	1,064,993		$	(956,545	)	$	4,494,698		$	(104,212	)	$	4,654,789

BALANCE—DECEMBER 31, 2006			156,460,057	$	156,460	$	1,083,649		$	(1,064,606	)	$	4,655,272		$	(259,374	)	$	4,571,401

Comprehensive income
	Net income—For the nine months ended September 30, 2007												442,424						442,424
	Other comprehensive loss, net of tax:
		Net change in unrealized losses on cash flow hedges														24,289			24,289
		Net change in unrealized losses on securities available for sale														(74,805	)		(74,805	)
		Foreign currency translation adjustment														602			602
		Pension and other benefits adjustment														10,179			10,179

Total comprehensive income																			402,689
FIN No. 48 adjustment⁽⁴⁾													(49,300	)					(49,300	)
FSP FAS 13-2 adjustment⁽⁵⁾													(20,803	)					(20,803	)
Stock options exercised			785,072		785		31,936												32,721
Restricted stock granted, net of forfeitures			20,062		20		(20	)											—
Restricted stock and performance share units vested			6,976		7		(7	)											—
Excess tax benefit—stock-based compensation							4,920												4,920
Compensation expense—stock options							10,366												10,366
Compensation expense—restricted stock							10,671												10,671
Compensation expense—restricted stock units, performance share units and other share-based compensation							3,456												3,456
Common stock repurchased⁽²⁾										(87,551	)								(87,551	)
Dividends declared on common stock, $1.51 per share⁽³⁾													(209,116	)					(209,116	)

Net change					812		61,322			(87,551	)		163,205			(39,735	)		98,053

BALANCE—SEPTEMBER 30, 2007			157,272,167	$	157,272	$	1,144,971		$	(1,152,157	)	$	4,818,477		$	(299,109	)	$	4,669,454

⁽¹⁾: Reclassification reflects a reduction in additional paid-in capital and a corresponding credit to retained earnings for unrecognized compensation expense on nonvested restricted stock as of January 1, 2006 upon adoption of SFAS No. 123(R) "Share-Based Payment."
⁽²⁾: Common stock repurchased includes commission costs.
⁽³⁾: Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.
⁽⁴⁾: See Note 2 of these condensed consolidated financial statements for a description of the adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109" (FIN No. 48).
⁽⁵⁾: See Note 2 of these condensed consolidated financial statements for a description of the adoption of FASB Staff Position (FSP) FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction."

See accompanying notes to condensed consolidated financial statements.

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

				For the Nine Months Ended September 30,
(Dollars in thousands)				For the Nine Months Ended September 30,
(Dollars in thousands)				2006			2007
Cash Flows from Operating Activities:
	Net income			$	526,562		$	442,424
		Loss from discontinued operations, net of taxes			(9,440	)		(22,636	)

		Income from continuing operations, net of taxes			536,002			465,060
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		(Reversal of) provision for loan losses			(8,000	)		25,000
		(Reversal of) provision for losses on off-balance sheet commitments			(7,000	)		5,000
		Depreciation, amortization and accretion			104,989			90,578
		Stock-based compensation—stock options and other share-based compensation			30,659			24,493
		Provision for deferred income taxes			30,990			23,359
		Gains on sales of securities available for sale, net			(1,822	)		(1,621	)
		Net increase in trading account assets			(47,612	)		(131,640	)
		Net increase in fees and other receivables			(42,024	)		(161,028	)
		Net increase in other liabilities			55,727			132,667
		Net increase in other assets			(422,408	)		(481,594	)
		Loans originated for resale			(405,543	)		(615,139	)
		Net proceeds from sales of loans originated for resale			265,702			383,716
		Excess tax benefit—stock-based compensation			(11,823	)		(4,920	)
		Other, net			(21,820	)		54,603
		Discontinued operations, net			188,372			(8,118	)

			Total adjustments		(291,613	)		(664,644	)

	Net cash provided by (used in) operating activities				244,389			(199,584	)

Cash Flows from Investing Activities:
	Proceeds from sales of securities available for sale				79,454			332,450
	Proceeds from matured and called securities available for sale				1,171,339			1,455,545
	Purchases of securities available for sale				(1,713,659	)		(1,656,178	)
	Net increase in loans				(2,435,574	)		(2,927,817	)
	Other, net				(46,542	)		(65,170	)
	Discontinued operations, net				725,358			1,337

	Net cash used in investing activities				(2,219,624	)		(2,859,833	)

Cash Flows from Financing Activities:
	Net increase in deposits				1,737,967			376,723
	Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements				(385,933	)		739,945
	Net increase (decrease) in commercial paper and other borrowed funds				1,354,398			(88,700	)
	Proceeds from issuance of medium-term debt				693,742			749,250
	Payment of medium-term debt				—			(200,000	)
	Common stock repurchased				(343,813	)		(87,551	)
	Payments of cash dividends				(185,206	)		(202,962	)
	Stock-based compensation exercised				59,799			37,641
	Other, net				3,562			1,352
	Discontinued operations, net				(908,671	)		—

	Net cash provided by financing activities				2,025,845			1,325,698

Net increase (decrease) in cash and cash equivalents					50,610			(1,733,719	)
Cash and cash equivalents at beginning of period					3,969,876			3,981,438
Effect of exchange rate changes on cash and cash equivalents					1,459			630

Cash and cash equivalents at end of period				$	4,021,945		$	2,248,349

Cash Paid During the Period For:
	Interest			$	507,257		$	978,118
	Income taxes				276,269			223,798
Supplemental Schedule of Noncash Investing and Financing Activities:
	Loans transferred to foreclosed assets (OREO)			$	1,324		$	1,571

See accompanying notes to condensed consolidated financial statements.

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, 2007 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, 2006 (2006 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 from those estimates.

UnionBanCal Corporation is a commercial bank holding company whose major subsidiary, Union Bank of California, 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 and Washington, as well as nationally and internationally.

Under a previously announced stock repurchase program, the Company was authorized to repurchase $562.1 million of the Company's common stock as of September 30, 2007. The Company repurchased $0.2 million of common stock in the third quarter of 2007, compared to $143.0 million in the third quarter of 2006. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., owned approximately 65 percent of the Company's outstanding common stock at September 30, 2007.

Certain amounts for prior periods have been reclassified to conform to current financial statement presentation.

Note 2—Recently Issued Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued FIN No. 48 "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" (FIN No. 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." The Interpretation establishes a "more-likely-than-not" recognition threshold that must be met before a tax benefit can be recognized in the financial statements. For tax positions that meet the more-likely-than-not threshold, an enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. On January 1, 2007, the Company adopted FIN No. 48 and recognized a $49.3 million reduction to the beginning balance of retained earnings.

The total amount of unrecognized tax benefits as of January 1, 2007 was $137.4 million. Included in total unrecognized tax benefits was $83.5 million that, if recognized, would result in adjustments to other income tax accounts, primarily deferred taxes. The amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $53.9 million.

Interest and penalties pertaining to unrecognized tax benefits are recognized in income tax expense. The Company had accrued $9.0 million of interest expense and no penalties related to unrecognized tax benefits as of the date of adoption. The Company does not accrue interest income on income tax refunds until they are realized.

During the third quarter of 2007, the Company settled audits of prior year tax returns with the State of California. As a result, the total amount of unrecognized tax benefits decreased by $9.3 million, with a net impact to income tax expense (including interest) of $7.6 million.

The Company does not expect any material increase or decrease to unrecognized tax benefits over the next 12 months. However, we are subject to ongoing federal and state tax examinations, as well as ongoing litigation concerning our lease-in/lease-out (LILO) transactions. Therefore, our estimate of unrecognized tax benefits is subject to change based on new developments and information.

The Company's years open to examination by major jurisdictions are 2003 and forward.

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

In July 2006, the FASB issued Staff Position (FSP) FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction." The FSP requires that if, during the lease term, the projected timing of the income tax cash flows generated by a leveraged lease is revised, the rate of return and the allocation of income must be recalculated from the inception of the lease. At adoption, the change in the net investment balance resulting from the calculation would be recognized as an adjustment to the beginning balance of retained earnings. Following adoption, a change in the net investment balance resulting from a recalculation would be recognized as a gain or a loss in the period in which the assumption is changed. The FSP is effective for all leveraged leases on January 1, 2007. The Company invests in LILO transactions that have been challenged by the Internal Revenue Service (IRS). The Company has paid the IRS the income tax associated with the LILO transactions. However, the Company is defending the initial filing position as to the timing of the tax benefits associated with these transactions. The Company adopted FSP FAS 13-2 on January 1, 2007 and recalculated these leases to reflect the potential change in the timing of income tax cash flows in accordance with this FSP. At adoption, the Company's beginning balance of retained earnings was reduced by $20.8 million. The reduction to beginning retained earnings will be recognized in interest income over the remaining term of the affected leases.

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115." The Statement permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis, with changes in fair value recognized in earnings each reporting period. An entity can elect the fair value option for existing assets and liabilities at the date of initial adoption and when

first recognizing eligible instruments. The Statement is effective January 1, 2008. Management is currently evaluating the potential impact of this Statement on the Company's financial position and results of operations.

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 to the Consolidated Financial Statements in the Company's 2006 Form 10-K.

Note 3—Discontinued Operations

During the third quarter of 2005, the Bank signed a definitive agreement to sell its international correspondent banking operations (previously reported as the International Banking Group for segment reporting) to Wachovia Bank, N.A., effective October 6, 2005. The Company accounted for this transaction as a discontinued operation and restated its prior period financial statements. The assets of the discontinued operations were reclassified as "held for sale" and accounted for at the lower of cost or fair value less the costs to sell.

In the third quarter of 2007, the Bank entered into a Deferred Prosecution Agreement (DPA) with the United States Department of Justice (DOJ) concerning past violations of the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML) that occurred in its now discontinued international banking business and paid $21.6 million to the DOJ. For additional information, refer to Note 9 of these Notes to Condensed Consolidated Financial Statements.

Substantially all assets and liabilities of the discontinued operations were liquidated as of March 31, 2007. At September 30, 2006 and December 31, 2006, the assets and liabilities identified as discontinued operations were comprised of the following:

(Dollars in thousands)	September 30, 2006		December 31, 2006
Assets
Cash and due from banks	$	32,456	$	18,422
Loans		4,338		1,337
Due from customers on acceptances		376		377
Other assets		359		304

Assets of discontinued operations to be disposed or sold	$	37,529	$	20,440

Liabilities
Other liabilities	$	3,293	$	4,585

Liabilities of discontinued operations to be extinguished or assumed	$	3,293	$	4,585

The components of loss from discontinued operations for the three and nine months ended September 30, 2006 and 2007 were:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2006			2007			2006			2007
Net interest (expense) income	$	(501	)	$	—		$	1,138		$	—
Noninterest income		268			—			13,184			—
Noninterest expense		1,828			23,297			29,555			23,297

Loss from discontinued operations before income taxes		(2,061	)		(23,297	)		(15,233	)		(23,297	)
Income tax benefit		(857	)		(661	)		(5,793	)		(661	)

Loss from discontinued operations	$	(1,204	)	$	(22,636	)	$	(9,440	)	$	(22,636	)

For the three and nine months ended September 30, 2006, net interest income included the allocation of interest expense from continuing operations to discontinued operations of approximately $0.5 million and $1.5 million, respectively. Interest expense allocated to discontinued operations is calculated based on its average net assets and the corresponding cost of funds rate equivalent to the average federal funds purchased rate for the period. Noninterest income for the nine months ended September 30, 2006 included a $4.0 million payment from Wachovia Bank, N.A., reflecting the final settlement upon the conversion of the international correspondent banking customer base to Wachovia Bank, N.A. Included in noninterest expense was compliance related expenses of $1.4 million and $8.5 million, for the three and nine months ended September 30, 2006, respectively. Additionally, the Company recorded $1.4 million of expenses related to the termination of lease contracts in the second quarter 2006.

Noninterest expense for the three and nine months ended September 30, 2007 included the $21.6 million paid to the DOJ and related legal and other outside services costs of $1.7 million. The income tax benefit of $0.7 million for the three and nine months ended September 30, 2007 reflects the nondeductibility of the $21.6 million DOJ payment.

Note 4—Earnings Per Share

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

The following table presents a reconciliation of basic and diluted EPS for the three and nine months ended September 30, 2006 and 2007.

		Three Months Ended September 30,												Nine Months Ended September 30,
		2006						2007						2006						2007
(Amounts in thousands, except per share data)		2006						2007						2006						2007
(Amounts in thousands, except per share data)		Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Income from continuing operations		$	171,910		$	171,910		$	150,095		$	150,095		$	536,002		$	536,002		$	465,060		$	465,060
Loss from discontinued operations			(1,204	)		(1,204	)		(22,636	)		(22,636	)		(9,440	)		(9,440	)		(22,636	)		(22,636	)

Net income		$	170,706		$	170,706		$	127,459		$	127,459		$	526,562		$	526,562		$	442,424		$	442,424

Weighted average common shares outstanding			140,942			140,942			137,668			137,668			142,371			142,371			137,695			137,695
Additional shares due to:
	Assumed conversion of dilutive share-based compensation		—			1,624			—			1,400			—			2,078			—			1,597

Adjusted weighted average common shares outstanding			140,942			142,566			137,668			139,068			142,371			144,449			137,695			139,292

Income from continuing operations per share		$	1.22		$	1.21		$	1.09		$	1.08		$	3.76		$	3.71		$	3.38		$	3.34
Loss from discontinued operations per share			(0.01	)		(0.01	)		(0.16	)		(0.16	)		(0.06	)		(0.06	)		(0.17	)		(0.16	)

Net income per share		$	1.21		$	1.20		$	0.93		$	0.92		$	3.70		$	3.65		$	3.21		$	3.18

The following table provides the number of options and the corresponding exercise prices for those options, which were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2006 and 2007 because they were anti-dilutive.

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2006	2007	2006	2007
Options outstanding	1,230,865	2,922,892	1,126,950	1,801,862
Exercise price of options	$61.56 - $71.23	$59.74 - $71.23	$67.39 - $71.23	$61.56 - $71.23

Note 5—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 Tax
For the Nine Months Ended September 30, 2006:
Cash flow hedge activities:
	Unrealized net losses on hedges arising during the period		$	(22,926	)	$	8,769		$	(14,157	)
	Reclassification adjustment for net losses on hedges included in net income			31,501			(12,049	)		19,452

Net change in unrealized losses on hedges				8,575			(3,280	)		5,295

Securities available for sale:
	Unrealized holding gains arising during the period on securities available for sale			16,112			(6,163	)		9,949
	Reclassification adjustment for net gains on securities available for sale included in net income			(1,822	)		697			(1,125	)

Net change in unrealized losses on securities available for sale				14,290			(5,466	)		8,824

Foreign currency translation adjustment				101			(39	)		62

Net change in accumulated other comprehensive loss			$	22,966		$	(8,785	)	$	14,181

For the Nine Months Ended September 30, 2007:
Cash flow hedge activities:
	Unrealized net gains on hedges arising during the period		$	13,940		$	(5,332	)	$	8,608
	Reclassification adjustment for net losses on hedges included in net income			25,395			(9,714	)		15,681

Net change in unrealized losses on hedges				39,335			(15,046	)		24,289

Securities available for sale:
	Unrealized holding losses arising during the period on securities available for sale			(119,521	)		45,717			(73,804	)
	Reclassification adjustment for net gains on securities available for sale included in net income			(1,621	)		620			(1,001	)

Net change in unrealized losses on securities available for sale				(121,142	)		46,337			(74,805	)

Foreign currency translation adjustment				975			(373	)		602

Reclassification adjustment for pension and other benefits included in net income:
		Amortization of prior service costs		120			(46	)		74
		Amortization of transition amount		1,526			(583	)		943
		Recognized net actuarial loss		14,837			(5,675	)		9,162

Net change in pension and other benefits				16,483			(6,304	)		10,179

Net change in accumulated other comprehensive loss			$	(64,349	)	$	24,614		$	(39,735	)

The following table presents accumulated other comprehensive loss balances.

(Dollars in thousands)	Net Unrealized Losses on Cash Flow Hedges			Net Unrealized Losses on Securities Available For Sale			Foreign Currency Translation Adjustment		Pension and Other Benefits Adjustment⁽¹⁾			Accumulated Other Comprehensive Loss
Balance, December 31, 2005	$	(34,308	)	$	(74,099	)	$	264	$	(10,250	)	$	(118,393	)
Change during the period		5,295			8,824			62		—			14,181

Balance, September 30, 2006	$	(29,013	)	$	(65,275	)	$	326	$	(10,250	)	$	(104,212	)

Balance, December 31, 2006	$	(27,405	)	$	(57,878	)	$	223	$	(174,314	)	$	(259,374	)
Change during the period		24,289			(74,805	)		602		10,179			(39,735	)

Balance, September 30, 2007	$	(3,116	)	$	(132,683	)	$	825	$	(164,135	)	$	(299,109	)

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

Note 6—Goodwill and Intangible Assets

The table below reflects the Company's identifiable intangible assets and accumulated amortization at September 30, 2006 and 2007.

		September 30, 2006							September 30, 2007
(Dollars in thousands)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core Deposit Intangibles		$	67,237	$	(52,152	)	$	15,085	$	58,956	$	(50,367	)	$	8,589
Rights-to-Expiration			36,608		(20,409	)		16,199		36,608		(23,721	)		12,887
Other			2,100		(1,053	)		1,047		2,100		(1,375	)		725

	Total	$	105,945	$	(73,614	)	$	32,331	$	97,664	$	(75,463	)	$	22,201

Total amortization expense for the three months ended September 30, 2006 and 2007 was $3.4 million and $2.2 million, respectively. For the nine months ended September 30, 2006 and 2007, the expense was $10.3 million and $6.7 million, respectively.

(Dollars in thousands)		Core Deposit Intangibles		Rights-to-Expiration		Other		Total Identifiable Intangibles
Estimated amortization expense for the years ending:
	Remaining 2007	$	1,368	$	777	$	74	$	2,219
	2008		3,245		2,687		230		6,162
	2009		1,764		2,254		177		4,195
	2010		807		1,870		137		2,814
	2011		443		1,531		107		2,081
	2012		336		1,229		—		1,565
	thereafter		626		2,539		—		3,165

Total amortization expense after September 30, 2007		$	8,589	$	12,887	$	725	$	22,201

The changes in the carrying amount of goodwill during the nine months ended September 30, 2006 and 2007 are shown below.

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

Balance, September 30,	$	453,489		$	453,489

Note 7—Business Segments

The Company's 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" based upon the aggregation criteria prescribed in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."

•: Retail Banking aggregates those operating segments that offer a range of banking services, primarily to individuals and small businesses, delivered generally through a network of branches and ATMs located in the western United States and through telephone and internet banking services. These services include mortgages, home equity lines of credit, consumer and commercial loans, deposit services and cash management, as well as fiduciary, private banking, investment and asset management services for individuals and institutions and risk management for small businesses and individuals. At September 30, 2006 and 2007, Retail Banking had $222.2 million of goodwill assigned to the operating segments.
•: Wholesale Banking aggregates those operating segments that provide credit, depository and cash management services, insurance, investment and risk management products to businesses, individuals and target specialty niches. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and capital markets products. At September 30, 2006 and 2007, Wholesale Banking had $231.3 million of goodwill assigned to the operating segments.

The information, set forth in the tables that follow, reflects selected income statement and balance sheet items by 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 each reportable business segment as of September 30, 2006 and 2007.

The information in the tables is 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 the 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 unallocated equity capital and 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. Except as discussed above, none of the items in "Other" is significant to the Company's business.

The Company's business segments are reported from a "market view" perspective in measuring the profitability of 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."

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

		Retail Banking				Wholesale Banking
		As of and for the Three Months Ended September 30,				As of and for the Three Months Ended September 30,
		2006		2007		2006		2007
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	240,741	$	222,971	$	265,925	$	241,505
	Noninterest income (expense)		127,266		135,448		105,563		113,117

	Total revenue		368,007		358,419		371,488		354,622
	Noninterest expense (income)		241,264		233,630		169,270		161,921
	Credit expense (income)		6,249		6,361		23,196		28,232

	Income (loss) from continuing operations before income taxes		120,494		118,428		179,022		164,469
	Income tax expense (benefit)		46,089		45,299		59,899		49,894

	Income (loss) from continuing operations		74,405		73,129		119,123		114,575
	Loss from discontinued operations, net of income taxes		—		—		—		—

	Net income (loss)	$	74,405	$	73,129	$	119,123	$	114,575

	Total assets, end of period—Market View (dollars in millions):	$	17,059	$	18,524	$	24,390	$	27,339

		Other						Reconciling Items						UnionBanCal Corporation
		As of and for the Three Months Ended September 30,						As of and for the Three Months Ended September 30,						As of and for the Three Months Ended September 30,
		2006			2007			2006			2007			2006			2007
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(45,497	)	$	(35,780	)	$	(2,445	)	$	(2,251	)	$	458,724		$	426,445
	Noninterest income (expense)		459			7,074			(16,033	)		(19,907	)		217,255			235,732

	Total revenue		(45,038	)		(28,706	)		(18,478	)		(22,158	)		675,979			662,177
	Noninterest expense (income)		15,534			25,242			(9,047	)		(12,373	)		417,021			408,420
	Credit expense (income)		(29,421	)		(18,569	)		(24	)		(24	)		—			16,000

	Income (loss) from continuing operations before income taxes		(31,151	)		(35,379	)		(9,407	)		(9,761	)		258,958			237,757
	Income tax expense (benefit)		(15,342	)		(3,797	)		(3,598	)		(3,734	)		87,048			87,662

	Income (loss) from continuing operations		(15,809	)		(31,582	)		(5,809	)		(6,027	)		171,910			150,095
	Loss from discontinued operations, net of income taxes		(1,204	)		(22,636	)		—			—			(1,204	)		(22,636	)

	Net income (loss)	$	(17,013	)	$	(54,218	)	$	(5,809	)	$	(6,027	)	$	170,706		$	127,459

	Total assets, end of period—Market View (dollars in millions):	$	10,588		$	8,500		$	(24	)	$	(20	)	$	52,013		$	54,343

		Retail Banking				Wholesale Banking
		As of and for the Nine Months Ended September 30,				As of and for the Nine Months Ended September 30,
		2006		2007		2006		2007
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	708,539	$	678,808	$	781,241	$	725,972
	Noninterest income (expense)		393,239		393,718		310,099		338,026

	Total revenue		1,101,778		1,072,526		1,091,340		1,063,998
	Noninterest expense (income)		723,247		717,986		502,495		489,411
	Credit expense (income)		19,221		18,896		71,549		80,165

	Income (loss) from continuing operations before income taxes		359,310		335,644		517,296		494,422
	Income tax expense (benefit)		137,436		128,384		174,735		151,455

	Income (loss) from continuing operations		221,874		207,260		342,561		342,967
	Loss from discontinued operations, net of income taxes		—		—		—		—

	Net income (loss)	$	221,874	$	207,260	$	342,561	$	342,967

	Total assets, end of period—Market View (dollars in millions):	$	17,059	$	18,524	$	24,390	$	27,339

		Other						Reconciling Items						UnionBanCal Corporation
		As of and for the Nine Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Nine Months Ended September 30,
		2006			2007			2006			2007			2006			2007
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(91,039	)	$	(114,389	)	$	(7,282	)	$	(6,561	)	$	1,391,459		$	1,283,830
	Noninterest income (expense)		5,929			14,812			(54,874	)		(58,421	)		654,393			688,135

	Total revenue		(85,110	)		(99,577	)		(62,156	)		(64,982	)		2,045,852			1,971,965
	Noninterest expense (income)		51,836			71,087			(32,983	)		(36,108	)		1,244,595			1,242,376
	Credit expense (income)		(98,701	)		(73,982	)		(69	)		(79	)		(8,000	)		25,000

	Income (loss) from continuing operations before income taxes		(38,245	)		(96,682	)		(29,104	)		(28,795	)		809,257			704,589
	Income tax expense (benefit)		(27,784	)		(29,296	)		(11,132	)		(11,014	)		273,255			239,529

	Income (loss) from continuing operations		(10,461	)		(67,386	)		(17,972	)		(17,781	)		536,002			465,060
	Loss from discontinued operations, net of income taxes		(9,440	)		(22,636	)		—			—			(9,440	)		(22,636	)

	Net income (loss)	$	(19,901	)	$	(90,022	)	$	(17,972	)	$	(17,781	)	$	526,562		$	442,424

	Total assets, end of period—Market View (dollars in millions):	$	10,588		$	8,500		$	(24	)	$	(20	)	$	52,013		$	54,343

Note 8—Derivative Instruments and Other Financial Instruments Used For Hedging

Derivative positions are integral components of the Company's designated ALM activities. The Company uses interest rate derivatives to manage the sensitivity of the Company's net interest income to changes in interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily London Interbank Offered Rate (LIBOR) indexed commercial loans, certificates of deposit and other time deposits (CDs) and subordinated debt. The following describes the significant hedging strategies of the Company.

Cash Flow Hedges

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

The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is 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 variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of purchased floor, cap and corridor options and interest rate swaps. At September 30, 2007, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 1.7 years.

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

The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor's upper strike rate, but only to the extent the index falls to 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 LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the collar contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the collar's floor strike rate while net payments to be paid will reduce the increase in loan interest income caused by the LIBOR index rising above the collar's cap strike rate.

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

The Company uses purchased interest rate caps 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 the LIBOR component of the CD rates, which is 3-month LIBOR, based on the CDs' original term to maturity, which reflects their repricing frequency. Net payments to be received under the cap contract offset the increase 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 the LIBOR component of the CD rates, either 1-month LIBOR, 3-month LIBOR, or 6-month LIBOR, based on the original term to maturity of the CDs, which reflects their repricing frequency. Net payments to be received under the cap corridor contract offset the increase 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 rises to 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 hedge are matched with an equal principal amount of loans or CDs, the index and repricing frequencies of the hedge matches those of the loans or CDs and the period in which the designated hedged cash flows occurs is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. In the third quarter of 2007, the Company recognized a net gain of $16 thousand due to ineffectiveness, which is recognized in other noninterest expense, compared to a net gain of $0.2 million in the third quarter of 2006.

Fair Value Hedges

Hedging Strategy for Medium-Term Notes

In December 2006, the Company's medium-term debt matured. Prior to maturity, the Company engaged in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation's five-year, medium-term debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigated the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR.

The fair value hedging transaction for the medium-term notes, was structured at inception to mirror all of the provisions of the medium-term notes, and allowed the Company to assume that no ineffectiveness exists.

Hedging Strategy for Subordinated Debt

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

The fair value hedging transaction for the subordinated debt was structured at inception to mirror all of the provisions of the subordinated debt, which allows the Company to assume that no ineffectiveness exists.

Other

The Company uses To-Be-Announced (TBA) contracts to fix the price and yield of anticipated purchases or sales of mortgage-backed securities that will be delivered at an agreed upon date. This strategy hedges the risk of variability in the cash flows to be paid or received upon settlement of the TBA contract.

Note 9—Commitments, Contingencies and Guarantees

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, the total commitment amounts do not necessarily represent future cash-flow requirements. At September 30, 2007, the Company had total commitments to extend credit under legally binding agreements of $23.5 billion. Exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments.

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. As of September 30, 2007, the Company's maximum exposure to loss for risk participations in bankers' acceptances, standby and commercial letters of credit was $30.3 million, $3.6 billion and $71.1 million, respectively. At September 30, 2007, the carrying value of the Company's risk participations in bankers' acceptances, standby and commercial letters of credit totaled $6.3 million. Exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the risk participation on bankers' acceptances, 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, risk participation on bankers' acceptances 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. 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. At September 30, 2007, the Company had commitments to fund principal investments of $111.2 million.

The Company is fund manager for limited liability companies issuing low-income housing credit (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 the timely completion of projects and delivery of tax benefits throughout the investment term. Guarantees may include a minimum rate of return, the availability of tax credits and operating deficit thresholds over an eleven-year weighted average period. Additionally, the Company receives project completion and tax credit guarantees from the limited liability companies issuing the LIHC investments that reduce the Company's ultimate exposure to loss. As of September 30, 2007, the Company's maximum exposure to loss under these

guarantees is limited to a return of investor capital and minimum investment yield, or $139.7 million. The Company maintains a reserve of $5.8 million for these guarantees.

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 is done in order to facilitate the sale of the commercial paper. As of September 30, 2007, the Bank had a maximum exposure to loss under the commercial paper program guarantee of $1.7 billion. The Bank's guarantee has an average term of less than nine months and is fully collateralized by a pledged deposit. 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 has no material obligation to be satisfied. As of September 30, 2007, the Company had no exposure to loss for these agreements.

The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $2.6 billion at September 30, 2007. The market value of the associated collateral was $2.7 billion at September 30, 2007.

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, 2007, the maximum exposure to loss under these contracts totaled $8.1 million. At September 30, 2007, the Company maintained a reserve of $0.3 million for losses related to these guarantees.

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.

On September 14, 2007, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order, and a Consent Order to a Civil Money Penalty and to Cease and Desist (the Order) with the Office of the Comptroller of the Currency (OCC). The Order supersedes the March 2005 memorandum of understanding between the Bank and the OCC. The Order imposes a civil money penalty of $10 million and requires the Bank to take actions to improve Bank Secrecy Act compliance. On the same day, the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) executed an Assessment of Civil Money Penalty (the Assessment) in the amount of $10 million. The Assessment provides that the $10 million penalty is deemed to be satisfied by the Bank's payment of the civil money penalty of $10 million to the OCC. On September 17, 2007, the Bank entered into a DPA with the DOJ. Under the DPA, the DOJ has agreed to defer prosecution for past violations of BSA/AML that occurred in the Bank's now discontinued international banking business, and to dismiss prosecution completely if the Bank meets the conditions of the Order for one year. In the DPA, the Bank also agreed to make a payment of $21.6 million to the DOJ.

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

Note 10—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, 2006 and 2007.

		Pension Benefits						Other Benefits
		For the Three Months Ended September 30,						For the Three Months Ended September 30,
(Dollars in thousands)		For the Three Months Ended September 30,						For the Three Months Ended September 30,
(Dollars in thousands)		2006			2007			2006			2007
Components of net periodic benefit cost
Service cost		$	13,501		$	12,559		$	1,850		$	1,929
Interest cost			16,287			17,797			2,418			2,571
Expected return on plan assets			(28,359	)		(31,586	)		(3,034	)		(3,478	)
Amortization of prior service cost			266			64			(28	)		(24	)
Amortization of transition amount			—			—			512			508
Recognized net actuarial loss			8,090			4,002			1,052			633

	Total net periodic benefit cost	$	9,785		$	2,836		$	2,770		$	2,139

		Pension Benefits						Other Benefits
		For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)		For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)		2006			2007			2006			2007
Components of net periodic benefit cost
Service cost		$	40,505		$	37,676		$	5,420		$	6,095
Interest cost			48,860			53,393			6,898			8,253
Expected return on plan assets			(85,079	)		(94,759	)		(8,719	)		(10,434	)
Amortization of prior service cost			800			192			(73	)		(72	)
Amortization of transition amount			—			—			1,527			1,526
Recognized net actuarial loss			24,271			12,006			3,182			2,831

	Total net periodic benefit cost	$	29,357		$	8,508		$	8,235		$	8,199

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

Note 11—Medium and Long-Term Debt

On March 23, 2007, the Bank issued $750 million of Floating Rate Senior Bank Notes due on March 23, 2009. The Senior Notes were issued at 100 percent of their face value, and bear a floating interest rate of 3-month LIBOR plus 2 basis points. Interest is payable and reset quarterly on the 23^rd of March, June, September and December of each year, with the first interest payment and interest reset date on June 23,

2007. The Senior Notes are not redeemable at the option of the Bank prior to maturity or subject to repayment at the option of the holders prior to maturity.

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

Note 12—Management Stock Plans

The Company has two management stock plans, the Year 2000 UnionBanCal Corporation Management Stock Plan, as amended (the 2000 Stock Plan), and the UnionBanCal Corporation Management Stock Plan, restated effective September 1, 1997 (the 1997 Stock Plan). Under these plans, the Company's common stock is authorized to be awarded to key employees, outside directors and consultants of the Company at the discretion of the Executive Compensation & Benefits Committee of the Board of Directors (the Committee). Employees on rotational assignment from BTMU are not eligible for stock awards. For further discussion of the Company's stock plans, see Note 16 to the Consolidated Financial Statements in the Company's 2006 Form 10-K.

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

Under the 2000 Stock Plan, the Company grants stock options and restricted stock and issues shares of common stock upon vesting of performance shares and restricted stock units that are settled in common stock. The Company issues new shares of common stock upon exercise of outstanding stock options, granting of restricted stock awards and settlement of other awards under the stock plans. At September 30, 2007, a total of 3,118,398 shares were available for future grants under the 2000 Stock Plan as stock options, restricted stock or shares of common stock issued upon vesting of performance shares and restricted stock units settled in common stock. The remaining shares under the 1997 Stock Plan are not available for future grants.

Stock Options

The following is a summary of stock option transactions under the stock plans for the nine months ended September 30, 2007.

		For the Nine Months Ended September 30, 2007
		Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
							(in thousands)
Options outstanding, beginning of the period⁽¹⁾		8,326,241		$	49.24
	Granted	730,342			62.98
	Exercised	(785,082	)		41.68
	Forfeited	(50,019	)		66.05

Options outstanding, end of the period⁽¹⁾		8,221,482		$	51.08	4.78	$	78,953

Options exercisable, end of the period		6,530,898		$	47.39	4.53	$	30,327

⁽¹⁾: Options not expected to vest are included in options outstanding. Amounts are nonmaterial.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the following table. The Black-Scholes option pricing model is applied to option tranches based on expected terms that result in ranges of input assumptions, such ranges are disclosed below. Expected volatilities are based on historical data and implied volatilities from traded options on the Company's stock and other factors. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected term of an option granted is derived from the output of the option valuation model, which is based on historical data and represents the period of time that the option granted is expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant based on the expected term.

	For the Nine Months Ended September 30, 2007
Weighted-average fair value—per share	$	8.79
Risk-free interest rate		4.6	%
Expected volatility		16.9 - 17.8	%
Weighted-average expected volatility		17.4	%
Expected term (in years)		3.8 - 4.4
Expected dividend yield		3.5	%

The weighted-average fair value of options granted during the nine months ended September 30, 2006 and 2007 was $12.31 and $8.79 per share, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2007 was $33.7 million and $15.7 million, respectively. The total fair value of options vested during the nine months ended September 30, 2006 and 2007 was $27.8 million and $20.2 million, respectively.

The Company recognized $10.4 million of compensation cost for share-based payment arrangements related to stock option awards with $4.0 million of corresponding tax benefit for the nine months ended September 30, 2007. As of September 30, 2007, the total unrecognized compensation cost related to nonvested stock option awards was $11.4 million and the weighted-average period over which it is expected to be recognized was one year.

Restricted Stock

In general, restricted stock awards are granted under the 2000 Stock Plan to key employees. The awards of restricted stock granted to employees vest pro-rata on each anniversary of the grant date and become fully vested four years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, retires under certain grant, age and service conditions or terminates employment under certain conditions. Restricted stockholders have the right to vote their restricted shares and receive dividends.

The following is a summary of the Company's nonvested restricted stock awards as of September 30, 2007 and changes during the period ended September 30, 2007.

		For the Nine Months Ended September 30, 2007
		Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested restricted awards, beginning of the period		840,003		$	62.59
	Granted	52,154			62.52
	Vested	(106,580	)		65.37
	Forfeited	(32,092	)		61.82

Nonvested restricted awards, end of the period		753,485		$	62.27

The total fair value of the restricted stock awards that vested during the nine months ended September 30, 2006 and 2007 was $4.2 million and $7.0 million, respectively.

The Company recognized $10.7 million of compensation cost for share-based payment arrangements related to restricted stock awards with $4.2 million of corresponding tax benefit for the nine months ended September 30, 2007. As of September 30, 2007, the total unrecognized compensation cost related to nonvested restricted awards was $31.1 million and the weighted-average period over which it is expected to be recognized was 1.5 years.

Restricted Stock Units

Starting in July 2006, the Company granted restricted stock units to non-employee directors. These restricted stock units consist of an annual grant, and in the case of new non-employee directors, an annual grant and an initial grant. In general, the annual grant vests in full on the first anniversary of the grant date, and the initial grant vests in three equal installments on each of the first three anniversaries of the grant date. During the nine months ended September 30, 2007, the Company granted 13,671 restricted stock units with a weighted-average grant date fair value of $59.24 per unit. There were no restricted stock units forfeited during the nine months ended September 30, 2007. The total fair value of the restricted stock units that vested during the nine months ended September 30, 2007 was $0.7 million. For the nine months ended September 30, 2007, the Company recognized $0.6 million of compensation cost with a corresponding

$0.3 million in tax benefits related to these grants. As of September 30, 2007, the total unrecognized compensation cost related to restricted stock units was $0.7 million and the weighted-average period over which it is expected to be recognized was 9 months.

The restricted stock unit participants do not have voting or other stockholder rights. However, the participants' stock unit accounts receive dividend equivalents, reflecting the aggregate dividends earned based on the total number of restricted stock units outstanding, in the form of additional restricted stock units. Participants may elect to defer the delivery of vested shares of common stock at predetermined dates as defined in the plan agreements. The Company will issue new shares under the 2000 Stock Plan upon vesting of these grants, which are redeemable only in shares.

Performance Share Plan

Effective January 1, 1997, the Company established a Performance Share Plan. At the discretion of the Committee, eligible participants may earn performance share awards to be redeemed in cash and/or shares three years after the date of grant. Performance shares are linked to stockholder value in two ways: (1) the market price of the Company's common stock; and (2) return on equity, a performance measure closely linked to value creation. Eligible participants generally receive grants of performance shares annually. The plan was amended in 2004, increasing the total number of shares that can be granted under the plan to 2.6 million shares. There were 2,065,156 performance shares remaining for future awards as of September 30, 2007.

All performance shares granted prior to 2006 are redeemable in cash and are therefore being accounted for as liabilities. The value of a performance share under the liability method is equal to the average month-end closing price of the Company's common stock for the final six months of the performance period. All cancelled or forfeited performance shares become available for future grants. The total fair value of the performance shares that vested during the nine months ended September 30, 2006 and 2007 was $4.7 million and $7.4 million, respectively. These amounts were paid in cash during the respective quarters, except for $0.3 million, which was deferred during the nine months ended September 30, 2006. There were no performance shares forfeited during the nine months ended September 30, 2007. At September 30, 2006 and 2007, the Company's liability for the cash settlement of the performance shares was $12.5 million and $5.1 million, respectively. The Company recognized $0.8 million of compensation cost related to these grants with $0.3 million of corresponding tax benefit for the nine months ended September 30, 2007. As of September 30, 2007, the total unrecognized compensation cost related to these grants that are redeemable in cash was $0.3 million and the weighted-average period over which it is expected to be recognized was 3 months.

During the nine months ended September 30, 2007, the Company granted 68,677 performance shares that are redeemable in shares, with a weighted-average grant date fair value of $63.42 per unit. There were 1,500 performance shares that are redeemable in shares forfeited during the nine months ended September 30, 2007. The total fair value of these performance shares which vested was $0.3 million during the nine months ended September 30, 2007. For the nine months ended September 30, 2007, the Company recognized $2.7 million of compensation cost with a corresponding $1.1 million in tax benefits related to these grants. As of September 30, 2007, the total unrecognized compensation cost related to grants that are redeemable in shares was $4.2 million and the weighted-average period over which it is expected to be recognized was one year. The Company issues new shares under the 2000 Stock Plan upon vesting of these grants that are redeemable in shares.

Note 13—Subsequent Events

On October 24, 2007, the Company's Board of Directors declared a quarterly cash dividend of $0.52 per share of common stock. The dividend will be paid on January 4, 2008 to stockholders of record as of December 7, 2007.

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 from 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 condensed consolidated financial condition and results of operations for the period ended September 30, 2007 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, 2006 (2006 Form 10-K). Averages, as presented in the following tables, are substantially all based upon daily average balances.

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

Introduction

We are a California-based, bank holding company whose major subsidiary, Union Bank of California, N.A. (the Bank), is a commercial bank. We had consolidated assets of $54 billion at September 30, 2007. At September 30, 2007, The Bank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately 65 percent of our outstanding common stock.

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 2007 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 any other reports that we refer to in this Form 10-Q that will assist your understanding of trends, events and uncertainties that could impact us.

Average loans grew 10 percent over the third quarter of 2006, primarily from the growth in commercial, residential mortgage and commercial mortgage lending. Our residential mortgage portfolio grew 10 percent over the third quarter of 2006, primarily from the increased demand experienced in the third quarter of 2007.

Our overall credit quality continues to be strong. Our nonperforming assets were $53 million, up 10 percent compared to third quarter 2006. Our net charge offs were $2 million in the third quarter of 2007 compared to $1 million in the third quarter of 2006. We provided $20 million for credit losses in the third quarter of 2007, compared to no provision in the third quarter of 2006. As our credit portfolio continues to grow and as we believe that we have passed the turning point in credit quality trends, we anticipate that we will continue to provide for credit losses during the remainder of 2007.

Offsetting our strong loan growth and continued good credit quality was the decline in our noninterest bearing deposits. Compared to the third quarter 2006, average noninterest bearing deposits declined by $3.2 billion as a result of our customers shifting their balances to interest bearing deposits or other investment alternatives, as well as a decline in our title and escrow deposit balances. In addition, the average cost of interest bearing deposits rose from 3.07 percent to 3.64 percent from the third quarter 2006 to the third quarter 2007. However, we believe that pricing has stabilized as indicated by the more modest sequential quarter increase in our average cost of interest bearing deposits of 7 basis points from 3.57 percent in the second quarter 2007. Although our noninterest bearing deposits have declined, we continue to enjoy a relatively high proportion of average noninterest bearing deposits to total deposits compared to our peers.

Based on the most recent statistics available, our percentage of average noninterest bearing deposits to average total deposits ranked us third among the 50 largest U.S. banks.

In the third quarter of 2007, our net interest income was $426 million, a decline of $32 million from the third quarter of 2006, continuing the trend experienced during 2006 and 2007 as our higher funding costs resulting from a decline in noninterest bearing deposits outstripped interest income earned on our loan growth.

Noninterest income grew 8.5 percent in the third quarter of 2007 over the third quarter of 2006 as gains on trading account activities, gains on private capital investments and higher trust and investment management fees offset reductions in our service charges on deposits.

Noninterest expense declined slightly in the third quarter of 2007 compared to the third quarter of 2006 primarily due to the decreased cost for outside services stemming from lower cost of services related to title and escrow deposit balances, and a 3.3 percent decline in salary and employee benefits expense, mainly due to lower workers compensation expense and employee pension expense.

In the third quarter of 2007, we made a $10 million payment for the civil money penalty, previously accrued in the second quarter of 2007 as part of the order entered into with the Office of the Comptroller of the Currency (OCC) and the assessment by the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department related to compliance with Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML). In addition, we entered into a Deferred Prosecution Agreement with the Department of Justice (DOJ) relating to past violations of BSA/AML that occurred in the Bank's now discontinued international banking business. As part of this agreement, we paid $21.6 million to the DOJ in the third quarter of 2007. For additional information, see "Regulatory Matters" in this Form 10-Q.

Our effective tax rate increased to 36.9 percent compared to 33.6 percent in the third quarter of 2006. The higher effective tax rate in third quarter 2007 was primarily due to $15.5 million of adjustments to California state tax expense filed on the worldwide unitary basis for 2006 and 2007, partially offset by the recognition of $7.6 million of state tax benefits due to the settlement of a prior year audit.

Discontinued Operations

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

This transaction has been accounted for as a discontinued operation and all prior periods, except where specifically mentioned, have been restated to reflect this accounting treatment. All of the assets and liabilities of the discontinued operations have been separately identified on our condensed consolidated balance sheet and the assets are accounted for at the lower of cost or fair value less costs to sell. The average net assets or liabilities of our discontinued operations are reflected in our analysis of net interest margin. All of our offices designated for disposal were closed as of June 30, 2006. For the detailed components of our assets and liabilities from discontinued operations at September 30, 2006 and December 31, 2006, see Note 3 to the Condensed Consolidated Financial Statements of this Form 10-Q. Substantially all assets and liabilities of the discontinued operations were liquidated as of March 31, 2007.

As described in the "Executive Overview" in this Form 10-Q, in the third quarter of 2007, we entered into a Deferred Prosecution Agreement with the DOJ relating to past violations of BSA/AML that occurred in the Bank's now discontinued international banking business. As part of this agreement, we paid the DOJ $21.6 million in the third quarter of 2007. The $21.6 million payment and related legal and other outside services costs were allocated to discontinued operations as these past violations pertained to our international banking business. For additional information, refer to "Regulatory Matters" in this Form 10-Q.

For the three and nine months ended September 30, 2006 and 2007, loss from discontinued operations included the following:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2006			2007			2006			2007
Net interest (expense) income	$	(501	)	$	—		$	1,138		$	—
Noninterest income		268			—			13,184			—
Noninterest expense		1,828			23,297			29,555			23,297

Loss from discontinued operations before income taxes		(2,061	)		(23,297	)		(15,233	)		(23,297	)
Income tax benefit		(857	)		(661	)		(5,793	)		(661	)

Loss from discontinued operations	$	(1,204	)	$	(22,636	)	$	(9,440	)	$	(22,636	)

Noninterest income for the nine months ended September 30, 2006 included a $4.0 million payment from Wachovia Bank, N.A., reflecting the final settlement upon the conversion of the international correspondent banking customer base to Wachovia Bank, N.A. Included in noninterest expense was compliance related expenses of $1.4 million and $8.5 million, for the three and nine months ended September 30, 2006, respectively. Additionally, the Company recorded $1.4 million of expenses related to the termination of lease contracts in the second quarter 2006. Noninterest expense for the three and nine months ended September 30, 2007 included the $21.6 million paid to the DOJ and $1.7 million in related legal and other outside services costs. The income tax benefit of $0.7 million for the three and nine months ended September 30, 2007 reflects the impact of the nondeductibility of the $21.6 million DOJ payment.

The remaining 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 to determine the present value of assets and liabilities. A change in the discount factor could increase or decrease the values of those assets and liabilities and such a change would result in either a beneficial or adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to determine the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use are employee turnover factors for pension purposes, residual values in our leasing portfolio, fair value of our 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 generally swaps and option contracts indexed to energy commodities, interest rates or foreign currencies, although we could enter into other types of derivative contracts. We value these contracts at fair value, using either readily available, market quoted prices or information that can be

extrapolated to approximate a market price. We are subject to US GAAP that may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Our most significant estimates are approved by our Chief Executive Officer Forum (CEO Forum), which is comprised of our most senior officers. 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 Estimates and our significant accounting policies are discussed in detail in our 2006 Form 10-K filed with the Securities and Exchange Commission (the SEC).

Financial Performance

Summary of Financial Performance

							Increase (Decrease)										Increase (Decrease)
		For the Three Months Ended September 30,					2007 versus 2006					For the Nine Months Ended September 30,					2007 versus 2006
(Dollars in thousands)		For the Three Months Ended September 30,					2007 versus 2006					For the Nine Months Ended September 30,					2007 versus 2006
(Dollars in thousands)		2006			2007		Amount			Percent		2006			2007		Amount			Percent
Results of Operations
Net interest income⁽¹⁾		$	458,724		$	426,445	$	(32,279	)	(7.0	)%	$	1,391,459		$	1,283,830	$	(107,629	)	(7.7	)%
Noninterest income
	Service charges on deposit accounts		79,083			76,210		(2,873	)	(3.6	)		242,555			228,373		(14,182	)	(5.8	)
	Trust and investment management fees		47,555			51,262		3,707		7.8			146,050			151,407		5,357		3.7
	Trading account activities		14,311			21,795		7,484		52.3			41,495			50,473		8,978		21.6
	Gains on private capital investments, net		7,681			12,203		4,522		58.9			14,210			41,469		27,259		nm
	Other noninterest income		68,625			74,262		5,637		8.2			210,083			216,413		6,330		3.0

Total noninterest income			217,255			235,732		18,477		8.5			654,393			688,135		33,742		5.2

Total revenue			675,979			662,177		(13,802	)	(2.0	)		2,045,852			1,971,965		(73,887	)	(3.6	)
(Reversal of) provision for loan losses			—			16,000		16,000		nm			(8,000	)		25,000		33,000		nm
Noninterest expense
	Salaries and employee benefits		244,613			236,575		(8,038	)	(3.3	)		745,745			746,520		775		0.1
	Net occupancy		35,753			39,017		3,264		9.1			103,109			109,398		6,289		6.1
	Outside services		31,890			21,394		(10,496	)	(32.9	)		91,203			60,081		(31,122	)	(34.1	)
	Professional services		12,169			18,162		5,993		49.2			43,754			47,219		3,465		7.9
	Foreclosed asset expense (income)		(183	)		37		220		nm			(15,332	)		55		15,387		nm
	(Reversal of) provision for losses on off-balance sheet commitments		—			4,000		4,000		nm			(7,000	)		5,000		12,000		nm
	Other noninterest expense		92,779			89,235		(3,544	)	(3.8	)		283,116			274,103		(9,013	)	(3.2	)

Total noninterest expense			417,021			408,420		(8,601	)	(2.1	)		1,244,595			1,242,376		(2,219	)	(0.2	)

Income from continuing operations before income taxes			258,958			237,757		(21,201	)	(8.2	)		809,257			704,589		(104,668	)	(12.9	)
Income tax expense			87,048			87,662		614		0.7			273,255			239,529		(33,726	)	(12.3	)

Income from continuing operations		$	171,910		$	150,095	$	(21,815	)	(12.7	)%	$	536,002		$	465,060	$	(70,942	)	(13.2	)%

⁽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 2007 compared to the third quarter of 2006 are presented below.

•: After several years of reducing the level of our allowances for credit losses (See our discussion under "Allowances for Credit Losses"), we believe we have passed the turning point in the credit cycle, which has increased the level of uncertainty in our principal portfolio segments. Although our credit quality remains strong, we have provided a total of $20 million for credit losses in the third quarter of 2007 primarily to account for a shift in risk grade mix (including risk grade migration in certain sectors of the real estate portfolio) and strong loan growth.

•: Our net interest income was unfavorably influenced by lower noninterest bearing deposit volumes partly due to lower title and escrow demand deposit balances, which resulted in a deposit mix shift toward higher cost deposits, and higher rates on interest bearing liabilities. Offsetting these negative influences to our net interest income were higher earning asset volumes (including higher volumes for commercial, financial and industrial loans, residential mortgages and commercial mortgages) and higher average yields on our earning assets. (See our discussion under "Net Interest Income.")

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

—: Service charges on deposits decreased primarily due to lower account analysis fees and lower overdraft fees;
—: Trust and investment management fees were higher primarily due to an increase in the total assets under administration on which fees are based. Managed assets increased by approximately 16 percent, while non-managed assets increased by approximately 12 percent from September 30, 2006 to September 30, 2007. Total assets under administration increased by approximately 12 percent, to $244.5 billion, for the same period;
—: Trading account activities income was higher compared to the prior year quarter due to higher derivative income and trading securities gains;
—: Net gains on private capital investments were higher compared to the prior year quarter due to higher sales and capital distributions; and
—: Other noninterest income included a $4.1 million gain from the sale of a minority interest in the check cashing entity with which we were formerly affiliated.

Our lower noninterest expense was due to several factors:

—

Salaries and employee benefits decreased primarily as a result of:

•: lower contract labor expense due to reduced use of contract staff for compliance-related projects, partly offset by higher base salaries primarily due to annual merit increases; and
•: lower pension expenses partially related to a change in the discount rate used to estimate future liabilities, which increased from 5.5% to 6.0%; partially offset by
•: higher incentive and bonus expenses;

—

Net occupancy expense increased mainly due to higher building rent and repair and maintenance costs;

—

Outside services expense decreased mainly due to lower cost of services related to a 34 percent decline in title and escrow deposits and a shift by our customers to an increased utilization of lower yielding title and escrow loans;

—

Professional services expense increased mainly due to higher compliance-related activities;

—

There was no provision for losses on off-balance sheet commitments in the third quarter of 2006 compared to a $4.0 million provision in the same quarter of 2007; and

—

Other noninterest expense included decreases in equipment expense, as well as lower advertising and public relations cost.

The primary contributors to our financial performance for the first nine months of 2007 compared to the first nine months of 2006 are presented below.

•: For the nine months ended September 30, 2007, we have provided a total of $30 million for credit losses primarily to account for a shift in risk grade mix (including risk grade migration in certain sectors

of the real estate portfolio), increased concern about certain economic conditions and strong loan growth.

•: Our net interest income was unfavorably influenced by lower noninterest bearing deposit volumes partly due to lower title and escrow demand deposit balances, which resulted in a deposit mix shift toward higher cost deposits, and higher rates on interest bearing liabilities. Offsetting these negative influences to our net interest income were higher earning asset volumes (including higher volumes for commercial, financial and industrial loans, residential mortgages, commercial mortgages and construction loans) and higher average yields on our earning assets. (See our discussion under "Net Interest Income.")

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

—: Service charges on deposits decreased primarily due to lower account analysis fees and lower overdraft fees;
—: Trust and investment management fees were higher primarily due to an increase in the total assets under administration on which fees are based. Managed assets increased by approximately 16 percent, while non-managed assets increased by approximately 12 percent from September 30, 2006 to September 30, 2007. Total assets under administration increased by approximately 12 percent, to $244.5 billion, for the same period;
—: Trading account activities income was higher compared to the prior year due to higher derivative income and trading securities gains;
—: Net gains on private capital investments were higher compared to the prior year due to higher sales and capital distributions; and
—: Other noninterest income included higher brokerage commissions, card processing fees and a $4.1 million gain from the sale of a minority interest in the check cashing entity with which we were formerly affiliated.

Our lower noninterest expense was due to several factors:

—

Salaries and employee benefits increased slightly primarily as a result of:

•: annual merit increases; and
•: higher bonuses and other performance-related incentives; partially offset by
•: lower pension expenses partially related to a change in the discount rate used to estimate future liabilities, which increased from 5.5% to 6.0%;

—

Outside services expense decreased mainly due to lower cost of services related to a 22 percent decline in title and escrow deposits and a shift by our customers to an increased utilization of lower yielding title and escrow loans;

—

Foreclosed asset income reflected higher gains on the sale of foreclosed properties in 2006;

—

Provision for losses on off-balance sheet commitments increased to $5.0 million in the current year compared to a $7.0 million reversal in the prior year; and

—

Other noninterest expense included lower costs for intangible asset amortization, marketing, equipment maintenance and software, and a favorable outcome of a lawsuit settlement, partially offset by a $10.0 million payment for the civil money penalty imposed by the OCC and FinCEN relating to BSA/AML compliance.

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) in
			September 30, 2006								September 30, 2007							Average Balance					Interest Income/ Expense⁽¹⁾
(Dollars in thousands)			Average Balance			Interest Income/Expense⁽¹⁾			Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance					Interest Income/ Expense⁽¹⁾
(Dollars in thousands)			Average Balance			Interest Income/Expense⁽¹⁾			Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		Amount			Percent		Amount			Percent
Assets
Loans:⁽³⁾
	Commercial, financial and industrial		$	13,244,947		$	225,177		6.74	%	$	14,342,095		$	246,275	6.81	%	$	1,097,148		8	%	$	21,098		9	%
	Construction			1,990,535			39,147		7.80			2,371,833			46,043	7.70			381,298		19			6,896		18
	Residential mortgage			11,972,024			154,983		5.18			13,196,677			178,589	5.41			1,224,653		10			23,606		15
	Commercial mortgage			5,680,603			102,577		7.16			6,386,963			112,743	7.00			706,360		12			10,166		10
	Consumer			2,507,524			49,672		7.86			2,570,234			50,601	7.81			62,710		3			929		2
	Lease financing			570,190			4,243		2.98			616,983			6,260	4.06			46,793		8			2,017		48

	Total Loans			35,965,823			575,799		6.37			39,484,785			640,511	6.45			3,518,962		10			64,712		11
Securities—taxable				8,548,420			107,378		5.02			8,593,958			111,934	5.21			45,538		1			4,556		4
Securities—tax-exempt				59,644			1,231		8.26			55,236			1,150	8.32			(4,408	)	(7	)		(81	)	(7	)
Interest bearing deposits in banks				37,351			411		4.37			44,185			709	6.37			6,834		18			298		73
Federal funds sold and securities purchased under resale agreements				894,039			12,024		5.34			355,111			4,683	5.23			(538,928	)	(60	)		(7,341	)	(61	)
Trading account assets				349,368			1,832		2.08			368,232			1,898	2.04			18,864		5			66		4

		Total earning assets		45,854,645			698,675		6.06			48,901,507			760,885	6.19			3,046,862		7			62,210		9

Allowance for loan losses				(328,399	)							(335,932	)						(7,533	)	(2	)
Cash and due from banks				2,063,653								1,845,331							(218,322	)	(11	)
Premises and equipment, net				497,957								485,934							(12,023	)	(2	)
Other assets				2,689,563								2,598,845							(90,718	)	(3	)

		Total assets	$	50,777,419							$	53,495,685						$	2,718,266		5	%

Liabilities
Deposits:
	Transaction accounts		$	12,405,367		$	73,826		2.36		$	14,288,967		$	108,653	3.02		$	1,883,600		15	%	$	34,827		47
	Savings and consumer time			4,493,082			25,682		2.27			4,475,522			30,453	2.70			(17,560	)	(0	)		4,771		19
	Large time			6,692,874			82,790		4.91			9,515,315			120,391	5.02			2,822,441		42			37,601		45

		Total interest bearing deposits		23,591,323			182,298		3.07			28,279,804			259,497	3.64			4,688,481		20			77,199		42

Federal funds purchased and securities sold under repurchase agreements				419,665			5,345		5.05			1,130,404			14,284	5.01			710,739		nm			8,939		nm
Net funding allocated from (to) discontinued operations⁽⁴⁾				(34,738	)		(454	)	5.18			—			—	—			34,738		nm			454		nm
Commercial paper				1,645,428			20,835		5.02			1,559,098			19,753	5.03			(86,330	)	(5	)		(1,082	)	(5	)
Other borrowed funds				577,533			7,842		5.39			828,655			11,321	5.42			251,122		43			3,479		44
Medium and long-term debt				1,496,207			21,974		5.83			1,846,674			26,957	5.79			350,467		23			4,983		23
Trust notes				15,054			239		6.33			14,601			239	6.53			(453	)	(3	)		—		—

		Total borrowed funds		4,119,149			55,781		5.37			5,379,432			72,554	5.35			1,260,283		31			16,773		30

		Total interest bearing liabilities		27,710,472			238,079		3.41			33,659,236			332,051	3.91			5,948,764		21			93,972		39

Noninterest bearing deposits				16,990,816								13,786,534							(3,204,282	)	(19	)
Other liabilities				1,497,496								1,385,686							(111,810	)	(7	)

		Total liabilities		46,198,784								48,831,456							2,632,672		6
Stockholders' Equity
Common equity				4,578,635								4,664,229							85,594		2

		Total stockholders' equity		4,578,635								4,664,229							85,594		2

		Total liabilities and stockholders' equity	$	50,777,419							$	53,495,685						$	2,718,266		5	%

Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)							460,596		4.00	%					428,834	3.50	%							(31,762	)	(7	)
Less: taxable-equivalent adjustment							1,872								2,389									517		28

		Net interest income				$	458,724							$	426,445								$	(32,279	)	(7	)%

Average Assets and Liabilities of Discontinued Operations for the Three Months Ended:	September 30, 2006
Assets	$	41,135
Liabilities	$	6,397
Net assets	$	34,738

⁽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.

nm = not meaningful

			For the Nine Months Ended															Increase (Decrease) in
			September 30, 2006								September 30, 2007							Average Balance					Interest Income/ Expense⁽¹⁾
(Dollars in thousands)			Average Balance			Interest Income/ Expense⁽¹⁾			Average Yield/ Rate⁽¹⁾⁽²⁾					Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance					Interest Income/ Expense⁽¹⁾
(Dollars in thousands)			Average Balance			Interest Income/ Expense⁽¹⁾			Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		Amount			Percent		Amount			Percent
Assets
Loans:⁽³⁾
	Commercial, financial and industrial		$	12,899,687		$	635,197		6.58	%	$	14,544,388		$	721,728	6.63	%	$	1,644,701		13	%	$	86,531		14	%
	Construction			1,747,603			99,166		7.59			2,300,862			132,865	7.72			553,259		32			33,699		34
	Residential mortgage			11,719,852			448,192		5.10			12,728,651			509,697	5.34			1,008,799		9			61,505		14
	Commercial mortgage			5,664,966			300,116		7.08			6,222,590			331,429	7.12			557,624		10			31,313		10
	Consumer			2,500,890			142,343		7.61			2,556,710			149,159	7.80			55,820		2			6,816		5
	Lease financing			567,508			11,790		2.77			578,082			17,339	4.00			10,574		2			5,549		47

	Total Loans			35,100,506			1,636,804		6.23			38,931,283			1,862,217	6.39			3,830,777		11			225,413		14
Securities—taxable				8,378,496			306,164		4.87			8,574,162			327,877	5.10			195,666		2			21,713		7
Securities—tax-exempt				62,670			3,804		8.09			56,316			3,468	8.21			(6,354	)	(10	)		(336	)	(9	)
Interest bearing deposits in banks				43,804			1,570		4.79			70,650			3,113	5.89			26,846		61			1,543		98
Federal funds sold and securities purchased under resale agreements				541,607			20,594		5.08			596,492			23,644	5.30			54,885		10			3,050		15
Trading account assets				354,134			5,047		1.91			339,666			5,200	2.05			(14,468	)	(4	)		153		3

		Total earning assets		44,481,217			1,973,983		5.93			48,568,569			2,225,519	6.12			4,087,352		9			251,536		13

Allowance for loan losses				(337,145	)							(332,690	)						4,455		1
Cash and due from banks				2,096,935								1,931,371							(165,564	)	(8	)
Premises and equipment, net				510,416								488,562							(21,854	)	(4	)
Other assets				2,675,245								2,540,779							(134,466	)	(5	)

		Total assets	$	49,426,668							$	53,196,591						$	3,769,923		8	%

Liabilities
Deposits:
	Transaction accounts		$	12,757,571		$	201,641		2.11		$	13,969,058		$	302,991	2.90		$	1,211,487		9	%	$	101,350		50
	Savings and consumer time			4,477,251			65,672		1.96			4,445,590			86,372	2.60			(31,661	)	(1	)		20,700		32
	Large time			5,133,186			173,971		4.53			9,045,417			338,566	5.00			3,912,231		76			164,595		95

		Total interest bearing deposits		22,368,008			441,284		2.64			27,460,065			727,929	3.54			5,092,057		23			286,645		65

Federal funds purchased and securities
sold under repurchase agreements				678,926			23,657		4.66			986,589			37,928	5.14			307,663		45			14,271		60
Net funding allocated from (to) discontinued operations⁽⁴⁾				(42,570	)		(1,509	)	4.74			—			—	—			42,570		nm			1,509		nm
Commercial paper				1,514,196			52,420		4.63			1,576,745			59,446	5.04			62,549		4			7,026		13
Other borrowed funds				319,096			12,233		5.13			821,910			33,291	5.42			502,814		nm			21,058		nm
Medium and long-term debt				1,164,090			49,246		5.66			1,752,240			75,625	5.77			588,150		51			26,379		54
Trust notes				15,166			715		6.28			14,713			715	6.48			(453	)	(3	)		—		—

		Total borrowed funds		3,648,904			136,762		5.01			5,152,197			207,005	5.37			1,503,293		41			70,243		51

		Total interest bearing liabilities		26,016,912			578,046		2.97			32,612,262			934,934	3.83			6,595,350		25			356,888		62

Noninterest bearing deposits				17,348,964								14,619,879							(2,729,085	)	(16	)
Other liabilities				1,508,382								1,376,387							(131,995	)	(9	)

		Total liabilities		44,874,258								48,608,528							3,734,270		8
Stockholders' Equity
Common equity				4,552,410								4,588,063							35,653		1

		Total stockholders' equity		4,552,410								4,588,063							35,653		1

		Total liabilities and stockholders' equity	$	49,426,668							$	53,196,591						$	3,769,923		8	%

Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)							1,395,937		4.19	%					1,290,585	3.55	%							(105,352	)	(8	)
Less: taxable-equivalent adjustment							4,478								6,755									2,277		51

Net interest income						$	1,391,459							$	1,283,830								$	(107,629	)	(8	)%

Average Assets and Liabilities of Discontinued Operations for the Nine Months Ended:	September 30, 2006
Assets	$	244,210
Liabilities	$	201,640
Net assets	$	42,570

⁽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.
nm = not meaningful

Net interest income in the third quarter of 2007, on a taxable-equivalent basis, decreased 7 percent from the third quarter of 2006. Our net interest margin decreased by 50 basis points. These results were primarily due to the following:

•: Average earning assets increased $3.0 billion, or 7 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a $1.1 billion increase in average commercial loans, including a $0.2 billion increase in lower yielding loans related to title and escrow customers, a $1.2 billion increase in average residential mortgages and a $0.7 billion increase in average commercial mortgages;
•: Yields on our earning assets were favorably impacted by the increasing interest rate environment resulting in a higher average yield on average earning assets of 13 basis points, which included the favorable impact of $5.8 million in lower hedge expense;
•: Average noninterest bearing deposits decreased $3.2 billion, or 19 percent, which resulted in a deposit mix shift to higher cost deposits. Excluding average title and escrow deposits, which decreased $0.8 billion, or 34 percent, average commercial noninterest bearing deposits declined $2.0 billion, or 17 percent, primarily due to changes in customer behavior in response to rising short-term interest rates. Consumer demand deposits decreased $0.4 billion, or 13 percent. Average noninterest bearing deposits represented 33 percent of average total deposits in the third quarter of 2007 compared to 42 percent in the third quarter of 2006;
•: Rates on our interest bearing liabilities were unfavorably impacted by the higher short-term interest rates, as well as by an unfavorable shift in deposit mix due to heightened competition for deposits, resulting in a 50 basis point increase in average rates on average interest bearing liabilities; and
•: In the third quarter of 2007, the annualized average all-in cost of funds was 2.78 percent, reflecting an average core deposit-to-loan ratio of 82 percent and a relatively high proportion of average noninterest bearing deposits to average total deposits compared to our peers. In the third quarter of 2006, the annualized all-in cost of funds was 2.11 percent and our average core deposit-to-loan ratio was 94 percent.

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 to convert our long-term, fixed-rate borrowings to floating rate. For loans, we had hedge expense of $14.8 million and $9.0 million for the quarters ended September 30, 2006 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge expense of $0.2 million and $0.6 million for the quarters ended September 30, 2006 and 2007, respectively.

Net interest income in the first nine months of 2007, on a taxable-equivalent basis, decreased 8 percent from the first nine months of 2006. Our net interest margin decreased by 64 basis points. These results were primarily due to the following:

•: Average earning assets increased $4.1 billion, or 9 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a $1.6 billion increase in average commercial loans, including a $0.5 billion increase in lower yielding loans related to title and escrow customers, a $1.0 billion increase in average residential mortgages, a $0.6 billion increase in average construction loans and a $0.6 billion increase in average commercial mortgages;
•: Yields on our earning assets were favorably impacted by the increasing interest rate environment resulting in a higher average yield on average earning assets of 19 basis points;
•: Average noninterest bearing deposits decreased $2.7 billion, or 16 percent. Excluding average title and escrow deposits, which decreased $0.5 billion, or 22 percent, average commercial noninterest bearing deposits declined $1.8 billion, or 15 percent, primarily due to changes in customer behavior in response to rising short-term interest rates. Consumer demand deposits decreased $0.4 billion, or

13 percent. Average noninterest bearing deposits represented 35 percent of average total deposits in the first nine months of 2007 compared to 44 percent in the first nine months of 2006;

•: Rates on our interest bearing liabilities were unfavorably impacted by the higher short-term interest rates, as well as to an unfavorable shift in deposit mix due to heightened competition for deposits, resulting in an 86 basis points increase in average rates on average interest bearing liabilities; and
•: In the first nine months of 2007, the annualized average all-in cost of funds was 2.65 percent, reflecting an average core deposit-to-loan ratio of 85 percent and a relatively high proportion of average noninterest bearing deposits to average total deposits compared to our peers. In the first nine months of 2006, the annualized all-in cost of funds was 1.78 percent and our average core deposit-to-loan ratio was 99 percent.

We use derivatives to hedge expected changes in the yields on our variable rate loans and CDs, and to convert our long-term, fixed-rate borrowings to floating rate. For loans, we had hedge expense of $34.6 million and $29.3 million for the first nine months of 2006 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge income of $0.6 million and hedge expense of $0.5 million for the first nine months of 2006 and 2007, respectively.

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, 2006 and 2007.

Noninterest Income

		For the Three Months Ended									For the Nine Months Ended
						Increase (Decrease)									Increase (Decrease)
(Dollars in thousands)		September 30, 2006		September 30, 2007		Increase (Decrease)					September 30, 2006		September 30, 2007		Increase (Decrease)
(Dollars in thousands)		September 30, 2006		September 30, 2007		Amount			Percent		September 30, 2006		September 30, 2007		Amount			Percent
Service charges on deposit accounts		$	79,083	$	76,210	$	(2,873	)	(3.6	)%	$	242,555	$	228,373	$	(14,182	)	(5.8	)%
Trust and investment management fees			47,555		51,262		3,707		7.8			146,050		151,407		5,357		3.7
Insurance commissions			17,301		15,988		(1,313	)	(7.6	)		54,571		52,739		(1,832	)	(3.4	)
Trading account activities			14,311		21,795		7,484		52.3			41,495		50,473		8,978		21.6
Brokerage commissions and fees			8,531		10,476		1,945		22.8			26,656		29,669		3,013		11.3
Merchant banking fees			11,655		10,031		(1,624	)	(13.9	)		28,280		27,917		(363	)	(1.3	)
Card processing fees, net			7,241		7,785		544		7.5			21,144		22,736		1,592		7.5
Securities gains, net			43		171		128		nm			1,822		1,621		(201	)	(11.0	)
Gains on private capital investments, net			7,681		12,203		4,522		58.9			14,210		41,469		27,259		nm
Other			23,854		29,811		5,957		25.0			77,610		81,731		4,121		5.3

	Total noninterest income	$	217,255	$	235,732	$	18,477		8.5	%	$	654,393	$	688,135	$	33,742		5.2	%

nm = not meaningful

Noninterest Expense

		For the Three Months Ended										For the Nine Months Ended
							Increase (Decrease)										Increase (Decrease)
(Dollars in thousands)		September 30, 2006			September 30, 2007		Increase (Decrease)					September 30, 2006			September 30, 2007		Increase (Decrease)
(Dollars in thousands)		September 30, 2006			September 30, 2007		Amount			Percent		September 30, 2006			September 30, 2007		Amount			Percent
Salaries and other compensation		$	200,591		$	203,914	$	3,323		1.7	%	$	596,539		$	617,681	$	21,142		3.5	%
Employee benefits			44,022			32,661		(11,361	)	(25.8	)		149,206			128,839		(20,367	)	(13.7	)

	Salaries and employee benefits		244,613			236,575		(8,038	)	(3.3	)		745,745			746,520		775		0.1
Net occupancy			35,753			39,017		3,264		9.1			103,109			109,398		6,289		6.1
Outside services			31,890			21,394		(10,496	)	(32.9	)		91,203			60,081		(31,122	)	(34.1	)
Equipment			17,387			15,964		(1,423	)	(8.2	)		52,155			48,885		(3,270	)	(6.3	)
Professional services			12,169			18,162		5,993		49.2			43,754			47,219		3,465		7.9
Software			15,334			15,325		(9	)	(0.1	)		47,001			44,657		(2,344	)	(5.0	)
Advertising and public relations			11,726			10,339		(1,387	)	(11.8	)		33,228			29,204		(4,024	)	(12.1	)
Communications			9,942			9,965		23		0.2			30,555			28,611		(1,944	)	(6.4	)
Data processing			7,933			8,152		219		2.8			23,175			25,019		1,844		8.0
Intangible asset amortization			3,427			2,243		(1,184	)	(34.5	)		10,284			6,729		(3,555	)	(34.6	)
Foreclosed asset expense (income)			(183	)		37		220		nm			(15,332	)		55		15,387		nm
(Reversal of) provision for losses on off-balance sheet commitments			—			4,000		4,000		nm			(7,000	)		5,000		12,000		nm
Other			27,030			27,247		217		0.8			86,718			90,998		4,280		4.9

	Total noninterest expense	$	417,021		$	408,420	$	(8,601	)	(2.1	)%	$	1,244,595		$	1,242,376	$	(2,219	)	(0.2	)%

nm = not meaningful

Income Tax Expense

Our effective tax rate on continuing operations in the third quarter of 2007 was 36.9 percent compared to 33.6 percent for the third quarter of 2006.

The higher effective tax rate was primarily due to an adjustment of $11.6 million to income tax expense for 2006 to recognize the difference between the estimate of California state tax expense for last year and the taxes reported in our 2006 tax return, which was filed on the worldwide unitary basis. The State of California requires us to file franchise tax returns as a member of either a worldwide or a water's edge unitary group that includes our majority stockholder, The Bank of Tokyo-Mitsubishi-UFJ, Ltd. (BTMU) and other affiliates of Mitsubishi-UFJ Financial Group, Inc. (MUFG). Changes between MUFG's estimated and actual income for the fiscal year ended March 31, 2007, as reported in their Form 20-F filed with the SEC on September 21, 2007, affected our California state taxes for 2006 and 2007. During the third quarter 2007, we increased our accrual of California state tax expense for 2007 by approximately $3.9 million, primarily as a result of the increased income reported by MUFG for its most recent reporting period, as well as MUFG's estimated income for its fiscal year ending March 31, 2008. Partially offsetting the two items summarized above was a $7.6 million state tax benefit recognized in the third quarter of 2007 as a result of the settlement of an audit of our tax returns for the tax year 2002.

Our effective tax rate on continuing operations in the first nine months of 2007 increased to 34.0 percent from 33.8 percent for the first nine months of 2006. The slight increase was due to the $7.9 million net tax increase in the third quarter 2007 identified above, partially offset by a $4.6 million net tax decrease in the second quarter of 2007 (consisting of the recognition of $8.4 million of tax benefits resulting from the expiration of the statute of limitations on uncertain tax positions, partially offset by $3.8 million in additional taxes due to the non-deductibility of the reserve for pending regulatory actions).

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 2006 Form 10-K.

Loans

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

										Increase (Decrease) September 30, 2007 from:
										September 30, 2006					December 31, 2006
(Dollars in thousands)				September 30, 2006		December 31, 2006		September 30, 2007		September 30, 2006					December 31, 2006
(Dollars in thousands)				September 30, 2006		December 31, 2006		September 30, 2007		Amount			Percent		Amount			Percent
Commercial, financial and industrial				$	12,513,749	$	12,944,771	$	13,837,388	$	1,323,639		10.6	%	$	892,617		6.9	%
Construction					2,074,320		2,175,545		2,411,434		337,114		16.3			235,889		10.8
Mortgage:
	Residential				12,101,517		12,343,792		13,451,633		1,350,116		11.2			1,107,841		9.0
	Commercial				5,760,046		6,028,242		6,529,125		769,079		13.4			500,883		8.3

		Total mortgage			17,861,563		18,372,034		19,980,758		2,119,195		11.9			1,608,724		8.8
Consumer:
	Installment				1,078,671		1,137,401		1,258,485		179,814		16.7			121,084		10.6
	Revolving lines of credit				1,428,317		1,401,173		1,328,747		(99,570	)	(7.0	)		(72,426	)	(5.2	)

		Total consumer			2,506,988		2,538,574		2,587,232		80,244		3.2			48,658		1.9
Lease financing					573,516		581,203		634,524		61,008		10.6			53,321		9.2

		Total loans held to maturity			35,530,136		36,612,127		39,451,336		3,921,200		11.0			2,839,209		7.8
		Total loans held for sale			143,333		59,596		294,005		150,672		nm			234,409		nm

			Total loans	$	35,673,469	$	36,671,723	$	39,745,341	$	4,071,872		11.4	%	$	3,073,618		8.4	%

nm = not meaningful

Commercial, Financial and Industrial Loans

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

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

The commercial, financial and industrial loan portfolio increased from September 30, 2006 to September 30, 2007 due to increased loan demand primarily in the oil and gas, national corporate and California middle market segments.

Construction and Commercial Mortgage Loans

We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust. Construction loans are made primarily to commercial property developers and to residential builders.

The construction loan portfolio increase from September 30, 2006 to September 30, 2007 was primarily due to increased demand for income property projects with office and apartment financing representing the largest components.

The commercial mortgage loan portfolio consists of loans on commercial income properties primarily in California. The increase in commercial mortgages from September 30, 2006 to September 30, 2007 was mainly due to increased demand in the California middle market for real estate related financing.

Residential Mortgage Loans

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

At September 30, 2007, 68 percent of our residential mortgage loans were interest only, of which none 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 balloon or regular amortizing loans.

We do not offer subprime loan products. However, we do have several loan products that allow a customer to move more quickly through the loan origination process by reducing or eliminating the need to verify the income or assets of the customer. We refer to these loans as "no doc" or "low doc" loans. "No doc" loans are only available for owner-occupied properties and eliminate the verification of both income and assets, while "low doc" loans require the verification of assets. In both cases, these loans require lower LTV ratios and higher FICO® credit scores than for fully documented residential loans. Although these loans comprise nearly half of our residential loan portfolio, the delinquency rates relative to the outstanding balances at September 30, 2007 were lower than fully documented loans. At September 30, 2007, the total amount of "no doc" and "low doc" loans past due 30 days or more was $13.2 million compared to $5.7 million at December 31, 2006. The total amount of residential mortgages delinquent 30 days or more was $32.8 million at September 30, 2007 compared to $27.9 million at December 31, 2006.

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

Consumer Loans

We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network. The increase in consumer loans from September 30, 2006 was primarily in our "Flex Equity Line/Loan" product. The "Flex Equity 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 their "Flex Equity Lines/Loans" to fixed rate loans, these new loans are classified as installment loans. In addition, we offer a "Flex Equity High LTV" product, which allows our customers to draw up to 100 percent of the value of their real estate or $150 thousand, whichever is less. At September 30, 2007, the total amount of "Flex Equity High LTV" loans was $5.4 million with $0.1 million delinquent 30 days or more. Our total home equity loans and lines delinquent 30 days or more were $5.9 million at September 30, 2007 compared to $4.6 million at December 31, 2006.

Lease Financing

We offer two types of leases to our customers: direct financing leases, where the 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. Included in our lease portfolio at September 30, 2007 are leveraged leases of $551 million, which are net of non-recourse debt of approximately $1.0 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.

On January 1, 2007, we adopted FASB Staff Position (FSP) FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction." See Note 2 to the Condensed Consolidated Financial Statements in this Form 10-Q for information regarding the adoption of this FSP.

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, 2007 for one country where such outstandings exceeded 1 percent of total assets. For the periods ended September 30, 2006 and December 31, 2006 there were no countries where such cross-border outstandings exceeded 1 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 either hedged or funded by local currency borrowings.

(Dollars in millions)			Financial Institutions			Public Sector Entities			Corporations and Other Borrowers			Total Outstandings
September 30, 2007
	Canada		$	8		$	—		$	1,039		$	1,047

Provision for Credit Losses

We recorded a provision for loan losses of $16 million in the third quarter of 2007, compared with no provision for loan losses in the third quarter of 2006. There was a $4 million provision for losses related to the allowance for losses on off-balance sheet commitments in the third quarter of 2007 compared to no provision in the third quarter of 2006. The provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowances for Credit Losses" below.

Allowances for Credit Losses

Allowance Policy and Methodology

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 2006 Form 10-K.

Comparison of the Total Allowances and Related Provision for Credit Losses from December 31, 2006

At September 30, 2007, our total allowances for credit losses were $437 million, which consisted of $351 million related to loans and $86 million related to off-balance sheet commitments. The allowances for credit losses were comprised of $375 million and $62 million of allocated and unallocated allowance, respectively. At September 30, 2007, our allowances for credit loss coverage ratios were 1.10 percent of total loans and 853 percent of total nonaccrual loans. At December 31, 2006, our total allowances for credit losses were $412 million, or 1.12 percent of the total loan portfolio and 987 percent of total nonaccrual loans.

In addition, the allowances include the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At September 30, 2007, our total impaired loans were $51 million and the associated impairment allowance was $11 million compared to total impaired loans of $27 million and an associated impairment allowance of $3 million on December 31, 2006.

At September 30, 2007 and December 31, 2006, the allowance for losses related to off-balance sheet commitments included within our discussion of the total allowances for credit losses, was $86 million and $81 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for off-balance sheet commitment losses.

We recorded a provision for credit losses of $20 million in the third quarter of 2007, as a result of management's assessment of factors, including the credit quality of our credit portfolio, impact of slower growth in the U.S. economy (including a continued slow down in the housing market and the potential adverse impact of higher fuel prices on the economy), growth of and changes in the composition of our credit portfolio and the amount of net charge offs and changes in loss factors.

During the third quarter of 2007, there were no material changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of our allowances for credit losses.

Changes in the Allocated (Formula and Specific) Allowance

At September 30, 2007, the formula allowance increased to $364 million from $347 million at December 31, 2006. The net increase included an increase in criticized credits and growth in our loan portfolio, offset by declines in certain loss factors. At September 30, 2007, the specific allowance was $11 million compared to $6 million at December 31, 2006.

Changes in the Unallocated Allowance

At September 30, 2007, the unallocated allowance increased to $62 million from $59 million at December 31, 2006, reflecting management's belief that maintaining the unallocated allowance near our December 31, 2006 assessment is appropriate based on continuing uncertainty associated with our principal portfolio segments, as we believe we have passed the turning point in credit quality trends. Additionally, the primary reasons for which we believe an unallocated allowance is warranted are detailed below.

In our assessment as of September 30, 2007, 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 collectibility of the applicable loans may not have been 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.

The following describes some of the specific conditions we considered.

•: With respect to commercial real estate, we considered the substantial weakness in the residential construction market, partly offset by continued strength in the commercial real estate construction sector, which could be in the range of $10 million to $28 million.
•: With respect to concentrated sales, which include suppliers of "big box" stores like Costco, Wal-Mart, Home Depot, Lowe's and other companies that generate 15 percent or more of their revenues from one customer, we considered the potential negative impact competitive market pricing would have on their profit margins and lower than expected same store sales, which could be in the range of $7 million to $12 million.
•: With respect to fuel prices, we considered the ability of borrowers to absorb higher fuel prices without anticipated negative effects, the prospects of high costs of oil and petroleum products and the impact across virtually all sectors of the economy, which could be in the range of $3 million to $12 million.
•: With respect to contractors, we considered the slump in the residential housing market, partly offset by continued strength in commercial real estate construction, which could be in the range of $5 million to $7 million.
•: With respect to building material suppliers, we considered the slump in the housing industry, including weakening home sales, and the effects on suppliers, which could be in the range of $2 million to $5 million.
•: With respect to our customers whose revenues are dependent on advertising, we considered the pressures on earnings of newspapers and radio and television stations due to decreases in advertising sale revenues, which could be in the range of $2 million to $4 million.

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

Change in the Total Allowances for Credit Losses

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

				For the Three Months Ended September 30,											For the Nine Months Ended September 30,
										Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)										Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)				2006			2007			Amount			Percent		2006			2007			Amount			Percent
Balance, beginning of period				$	328,338		$	335,952		$	7,614		2.3	%	$	351,532		$	331,077		$	(20,455	)	(5.8	)%
Loans charged off:
	Commercial, financial and industrial				4,105			2,719			(1,386	)	(33.8	)		33,274			8,559			(24,715	)	(74.3	)
	Mortgage				—			86			86		nm			336			91			(245	)	(72.9	)
	Consumer				929			1,696			767		82.6			2,723			4,416			1,693		62.2
	Lease financing				—			—			—		—			22			—			(22	)	(100.0	)

		Total loans charged off			5,034			4,501			(533	)	(10.6	)		36,355			13,066			(23,289	)	(64.1	)

Recoveries of loans previously charged off:
	Commercial, financial and industrial				3,179			2,098			(1,081	)	(34.0	)		14,025			5,550			(8,475	)	(60.4	)
	Mortgage				—			336			336		nm			2			336			334		nm
	Consumer				456			245			(211	)	(46.3	)		1,332			756			(576	)	(43.2	)
	Lease financing				20			2			(18	)	(90.0	)		4,258			89			(4,169	)	(97.9	)

		Total recoveries of loans previously charged off			3,655			2,681			(974	)	(26.6	)		19,617			6,731			(12,886	)	(65.7	)

			Net loans charged off		1,379			1,820			441		32.0			16,738			6,335			(10,403	)	(62.2	)
(Reversal of) provision for loan losses					—			16,000			16,000		nm			(8,000	)		25,000			33,000		nm
Foreign translation adjustment and other net additions					(4	)		359			363		nm			161			749			588		nm

Ending balance of allowance for loan losses				$	326,955		$	350,491		$	23,536		7.2	%	$	326,955		$	350,491		$	23,536		7.2	%
Allowance for losses on off-balance sheet commitments					79,374			86,374			7,000		8.8			79,374			86,374			7,000		8.8

Allowances for credit losses				$	406,329		$	436,865		$	30,536		7.5	%	$	406,329		$	436,865		$	30,536		7.5	%

Allowance for loan losses to total loans					0.92	%		0.88	%							0.92	%		0.88	%
Allowances for credit losses to total loans⁽¹⁾					1.14			1.10								1.14			1.10
(Reversal of) provision for loan losses to net loans charged off					nm			879.12								nm			394.63
Net loans charged off to average loans outstanding for the period⁽²⁾					0.02			0.02								0.06			0.02

⁽¹⁾: The allowances for credit losses to total loans ratio includes the allowance for loan losses and losses on off-balance sheet commitments.
⁽²⁾: Annualized.

nm = not meaningful

Total loans charged off in the third quarter of 2007 decreased from the third quarter of 2006. Charge offs reflect the realization of losses in the portfolio that were recognized previously through provision for credit losses. In addition, third quarter 2007 recoveries of loans previously charged off decreased from the third quarter of 2006 primarily as result of the higher levels of loans charged off in periods prior to September 30, 2006. Such fluctuations in loan recoveries from year-to-year are due to variability in timing of recoveries and tend to trail the periods in which charge offs are recorded.

Nonperforming Assets

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

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

The following table sets forth an analysis of nonperforming assets.

											Increase (Decrease) September 30, 2007 from:
											September 30, 2006					December 31, 2006
(Dollars in thousands)		September 30, 2006			December 31, 2006			September 30, 2007			September 30, 2006					December 31, 2006
(Dollars in thousands)		September 30, 2006			December 31, 2006			September 30, 2007			Amount			Percent		Amount			Percent
Commercial, financial and industrial		$	14,171		$	7,552		$	36,979		$	22,808		nm		$	29,427		nm
Commercial mortgage			18,538			19,187			14,265			(4,273	)	(23.0	)%		(4,922	)	(25.7	)%
Lease financing			15,094			15,047			—			(15,094	)	(100.0	)		(15,047	)	(100.0	)

	Total nonaccrual loans		47,803			41,786			51,244			3,441		7.2			9,458		22.6
Foreclosed assets			—			579			1,318			1,318		nm			739		nm

	Total nonperforming assets	$	47,803		$	42,365		$	52,562		$	4,759		10.0	%	$	10,197		24.1	%

Allowance for loan losses		$	326,955		$	331,077		$	350,491		$	23,536		7.2	%	$	19,414		5.9	%

Allowances for credit losses⁽¹⁾		$	406,329		$	412,451		$	436,865		$	30,536		7.5	%	$	24,414		5.9	%

Nonaccrual loans to total loans			0.13	%		0.11	%		0.13	%
Allowance for loan losses to nonaccrual loans			683.96			792.32			683.96
Allowances for credit losses to nonaccrual loans			850.01			987.06			852.52
Nonperforming assets to total loans and foreclosed assets			0.13			0.12			0.13
Nonperforming assets to total assets			0.09			0.08			0.10

⁽¹⁾: Includes allowance for losses related to off-balance sheet commitments.

nm = not meaningful

The increase in commercial, financial and industrial nonperforming loans was primarily due to the addition of two nonperforming loans, which included an energy company (for $12 million) and a medical equipment rental company (for $11 million). We had no sales of nonperforming loans during the third quarters of 2006 and 2007. Losses and recoveries that result when the sale decision is made are reflected in our net charge offs.

Loans 90 Days or More Past Due and Still Accruing

									Increase (Decrease) September 30, 2007 from:
									September 30, 2006					December 31, 2006
(Dollars in thousands)			September 30, 2006		December 31, 2006		September 30, 2007		September 30, 2006					December 31, 2006
(Dollars in thousands)			September 30, 2006		December 31, 2006		September 30, 2007		Amount			Percent		Amount			Percent
Commercial, financial and industrial			$	563	$	3,085	$	3,076	$	2,513		nm		$	(9	)	(0.3	)%
Construction				—		—		3,052		3,052		nm			3,052		—
Mortgage:
	Residential			2,259		2,359		10,975		8,716		nm			8,616		nm
	Commercial			—		2,155		—		—		—			(2,155	)	(100.0	)

		Total mortgage		2,259		4,514		10,975		8,716		nm			6,461		nm
Consumer and other				1,342		1,706		819		(523	)	(39.0	)%		(887	)	(52.0	)%

	Total loans 90 days or more past due and still accruing		$	4,164	$	9,305	$	17,922	$	13,758		nm		$	8,617		92.6	%

nm = not meaningful

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk exists primarily in interest rate risk in our non-trading balance sheet and, to a much lesser degree, in price risk in our trading portfolio for our customer-focused trading and sales activities. The objective of Treasury 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, through its Finance and Capital Committee, approves our Asset Liability Management, Investment and Derivatives Policy (ALM Policy), which governs the management of market risk and guides our investment and derivatives 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.

In an effort to ensure that the Bank has an effective process to identify, measure, monitor and manage market risk, the ALM Policy requires the Bank to establish an Asset Liability Management Committee (ALCO), which is comprised of the members of the CEO Forum and the Treasurer. ALCO provides the broad and strategic guidance of market risk management by formulating high-level strategies for market risk management and defining the risk/return stance for the Bank and by approving the investment, derivatives and trading policies that govern the Bank's activities. ALCO is also responsible for ongoing management of market risk and approves specific risk management programs, including those related to interest rate hedging, investment securities and wholesale funding.

The Treasurer is primarily responsible for the implementation of Asset Liability risk management strategies approved by ALCO and for operating management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The manager of the Global Markets Division is responsible for operating management of price risk through the trading activities conducted in that division. The Market Risk Monitoring unit is responsible for the monitoring of market risk and functions independently of all operating and management units.

We have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For additional information about our market risk management, please see "Quantitative and Qualitative Disclosures about Market Risk" in

"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2006 Form 10-K.

Interest Rate Risk Management (Other Than Trading)

During the first nine months of 2007, our interest rate risk profile remained neutral to slightly liability-sensitive primarily as a result of trends in our unhedged, core balance sheet including wholesale funding replacing declining noninterest bearing deposit balances. In February and April 2007, we added $500 million and $900 million, respectively, of new floor hedges to maintain our downside neutral to liability sensitivity (see our discussion of "ALM Derivatives" below).

At September 30, 2007, Economic Net Interest Income (NII) sensitivity was neutral to slightly liability-sensitive to parallel rate shifts. A +200 basis point parallel shift would reduce 12-month Economic NII by 0.13 percent, while a similar downward shift would increase it by 0.74 percent. At September 30, 2006, a +200 basis point parallel shift would reduce the 12-month Economic NII by 1.02 percent, while a -200 basis point shift would increase it by 0.18 percent. We caution that ongoing enhancements or changes in assumptions 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 more asset-sensitive or less liability-sensitive than Economic NII.

Economic NII

(Dollars in millions)	September 30, 2006			December 31, 2006			September 30, 2007
+200 basis points	$	(19.6	)	$	(7.0	)	$	(2.6	)
as a percentage of base case NII		(1.02	)%		(0.37	)%		(0.13	)%
-200 basis points	$	3.4		$	20.5		$	14.7
as a percentage of base case NII		0.18	%		1.09	%		0.74	%

The figures in the above table are reported on a continuing operations basis, with all assets and liabilities associated with the disposal of the international correspondent banking business 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 is liability-sensitive to changes in short-term rates (with long-term rates held constant) and asset-sensitive to changes in long-term rates (with short-term rates held constant). In other words, our Economic NII will benefit from curve steepening with short (long) rates dropping (rising) and will contract from the curve further inverting with long (short) rates dropping (rising).

ALM Activities

During the first nine months of 2007, our unhedged, core balance sheet became less asset-sensitive compared to the first nine months of 2006. The change in the risk profile of the core balance sheet resulted primarily from a decline in core deposit balances and increased asset growth funded by proportionally more short-term wholesale liabilities. At September 30, 2007, the core balance sheet continues to be asset-sensitive, meaning that the current mix of assets reprices faster than our current mix of liabilities. 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 2007, we reinvested proceeds from maturing ALM securities into securities with like terms and asset allocation. New derivative hedges were also added during the year as described below.

ALM Securities

At both September 30, 2006 and 2007, our available for sale securities portfolio included $6.6 billion of securities for ALM purposes. At September 30, 2007, approximately $3.7 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the first nine months of 2007, we purchased approximately $1.3 billion of securities, while approximately $1.4 billion of securities matured or were called during the same period. The composition of the portfolio is expected to remain relatively stable in 2007. Based on current prepayment projections, the estimated ALM portfolio effective duration was 2.2 at September 30, 2007, compared to 2.0 at September 30, 2006.

Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.2 suggests an expected price change of approximately minus 2.2 percent for an immediate 1.0 percent increase in interest rates.

ALM Derivatives

During the first nine months of 2007, the ALM derivatives portfolio decreased by a net $500 million notional amount, as $1.4 billion of notional amount of LIBOR floor contracts were purchased to maintain the downside neutral to liability sensitivity of our overall risk position, offset by maturities of $1.7 billion notional amount of receive fixed interest rate swaps and $200 million notional amount in LIBOR floors.

The fair value of the ALM derivative contracts increased during the third quarter of 2007 as the value of our receive fixed interest rate swaps and floor option contracts increased with the Fed easing in September and the expectation of lower future interest rates. For additional discussion of derivative instruments and our hedging strategies, see Note 8 to the Condensed Consolidated Financial Statements included in this Form 10-Q and Note 19 to the Consolidated Financial Statements included in our 2006 Form 10-K.

The following table provides the notional value and the fair value of our ALM derivatives portfolio as of September 30, 2006, December 31, 2006 and September 30, 2007 and the change in fair value between December 31, 2006 and September 30, 2007.

(Dollars in thousands)			September 30, 2006			December 31, 2006		September 30, 2007		Increase / (Decrease) From December 31, 2006 to September 30, 2007
Total gross notional amount of positions held for purposes other than trading:			$	7,200,000		$	8,250,000	$	7,750,000	$	(500,000	)
	Of which, interest rate swaps pay fixed rates of interest:		$	—		$	—	$	—	$	—

Fair value of positions held for purposes other than trading:
	Gross positive fair value		$	31,956		$	44,720	$	55,189	$	10,469
	Gross negative fair value		$	46,890		$	37,682	$	8,643	$	(29,039	)

		Positive (Negative) Fair value of positions, net	$	(14,934	)	$	7,038	$	46,546	$	39,508

Trading Activities

We enter into trading account activities primarily as a financial intermediary for customers and, to a minor 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 from the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities and foreign exchange instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.

As of September 30, 2007, we had approximately $11.3 billion notional amount of interest rate derivative contracts, which included approximately $5.6 billion notional amount of derivative contracts entered into as an accommodation for customers. We act as an intermediary and entered into approximately $5.7 billion notional amount of offsetting contracts with major dealers, at a credit spread, thus neutralizing substantially all of the related market risk on our customer accommodation transactions.

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 remove our exposure to market risk, with income earned on the credit spread. As of September 30, 2007, we had $3.0 billion notional amount of energy derivative contracts with half of these energy derivative contacts 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.

Liquidity Risk

Liquidity risk is the undue risk to our earnings and capital, which would result from our inability to meet our 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. 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, asset liquidation, including securities sold under repurchase agreements, and wholesale funding, which includes funds raised from interbank and other sources, both domestic and offshore. The Treasurer is responsible for operating management of liquidity through the funding and investment functions of Corporate Treasury. ALCO also maintains a Liquidity Contingency Plan, the objective of which is to identify actions to be taken to ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding activities.

Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our $32.6 billion in average core deposits (which consist of demand deposits, money market demand accounts, savings and consumer time deposits under $100,000), combined with average common stockholders' equity, funded 70 percent of average total assets of $53.5 billion in the third quarter of 2007. Most of the remaining funding was provided by short-term borrowings in the form of certificates of deposit, large time deposits, federal funds purchased, securities sold under repurchase agreements, commercial paper and other borrowings. During the first nine months of 2007, we extended the weighted average maturity of our wholesale borrowing position to enhance our overall liquidity profile.

Our securities portfolio provides additional enhancement to our liquidity position, which may be created through either securities sales or repurchase agreements. At September 30, 2007, we could have sold or transferred under repurchase agreements approximately $3.6 billion of our available for sale securities including excess pledged securities available for withdrawal on short notice. Liquidity may also be provided by the sale or maturity of other assets such as interest-bearing deposits in banks, federal funds sold and trading account securities. The aggregate balance of these assets averaged $767.5 million in the third quarter of 2007. Additional liquidity may be provided through loan maturities and sales.

On March 23, 2007, the Bank issued $750 million of two-year floating rate senior notes under the $4 billion Bank Note Program initiated in 2006. Combined with the $700 million, ten-year, fixed rate subordinated note issuance in 2006, the remaining available funding from the Bank Note Program is $2.6 billion. In the third quarter 2007, the Bank pledged collateral to establish an operational funding capacity with the Federal Home Loan Bank of San Francisco.

In addition to the funding provided by our bank subsidiary, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration statement with the SEC permitting ready access to the public debt markets. As of September 30, 2007, $600 million of debt or other securities were available for issuance under this shelf registration. Although we do not have firm commitments in place to sell securities

under the Bank Note Program or the shelf registration statement, these sources, in addition to our core deposit and equity capital, provide a stable funding base. Management does not rely on any single source of liquidity and manages availability in response to changing balance sheet needs.

Effective May 2007, Moody's upgraded the long-term rating of Union Bank of California, N.A. as shown in the table below. The following table reflects our credit ratings as of September 30, 2007.

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

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, 2006		December 31, 2006		September 30, 2007
Capital Components
Tier 1 capital	$	4,261,221	$	4,333,865	$	4,476,759
Tier 2 capital		1,502,587		1,509,338		1,533,891

Total risk-based capital	$	5,763,808	$	5,843,203	$	6,010,650

Risk-weighted assets	$	49,079,079	$	49,904,203	$	53,287,524

Quarterly average assets	$	50,324,270	$	51,353,681	$	53,368,377

	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Capital Ratios
Total capital (to risk-weighted assets)	$	5,763,808	11.74	%	$	5,843,203	11.71	%	$	6,010,650	11.28	%	³$	4,263,002	8.0	%
Tier 1 capital (to risk-weighted assets)		4,261,221	8.68			4,333,865	8.68			4,476,759	8.40			³ 2,131,501	4.0
Leverage⁽¹⁾		4,261,221	8.47			4,333,865	8.44			4,476,759	8.39			³ 2,134,735	4.0

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

Union Bank of California, N.A.

(Dollars in thousands)	September 30, 2006		December 31, 2006		September 30, 2007
Capital Components
Tier 1 capital	$	4,261,541	$	4,179,359	$	4,351,532
Tier 2 capital		1,093,876		1,100,287		1,125,260

Total risk-based capital	$	5,355,417	$	5,279,646	$	5,476,792

Risk-weighted assets	$	48,472,149	$	49,385,397	$	52,802,713

Quarterly average assets	$	49,674,643	$	50,686,185	$	52,775,720

	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Capital Ratios
Total capital (to risk-weighted assets)	$	5,355,417	11.05	%	$	5,279,646	10.69	%	$	5,476,792	10.37	%	³$	4,224,217	8.0	%	³$	5,280,271	10.0	%
Tier 1 capital (to risk-weighted assets)		4,261,541	8.79			4,179,359	8.46			4,351,532	8.24			³ 2,112,109	4.0			³ 3,168,163	6.0
Leverage⁽¹⁾		4,261,541	8.58			4,179,359	8.25			4,351,532	8.25			³ 2,111,029	4.0			³ 2,638,786	5.0

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

We and Union Bank of California 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 decrease in the Tier 1 and Total capital ratios from September 30, 2006 and December 31, 2006 was primarily due to an increase in risk-weighted assets stemming from growth in our loan portfolio and unfunded commitments. The decrease in our Leverage ratios from September 30, 2006 and December 31, 2006 was primarily due to the increase in our quarterly average assets resulting from the growth in our loan portfolio.

As of September 30, 2007, management believes the capital ratios of Union Bank of California met all regulatory requirements of "well-capitalized" institutions, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio.

Business Segments

Our 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" based upon the aggregation criteria prescribed in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."

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. Our reporting reflects a "market view" perspective in measuring the profitability of our operating 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 operating segment that provides the service and the operating 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 Corporation 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.

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.

		Retail Banking											Wholesale Banking
		As of and for the Three Months Ended September 30,						Increase/(decrease)					As of and for the Three Months Ended September 30,						Increase/(decrease)
		2006			2007			Amount			Percent		2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	240,741		$	222,971		$	(17,770	)	(7	)%	$	265,925		$	241,505		$	(24,420	)	(9	)%
	Noninterest income (expense)		127,266			135,448			8,182		6			105,563			113,117			7,554		7

	Total revenue		368,007			358,419			(9,588	)	(3	)		371,488			354,622			(16,866	)	(5	)
	Noninterest expense (income)		241,264			233,630			(7,634	)	(3	)		169,270			161,921			(7,349	)	(4	)
	Credit expense (income)		6,249			6,361			112		2			23,196			28,232			5,036		22

	Income (loss) from continuing operations before income taxes		120,494			118,428			(2,066	)	(2	)		179,022			164,469			(14,553	)	(8	)
	Income tax expense (benefit)		46,089			45,299			(790	)	(2	)		59,899			49,894			(10,005	)	(17	)

	Income (loss) from continuing operations		74,405			73,129			(1,276	)	(2	)		119,123			114,575			(4,548	)	(4	)
	Loss from discontinued operations, net of income taxes		—			—			—		na			—			—			—		na

Net income (loss)		$	74,405		$	73,129		$	(1,276	)	(2	)	$	119,123		$	114,575		$	(4,548	)	(4	)

Average balances—Market View (dollars in millions):
	Total loans	$	15,810		$	17,050		$	1,240		8		$	20,145		$	22,450		$	2,305		11
	Total assets		16,669			17,874			1,205		7			24,773			27,202			2,429		10
	Total deposits		18,886			19,066			180		1			18,337			18,373			36		0
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		45.00	%		45.00	%							23.00	%		20.00	%
	Return on average assets⁽¹⁾		1.77			1.62								1.91			1.67
	Efficiency ratio⁽²⁾		65.56			65.17								45.61			45.66

		Other											Reconciling Items						UnionBanCal Corporation
		As of and for the Three Months Ended September 30,						Increase/(decrease)					As of and for the Three Months Ended September 30,						As of and for the Three Months Ended September 30,						Increase/(decrease)
		2006			2007			Amount			Percent		2006			2007			2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(45,497	)	$	(35,780	)	$	9,717		21	%	$	(2,445	)	$	(2,251	)	$	458,724		$	426,445		$	(32,279	)	(7	)%
	Noninterest income (expense)		459			7,074			6,615		nm			(16,033	)		(19,907	)		217,255			235,732			18,477		9

	Total revenue		(45,038	)		(28,706	)		16,332		36			(18,478	)		(22,158	)		675,979			662,177			(13,802	)	(2	)
	Noninterest expense (income)		15,534			25,242			9,708		62			(9,047	)		(12,373	)		417,021			408,420			(8,601	)	(2	)
	Credit expense (income)		(29,421	)		(18,569	)		10,852		37			(24	)		(24	)		—			16,000			16,000		100

	Income (loss) from continuing operations before income taxes		(31,151	)		(35,379	)		(4,228	)	(14	)		(9,407	)		(9,761	)		258,958			237,757			(21,201	)	(8	)
	Income tax expense (benefit)		(15,342	)		(3,797	)		11,545		75			(3,598	)		(3,734	)		87,048			87,662			614		1

	Income (loss) from continuing operations		(15,809	)		(31,582	)		(15,773	)	(100	)		(5,809	)		(6,027	)		171,910			150,095			(21,815	)	(13	)
	Loss from discontinued operations, net of income taxes		(1,204	)		(22,636	)		(21,432	)	nm			—			—			(1,204	)		(22,636	)		(21,432	)	nm

	Net income (loss)	$	(17,013	)	$	(54,218	)	$	(37,205	)	nm		$	(5,809	)	$	(6,027	)	$	170,706		$	127,459		$	(43,247	)	(25	)

Average balances—Market View (dollars in millions):
	Total loans	$	32		$	8		$	(24	)	(75	)	$	(21	)	$	(23	)	$	35,966		$	39,485		$	3,519		10
	Total assets		9,360			8,446			(914	)	(10	)		(25	)		(26	)		50,777			53,496			2,719		5
	Total deposits		6,082			5,246			(836	)	(14	)		(2,723	)		(619	)		40,582			42,066			1,484		4
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		na			na								na			na			na			na
	Return on average assets⁽¹⁾		na			na								na			na			1.34	%		1.11	%
	Efficiency ratio⁽²⁾		na			na								na			na			61.55			60.85

⁽¹⁾

Annualized.

⁽²⁾

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

na = not applicable

nm = not meaningful

		Retail Banking											Wholesale Banking
		As of and for the Nine Months Ended September 30,						Increase/(decrease)					As of and for the Nine Months Ended September 30,						Increase/(decrease)
		2006			2007			Amount			Percent		2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	708,539		$	678,808		$	(29,731	)	(4	)%	$	781,241		$	725,972		$	(55,269	)	(7	)%
	Noninterest income (expense)		393,239			393,718			479		0			310,099			338,026			27,927		9

	Total revenue		1,101,778			1,072,526			(29,252	)	(3	)		1,091,340			1,063,998			(27,342	)	(3	)
	Noninterest expense (income)		723,247			717,986			(5,261	)	(1	)		502,495			489,411			(13,084	)	(3	)
	Credit expense (income)		19,221			18,896			(325	)	(2	)		71,549			80,165			8,616		12

	Income (loss) from continuing operations before income taxes		359,310			335,644			(23,666	)	(7	)		517,296			494,422			(22,874	)	(4	)
	Income tax expense (benefit)		137,436			128,384			(9,052	)	(7	)		174,735			151,455			(23,280	)	(13	)

	Income (loss) from continuing operations		221,874			207,260			(14,614	)	(7	)		342,561			342,967			406		0
	Loss from discontinued operations, net of income taxes		—			—			—		na			—			—			—		na

	Net income (loss)	$	221,874		$	207,260		$	(14,614	)	(7	)	$	342,561		$	342,967		$	406		0

Average balances—Market View (dollars in millions):
	Total loans	$	15,559		$	16,590		$	1,031		7		$	19,530		$	22,343		$	2,813		14
	Total assets		16,428			17,422			994		6			24,208			27,210			3,002		12
	Total deposits		19,022			18,911			(111	)	(1	)		18,301			18,481			180		1
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		46.00	%		42.00	%							22.00	%		20.00	%
	Return on average assets⁽¹⁾		1.81			1.59								1.89			1.69
	Efficiency ratio⁽²⁾		65.64			66.94								47.45			46.00

		Other											Reconciling Items						UnionBanCal Corporation
		As of and for the Nine Months Ended September 30,						Increase/(decrease)					As of and for the Nine Months Ended September 30,						As of and for the Nine Months Ended September 30,						Increase/(decrease)
		2006			2007			Amount			Percent		2006			2007			2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(91,039	)	$	(114,389	)	$	(23,350	)	(26	)%	$	(7,282	)	$	(6,561	)	$	1,391,459		$	1,283,830		$	(107,629	)	(8	)%
	Noninterest income (expense)		5,929			14,812			8,883		150			(54,874	)		(58,421	)		654,393			688,135			33,742		5

	Total revenue		(85,110	)		(99,577	)		(14,467	)	(17	)		(62,156	)		(64,982	)		2,045,852			1,971,965			(73,887	)	(4	)
	Noninterest expense (income)		51,836			71,087			19,251		37			(32,983	)		(36,108	)		1,244,595			1,242,376			(2,219	)	0
	Credit expense (income)		(98,701	)		(73,982	)		24,719		25			(69	)		(79	)		(8,000	)		25,000			33,000		nm

	Income (loss) from continuing operations before income taxes		(38,245	)		(96,682	)		(58,437	)	nm			(29,104	)		(28,795	)		809,257			704,589			(104,668	)	(13	)
	Income tax expense (benefit)		(27,784	)		(29,296	)		(1,512	)	(5	)		(11,132	)		(11,014	)		273,255			239,529			(33,726	)	(12	)

	Income (loss) from continuing operations		(10,461	)		(67,386	)		(56,925	)	nm			(17,972	)		(17,781	)		536,002			465,060			(70,942	)	(13	)
	Loss from discontinued operations, net of income taxes		(9,440	)		(22,636	)		(13,196	)	(140	)		—			—			(9,440	)		(22,636	)		(13,196	)	(140	)

	Net income (loss)	$	(19,901	)	$	(90,022	)	$	(70,121	)	nm		$	(17,972	)	$	(17,781	)	$	526,562		$	442,424		$	(84,138	)	(16	)

Average balances—Market View (dollars in millions):
	Total loans	$	31		$	22		$	(9	)	(29	)	$	(19	)	$	(24	)	$	35,101		$	38,931		$	3,830		11
	Total assets		8,814			8,593			(221	)	(3	)		(23	)		(28	)		49,427			53,197			3,770		8
	Total deposits		2,976			5,357			2,381		80			(582	)		(669	)		39,717			42,080			2,363		6
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		na			na								na			na			na			na
	Return on average assets⁽¹⁾		na			na								na			na			1.45	%		1.17	%
	Efficiency ratio⁽²⁾		na			na								na			na			61.79			62.53

⁽¹⁾

Annualized.

⁽²⁾

na = not applicable

nm = not meaningful

Retail Banking

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 segment based strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to retain customers and attract new customers in these identified target markets. While the primary focus of Retail Banking's segment based strategy is deposit growth, an additional focus continues to be consumer and small business loan generation.

During the nine months ended September 30, 2007, Retail Banking net income decreased 7 percent from the same period in 2006, primarily due to lower net interest income. Net interest income declined 4 percent as a result of lower noninterest bearing deposits and higher interest expense.

Average total deposits were essentially flat during the nine months ended September 30, 2007, compared to the same period in 2006. Retail Banking's customer segmentation strategy continues to focus on retaining and 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.

Noninterest income increased slightly for the nine months ended September 30, 2007 compared to the same period in 2006.

Noninterest expense decreased 1 percent for the nine months ended September 30, 2007 compared to the prior year primarily from lower non-personnel related operating expenses.

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

•: Retail Banking Branches serves its customers through 319 full-service branches in California, 4 full-service branches in Oregon and Washington and 2 international offices. We own property occupied by 116 of the domestic offices and lease the remaining properties for periods of five to twenty years. Customers also access our services 24 hours a day by telephone or through our website at www.unionbank.com. In addition, the branches offer automated teller and point-of-sale merchant services.

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

—: through conveniently located banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of consumer financing and investment services;
—: through our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services;
—: through business banking centers, which serve small businesses;
—: through in-store branches; and
—: through our network of over 600 ATM machines.

•: Consumer Asset Management provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages.

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

Our Retail Banking Branches and Consumer Asset Management divisions operate in a highly competitive environment including traditional banking institutions as well as non-traditional competitors such as investment brokerage companies, consumer finance companies and residential real estate lenders.

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

•

Wealth Management provides comprehensive private banking services to our affluent clientele. The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services and deposit and credit products. A key strategy of The Private Bank is to expand its business by leveraging existing Bank client relationships. Through 15 existing locations, The Private Bank relationship managers offer all of our available products and services.

•

Institutional Services and Asset Management provides investment management and administration services for a broad range of individuals and institutions.

—: HighMark Capital Management, Inc., a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated HighMark Funds. It also provides investment management services to Union Bank of California, N.A. with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s strategy is to broaden its client base and to increase the assets of the HighMark Funds.
—: Institutional Services provides custody, corporate trust and retirement plan services. Custody Services provides both domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues, provides escrow services and trustee services for project finance. Retirement Services provides a full range of defined benefit and defined contribution administrative services, including trustee services, administration, investment management and 401(k) valuation services. The client base of Institutional Services includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers and non-profit organizations. Institutional Services' strategy is to continue to leverage and expand its position in our target markets.

Wholesale Banking

Wholesale Banking offers financing, depository, cash management and insurance services to middle market and large corporate businesses primarily headquartered in the western United States. Wholesale Banking continues to focus 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, 2007, Wholesale Banking net income increased slightly from the same period in 2006, due to higher tax credits associated with the financing of low income housing projects, partly offset by lower total revenue.

For the nine months ended September 30, 2007, net interest income decreased 7 percent compared to the same period in 2006. The decrease in net interest income was partly due to an increase in the title and escrow loan portfolio, which is highly rate-advantaged compared to other commercial loans.

Noninterest income was 9 percent higher for the nine months ended September 30, 2007 compared to the prior year primarily due to higher net gains on private capital investments.

Noninterest expense for the nine months ended September 30, 2007 decreased 3 percent from prior year primarily as a result of lower deposit balances of title and escrow customers along with their increased usage of title and escrow loans, which when combined resulted in lower vendor billing expense incurred on behalf of these customers. Offsetting this decrease in noninterest expense were foreclosed asset recoveries in the nine months ended September 30, 2006, which did not occur in the same period in 2007.

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.

Wholesale Banking is comprised of the following main divisions:

•: the Commercial Banking Division, which serves California middle-market and large corporate companies with commercial lending, trade financing and asset-based loans;
•: the Real Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing;
•: the Energy Capital Services Division, which provides corporate financing and project financing to oil and gas companies, as well as power and utility companies, nationwide;
•: the Equipment Leasing Division, which provides lease financing services to corporate customers nationwide;
•: the National Banking Division, which provides financing, deposits and traditional banking services to corporate clients primarily headquartered outside California;
•: the Commercial Deposit and Treasury Management Division, which provides deposit and cash management expertise to middle-market and large corporate clients, government agencies and specialized industries. This division also manages Union Bank of California's web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development;
•: the Capital Markets Division, which provides financing to middle-market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services;
•: the Global Markets Division, which serves our customers' insurance, foreign exchange, interest rate risk management and investment needs. The Global Markets Division offers energy derivative contracts, on a limited basis, to serve our energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account, but takes no market risk when providing insurance or derivative contracts, since the market risk for these products is offset with third parties. The division also includes UnionBanc Investment Services LLC, which is a subsidiary of Union Bank of California and a registered broker-dealer;
•: the Insurance Services Division products are sold through UnionBanc Insurance Services, Inc., the insurance agency subsidiary of UBOC Insurance, Inc., which is a subsidiary of Union Bank of California; and
•: the Pacific Rim Corporate Group offers a range of credit, deposit and investment management products and services to companies in the U.S., which are affiliated with companies headquartered in Japan.

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.

Other

Net loss for "Other" increased by $70.1 million for the nine months ended September 30, 2007 compared to the same period in 2006. Net interest expense was $23.4 million higher primarily due to the impact of higher market rates on transfer pricing results. Credit expense on expected loan and lease losses increased by $24.7 million due to higher loan loss provisions taken at the Corporate level. Noninterest expense was $19.3 million higher, primarily due to higher compliance related expenses. The loss from discontinued operations increased $13.2 million mainly due to a $21.6 million payment to the DOJ. For additional information, refer to "Regulatory Matters" in this Form 10-Q.

"Other" includes the following items:

•: the funds transfer pricing results for the entire company, which allocates to the other business segments their cost of funds on all asset categories and credit for funds on all liability categories and credit for equity under RAROC;
•: Corporate Treasury, which is responsible for our ALM, wholesale funding and the ALM investment and derivatives hedging portfolios. These treasury management activities are carried out to counter-balance the residual risk positions of our balance sheet and to manage those risks within the guidelines established by ALCO. (For additional information regarding these risk management activities, refer to "Quantitative and Qualitative Disclosures About Market Risk" in this Form 10-Q);
•: the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP and earnings associated with unallocated equity capital;
•: the residual costs of support groups;
•: corporate activities that are not directly attributable to one of the two business segments. Included in this category are certain other items such as the results of operations of certain non-bank subsidiaries of UnionBanCal and the elimination of the fully taxable-equivalent basis amount;
•: the discontinued operations resulting from the sale of our international correspondent banking business; and
•: the adjustment between the tax expense calculated under RAROC using a tax rate of 38.25 percent and our effective tax rates.

The financial results for the nine months ended September 30, 2007 were impacted by the following factors:

•: net interest income (expense) of ($114.4) million is the result of differences between the net interest income earned by UnionBanCal and transfer pricing results, which include the credit for equity for the reportable segments under RAROC. Net interest expense increased by $23.4 million compared to 2006 primarily due to the impact of higher market rates on transfer pricing results;
•: credit expense (income) of ($74.0) million was due to the difference between the $25.0 million provision for loan losses calculated under our US GAAP methodology and the $99.0 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
•: noninterest income of $14.8 million;
•: noninterest expense of $71.1 million, which includes the residual costs of support groups and corporate activities not directly related to either of the two business segments, and includes $10.0 million for the civil money penalty imposed by the OCC and FinCEN;

•: income tax expense (income) of ($29.3) million, was primarily due to the calculated tax on reported pretax loss and the difference between the 34.0 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments using the RAROC effective rate of 38.25 percent; and
•: loss from discontinued operations of $22.6 million, which consists of a $21.6 million payment to the DOJ and the related legal and other outside services costs of $1.7 million, offset by a $0.7 million tax benefit.

The financial results for the nine months ended September 30, 2006 were impacted by the following factors:

•: net interest income (expense) of ($91.0) million;
•: credit expense (income) of ($98.7) million was due to the difference between the $8.0 million reversal of provision for loan losses calculated under our US GAAP methodology and the $90.7 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
•: noninterest income of $5.9 million;
•: noninterest expense of $51.8 million related to residual costs of support groups and corporate activities not directly related to either of the two business segments;
•: income tax expense (income) of ($27.8) million was due to the calculated tax on reported pretax income and the difference between the 33.8 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments using the RAROC effective rate of 38.25 percent; and
•: loss from discontinued operations, net of taxes, of $9.4 million.

Regulatory Matters

In recent years, a number of banks and bank holding companies have been subject to regulatory actions, including cease and desist orders, formal written agreements and the assessment of significant civil money penalties, and criminal sanctions, including the imposition of significant fines, as a result of failures to comply with the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML).

In October 2004, Union Bank of California International entered into a written agreement with the Federal Reserve Bank of New York relating to Union Bank of California International's BSA/AML controls and processes. With the liquidation of Union Bank of California International in March 2007, the written agreement is no longer effective. In March 2005, Union Bank of California entered into a memorandum of understanding with the Office of the Comptroller of the Currency (OCC), which requires Union Bank of California to strengthen its BSA/AML controls and processes.

Management is committed to resolving these issues raised by the regulators and continues to take actions it believes to be appropriate to achieve this objective. We have committed significant resources to strengthen our BSA/AML controls and processes. Among other actions to enhance our controls and procedures, we engaged independent consultants to provide a comprehensive review of our suspicious activity monitoring and reporting, acquired new and upgraded our existing compliance systems, added numerous well qualified staff, enhanced training, and put in place an enhanced internal audit program.

Notwithstanding these efforts, on September 14, 2007, Union Bank of California entered into a Stipulation and Consent to the Issuance of a Consent Order, and a Consent Order to a Civil Money Penalty and to Cease and Desist (the Order) with the OCC. The Order supersedes the March 2005 memorandum of understanding described above. The Order imposes a civil money penalty of $10 million and requires Union Bank of California to take actions to improve Bank Secrecy Act compliance. On the same day, the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) executed an Assessment of Civil Money

Penalty (the Assessment) in the amount of $10 million. The Assessment provides that the $10 million penalty is deemed to be satisfied by Union Bank of California's payment of the civil money penalty of $10 million to the OCC. On September 17, 2007, Union Bank of California entered into a Deferred Prosecution Agreement (DPA) with the Department of Justice (DOJ). Under the DPA, the DOJ has agreed to defer prosecution for past violations of BSA/AML that occurred in Union Bank of California's now discontinued international banking business, and to dismiss prosecution completely if Union Bank of California meets the conditions of the Order for one year. In the DPA, Union Bank of California also agreed to make a payment of $21.6 million to the DOJ. We are committed to making all improvements necessary to strengthen Union Bank of California's Bank Secrecy Act compliance program and to achieve compliance with the Order and the DPA.

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

Until resolved, these pending regulatory matters, including the Order and the DPA, or any future regulatory or other government actions concerning BSA/AML controls and processes, may adversely affect UnionBanCal Corporation's and Union Bank of California's ability to obtain regulatory approvals for future initiatives, including acquisitions. Also, any future actions relating to noncompliance or repeat violations of BSA/AML laws, regulations or orders, including any failure to comply with the requirements of the Order or the DPA, could result in the assessment of additional civil money penalties or the imposition of additional fines, which could be substantial.

The SEC is conducting an inquiry regarding certain practices related to our mutual fund activities. The inquiry concerns the use of a portion of the fees received under an agreement from the HighMark Funds by an unaffiliated administrator to pay expenses related to the marketing and distribution of fund shares. The HighMark Funds is a family of mutual funds managed by HighMark Capital Management, Inc., the investment management subsidiary of Union Bank of California. We are cooperating with this inquiry.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2007. 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, 2007, 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

For information relating to the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML) matters, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters" in this Form 10-Q.

We are subject to various other 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

We are subject to numerous risks and uncertainties, including but not limited to those risks set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters" in Item 2 of Part I of this Form 10-Q and the following information:

Industry Factors

Fluctuations in interest rates on loans could adversely affect our business

Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.

Fluctuations in interest rates on deposits or other funding sources could adversely affect our margin spread

Changes in market interest rates on deposits or other funding sources, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact and has impacted our margin spread, that is, the difference between the interest rates we charge on interest earning assets, such as loans, and the interest rates we pay on interest bearing liabilities, such as deposits or other borrowings. This impact could result in a decrease in our interest income relative to interest expense.

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

The banking industry and we are facing increasing deposit-pricing pressures. Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market, other non-depository investments or higher yielding deposits, as providing superior expected returns. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers. Additional increases in short-term interest rates could increase such transfers of deposits to higher yielding deposits or other investments either with us or with external providers. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative

investments or into higher yielding deposits, we can lose a relatively inexpensive source of funds, increasing our funding cost.

Changes in the premiums payable to the Federal Deposit Insurance Corporation will increase our costs and could adversely affect our business

Deposits of Union Bank of California, N.A. are insured up to statutory limits by the Federal Deposit Insurance Corporation (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 new assessment system is expected to result in annual assessments on deposits of Union Bank of California of 5 to 7 basis points. Prior to this change, Union Bank of California was not paying any insurance assessments on deposits under the FDIC's risk-related assessment system. An FDIC credit for prior contributions is expected to offset the assessment for 2007. Once the credit is exceeded, which we presently expect to occur in the first half of 2008, the deposit insurance assessments Union Bank of California pays will increase our costs. Any future increases in the deposit insurance assessments Union Bank of California pays would further increase our costs.

The continuing war on terrorism and overseas military conflicts could adversely affect U.S. and global economic conditions

Acts or threats of terrorism and actions taken by the U.S. or other governments as a result of such acts or threats and other international hostilities may result in a disruption of U.S. and global economic and financial conditions and could adversely affect business, economic and financial conditions in the U.S. and globally and in our principal markets.

Substantial competition could adversely affect us

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

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

We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit Insurance Fund and not for the benefit of investors in our stock or other 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 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 The Bank of Tokyo-Mitsubishi UFJ's controlling ownership of us, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future.

We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if there were in place at the time compliance systems and procedures. 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 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 (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 our 2006 Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—Regulatory Matters" in this Form 10-Q for discussion of other laws and regulations that may affect our business, and certain pending or threatened regulatory or other governmental matters, including those relating to the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML). Such matters include a Stipulation and Consent to the Issuance of a Consent Order, and a Consent Order to a Civil Money Penalty and to Cease and Desist (the Order) entered into by Union Bank of California with the OCC, an Assessment of Civil Money Penalty by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN), and a Deferred Prosecution Agreement entered into by Union Bank of California with the Department of Justice with respect to BSA/AML matters.

Changes in accounting standards could materially impact our financial statements

From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.

There are an increasing number of non-bank competitors providing financial services

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

Company Factors

Adverse California economic conditions could adversely affect our business

A substantial majority of our assets, deposits and fee income are generated in California, and a substantial majority of our residential real estate loans are 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 and from time to time, including the softening in the California real estate market and housing industry and natural disasters. If economic conditions in California decline, our level of problem assets could increase and our prospects for growth could be impaired.

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

We are subject to certain industry-specific economic factors. For example, a significant 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, which in turn could negatively impact our title and escrow deposit levels. Additionally, a 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 correction 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 portfolio 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, including the commercial real estate industry, the communications/media industry, the retail industry, the energy industry and the technology industry. Increases in fuel prices and energy costs could adversely affect businesses in several of these industries. 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.

Higher credit losses could require us to increase our allowance for credit losses through a charge to earnings

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

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

We are not able to offer all of the financial services and products of a financial holding company

Banks, securities firms, and insurance companies can now combine as a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have elected to become financial holding companies. A number of foreign banks have acquired financial holding companies in the U.S., further increasing competition in the U.S. market. Under current regulatory interpretations, Mitsubishi UFJ Financial Group, Inc. would be required to make a financial holding company election in order for us to have the benefits of this status. Mitsubishi UFJ Financial Group is not presently a financial holding company.

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

The Bank of Tokyo-Mitsubishi UFJ, a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, owns a majority of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi UFJ can elect all of our directors and can control the vote on all matters, including: approval of mergers or other business combinations; a sale of all or substantially all of our assets; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to our common stock or other equity securities; and other matters that might be favorable to The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group.

The Bank of Tokyo-Mitsubishi UFJ's ability to prevent an unsolicited bid for us or any other change in control could also have an adverse effect on the market price for our common stock. A majority of our directors are independent of The Bank of Tokyo-Mitsubishi UFJ and are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo-Mitsubishi UFJ. However, because of The Bank of Tokyo-Mitsubishi UFJ's control over the election of our directors, we could designate ourselves as a "controlled company" under the New York Stock Exchange rules and could change the composition of our Board of Directors so that the Board would not have a majority of independent directors. We have not done so.

Possible future sales of our shares by The Bank of Tokyo-Mitsubishi UFJ could adversely affect the market for our stock

The Bank of Tokyo-Mitsubishi UFJ may sell shares of our common stock. By virtue of The Bank of Tokyo-Mitsubishi UFJ's current control of us, The Bank of Tokyo-Mitsubishi UFJ could sell large amounts of shares of our common stock by causing us to file a registration statement that would allow it to sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi UFJ could sell shares of our common stock without registration under certain circumstances, such as in a private transaction. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock. If The Bank of Tokyo-Mitsubishi UFJ sells or transfers shares of our common stock as a block, another person or entity could become our controlling stockholder.

The Bank of Tokyo-Mitsubishi UFJ's and Mitsubishi UFJ Financial Group's financial or regulatory condition could adversely affect our operations

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

The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group are also subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Japanese and U.S.

regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action in the U.S. and in Japan against The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. For additional information, see "MD&A—Regulatory Matters."

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

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

Also, as part of The Bank of Tokyo-Mitsubishi UFJ's risk management processes, The Bank of Tokyo-Mitsubishi UFJ manages global credit and other types of exposures and concentrations on an aggregate basis, including exposures and concentrations at UnionBanCal. Therefore, at certain levels or in certain circumstances, our ability to approve certain credits or other banking transactions and categories of customers is subject to the concurrence of The Bank of Tokyo-Mitsubishi UFJ. We may wish to extend credit or furnish other banking services to the same customers as The Bank of Tokyo-Mitsubishi UFJ. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi UFJ's aggregate exposure and marketing policies.

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

Restrictions on dividends and other distributions could limit amounts payable to us

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

Our ability to make acquisitions is subject to regulatory constraints and risks associated with potential acquisitions or divestitures or restructurings may adversely affect us

Our ability to obtain regulatory approval of acquisitions is severely constrained while the OCC's Order, described in "MD&A—Regulatory Matters" in this Form 10-Q, is in effect. As soon as we have successfully addressed the OCC's regulatory concerns, we may seek to acquire or invest in financial and non-financial companies that complement our business.

We may not be successful in completing any such acquisition or investment as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. In addition, we continue to evaluate the performance of all of our businesses and business lines and may sell or restructure a business or business line. Any acquisitions, divestitures or restructurings may result in the issuance of potentially dilutive equity securities, significant write-offs, including those related to goodwill and other intangible assets, and/or the incurrence of debt, any of which could have a material adverse effect on our business, results of operations and financial condition.

Acquisitions, divestitures or restructurings could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, higher than expected deposit attrition, divestitures required by regulatory authorities, the disruption of our business, the potential loss of key employees and unexpected contingent liabilities arising from any business we might

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

Privacy restrictions could adversely affect our business

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

We rely on third parties for important products and services

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

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

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

Significant legal proceedings could subject us to substantial uninsured liabilities

We are from time to time subject to claims and proceedings related to our present or previous operations. These claims, which could include supervisory or enforcement actions by bank regulatory authorities, or criminal proceedings by prosecutorial authorities, could involve demands for large monetary amounts, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition.

Changes in our tax rates could affect our future results

The State of California requires us to file our franchise tax returns as a member of a unitary group that includes Mitsubishi UFJ Financial Group and either all worldwide affiliates or only U.S. affiliates. Our future effective tax rates could be favorably or unfavorably affected by increases or decreases in Mitsubishi UFJ Financial Group's taxable profits, which in turn are affected by changes in the worldwide economy, especially in Japan, and decisions that they may make about the timing of the recognition of credit losses or other matters. Our effective tax rates could also be affected by changes in the valuation of our deferred tax assets and liabilities, changes in tax laws or their interpretation, by the outcomes of examinations of our income tax returns by the Internal Revenue Service and other tax authorities and with respect to our California state tax liability, by adjustments that may be necessary from time to time to recognize differences in estimated California state tax expense based on MUFG's estimated worldwide income and its actual results.

We are subject to operational risks

We are subject to many types of operational risks throughout our organization. Operational risk is the potential loss from our operations due to factors, such as failures in internal control, systems failures or external events, that do not fall into the market risk or credit risk categories described in "MD&A—Business Segments." Operational risk includes reputational risk, legal and compliance risk, the risk of fraud or theft by employees, customers or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. A discussion of risks associated with regulatory compliance appears above under the caption "The effects of, changes in or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us."

We depend on the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and our employees in our day-to-day and ongoing operations. Our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. Failures in our internal control or operational systems could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition.

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

Negative public opinion could damage our reputation and adversely impact our business and revenues

As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our customers' expectations or applicable regulatory requirements, governmental enforcement actions, corporate governance and acquisitions, or from actions taken by regulators and community organizations in response to those activities. We fund our operations independently of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group and believe our business is not necessarily closely related to the business or outlook of The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. However, negative public opinion could also result from regulatory concerns regarding, or supervisory or other governmental actions in the U.S. or Japan against, us or Union Bank of California, or The Bank of Tokyo- Mitsubishi UFJ or Mitsubishi UFJ Financial Group. Negative public opinion can adversely affect our ability to keep and attract and/or retain customers and can expose us to litigation and regulatory action. Actual or alleged conduct by one of our businesses can result in negative public opinion about our other businesses. Negative public opinion could also affect our credit ratings, which are important to our access to unsecured wholesale or other borrowings; significant changes in these ratings could change the cost and availability of these sources of funding.

Our framework for managing risks may not be effective in mitigating risk and loss to our company

Our risk management framework is made up of various processes and strategies to manage our risk exposure. Types of risk to which we are subject include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal risk, compliance risk, reputation risk, fiduciary risk and private equity risk, among others. Our framework to manage risk, including the framework's underlying assumptions, may not be effective under all conditions and circumstances. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Equity Securities

The following table presents repurchases by us of our equity securities during the third quarter 2007.

Period			Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Programs
July 2007
	(July 2-23, 2007)		325	$	58.49	—	$	562,216,171⁽²⁾
August 2007
	(August 1-30, 2007)		1,860	$	58.03	—	$	562,108,242
September 2007
	(September 4-17, 2007)		778	$	58.72	—	$	562,062,555⁽³⁾

		Total	2,963	$	58.26	—

⁽¹⁾: All common stock repurchased during July, August and September 2007 were from employees for required personal income tax withholdings on the vesting of restricted stock issued under the Year 2000 UnionBanCal Corporation Management Stock Plan.
⁽²⁾: On July 25, 2007, UnionBanCal Corporation announced the Board of Directors' authorization of an additional $500 million repurchase of the Company's common stock.
⁽³⁾: In the third quarter of 2007, UnionBanCal Corporation used $0.2 million from the $500 million repurchase program announced on April 26, 2006.

Item 6. Exhibits

No.		Description
10.1		Amendment to 2007 Restricted Stock Unit Agreements for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
10.2		Forms of Restricted Stock Unit Agreement for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽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.

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 7, 2007	By:	/s/ MASAAKI TANAKA Masaaki Tanaka President and Chief Executive Officer (Principal Executive Officer)
Date: November 7, 2007	By:	/s/ DAVID I. MATSON David I. Matson Vice Chairman and Chief Financial Officer (Principal Financial Officer)
Date: November 7, 2007	By:	/s/ DAVID A. ANDERSON David A. Anderson Executive Vice President and Controller (Chief Accounting Officer)

EXHIBIT INDEX

No.		Description
10.1		Amendment to 2007 Restricted Stock Unit Agreements for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
10.2		Forms of Restricted Stock Unit Agreement for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽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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UnionBanCal Corporation and Subsidiaries TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION UnionBanCal Corporation and Subsidiaries Condensed Consolidated Financial Highlights (Unaudited)
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Financial Highlights (Continued) (Unaudited)
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited)
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Balance Sheets
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX