10-Q 1 a2187141z10-q.htm 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 June 30, 2008
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 þ No o

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

Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Number of shares of Common Stock outstanding at July 31, 2008: 138,130,616

UnionBanCal Corporation and Subsidiaries

TABLE OF CONTENTS

			Page Number
PART I
Financial Information
	Condensed Consolidated Financial Highlights		6
	ITEM 1. FINANCIAL STATEMENTS:
		Condensed Consolidated Statements of Income	8
		Condensed Consolidated Balance Sheets	9
		Condensed Consolidated Statements of Changes in Stockholders' Equity	10
		Condensed Consolidated Statements of Cash Flows	11
		Notes to Condensed Consolidated Financial Statements:
		Note 1—Basis of Presentation and Nature of Operations	12
		Note 2—Recently Issued Accounting Pronouncements	12
		Note 3—Discontinued Operations	15
		Note 4—Loans and Allowance for Loan Losses	18
		Note 5—Goodwill and Intangible Assets	19
		Note 6—Employee Pension and Other Postretirement Benefits	21
		Note 7—Medium- and Long-Term Debt	21
		Note 8—Management Stock Plans	21
		Note 9—Fair Value of Financial Instruments	26
		Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging	30
		Note 11—Earnings Per Share (EPS)	32
		Note 12—Accumulated Other Comprehensive Income (Loss)	34
		Note 13—Commitments, Contingencies and Guarantees	35
		Note 14—Business Segments	37
		Note 15—Subsequent Event	41
	ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
		Introduction	42
		Executive Overview	42
		Discontinued Operations	43
		Critical Accounting Policies	45
		Financial Performance	48
		Net Interest Income	51
		Noninterest Income and Noninterest Expense	54
		Income Tax Expense	55
		Loans	55
		Cross-Border Outstandings	58
		Provision for Credit Losses	58
		Allowances for Credit Losses	58
		Nonperforming Assets	61
		Loans 90 Days or More Past Due and Still Accruing	63
		Quantitative and Qualitative Disclosures About Market Risk	63
		Liquidity Risk	66
		Regulatory Capital	67
		Business Segments	68
		Regulatory Matters	76

	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	77
	ITEM 4. CONTROLS AND PROCEDURES	77
PART II
Other Information
	ITEM 1. LEGAL PROCEEDINGS	78
	ITEM 1A. RISK FACTORS	78
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	80
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	80
	ITEM 5. OTHER INFORMATION	81
	ITEM 6. EXHIBITS	81
	SIGNATURES	82

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

This document includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles, 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, our organizational structure, 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 likely changes to the Federal Deposit Insurance Corporation's deposit insurance assessment policies
•: 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 an expected acceleration of charge offs, anticipated loan growth, credit quality trends and our delinquency rates compared to the industry average
•: Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance
•: Our assessment of economic conditions and trends and credit cycles
•: Net interest income
•: The impact of changes in interest rates
•: Loan growth rates and portfolio composition

•: 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
•: Our relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers
•: Our ability and intent to hold various securities
•: Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook for the U.S. in general and for 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
•: Expected rates of return and projected results
•: Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network or otherwise restructure, reorganize or change our business mix, their timing 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 compared to 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 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 in this report. 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)			June 30, 2007			June 30, 2008			Percent Change
Results of operations:
	Net interest income⁽¹⁾		$	431,039		$	512,887		18.99	%
	Provision for loan losses			5,000			95,000		nm
	Noninterest income			201,661			199,626		(1.01	)
	Noninterest expense			383,051			419,312		9.47

	Income before income taxes⁽¹⁾			244,649			198,201		(18.99	)
	Taxable-equivalent adjustment			2,251			2,329		3.47
	Income tax expense			76,658			61,574		(19.68	)

	Income from continuing operations			165,740			134,298		(18.97	)
	Income (loss) from discontinued operations, net of taxes			(386	)		7,047		nm

	Net income		$	165,354		$	141,345		(14.52	)

Per common share:
	Basic earnings:
		From continuing operations	$	1.21		$	0.98		(19.01	)%
		Net income		1.20			1.03		(14.17	)
	Diluted earnings:
		From continuing operations		1.19			0.97		(18.49	)
		Net income		1.19			1.02		(14.29	)
	Dividends⁽²⁾			0.52			0.52		—
	Book value (end of period)			33.45			34.11		1.97
	Common shares outstanding (end of period)⁽³⁾⁽⁴⁾			138,314,564			138,050,671		(0.19	)
	Weighted average common shares outstanding—basic⁽³⁾⁽⁴⁾			137,476,765			137,208,620		(0.20	)
	Weighted average common shares outstanding—diluted⁽³⁾⁽⁴⁾			139,137,955			137,899,057		(0.89	)
Balance sheet (end of period):
	Total assets⁽⁵⁾		$	53,173,833		$	60,593,921		13.95	%
	Total loans			37,743,222			46,041,358		21.99
	Nonperforming assets			29,826			224,944		nm
	Total deposits			41,980,999			42,604,419		1.49
	Medium- and long-term debt			1,835,495			2,809,329		53.06
	Stockholders' equity			4,627,147			4,708,790		1.76
Balance sheet (period average):
	Total assets		$	52,986,633		$	59,269,965		11.86	%
	Total loans			38,839,769			45,494,161		17.13
	Earning assets			48,443,233			54,935,058		13.40
	Total deposits			42,564,891			43,203,180		1.50
	Stockholders' equity			4,588,061			4,616,596		0.62
Financial ratios⁽⁶⁾:
	Return on average assets⁽⁷⁾:
		From continuing operations		1.25	%		0.91	%
		Net income		1.25			0.96
	Return on average stockholders' equity⁽⁷⁾:
		From continuing operations		14.49			11.70
		Net income		14.46			12.31
	Efficiency ratio⁽⁸⁾			60.54			58.14
	Net interest margin⁽¹⁾			3.56			3.74
	Dividend payout ratio			42.98			53.06
	Tangible equity ratio			7.87			7.22
	Tier 1 risk-based capital ratio⁽⁵⁾			8.59			7.96
	Total risk-based capital ratio⁽⁵⁾			11.54			10.84
	Leverage ratio⁽⁵⁾			8.30			7.95
	Allowance for loan losses to:⁽⁹⁾
		Total loans		0.89			1.14
		Nonaccrual loans		1,170.08			243.59
	Allowance for credit losses to:⁽¹⁰⁾
		Total loans		1.11			1.37
		Nonaccrual loans		1,456.97			291.42
	Net loans charged off to average total loans⁽⁷⁾			0.02			0.28
	Nonperforming assets to total loans and foreclosed assets			0.08			0.49
	Nonperforming assets to total assets⁽⁵⁾			0.06			0.37

⁽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.
⁽⁴⁾: Weighted average common shares outstanding (basic) excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares.
⁽⁵⁾: End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.
⁽⁶⁾: Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.
⁽⁷⁾: Annualized.
⁽⁸⁾: The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the 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.
⁽⁹⁾: The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
⁽¹⁰⁾: The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
nm= not meaningful

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

				As of and for the Six Months Ended
(Dollars in thousands, except per share data)				June 30, 2007			June 30, 2008			Percent Change
Results of operations:
	Net interest income⁽¹⁾			$	861,583		$	975,991		13.28	%
	Provision for loan losses				9,000			167,000		nm
	Noninterest income				392,403			395,022		0.67
	Noninterest expense				775,670			822,518		6.04

	Income before income taxes⁽¹⁾				469,316			381,495		(18.71	)
	Taxable-equivalent adjustment				4,366			4,855		11.20
	Income tax expense				151,063			119,944		(20.60	)

	Income from continuing operations				313,887			256,696		(18.22	)
	Income (loss) from discontinued operations, net of taxes				1,078			(6,761	)	nm

	Net income			$	314,965		$	249,935		(20.65	)

Per common share:
	Basic earnings:
		From continuing operations		$	2.28		$	1.87		(17.98	)%
		Net income			2.29			1.82		(20.52	)
	Diluted earnings:
		From continuing operations			2.25			1.86		(17.33	)
		Net income			2.26			1.82		(19.47	)
	Dividends⁽²⁾				0.99			1.04		5.05
	Book value (end of period)				33.45			34.11		1.97
	Common shares outstanding (end of period)⁽³⁾⁽⁴⁾				138,314,564			138,050,671		(0.19	)
	Weighted average common shares outstanding—basic⁽³⁾⁽⁴⁾				137,708,257			137,107,161		(0.44	)
	Weighted average common shares outstanding—diluted⁽³⁾⁽⁴⁾				139,360,012			137,674,584		(1.21	)
Balance sheet (end of period):
	Total assets⁽⁵⁾			$	53,173,833		$	60,593,921		13.95	%
	Total loans				37,743,222			46,041,358		21.99
	Nonperforming assets				29,826			224,944		nm
	Total deposits				41,980,999			42,604,419		1.49
	Medium- and long-term debt				1,835,495			2,809,329		53.06
	Stockholders' equity				4,627,147			4,708,790		1.76
Balance sheet (period average):
	Total assets			$	52,913,455		$	57,951,110		9.52	%
	Total loans				38,649,947			44,097,805		14.10
	Earning assets				48,399,330			53,561,569		10.67
	Total deposits				41,968,353			43,408,469		3.43
	Stockholders' equity				4,549,348			4,667,429		2.60
Financial ratios⁽⁶⁾:
	Return on average assets⁽⁷⁾:
		From continuing operations			1.20	%		0.89	%
		Net income			1.20			0.87
	Return on average stockholders' equity⁽⁷⁾:
		From continuing operations			13.91			11.06
		Net income			13.96			10.77
	Efficiency ratio⁽⁸⁾				61.78			59.03
	Net interest margin⁽¹⁾				3.56			3.65
	Dividend payout ratio				43.42			55.61
	Tangible equity ratio				7.87			7.22
	Tier 1 risk-based capital ratio⁽⁵⁾				8.59			7.96
	Total risk-based capital ratio⁽⁵⁾				11.54			10.84
	Leverage ratio⁽⁵⁾				8.30			7.95
	Allowance for loan losses to⁽⁹⁾:
			Total loans		0.89			1.14
			Nonaccrual loans		1,170.08			243.59
	Allowance for credit losses to⁽¹⁰⁾:
			Total loans		1.11			1.37
			Nonaccrual loans		1,456.97			291.42
	Net loans charged off to average total loans⁽⁷⁾				0.02			0.20
	Nonperforming assets to total loans and foreclosed assets				0.08			0.49
	Nonperforming assets to total assets⁽⁵⁾				0.06			0.37

⁽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.
⁽⁴⁾: Weighted average common shares outstanding (basic) excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares.
⁽⁵⁾: End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.
⁽⁶⁾: Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.
⁽⁷⁾: Annualized.
⁽⁸⁾: The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the 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.
⁽⁹⁾: The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
⁽¹⁰⁾: The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
nm = not meaningful

Item 1. Financial Statements

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

			For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Amounts in thousands, except per share data)			For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Amounts in thousands, except per share data)			2007			2008			2007		2008
Interest Income
	Loans		$	616,558		$	615,656		$	1,218,491	$	1,247,242
	Securities			109,417			97,938			217,406		203,578
	Interest bearing deposits in banks			1,295			228			2,404		356
	Federal funds sold and securities purchased under resale agreements			7,809			1,093			18,961		3,786
	Trading account assets			1,417			1,042			3,004		3,501

		Total interest income		736,496			715,957			1,460,266		1,458,463

Interest Expense
	Deposits			246,071			144,509			468,226		365,169
	Federal funds purchased and securities sold under repurchase agreements			10,312			13,057			24,031		28,772
	Commercial paper			17,429			8,279			39,693		18,071
	Medium and long-term debt			28,973			19,692			48,668		39,149
	Trust notes			238			238			476		476
	Other borrowed funds			4,685			19,624			21,955		35,690

		Total interest expense		307,708			205,399			603,049		487,327

Net Interest Income				428,788			510,558			857,217		971,136
	Provision for loan losses			5,000			95,000			9,000		167,000

		Net interest income after provision for loan losses		423,788			415,558			848,217		804,136

Noninterest Income
	Service charges on deposit accounts			77,218			77,706			152,163		152,442
	Trust and investment management fees			39,656			43,802			76,516		87,190
	Trading account activities			13,838			16,687			28,678		27,699
	Merchant banking fees			8,809			11,085			17,886		22,878
	Brokerage commissions and fees			9,533			10,635			19,193		20,494
	Card processing fees, net			7,824			8,167			14,951		15,931
	Securities gains (losses), net			230			—			1,450		(2	)
	Other			44,553			31,544			81,566		68,390

		Total noninterest income		201,661			199,626			392,403		395,022

Noninterest Expense
	Salaries and employee benefits			231,939			243,299			469,363		484,969
	Net occupancy			33,718			38,232			67,385		74,434
	Outside services			17,150			20,295			35,119		37,304
	Professional services			11,144			15,931			27,494		30,528
	Equipment			15,804			15,141			31,814		30,488
	Software			13,959			14,409			27,273		29,204
	Communications			8,278			9,111			17,413		18,486
	Foreclosed asset expense			9			83			18		172
	Provision for losses on off-balance sheet commitments			—			5,000			1,000		13,000
	Other			51,050			57,811			98,791		103,933

		Total noninterest expense		383,051			419,312			775,670		822,518

	Income from continuing operations before income taxes			242,398			195,872			464,950		376,640
	Income tax expense			76,658			61,574			151,063		119,944

Income from Continuing Operations				165,740			134,298			313,887		256,696

	Income (loss) from discontinued operations before income taxes			(545	)		3,068			1,882		(14,517	)
	Income tax expense (benefit)			(159	)		(3,979	)		804		(7,756	)

Income (Loss) from Discontinued Operations				(386	)		7,047			1,078		(6,761	)

Net Income			$	165,354		$	141,345		$	314,965	$	249,935

Income from continuing operations per common share—basic			$	1.21		$	0.98		$	2.28	$	1.87

Net Income per common share—basic			$	1.20		$	1.03		$	2.29	$	1.82

Income from continuing operations per common share—diluted			$	1.19		$	0.97		$	2.25	$	1.86

Net Income per common share—diluted			$	1.19		$	1.02		$	2.26	$	1.82

Weighted average common shares outstanding—basic				137,477			137,209			137,708		137,107

Weighted average common shares outstanding—diluted				139,138			137,899			139,360		137,675

See accompanying notes to condensed consolidated financial statements.

UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

(Dollars in thousands)			(Unaudited) June 30, 2007			December 31, 2007			(Unaudited) June 30, 2008
Assets
Cash and due from banks			$	1,863,479		$	2,106,927		$	1,800,313
Interest bearing deposits in banks				100,800			104,528			65,788
Federal funds sold and securities purchased under resale agreements				1,400,875			310,178			172,345

		Total cash and cash equivalents		3,365,154			2,521,633			2,038,446
Trading account assets				307,012			603,333			1,136,416
Securities available for sale:
	Securities pledged as collateral			112,974			685,123			1,079,491
	Held in portfolio			8,742,728			7,770,037			7,396,824
Loans (net of allowance for loan losses: June 30, 2007, $335,952; December 31, 2007, $402,726; June 30, 2008, $526,401)				37,407,270			40,801,462			45,514,957
Due from customers on acceptances				18,969			16,482			21,272
Premises and equipment, net				482,702			486,034			480,366
Intangible assets				8,708			6,458			5,117
Goodwill				360,058			355,287			355,287
Other assets				2,236,037			2,358,915			2,559,694
Assets of discontinued operations to be disposed or sold				132,221			122,984			6,051

		Total assets	$	53,173,833		$	55,727,748		$	60,593,921

Liabilities
	Noninterest bearing		$	14,938,229		$	13,802,640		$	13,440,290
	Interest bearing			27,042,770			28,877,551			29,164,129

		Total deposits		41,980,999			42,680,191			42,604,419
Federal funds purchased and securities sold under repurchase agreements				1,281,162			1,631,602			2,296,587
Commercial paper				1,167,437			1,266,656			1,397,159
Other borrowed funds				606,572			1,875,619			4,719,809
Trading account liabilities				188,437			351,057			892,240
Acceptances outstanding				18,969			16,482			21,272
Other liabilities				1,318,212			1,108,585			1,012,403
Medium- and long-term debt				1,835,495			1,913,622			2,809,329
Junior subordinated debt payable to subsidiary grantor trust				14,659			14,432			14,206
Liabilities of discontinued operations to be extinguished or assumed				134,744			131,521			117,707

		Total liabilities		48,546,686			50,989,767			55,885,131

Commitments, contingencies and guarantees—See Note 13
Stockholders' Equity
Preferred stock:
	Authorized 5,000,000 shares; no shares issued or outstanding as of June 30, 2007, December 31, 2007 and June 30, 2008			—			—			—
Common stock, par value $1 per share:
	Authorized 300,000,000 shares; issued 157,060,102 shares as of June 30, 2007, 157,559,521 shares as of December 31, 2007 and 157,811,268 shares as of June 30, 2008			157,060			157,559			157,811
Additional paid-in capital				1,127,607			1,153,737			1,182,978
Treasury stock—18,745,538 shares as of June 30, 2007, 19,723,453 shares as of December 31, 2007 and 19,760,597 shares as of June 30, 2008				(1,151,985	)		(1,202,584	)		(1,204,469	)
Retained earnings				4,763,031			4,912,392			5,018,601
Accumulated other comprehensive loss				(268,566	)		(283,123	)		(446,131	)

		Total stockholders' equity		4,627,147			4,737,981			4,708,790

		Total liabilities and stockholders' equity	$	53,173,833		$	55,727,748		$	60,593,921

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 income (loss)			Total stock- holders' equity
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 six months
		ended June 30, 2007												314,965						314,965
	Other comprehensive income (loss), net of tax:
		Net change in unrealized losses on
			cash flow hedges														2,383			2,383
		Net change in unrealized losses on
			securities available for sale														(18,856	)		(18,856	)
		Foreign currency translation adjustment															303			303
		Net change in pension and other benefits															6,978			6,978

Total comprehensive income																				305,773
FIN No. 48 adjustment⁽¹⁾														(49,300	)					(49,300	)
FSP FAS 13-2 adjustment⁽²⁾														(20,803	)					(20,803	)
Stock options exercised				577,828		578		23,150												23,728
Restricted stock granted, net of forfeitures				17,005		17		(17	)											—
Performance share units vested				5,212		5		(5	)											—
Excess tax benefit—stock-based compensation								3,970												3,970
Compensation expense—stock options								7,460												7,460
Compensation expense—restricted stock								7,318												7,318
Compensation expense—restricted stock units, performance share units and other share-based compensation								2,082												2,082
Common stock repurchased⁽³⁾											(87,379	)								(87,379	)
Dividends declared on common stock,
	$0.99 per share⁽⁴⁾													(137,103	)					(137,103	)

Net change						600		43,958			(87,379	)		107,759			(9,192	)		55,746

BALANCE JUNE 30, 2007				157,060,102	$	157,060	$	1,127,607		$	(1,151,985	)	$	4,763,031		$	(268,566	)	$	4,627,147

BALANCE DECEMBER 31, 2007				157,559,521	$	157,559	$	1,153,737		$	(1,202,584	)	$	4,912,392		$	(283,123	)	$	4,737,981

Comprehensive income
	Net income—For the six months
		ended June 30, 2008												249,935						249,935
	Other comprehensive income (loss), net of tax:
		Net change in unrealized gains on cash flow hedges															14,251			14,251
		Net change in unrealized losses on securities available for sale															(181,747	)		(181,747	)
		Foreign currency translation adjustment															(217	)		(217	)
		Net change in pension and other benefits															4,705			4,705

Total comprehensive income																				86,927
EITF 06-4 adjustment⁽⁵⁾														(236	)					(236	)
EITF 06-11 adjustment⁽⁶⁾								162												162
Stock options exercised				249,163		249		9,842												10,091
Restricted stock granted, net of forfeitures				2,584		3		(3	)											—
Excess tax benefit—stock-based compensation								190												190
Compensation expense—stock options								6,781												6,781
Compensation expense—restricted stock								8,733												8,733
Compensation expense—restricted stock units, performance share units and other share-based compensation								3,536												3,536
Common stock repurchased⁽³⁾											(1,885	)								(1,885	)
Dividends declared on common stock, $1.04 per share⁽⁴⁾														(143,490	)					(143,490	)

Net change						252		29,241			(1,885	)		106,209			(163,008	)		(29,191	)

BALANCE JUNE 30, 2008				157,811,268	$	157,811	$	1,182,978		$	(1,204,469	)	$	5,018,601		$	(446,131	)	$	4,708,790

⁽¹⁾: Reflects the adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB No. 109" (FIN No. 48).
⁽²⁾: Reflects 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."
⁽³⁾: Common stock repurchased includes commission costs.
⁽⁴⁾: Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.
⁽⁵⁾: See Note 2 to these condensed consolidated financial statements for a description of the adoption of EITF No. 06-4 "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements."
⁽⁶⁾: See Note 2 to these condensed consolidated financial statements for a description of the adoption of EITF No. 06-11 "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards."

See accompanying notes to condensed consolidated financial statements.

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

				For the Six Months Ended June 30,
(Dollars in thousands)				For the Six Months Ended June 30,
(Dollars in thousands)				2007			2008
Cash Flows from Operating Activities:
	Net income			$	314,965		$	249,935
		Income (loss) from discontinued operations, net of taxes			1,078			(6,761	)

		Income from continuing operations, net of taxes			313,887			256,696
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Provision for loan losses			9,000			167,000
		Provision for losses on off-balance sheet commitments			1,000			13,000
		Depreciation, amortization and accretion			56,573			56,405
		Stock-based compensation—stock options and other share-based compensation			16,860			19,050
		Provision for deferred income taxes			18,496			60,065
		(Gains) losses on sales of securities available for sale, net			(1,450	)		2
		Net increase in prepaid expenses			(45,364	)		(7,243	)
		Net decrease in accrued expenses			(34,074	)		(250,868	)
		Net (increase) decrease in trading account assets			69,309			(533,083	)
		Net increase (decrease) in trading account liabilities			(69,699	)		541,183
		Net increase in fees and other receivables			(98,374	)		(14,961	)
		Net increase in other liabilities			130,648			185,301
		Net increase in other assets			(75,477	)		(159,142	)
		Loans originated for resale			(263,982	)		(382,759	)
		Net proceeds from sale of loans originated for resale			311,166			258,831
		Excess tax benefit—stock-based compensation			(3,970	)		(190	)
		Other, net			(13,134	)		6,588
		Discontinued operations, net			12,048			84,721

			Total adjustments		19,576			43,900

	Net cash provided by operating activities				333,463			300,596

Cash Flows from Investing Activities:
	Proceeds from sales of securities available for sale				296,375			10,300
	Proceeds from matured and called securities available for sale				775,608			807,237
	Purchases of securities available for sale				(1,200,525	)		(1,132,494	)
	Purchases of premises and equipment, net				(43,476	)		(43,141	)
	Net increase in loans				(1,137,454	)		(4,767,468	)
	Other, net				21			(32	)
	Discontinued operations, net				960			3,732

	Net cash used in investing activities				(1,308,491	)		(5,121,866	)

Cash Flows from Financing Activities:
	Net increase (decrease) in deposits				130,317			(75,772	)
	Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements				197,235			664,985
	Net increase (decrease) in commercial paper and other borrowed funds				(315,617	)		2,974,693
	Proceeds from issuance of medium- and long-term debt				749,250			901,000
	Repayment of medium-term debt				(200,000	)		—
	Common stock repurchased				(87,379	)		(1,885	)
	Payments of cash dividends				(131,049	)		(143,462	)
	Stock options exercised				27,698			10,281
	Other, net				1,053			(217	)
	Discontinued operations, net				(12,993	)		7,905

	Net cash provided by financing activities				358,515			4,337,528

Net increase (decrease) in cash and cash equivalents					(616,513	)		(483,742	)
Cash and cash equivalents at beginning of period					3,981,435			2,521,633
Effect of exchange rate changes on cash and cash equivalents					232			555

Cash and cash equivalents at end of period				$	3,365,154		$	2,038,446

Cash Paid During the Period For:
	Interest			$	655,072		$	506,653
	Income taxes, net				144,903			147,689
Supplemental Schedule of Noncash Investing and Financing Activities:
	Loans transferred to foreclosed assets (OREO)			$	1,114		$	8,612

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 June 30, 2008 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, 2007 (2007 Form 10-K). The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ compared to those estimates.

UnionBanCal Corporation is a 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.

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 June 30, 2008.

Note 2—Recently Issued Accounting Pronouncements

Accounting for Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." The Statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy ranks the quality and reliability of information used to determine fair values with the highest priority given to quoted prices in active markets and the lowest priority given to model values that include inputs based on unobservable data. The Statement applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value. The Statement was effective January 1, 2008. However, on February 12, 2008, the FASB issued FSP FAS 157-2, "Effective Date of FASB Statement 157" which allows companies to delay for one year the effective date of SFAS No. 157 for all nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The Company has elected to delay the effective date of the Statement for its nonfinancial assets and liabilities, including goodwill and intangible assets. Effective January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities measured and reported at fair value. At adoption, there was no impact on the Company's

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

financial position or results of operations. For detailed information on the Company's fair value measurements, see Note 9 to these condensed consolidated financial statements.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The guidance requires that an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period is a postretirement benefit arrangement for which a liability must be recorded. The Company adopted EITF 06-4 on January 1, 2008. At adoption, the Company's retained earnings were reduced by $0.2 million and there was no impact on the Company's results of operations.

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 may elect the fair value option for existing assets and liabilities at the date of initial adoption and when first recognizing eligible instruments. The Statement was effective January 1, 2008. Management did not make the fair value option election, and therefore there was no impact on the Company's financial position or results of operations.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards

In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." The EITF requires that the tax benefit related to dividend equivalents paid on restricted stock and restricted stock units, which are expected to vest, be recorded as an increase to additional paid-in-capital. Prior to the issuance of this EITF, the Company recorded this tax benefit as a reduction to income tax expense. The EITF was effective for all tax benefits on dividends declared by the Company after January 1, 2008, with early application permitted as of the beginning of the fiscal year. At adoption, there was no impact on the Company's financial position or results of operations.

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which replaces SFAS No. 141. The Statement requires that all business combinations be accounted for under the "acquisition method." The Statement requires that the assets, liabilities and noncontrolling interests of a business combination be measured at fair value at the acquisition date. The acquisition date is defined as the date an acquirer obtains control of the entity, which is typically the closing date. The Statement requires that all acquisition and restructuring related costs be expensed as incurred and that any contingent consideration be measured at fair value and recorded as either equity or a liability with the liability remeasured at fair value in subsequent periods. The Statement is effective January 1, 2009. Management is currently evaluating the

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

impact this Statement may have on the Company's financial position and results of operations related to future acquisitions.

Noncontrolling Interest in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment to ARB No. 51." The Statement requires that a noncontrolling interest (formerly minority interest) be measured at fair value at the acquisition date and be presented in the equity section on the balance sheet. The Statement requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions with no resulting gain or loss. If control is lost, the noncontrolling interest is remeasured to fair value and a gain or loss is recorded. The Statement is effective January 1, 2009. Management believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133." The Statement requires expanded qualitative, quantitative and credit-risk disclosures of derivative instruments and hedging activities. These disclosures include more detailed information about gains and losses, location of derivative instruments in financial statements, and credit-risk-related contingent features in derivative instruments. The Statement also clarifies that derivative instruments are subject to concentration of credit risk disclosures under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The Statement, which applies only to disclosures, is effective January 1, 2009.

The Hierarchy of Generally Accepted Accounting Principles

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The Statement identifies the sources of accounting principles and establishes a hierarchy for selecting those principles to prepare financial statements in accordance with U.S. GAAP. The Statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." Management believes that the adoption of SFAS No. 162 will not have an impact on the Company's financial position or results of operations.

Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities

In June 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities." The FSP requires that unvested share-based payment awards that contain nonforfeitable rights to dividends be treated as participating securities and included in the computation of earnings per share (EPS). Under the FSP, the Company's unvested restricted stock shares are considered participating securities and will be included in the computation of EPS upon adoption of the FSP. The FSP is effective January 1, 2009 and retrospective application is required. Management believes that adopting this FSP will not have a material impact on the Company's EPS.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3—Discontinued Operations

The Company's discontinued operations consist of three separate businesses: international correspondent banking, retirement recordkeeping services and insurance brokerage services. In 2005, the Bank sold its international correspondent banking business (ICBB) to Wachovia Bank, N.A. for $245.0 million, and a subsequent $4.0 million purchase price adjustment in 2006. This business consisted of international payment and trade processing along with related lending activities. As of March 31, 2007, substantially all of the assets and liabilities related to this discontinued operation were liquidated.

Although ICBB's operations had substantially ended in 2006, the Bank was responsible for past violations of the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML) associated with ICBB. As a result of the past violations, the Bank entered into a Deferred Prosecution Agreement (DPA) with the United States Department of Justice (DOJ) in the third quarter of 2007 and paid $21.6 million to the DOJ. For additional information, refer to Note 13 to these condensed consolidated financial statements.

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

In June 2008, the Company sold its insurance brokerage business (IBB) subsidiary, UnionBanc Insurance Services, Inc., to a wholly-owned subsidiary of BB&T Corporation. The Company recorded a pre-tax gain of $9.8 million, net of $1.6 million in transaction costs, and an elimination of intangible assets consisting of goodwill of $74.7 million and other intangibles of $11.0 million. The IBB was previously included in the Wholesale Banking reportable business segment.

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

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3—Discontinued Operations (Continued)

Retirement Recordkeeping Business Discontinued Operations

At June 30 and December 31, 2007 and June 30, 2008, the assets and liabilities identified as the RRB discontinued operations consisted of the following:

(Dollars in thousands)	June 30, 2007		December 31, 2007		June 30, 2008
Assets
Premises and equipment	$	1,424	$	1,086	$	58
Intangible assets		2,049		—		—
Other assets		7,091		6,518		5,993

Assets of discontinued operationsto be disposed or sold	$	10,564	$	7,604	$	6,051

Liabilities
Noninterest bearing deposits	$	4	$	—	$	—
Interest bearing deposits		109,303		98,516		106,426
Other liabilities		279		9,483		11,205

Liabilities of discontinued operations to be extinguished or assumed	$	109,586	$	107,999	$	117,631

The $10.9 million increase in other liabilities from June 30, 2007 to June 30, 2008 was mainly due to severance accruals recorded in December 2007.

The components of income from the RRB discontinued operations for the three and six months ended June 30, 2007 and 2008 are:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands)	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands)	2007		2008			2007		2008
Net interest income	$	1,307	$	477		$	2,597	$	1,314
Noninterest income		11,929		6,527			23,629		17,528
Noninterest expense		10,996		10,111			22,221		22,180

Income (loss) from discontinued operations before income taxes		2,240		(3,107	)		4,005		(3,338	)
Income tax expense (benefit)		866		(1,095	)		1,541		(1,164	)

Income (loss) from discontinued operations	$	1,374	$	(2,012	)	$	2,464	$	(2,174	)

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3—Discontinued Operations (Continued)

customers onto Prudential's accounting systems was completed in June 2008. As such, future servicing revenues from Prudential are expected to be minimal. For the three months ended June 30, 2007 and 2008, noninterest expense included salaries and benefits expense of $6.4 million and $4.7 million, respectively, and $13.1 million and $11.3 million for the six months ended June 30, 2007 and 2008, respectively.

Insurance Brokerage Business Discontinued Operations

At June 30 and December 31, 2007 and June 30, 2008, the assets and liabilities identified as the IBB discontinued operations consisted of the following:

(Dollars in thousands)	June 30, 2007		December 31, 2007		June 30, 2008
Assets
Cash and due from banks	$	3	$	3	$	—
Securities available for sale		13		11		—
Premises and equipment		4,593		4,163		—
Intangible assets		13,687		12,110		—
Goodwill		93,431		93,431		—
Other assets		9,931		5,662		—

Assets of discontinued operations to be disposed or sold	$	121,658	$	115,380	$	—

Liabilities
Other borrowed funds	$	225	$	4	$	—
Other liabilities		24,933		23,518		77

Liabilities of discontinued operations to be extinguished or assumed	$	25,158	$	23,522	$	77

The components of income from the IBB discontinued operations for the three and six months ended June 30, 2007 and 2008 are:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2007			2008			2007			2008
Net interest expense	$	(1,222	)	$	(213	)	$	(2,429	)	$	(993	)
Noninterest income		16,255			18,369			36,371			35,591
Noninterest expense		17,818			11,981			36,065			45,777

Income (loss) from discontinued operations before income taxes		(2,785	)		6,175			(2,123	)		(11,179	)
Income tax benefit		(1,025	)		(2,885	)		(737	)		(6,592	)

Income (loss) from discontinued operations	$	(1,760	)	$	9,060		$	(1,386	)	$	(4,587	)

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3—Discontinued Operations (Continued)

$8.4 million, respectively, and $36.3 million and $25.7 million, for the six months ended June 30, 2007 and 2008, respectively. Noninterest income for the three and six months ended June 30, 2008 also included the $9.8 million pre-tax gain from the sale of IBB. Noninterest expense for the three months ended June 30, 2007 and 2008 included salaries and benefits expense of $13.1 million and $9.0 million, respectively, and $27.5 million and $20.7 million, for the six months ended June 30, 2007 and 2008, respectively. For the six months ended June 30, 2008, noninterest expense also included an $18.7 million goodwill impairment charge. This charge was recorded in the first quarter of 2008, when the Company determined that the value of the net assets was greater than the fair value of IBB, which was based on indicative prices for insurance agencies.

Note 4—Loans and Allowance for Loan Losses

A summary of loans, net of unearned interest and deferred fees (costs) of ($13) million, ($15) million and ($10) million, at June 30, 2007, December 31, 2007 and June 30, 2008, respectively, is as follows:

(Dollars in thousands)				June 30, 2007		December 31, 2007		June 30, 2008
Commercial, financial and industrial				$	13,052,803	$	14,563,477	$	16,602,393
Construction					2,303,089		2,406,729		2,622,740
Mortgage:
	Residential				12,936,691		13,827,241		14,852,058
	Commercial				6,292,157		7,021,299		7,912,592

		Total mortgage			19,228,848		20,848,540		22,764,650
Consumer:
	Installment				1,230,021		1,327,348		1,957,379
	Revolving lines of credit				1,335,117		1,334,132		1,295,047

		Total consumer			2,565,138		2,661,480		3,252,426
Lease financing					581,297		654,467		640,612

		Total loans held to maturity			37,731,175		41,134,693		45,882,821
		Total loans held for sale			12,047		69,495		158,537

			Total loans		37,743,222		41,204,188		46,041,358
			Allowance for loan losses		335,952		402,726		526,401

			Loans, net	$	37,407,270	$	40,801,462	$	45,514,957

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Loans and Allowance for Loan Losses (Continued)

Changes in the allowance for loan losses were as follows:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)		For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)		2007			2008			2007			2008
Allowance for loan losses, beginning of period		$	332,679		$	462,943		$	331,077		$	402,726
Loans charged off			(4,146	)		(33,444	)		(8,565	)		(46,545	)
Recoveries of loans previously charged off			2,067			1,836			4,050			3,411

	Total net loans charged off		(2,079	)		(31,608	)		(4,515	)		(43,134	)
Provision for loan losses			5,000			95,000			9,000			167,000
Foreign translation adjustment and other net additions			352			66			390			(191	)

Allowance for loan losses, end of period		$	335,952		$	526,401		$	335,952		$	526,401
Allowance for losses on off-balance sheet commitments			82,374			103,374			82,374			103,374

Allowances for credit losses, end of period		$	418,326		$	629,775		$	418,326		$	629,775

Nonaccrual loans totaled $28.7 million and $216.1 million at June 30, 2007 and 2008, respectively. There were no troubled debt restructured loans at June 30, 2007 and $1.5 million at June 30, 2008. Loans 90 days past due and still accruing totaled $9.7 million and $51.2 million at June 30, 2007 and 2008, respectively.

Note 5—Goodwill and Intangible Assets

Goodwill

The carrying amount of goodwill at June 30, 2007 and 2008 was $360.1 million and $355.3 million, respectively. There were no changes in the carrying amount of goodwill, which is reported on a continuing operating basis, during the six months ended June 30, 2007 and 2008.

As a result of softening in the insurance market and declining fair value, the Company performed a goodwill impairment test as of March 31, 2008 on its insurance brokerage business, which was sold in June 2008. As required by SFAS No. 142, "Goodwill and Other Intangible Assets," the Company determined that the value of the net assets was greater than the fair value of the insurance brokerage business, which was based on indicative prices for insurance agencies. Consequently, the Company recorded an $18.7 million goodwill impairment charge, which is included in discontinued operations in the first quarter of 2008. As part of the sale in June 2008, the Company eliminated its related goodwill balances. For additional information on the Company's sale of its insurance brokerage business, see Note 3 to these condensed consolidated financial statements.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 5—Goodwill and Intangible Assets (Continued)

Intangible Assets

The table below reflects the Company's identifiable intangible assets, which consist of core deposit intangibles, and accumulated amortization on a continuing operations basis at June 30, 2007 and 2008. The identifiable intangible assets related to the discontinued operations of the retirement recordkeeping business and the insurance brokerage business have been excluded from this table.

	June 30, 2007							June 30, 2008
(Dollars in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core Deposit Intangibles	$	51,698	$	(42,990	)	$	8,708	$	43,114	$	(37,997	)	$	5,117

Total amortization expense for the three months ended June 30, 2007 and 2008 was $1.1 million and $0.7 million, respectively. Total amortization expense for the six months ended June 30, 2007 and 2008 was $2.3 million and $1.3 million, respectively.

The table below reflects the Company's expected identifiable intangible amortization expense, after June 30, 2008, on a continuing operations basis.

(Dollars in thousands)		Core Deposit Intangibles
Estimated amortization expense for the years ending:
	Remaining 2008	$	1,340
	2009		1,571
	2010		800
	2011		443
	2012		336
	2013		240
	thereafter		387

Total amortization expense after June 30, 2008		$	5,117

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6—Employee Pension and Other Postretirement Benefits

The following tables summarize the components of net periodic benefit cost for the three and six months ended June 30, 2007 and 2008.

		Pension Benefits						Other Benefits
		For the Three Months Ended June 30,						For the Three Months Ended June 30,
(Dollars in thousands)		For the Three Months Ended June 30,						For the Three Months Ended June 30,
(Dollars in thousands)		2007			2008			2007			2008
Components of net periodic benefit cost
Service cost		$	12,931		$	12,521		$	2,108		$	1,939
Interest cost			18,080			19,329			2,895			2,700
Expected return on plan assets			(31,594	)		(33,413	)		(3,486	)		(3,376	)
Amortization of prior service cost			64			—			(24	)		(23	)
Amortization of transition amount			—			—			509			510
Recognized net actuarial loss			4,498			2,328			1,204			603

	Total net periodic benefit cost	$	3,979		$	765		$	3,206		$	2,353

		Pension Benefits						Other Benefits
		For the Six Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)		For the Six Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)		2007			2008			2007			2008
Components of net periodic benefit cost
Service cost		$	25,117		$	25,568		$	4,166		$	4,037
Interest cost			35,596			38,823			5,682			5,642
Expected return on plan assets			(63,173	)		(66,822	)		(6,956	)		(6,739	)
Amortization of prior service cost			128			—			(48	)		(48	)
Amortization of transition amount			—			—			1,018			1,018
Recognized net actuarial loss			8,004			4,966			2,198			1,681

	Total net periodic benefit cost	$	5,672		$	2,535		$	6,060		$	5,591

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 2007 Form 10-K.

Note 7—Medium- and Long-Term Debt

In the second quarter of 2008, the Bank began borrowing from the Federal Home Loan Bank (FHLB) on a medium-term basis. These FHLB advances are secured by certain of the Bank's assets and bear a floating interest rate tied to 1-to 3-month LIBOR plus or minus a spread, with reset dates every 90 days. At June 30, 2008, the Bank's outstanding borrowings from the FHLB were $901.0 million with a weighted average interest rate of 2.75 percent and a weighted average remaining maturity of 18 months.

Note 8—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,

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Management Stock Plans (Continued)

restated effective June 1, 1997 (the 1997 Stock Plan), have 27.0 million and 6.6 million shares, respectively, of the Company's common stock authorized to be awarded to key employees, outside directors and consultants of the Company at the discretion of the Executive Compensation and 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 Item 5 of Part II of this Form 10-Q and Note 16 to the Consolidated Financial Statements in the Company's 2007 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. The value of options is recognized as compensation expense over the vesting period during which the employees are required to provide service. The value of the restricted stock at the date of grant is recognized as compensation expense over its vesting period with a corresponding credit adjustment to additional paid-in capital. All cancelled or forfeited options and restricted stock become available for future grants.

Under the 2000 Stock Plan, the Company grants stock options and restricted stock. Additionally, under this plan, the Company issues shares of common stock upon the vesting and settlement of performance shares settled in common stock and restricted stock units, as well as upon the settlement of stock units. Under the 1997 Stock Plan, the Company issues shares of common stock upon exercise of outstanding stock options. The Company issues new shares of common stock for all awards under the stock plans. A total of 7,180,329 shares were available for future grants under the 2000 Stock Plan at June 30, 2008. These available shares have taken into account the outstanding number of shares of stock options and restricted stock, as well as the maximum number of shares that may be issued upon the vesting and settlement of outstanding performance shares settled in common stock and restricted stock units, and upon the settlement of outstanding stock units. The remaining shares under the 1997 Stock Plan are not available for future grants.

Stock Options

The following table summarizes stock option transactions under the stock plans for the six months ended June 30, 2008.

		For the Six Months Ended June 30, 2008
		Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, beginning of the period⁽¹⁾		9,673,146		$	51.14
	Granted	801,800			51.32
	Exercised	(249,163	)		40.50
	Forfeited	(73,809	)		59.82

Options outstanding, end of the period⁽¹⁾		10,151,974		$	51.36	4.62	$	9,854

Options exercisable, end of the period		7,019,223		$	49.61	3.90	$	9,854

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

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Management Stock Plans (Continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model uses tranches based on expected terms that result in ranges of input assumptions. Expected volatilities are based on historical data and implied volatilities compared to trade 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 Six Months Ended June 30, 2008
Weighted-average fair value—per share	$	7.23
Risk-free interest rate		2.2 - 3.3	%
Expected volatility		22.2 - 24.5	%
Weighted-average expected volatility		24.2	%
Expected term (in years)		3.9 - 4.4
Expected dividend yield		4.4 - 4.8	%
Weighted-average expected dividend yield		4.4	%

The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2008 was $12.4 million and $2.6 million, respectively, with a corresponding tax benefit of $4.4 million and $1.0 million, respectively. The total fair value of options vested during the six months ended June 30, 2007 and 2008 was $19.2 million and $9.6 million, respectively.

The Company recognized $7.5 million and $6.8 million of compensation cost for share-based payment arrangements related to stock option awards with a $2.8 million and $2.6 million corresponding tax benefit during the six months ended June 30, 2007 and 2008, respectively. As of June 30, 2008, the total unrecognized compensation cost related to nonvested stock option awards was $16.3 million and the weighted-average period over which the cost is expected to be recognized was 1.1 years.

Restricted Stock

In general, restricted stock awards are granted under the 2000 Stock Plan to key employees, and in 2005, to non-employee directors. 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. Generally, 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 grant date fair value of awards is equal to the closing price on date of grant.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Management Stock Plans (Continued)

The following is a summary of the Company's nonvested restricted stock awards as of June 30, 2008 and changes during the six months ended June 30, 2008.

		For the Six Months Ended June 30, 2008
		Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested restricted awards, beginning of the period		881,117		$	59.00
	Granted	29,202			50.84
	Vested	(109,416	)		62.96
	Forfeited	(26,618	)		58.42

Nonvested restricted awards, end of the period		774,285		$	58.16

The total fair value of the restricted stock awards vested during the six months ended June 30, 2007 and 2008, was $6.4 million, and $6.9 million, respectively, with a corresponding tax benefit of $2.2 million and $2.0 million, respectively.

The Company recognized $7.3 million and $8.7 million of compensation cost for share-based payment arrangements related to restricted stock awards with a $2.8 million and $3.4 million corresponding tax benefit during the six months ended June 30, 2007 and 2008, respectively. At June 30, 2008, the total unrecognized compensation cost related to nonvested restricted awards was $32.2 million and the weighted-average period over which it is expected to be recognized was 1.4 years.

Restricted Stock Units and 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. The grant date fair value of awards is equal to the closing price on date of grant. There were no restricted stock units granted or forfeited during the six months ended June 30, 2008. The total fair value of the restricted stock units that vested during the six months ended June 30, 2008 was less than $0.1 million. The Company recognized $0.4 million and $0.7 million of compensation cost with a corresponding $0.2 million and $0.3 million tax benefit related to these grants during the six months ended June 30, 2007 and 2008, respectively. As of June 30, 2008, the total unrecognized compensation cost related to restricted stock units was $0.4 million and the weighted-average period over which it is expected to be recognized was 1 year.

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 and settlement of these grants, which are redeemable only in shares.

Non-employee directors may irrevocably elect to defer all or a portion of the cash retainer and/or fees payable to them for services on the Board of Directors and its committees in the form of stock units. At the time

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Management Stock Plans (Continued)

of deferral, a bookkeeping account is established on behalf of the director and credited with a number of fully vested stock units. The director will receive a number of stock units equal to the number of shares of common stock when the deferred compensation is payable. Dividend equivalents are credited to the stock unit accounts. Stock units have no voting rights. The Company will issue new shares under the 2000 Stock Plan upon settlement of the stock units.

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. Beginning in 2006, the Committee determined that performance share awards granted were to be redeemed in shares. The following is a summary of shares granted and available for future grants under the Performance Share Plan.

		For the Six Months Ended June 30, 2008
Performance shares:
	Granted	91,750
	Available for future grant, end of period	1,971,469

Performance Shares—Redeemable in Cash

All performance shares granted prior to 2006 are redeemable in cash and therefore are 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 following is a summary of performance shares that are redeemable in cash under the Performance Share Plan.

	For the Six Months Ended June 30,
(Dollars in millions)	For the Six Months Ended June 30,
(Dollars in millions)	2007		2008
Performance shares granted		—		—
Performance shares forfeited		—		—
Fair value of performance shares that vested	$	7.2	$	—
Cash payments made for performance shares that vested	$	7.2	$	5.7
Fair value of performance shares that vested and deferred	$	—	$	—
Performance shares compensation expense	$	0.8	$	—
Tax benefit related to compensation expense	$	0.3	$	—
Liability for cash settlement of performance shares, end of the period	$	5.3	$	—

The compensation cost related to these grants that are redeemable in cash was fully recognized as of June 30, 2008.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Management Stock Plans (Continued)

Performance Shares—Redeemable in Shares

The following is a summary of performance shares that are redeemable in shares under the Performance Share Plan.

	For the Six Months Ended June 30,
(Dollars in millions, except per share)	For the Six Months Ended June 30,
(Dollars in millions, except per share)	2007		2008
Performance shares granted		68,677		91,750
Weighted average grant date fair value—per share	$	63.42	$	51.42
Performance shares forfeited		—		—
Fair value of performance shares that vested during the period	$	0.3	$	—
Performance shares compensation expense	$	1.6	$	2.8
Tax benefit related to compensation expense	$	0.6	$	1.1

As of June 30, 2008, the total unrecognized compensation cost related to grants that are redeemable in shares was $6.4 million and the weighted-average period over which it is expected to be recognized was 1 year. The Company issues new shares under the 2000 Stock Plan upon vesting and settlement of these grants that are redeemable in shares.

Note 9—Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" for all financial assets and liabilities measured and reported on a fair value basis. At adoption, there was no effect on the Company's financial position or results of operations.

Fair Value Hierarchy

As defined in SFAS No.157, fair value is the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data. Based on the observability of the inputs used in the valuation techniques, the Company classifies its financial assets and liabilities measured and disclosed at fair value in accordance with the three-level hierarchy established under SFAS No. 157. This hierarchy ranks the quality and reliability of the information used to determine fair values.

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Fair Value of Financial Instruments (Continued)

models and discounted cash flow models and include management judgment and estimation which may be significant.

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to SFAS No. 157. In certain cases, the inputs used to measure fair value of an asset or liability may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

Valuation Methodologies

The Company has an established and documented process for determining fair value for financial assets and financial liabilities within the scope of SFAS No. 157. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as interest rates, yield curves, foreign exchange rates, volatilities and credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and, with the adoption of SFAS No. 157, that consider the Company's creditworthiness in determining the fair value of its trading liabilities. A description of the valuation methodologies used for certain financial assets and financial liabilities measured at fair value is as follows.

Trading Account Assets: Trading account assets are recorded at fair value and primarily consist of securities and derivatives held for trading purposes. See discussion below on securities available for sale, which utilize the same valuation methodology as trading account securities. See also discussion below on derivatives valuation.

Securities Available for Sale: Securities available for sale are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 1 securities include those traded on an active exchange, as well as U.S. government and its agencies securities. Level 2 securities include mortgage-backed securities and certain asset-backed securities. Level 3 securities include collateralized loan obligations (CLOs).

Loans Held for Sale: Residential mortgage and commercial loans held for sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. These loans are classified as Level 2. The fair value of commercial loans held for sale is based on secondary market offerings for loans with similar characteristics. These loans are classified as Level 3.

Loans Impaired under SFAS No. 114: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. As a practical expedient, fair value may be measured based on a loan's observable market price or the underlying collateral securing the loan. Collateral may be real estate or business assets including equipment. The value of collateral is determined based on independent appraisals. Appraised values may be adjusted based on management's historical knowledge, changes in market conditions from the time of valuation, and management's knowledge of the client and the client's business. Impaired loans are reviewed and evaluated on at least a quarterly basis for

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Fair Value of Financial Instruments (Continued)

additional impairment and adjusted accordingly. Loans impaired under SFAS No. 114 that are valued based on underlying collateral are classified as Level 3.

Derivatives: The Company's derivatives are traded in over-the-counter markets where quoted market prices are not readily available. The Company values its derivatives using pricing models that are widely accepted in the financial services industry with inputs that are observable in the market or can be derived from or corroborated by observable market data. These models reflect the contractual terms of the derivatives including the period to maturity and market observable inputs such as yield curves and option volatility. Valuation adjustments are made to reflect counterparty credit quality and to consider the credit worthiness of the company. Derivatives, which are included in trading account assets, trading account liabilities and other assets, are generally classified as Level 2.

Private Equity Investments: Private equity investments are recorded at cost and evaluated for impairment. The valuation of these investments requires significant management judgment due to the absence of quoted market prices, lack of liquidity and the long-term nature of these assets. The fair value of the investments is estimated quarterly based on a company's business model, current and projected financial performance, liquidity and overall economic and market conditions. Private equity investments are classified as Level 3.

Long-term Subordinated Debt: Long-term subordinated fixed rate debt, identified at inception with pay floating interest rate swaps, qualifies as a fair value hedge and meets the requirements under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" for utilizing the shortcut method for measuring effectiveness. The fair value of the debt is determined based on the value of the floating interest rate swaps which are valued in a widely used interest rate derivative model in which inputs are readily observable from actively quoted markets. This debt is classified as Level 2.

Financial Instruments Not Measured at Fair Value: The Company also has financial instruments that are not measured at fair value on a recurring or nonrecurring basis and therefore do not have disclosure requirements pursuant to SFAS No. 157. Such financial assets and financial liabilities include: cash and due from banks, interest bearing deposits in banks, federal funds sold and securities purchased under resale agreements, federal funds purchased and securities sold under repurchase agreements, commercial paper issued by the Company, and other borrowed funds.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Fair Value of Financial Instruments (Continued)

Fair Value Measurements on a Recurring Basis

The following table presents financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, by caption on the consolidated balance sheet and by SFAS No. 157 valuation hierarchy.

		June 30, 2008
(Dollars in thousands)		Level 1		Level 2		Level 3		Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets		$	34,937	$	1,122,265	$	—	$	(20,786	)	$	1,136,416
Securities available for sale			845,467		6,112,509		1,518,339		—			8,476,315
Other assets⁽²⁾			—		163,065		—		(51,178	)		111,887

	Total assets	$	880,404	$	7,397,839	$	1,518,339	$	(71,964	)	$	9,724,618

Liabilities
Trading account liabilities		$	1,560	$	962,644	$	—	$	(71,964	)	$	892,240
Medium- and long-term debt			—		1,161,288		—		—			1,161,288

	Total liabilities	$	1,560	$	2,123,932	$	—	$	(71,964	)	$	2,053,528

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

The following table presents a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months and six months ended June 30, 2008. Level 3 available for sale securities include CLOs. The CLOs were valued using broker quotes that are derived from pricing models whose assumptions are based on observable inputs adjusted for unobservable liquidity spreads.

(Dollars in thousands)			For the Three Months Ended June 30, 2008		For the Six Months Ended June 30, 2008
Balance, beginning of period			$	1,497,916	$	1,769,880
	Total gains/(losses) (realized/unrealized):
		Included in income before taxes		61		122
		Included in other comprehensive income		20,362		(251,663	)
	Purchases, issuances and settlements			—		—
	Transfers in/out Level 3			—		—

Balance, end of period			$	1,518,339	$	1,518,339

Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at June 30, 2008			$	29	$	58

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Fair Value of Financial Instruments (Continued)

Fair Value Measurement on a Nonrecurring Basis

Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. The following table presents the carrying value of financial instruments by level within the fair value hierarchy as of June 30, 2008, for which a nonrecurring change in fair value has been recorded during the three month period ended June 30, 2008.

		June 30, 2008
(Dollars in thousands)		Carrying Value		Level 1		Level 2		Level 3		Losses for the Three Months Ended June 30, 2008			Losses for the Six Months Ended June 30, 2008
Loans		$	33,465	$	—	$	3,943	$	29,522	$	(7,405	)	$	(7,457	)
Other assets			—		—		—		—		(561	)		(561	)

	Total	$	33,465	$	—	$	3,943	$	29,522	$	(7,966	)	$	(8,018	)

Loans include loans held for sale and loans impaired under SFAS No. 114 that are valued based on the fair value of the underlying collateral. Loans held for sale include residential mortgage loans measured at the lower of cost or fair value. The fair value of the fixed-rate residential mortgage loans was determined using the whole loan forward prices obtained from government sponsored enterprises. The fair value of SFAS No. 114 loans was determined based on appraised values of the underlying collateral adjusted for management's judgment. Other assets include private equity investments that were written down to fair value during the period as a result of an impairment. The fair value of private equity investments was estimated based on the company's current and projected financial performance.

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging

Derivative positions are integral components of the Company's designated asset and liability management 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 LIBOR-based commercial loans, certificates of deposit 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, collars and corridor options and interest rate swaps. At June 30, 2008, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 1.4 years.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income 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 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 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 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 interest 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, 3-month, 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 match 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 second quarter of 2008, the Company recognized a net loss of $44 thousand due to ineffectiveness, which is recognized in other noninterest expense, compared to a net gain of $1 thousand in the second quarter of 2007.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

Fair Value Hedges

Hedging Strategy for Subordinated Debt

The Company engages in an interest rate hedging strategy in which one or more interest rate swaps are associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. 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 transactions for the issuances of subordinated debt were 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.

Economic Hedging Strategy for "MarketPath" Certificates of Deposit

The Company engages in an economic hedging strategy in which interest bearing CDs issued to customers, which are tied to the changes in the Standard and Poor's 500 Index, are exchanged for a fixed rate of interest. The Company accounts for the embedded derivative in the CD at fair value. A total return swap that encompasses the value of a series of options that had individually hedged each CD is valued at fair value. The changes in the fair value of the embedded derivative and the hedge instrument are recognized as interest expense.

Note 11—Earnings Per Share (EPS)

Basic 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, restricted stock units, stock units and performance shares are common stock equivalents.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Earnings Per Share (EPS) (Continued)

The following table presents a reconciliation of basic and diluted EPS for the three and six months ended June 30, 2007 and 2008.

		Three Months Ended June 30,										Six Months Ended June 30,
		2007						2008				2007				2008
(Amounts in thousands, except per share data)		2007						2008				2007				2008
(Amounts in thousands, except per share data)		Basic			Diluted			Basic		Diluted		Basic		Diluted		Basic			Diluted
Income from continuing operations		$	165,740		$	165,740		$	134,298	$	134,298	$	313,887	$	313,887	$	256,696		$	256,696
Income (loss) from discontinued operations			(386	)		(386	)		7,047		7,047		1,078		1,078		(6,761	)		(6,761	)

Net income		$	165,354		$	165,354		$	141,345	$	141,345	$	314,965	$	314,965	$	249,935		$	249,935

Weighted average common shares outstanding			137,477			137,477			137,209		137,209		137,708		137,708		137,107			137,107
Additional shares due to:
	Assumed conversion of dilutive share-based compensation		—			1,661			—		690		—		1,652		—			568

Adjusted weighted average common shares outstanding			137,477			139,138			137,209		137,899		137,708		139,360		137,107			137,675

Income from continuing operations per share		$	1.21		$	1.19		$	0.98	$	0.97	$	2.28	$	2.25	$	1.87		$	1.86
Income (loss) from discontinued operations per share			(0.01	)		—			0.05		0.05		0.01		0.01		(0.05	)		(0.04	)

Net income per share		$	1.20		$	1.19		$	1.03	$	1.02	$	2.29	$	2.26	$	1.82		$	1.82

The following table provides the number of options and the corresponding exercise prices for those options that were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2007 and 2008 because they were antidilutive.

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2007	2008	2007	2008
Options outstanding	1,817,495	6,889,317	1,817,495	6,956,967
Exercise price of options	$62.19 - $71.23	$50.35 - $71.23	$62.19 - $71.23	$48.51 - $71.23

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Earnings Per Share (EPS) (Continued)

Note 12—Accumulated Other Comprehensive Income (Loss)

The following table presents the change in each of the components of other comprehensive income (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 Six Months Ended June 30, 2007:
Cash flow hedge activities:
	Unrealized net losses on hedges arising during the period		$	(14,406	)	$	5,510		$	(8,896	)
	Less: Reclassification adjustment for net losses on hedges included in net income			18,265			(6,986	)		11,279

Net change in unrealized losses on hedges				3,859			(1,476	)		2,383

Securities available for sale:
	Unrealized holding losses arising during the period on securities available for sale			(29,087	)		11,126			(17,961	)
	Less: Reclassification adjustment for net gains on securities available for sale included in net income			(1,450	)		555			(895	)

Net change in unrealized losses on securities available for sale				(30,537	)		11,681			(18,856	)

Foreign currency translation adjustment				491			(188	)		303

Reclassification adjustment for pension and other benefits included in net income:
		Amortization of prior service costs		80			(31	)		49
		Amortization of transition amount		1,018			(389	)		629
		Recognized net actuarial loss		10,202			(3,902	)		6,300

Net change in pension and other benefits				11,300			(4,322	)		6,978

Net change in accumulated other comprehensive income (loss)			$	(14,887	)	$	5,695		$	(9,192	)

For the Six Months Ended June 30, 2008:
Cash flow hedge activities:
	Unrealized net gains on hedges arising during the period		$	58,445		$	(22,355	)	$	36,090
	Less: Reclassification adjustment for net gains on hedges included in net income			(35,367	)		13,528			(21,839	)

Net change in unrealized gains on hedges				23,078			(8,827	)		14,251

Securities available for sale:
	Unrealized holding losses arising during the period on securities available for sale			(294,326	)		112,580			(181,746	)
	Less: Reclassification adjustment for net gains on securities available for sale included in net income			(2	)		1			(1	)

Net change in unrealized losses on securities available for sale				(294,328	)		112,581			(181,747	)

Foreign currency translation adjustment				(352	)		135			(217	)

Reclassification adjustment for pension and other benefits included in net income:
		Amortization of prior service costs		(48	)		19			(29	)
		Amortization of transition amount		1,018			(389	)		629
		Recognized net actuarial loss		6,647			(2,542	)		4,105

Net change in pension and other benefits				7,617			(2,912	)		4,705

Net change in accumulated other comprehensive income (loss)			$	(263,985	)	$	100,977		$	(163,008	)

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12—Accumulated Other Comprehensive Income (Loss) (Continued)

The following table presents accumulated other comprehensive income (loss) balances.

(Dollars in thousands)	Net Unrealized Gains (Losses) on Cash Flow Hedges			Net Unrealized Gains (Losses) on Securities Available For Sale			Foreign Currency Translation Adjustment			Pension and Other Benefits Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2006	$	(27,405	)	$	(57,878	)	$	223		$	(174,314	)	$	(259,374	)
Change during the period		2,383			(18,856	)		303			6,978			(9,192	)

Balance, June 30, 2007	$	(25,022	)	$	(76,734	)	$	526		$	(167,336	)	$	(268,566	)

Balance, December 31, 2007	$	23,563		$	(129,163	)	$	740		$	(178,263	)	$	(283,123	)
Change during the period		14,251			(181,747	)		(217	)		4,705			(163,008	)

Balance, June 30, 2008	$	37,814		$	(310,910	)	$	523		$	(173,558	)	$	(446,131	)

Note 13—Commitments, Contingencies and Guarantees

The following table summarizes the Company's significant commitments.

(Dollars in thousands)	June 30, 2008
Commitments to extend credit	$	23,397,736
Standby letters of credit		4,275,388
Commercial letters of credit		88,919
Risk participations in bankers' acceptances		8,250
Commitments to fund principal investments		101,674
Commitments to fund low-income housing credit (LIHC) investments		150,314

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

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At June 30, 2008, the carrying value of the Company's risk participations in bankers' acceptances, standby and commercial letters of credit totaled $6.1 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 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.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13—Commitments, Contingencies and Guarantees (Continued)

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

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

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

The Company is fund manager for LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over an eleven-year weighted average period. Additionally, the Company receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC investments that reduce the Company's ultimate exposure to loss. As of June 30, 2008, the Company's maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, or $176.3 million. The Company maintains a reserve of $6.8 million for these guarantees included in other liabilities.

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 June 30, 2008, the Bank had a maximum exposure to loss under the commercial paper program guarantee of $1.4 billion. The Bank's guarantee has an average term of less than nine months and is fully collateralized by a pledged deposit placed with the Bank. The Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of June 30, 2008, the Company did not have any exposure to loss for these agreements.

The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $2.7 billion at June 30, 2008. The market value of the associated collateral was $2.8 billion at June 30, 2008.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 13—Commitments, Contingencies and Guarantees (Continued)

The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap or option contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of June 30, 2008, the maximum exposure to loss under these contracts totaled $33.0 million. At June 30, 2008, the Company maintained a reserve of $1.0 million for losses related to these guarantees included in trading account liabilities.

The Company is a member of the Visa USA network (Visa). Visa's bylaws obligate its members to indemnify Visa for losses in connection with the settlement of certain antitrust lawsuits. The Company's indemnification obligation is limited to its proportionate share. Under FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34," the Company had a liability of $9.5 million and $4.5 million at December 31, 2007 and June 30, 2008, respectively, representing the estimated fair value of the Company's obligations under the indemnity provisions. The reduction in this liability from December 31, 2007 to June 30, 2008 was primarily due to the establishment of an escrow account by Visa, during its initial public offering in March 2008, to pay for settlements of its antitrust lawsuits. The Company's maximum exposure to loss for the pending Visa antitrust lawsuits is not determinable, as it is dependent on the outcome of the litigation, but any loss will be proportionate to the Company's ownership interest in Visa.

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 imposed a civil money penalty of $10 million and requires the Bank to take actions to improve compliance with the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML). 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 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 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. Pursuant to the DPA, the Bank also paid $21.6 million in the third quarter of 2007 to the DOJ.

Note 14—Business Segments

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

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14—Business Segments (Continued)

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. 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, and risk management for small businesses and individuals. At June 30, 2007 and 2008, Retail Banking had $222.2 million and $217.5 million, respectively, of goodwill. In December 2007, $4.8 million of goodwill attributed to the retirement recordkeeping business was eliminated against the gain on sale of this business. For further information on this sale, see Note 3 to these condensed consolidated financial statements.
•: Wholesale Banking aggregates those operating segments that provide credit, depository and cash management services, 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 both June 30, 2007 and 2008, Wholesale Banking had $137.8 million of goodwill. In March 2008, a goodwill impairment charge of $18.7 million, which is included in discontinued operations, was recorded related to the insurance brokerage business. The remaining goodwill associated with the insurance brokerage business of $74.7 million was eliminated in June 2008, when the business was sold. Refer to Note 5 to these condensed consolidated financial statements for further information on the impairment and Note 3 to these condensed consolidated financial statements for further information on the sale of the insurance brokerage business.

The information, set forth in the tables that follow, reflects selected income statement and balance sheet items by reportable business segment. The information presented does not necessarily represent the business units' financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. Included in the tables, within total assets, are the amounts of goodwill for both reportable business segments as of June 30, 2007 and 2008.

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 an operating segment based on a predetermined percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to an operating segment based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks.

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14—Business Segments (Continued)

"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. Discontinued operations consists of three separate businesses: international correspondent banking, retirement recordkeeping services and insurance brokerage services. For further detail on discontinued operations, see Note 3 to these condensed consolidated financial statements. Except as discussed above, none of the items in "Other" is significant to the Company's business.

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

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14—Business Segments (Continued)

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

		Retail Banking				Wholesale Banking
		As of and for the Three Months Ended June 30,				As of and for the Three Months Ended June 30,
		2007		2008		2007		2008
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	223,997	$	242,610	$	242,690	$	300,085
	Noninterest income (expense)		120,768		126,085		95,168		88,130

	Total revenue		344,765		368,695		337,858		388,215
	Noninterest expense (income)		224,626		242,216		138,525		149,711
	Credit expense (income)		6,262		6,842		26,859		49,416

	Income (loss) from continuing operations before income taxes		113,877		119,637		172,474		189,088
	Income tax expense (benefit)		43,558		45,761		53,651		55,273

	Income (loss) from continuing operations		70,319		73,876		118,823		133,815
	Income (loss) from discontinued operations, net of income taxes		—		—		—		—

	Net income (loss)	$	70,319	$	73,876	$	118,823	$	133,815

	Total assets, end of period—Market View (dollars in millions):	$	17,710	$	20,519	$	25,587	$	31,532

		Other						Reconciling Items						UnionBanCal Corporation
		As of and for the Three Months Ended June 30,						As of and for the Three Months Ended June 30,						As of and for the Three Months Ended June 30,
		2007			2008			2007			2008			2007			2008
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(35,696	)	$	(28,991	)	$	(2,203	)	$	(3,146	)	$	428,788		$	510,558
	Noninterest income (expense)		1,967			6,184			(16,242	)		(20,773	)		201,661			199,626

	Total revenue		(33,729	)		(22,807	)		(18,445	)		(23,919	)		630,449			710,184
	Noninterest expense (income)		29,862			40,189			(9,962	)		(12,804	)		383,051			419,312
	Credit expense (income)		(28,097	)		38,778			(24	)		(36	)		5,000			95,000

	Income (loss) from continuing operations before income taxes		(35,494	)		(101,774	)		(8,459	)		(11,079	)		242,398			195,872
	Income tax expense (benefit)		(17,316	)		(35,221	)		(3,235	)		(4,239	)		76,658			61,574

	Income (loss) from continuing operations		(18,178	)		(66,553	)		(5,224	)		(6,840	)		165,740			134,298
	Income (loss) from discontinued operations, net of income taxes		(386	)		7,047			—			—			(386	)		7,047

	Net income (loss)	$	(18,564	)	$	(59,506	)	$	(5,224	)	$	(6,840	)	$	165,354		$	141,345

	Total assets, end of period—Market View (dollars in millions):	$	9,901		$	8,604		$	(24	)	$	(61	)	$	53,174		$	60,594

UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14—Business Segments (Continued)

		Retail Banking				Wholesale Banking
		As of and for the Six Months Ended June 30,				As of and for the Six Months Ended June 30,
		2007		2008		2007		2008
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	451,810	$	466,474	$	484,047	$	566,369
	Noninterest income (expense)		234,307		246,747		181,646		165,806

	Total revenue		686,117		713,221		665,693		732,175
	Noninterest expense (income)		450,528		473,690		280,553		295,516
	Credit expense (income)		12,535		13,281		51,926		86,567

	Income (loss) from continuing operations before income taxes		223,054		226,250		333,214		350,092
	Income tax expense (benefit)		85,318		86,541		102,809		100,992

	Income (loss) from continuing operations		137,736		139,709		230,405		249,100
	Income (loss) from discontinued operations, net of income taxes		—		—		—		—

	Net income (loss)	$	137,736	$	139,709	$	230,405	$	249,100

	Total assets, end of period—Market View (dollars in millions):	$	17,710	$	20,519	$	25,587	$	31,532

		Other						Reconciling Items						UnionBanCal Corporation
		As of and for the Six Months Ended June 30,						As of and for the Six Months Ended June 30,						As of and for the Six Months Ended June 30,
		2007			2008			2007			2008			2007		2008
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(74,373	)	$	(56,400	)	$	(4,267	)	$	(5,307	)	$	857,217	$	971,136
	Noninterest income (expense)		8,422			20,515			(31,972	)		(38,046	)		392,403		395,022

	Total revenue		(65,951	)		(35,885	)		(36,239	)		(43,353	)		1,249,620		1,366,158
	Noninterest expense (income)		64,275			76,396			(19,686	)		(23,084	)		775,670		822,518
	Credit expense (income)		(55,413	)		67,213			(48	)		(61	)		9,000		167,000

	Income (loss) from continuing operations before income taxes		(74,813	)		(179,494	)		(16,505	)		(20,208	)		464,950		376,640
	Income tax expense (benefit)		(30,751	)		(59,859	)		(6,313	)		(7,730	)		151,063		119,944

	Income (loss) from continuing operations		(44,062	)		(119,635	)		(10,192	)		(12,478	)		313,887		256,696
	Income (loss) from discontinued operations, net of income taxes		1,078			(6,761	)		—			—			1,078		(6,761	)

	Net income (loss)	$	(42,984	)	$	(126,396	)	$	(10,192	)	$	(12,478	)	$	314,965	$	249,935

	Total assets, end of period—Market View (dollars in millions):	$	9,901		$	8,604		$	(24	)	$	(61	)	$	53,174	$	60,594

Note 15—Subsequent Event

On July 23, 2008, 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 October 3, 2008 to stockholders of record as of September 5, 2008.

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

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

You should read the following discussion and analysis of our consolidated financial condition and results of operations for the period ended June 30, 2008 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, 2007 (2007 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 condensed 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 $61 billion at June 30, 2008. At June 30, 2008, 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 second quarter 2008 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.

Uncertain and turbulent overall financial market conditions continued to impact the banking industry in the second quarter of 2008. Despite the challenging market, we continued to generate loan growth, maintain stable deposits, expand net interest margin and drive disciplined expense management.

In the second quarter of 2008, our average total loans grew 17 percent from the second quarter of 2007 to $45.5 billion. This strong growth was spread across all major categories, including commercial, residential and commercial real estate, due to increased loan demand.

During the second quarter of 2008, we provided $100 million for our allowance for credit losses compared to $5 million in the second quarter of 2007. The increase was primarily attributable to higher criticized assets, increases in certain loss factors and strong loan growth. The provision reflects negative risk grade trends throughout the portfolio. We anticipate a continued recessionary environment during the remainder of 2008, resulting in deterioration in our loan portfolio. Consequently, we expect a significant increase in our full year provision for credit losses as compared to 2007. See further discussion below in "Allowances for Credit Losses."

Our nonperforming assets totaled $57 million and $225 million at December 31, 2007 and June 30, 2008, respectively. The increase in nonperforming assets was primarily due to increases in the construction portfolio of $82 million, commercial and industrial portfolio of $52 million, and commercial real estate of $26 million. Of the total increase in nonperforming assets, $90 million was attributable to our homebuilder

portfolio. Net charge offs were $32 million in the second quarter of 2008, compared to $2 million in the second quarter of 2007.

At December 31, 2007 and June 30, 2008, our allowances for credit losses as a percent of total loans were 1.20 percent and 1.37 percent, respectively. At December 31, 2007 and June 30, 2008, our allowances for credit losses as a percent of nonaccrual loans were 885 percent and 291 percent, respectively. At December 31, 2007 and June 30, 2008, our allowance for loan losses as a percent of total loans were 0.98 percent and 1.14 percent, respectively. At December 31, 2007 and June 30, 2008, our allowance for loan losses as a percent of nonaccrual loans were 723 percent and 244 percent, respectively.

In the second quarter of 2008, our average noninterest bearing deposits declined 14 percent to $12.9 billion compared to the second quarter of 2007. The decline was primarily due to lower commercial noninterest bearing deposits as a result of a mix shift toward interest bearing deposit accounts, and lower title and escrow deposits resulting from reduced residential real estate activity. Average noninterest bearing deposits represented 30 percent of average total deposits in the second quarter of 2008, compared to 35 percent in the second quarter of 2007. In addition, the annualized average all-in-cost of funds improved to 1.56 percent, compared to 2.62 percent in the second quarter of 2007.

In the second quarter of 2008, our net interest income increased 19 percent from the second quarter of 2007 to $511 million, primarily due to strong loan growth and lower rates paid on interest bearing liabilities. Offsetting these positive impacts on our net interest income were lower yields on earning assets and a deposit mix shift from noninterest bearing and low-cost deposits into higher-cost deposits.

In the second quarter of 2008, our noninterest income declined 1 percent from the second quarter of 2007 to $200 million primarily due to lower gains on the sale of private capital investments. This decrease in noninterest income was partially offset by a $7.1 million pre-tax gain on the partial redemption of MasterCard Inc. common stock, as well as higher trust and investment management fees related to an increase in trust assets.

In the second quarter of 2008, our noninterest expense grew by 9 percent from the second quarter of 2007 to $419 million. The increase was primarily due to higher salaries and other compensation primarily due to annual merit increases and higher performance-related incentives. The increase was also due to higher costs related to the provision for credit losses on off-balance sheet commitments and higher regulatory agency fees as credits available from prior quarters were exhausted.

Our effective tax rate was 31.4 percent in the second quarter of 2008, compared to 31.6 percent in the second quarter of 2007.

During the second quarter of 2008, we declared $71.8 million in dividends, compared to $71.9 million in the second quarter of 2007. There were no significant repurchases of our common stock in the second quarter of 2008. As of June 30, 2008, we had $510 million remaining under our current Board of Directors' authorization for the repurchase of our common stock.

On June 2, 2008, we completed the sale of our insurance subsidiary, UnionBanc Insurance Services, Inc., to a wholly-owned subsidiary of BB&T Corporation. We recorded a gain on sale of $11.5 million after tax.

Discontinued Operations

Our discontinued operations consist of three separate businesses: retirement recordkeeping services (RRB), international correspondent banking (ICBB), and insurance brokerage services (IBB). The ICBB business was sold to Wachovia Bank, N.A. in 2005 for $245.0 million and we recognized a pre-tax gain of $228.8 million. We received a subsequent $4.0 million purchase price adjustment and recorded this pre-tax gain in 2006. The business consisted of international payment and trade processing along with related lending activities. Substantially all of the assets and liabilities of ICBB were settled in the first quarter of 2007.

In the fourth quarter of 2007, we sold our RRB to Prudential Retirement, a subsidiary of Prudential Financial, Inc., for $103.0 million. We recorded a pre-tax gain of $94.7 million, net of $2.1 million in transaction costs and a $6.2 million elimination of intangible assets, which includes goodwill of $4.8 million attributed to this business. The RRB was previously included in the Retail Banking reportable business segment.

In June 2008, we sold our IBB subsidiary, UnionBanc Insurance Services, Inc., to a wholly-owned subsidiary of BB&T Corporation. We recorded a pre-tax gain of $9.8 million, net of $1.6 million in transaction costs, and an elimination of intangible assets, consisting of goodwill of $74.7 million and other intangibles of $11.0 million. The IBB was previously included in the Wholesale Banking reportable business segment.

All transactions have been accounted for as discontinued operations and all prior period financial statements 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 shown at the lower of cost or fair value less costs to dispose. The average net assets or liabilities of our discontinued operations are reflected in our analysis of net interest margin. For the detailed components of our assets and liabilities of our discontinued operations, see Note 3 to the condensed consolidated financial statements in this Form 10-Q.

Retirement Recordkeeping Business (RRB) Discontinued Operations

The results of the RRB included in our net income for the three and six months ended June 30, 2007 and 2008, consisted of the following:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands)	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands)	2007		2008			2007		2008
Net interest income	$	1,307	$	477		$	2,597	$	1,314
Noninterest income		11,929		6,527			23,629		17,528
Noninterest expense		10,996		10,111			22,221		22,180

Income (loss) from discontinued operations before income taxes		2,240		(3,107	)		4,005		(3,338	)
Income tax expense (benefit)		866		(1,095	)		1,541		(1,164	)

Income (loss) from discontinued operations	$	1,374	$	(2,012	)	$	2,464	$	(2,174	)

The RRB's net interest income for the three months ended June 30, 2007 and 2008 included the allocation of interest income (based on its average net liabilities) of $1.4 million and $0.6 million, respectively, and $2.8 million and $1.5 million for the six months ended June 30, 2007 and 2008, respectively. Noninterest income for the three months ended June 30, 2007 and 2008 included trust fees of $11.9 million and $3.1 million, respectively, and $23.6 million and $6.4 million for the six months ended June 30, 2007 and 2008, respectively. Noninterest income for the three and six months ended June 30, 2008 also included $4.1 million and $11.8 million, respectively, in servicing revenues from Prudential. Since the migration of all customers onto Prudential accounting systems was completed in June 2008, future servicing revenues from Prudential are expected to be minimal. For the three months ended June 30, 2007 and 2008, noninterest expense included salaries and benefits expense of $6.4 million and $4.7 million, respectively, and $13.1 million and $11.3 million for the six months ended June 30, 2007 and 2008, respectively.

Insurance Brokerage Business (IBB) Discontinued Operations

The components of income from the IBB discontinued operations for the three and six months ended June 30, 2007 and 2008 are:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2007			2008			2007			2008
Net interest expense	$	(1,222	)	$	(213	)	$	(2,429	)	$	(993	)
Noninterest income		16,255			18,369			36,371			35,591
Noninterest expense		17,818			11,981			36,065			45,777

Income (loss) from discontinued operations before income taxes		(2,785	)		6,175			(2,123	)		(11,179	)
Income tax benefit		(1,025	)		(2,885	)		(737	)		(6,592	)

Income (loss) from discontinued operations	$	(1,760	)	$	9,060		$	(1,386	)	$	(4,587	)

The IBB's net interest expense for the three and six months ended June 30, 2007 and 2008 was mainly comprised of the allocation of interest expense (based on its average net assets). Noninterest income for the three months ended June 30, 2007 and 2008 included insurance commissions of $16.2 million and $8.4 million, respectively, and $36.3 million and $25.7 million, for the six months ended June 30, 2007 and 2008, respectively. Noninterest income for the three and six months ended June 30, 2008 also included the $9.8 million pre-tax gain from the sale of IBB. Noninterest expense for the three months ended June 30, 2007 and 2008 included salaries and benefits expense of $13.1 million and $9.0 million, respectively, and $27.5 million and $20.7 million, for the six months ended June 30, 2007 and 2008, respectively. For the six months ended June 30, 2008, noninterest expense also included an $18.7 million goodwill impairment charge. This charge was recorded in the first quarter of 2008, when we determined that the value of the net assets was greater than the fair value of IBB, which was based on indicative prices for insurance agencies.

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

Critical Accounting Policies

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 compared to 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 Policies and our significant accounting policies are discussed in detail in our 2007 Form 10-K filed with the Securities and Exchange Commission (the SEC) and as follows.

Fair Valuation of Financial Instruments

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" for all financial assets and liabilities measured and reported on a fair value basis. At adoption, there was no impact on our financial position or results of operations. For detailed information on our use of fair valuation of financial instruments and our related valuation methodologies, see Note 9 to the condensed consolidated financial statements in this Form 10-Q.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimate about market data. Based on the observability of the inputs used in the valuation techniques, we classify our financial assets and liabilities measured and disclosed at fair value in accordance with the three-level hierarchy (i.e., Level 1, Level 2 and Level 3) established under SFAS No. 157. This hierarchy ranks the quality and reliability of the information used to determine fair values. The degree of management judgment increases with the higher the level of inputs.

Included in the Level 3 category are collateralized loan obligations (CLOs), which are somewhat illiquid. All of our CLO securities are known as "Cash Flow CLOs." A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs repay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that repay note holders through the trading and sale of underlying collateral. The valuation of CLOs are based upon indicative broker quotes, that are derived from pricing models whose assumptions are based upon observable inputs adjusted for unobservable liquidity spreads. The fair value of our CLOs declined by $251.2 million from December 31, 2007 to $1.5 billion at June 30, 2008. Since no observable credit quality issues were present in our CLO portfolio at June 30, 2008, and we have the ability and intent to hold the CLO securities until maturity, we consider the unrealized loss to be temporary.

We have an established and documented process for determining fair value. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as interest rates, yield curves, foreign exchange rates, volatilities and credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and, with the adoption of SFAS No. 157, that consider our creditworthiness in determining the fair value of our trading liabilities.

The following table reflects financial instruments measured at fair value on a recurring basis as of June 30, 2008.

(Dollars in thousands)			Fair Value			Percentage of Total
Financial instruments recorded at fair value on a recurring basis
Assets:
	Level 1		$	880,404		9	%
	Level 2			7,397,839		76	%
	Level 3			1,518,339		16	%
	Netting Adjustment⁽¹⁾			(71,964	)	(1	)%

		Total	$	9,724,618		100	%

	As a percentage of total Company assets					16	%

Liabilities:
	Level 1		$	1,560		0	%
	Level 2			2,123,932		104	%
	Level 3			—		0	%
	Netting Adjustment⁽¹⁾			(71,964	)	(4	)%

		Total	$	2,053,528		100	%

	As a percentage of total Company liabilities					4	%

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

Financial Performance

Summary of Financial Performance

						Increase (Decrease)									Increase (Decrease)
		For the Three Months Ended June 30,				Increase (Decrease)					For the Six Months Ended June 30,				Increase (Decrease)
						2008 versus 2007									2008 versus 2007
(Dollars in thousands)						2008 versus 2007									2008 versus 2007
(Dollars in thousands)		2007		2008		Amount			Percent		2007		2008		Amount			Percent
Results of Operations
Net interest income⁽¹⁾		$	428,788	$	510,558	$	81,770		19.1	%	$	857,217	$	971,136	$	113,919		13.3	%
Noninterest income
	Trust and investment management fees		39,656		43,802		4,146		10.5			76,516		87,190		10,674		14.0
	Trading account activities		13,838		16,687		2,849		20.6			28,678		27,699		(979	)	(3.4	)
	Merchant banking fees		8,809		11,085		2,276		25.8			17,886		22,878		4,992		27.9
	Gains on private capital investments, net		20,171		1,282		(18,889	)	(93.6	)		29,266		2,352		(26,914	)	(92.0	)
	Gain on the VISA IPO redemption		—		—		—		—			—		14,211		14,211		nm
	Other noninterest income		119,187		126,770		7,583		6.4			240,057		240,692		635		0.3

Total noninterest income			201,661		199,626		(2,035	)	(1.0	)		392,403		395,022		2,619		0.7

Total revenue			630,449		710,184		79,735		12.6			1,249,620		1,366,158		116,538		9.3
Provision for loan losses			5,000		95,000		90,000		nm			9,000		167,000		158,000		nm
Noninterest expense
	Salaries and employee benefits		231,939		243,299		11,360		4.9			469,363		484,969		15,606		3.3
	Net occupancy		33,718		38,232		4,514		13.4			67,385		74,434		7,049		10.5
	Outside services		17,150		20,295		3,145		18.3			35,119		37,304		2,185		6.2
	Professional services		11,144		15,931		4,787		43.0			27,494		30,528		3,034		11.0
	Advertising and public relations		10,226		12,857		2,631		25.7			18,391		20,956		2,565		13.9
	Provision for losses on off-balance sheet commitments		—		5,000		5,000		nm			1,000		13,000		12,000		nm
	Other noninterest expense		78,874		83,698		4,824		6.1			156,918		161,327		4,409		2.8

Total noninterest expense			383,051		419,312		36,261		9.5			775,670		822,518		46,848		6.0

Income from continuing operations before income taxes			242,398		195,872		(46,526	)	(19.2	)		464,950		376,640		(88,310	)	(19.0	)
Income tax expense			76,658		61,574		(15,084	)	(19.7	)		151,063		119,944		(31,119	)	(20.6	)

Income from continuing operations		$	165,740	$	134,298	$	(31,442	)	(19.0	)%	$	313,887	$	256,696	$	(57,191	)	(18.2	)%

⁽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 second quarter of 2008 compared to the second quarter of 2007 are presented below.

•: We provided a total of $100 million for credit losses ($95 million for loan losses and $5 million for losses on off-balance sheet commitments) in the second quarter of 2008. The provision increases were primarily attributable to higher criticized assets, increases in certain loss factors and strong loan growth.
•: Our net interest income was favorably influenced by lower average rates on our interest bearing liabilities, as well as by higher volumes in most of our major loan categories. Partly offsetting these positive influences to our net interest margin were lower average demand deposit balances (which

resulted in a shift to more costly interest bearing liabilities) and lower average yields on our earning assets (see discussion under "Net Interest Income").

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

—: Trust and investment management fees were higher primarily due to an approximately 4 percent increase to $240.1 billion in total assets under administration on which fees are based. Managed assets decreased by approximately 5 percent, while non-managed assets increased by approximately 5 percent from June 30, 2007 to June 30, 2008;
—: Trading account activities were higher compared to the prior year primarily due to higher foreign exchange trading and securities trading income;
—: Merchant banking income was higher compared to the prior year primarily due to higher referral fees and risk participation fees;
—: Net gains on private capital investments were lower compared to the prior year due to lower sales and capital distributions; and
—: In the second quarter of 2008, other income included a gain of $7.1 million on the partial redemption of our MasterCard Inc. common stock.

The increase in noninterest expense was due to several factors:

—: Salaries and employee benefits increased mainly due to annual merit increases and higher performance-related incentives;
—: Net occupancy costs increased mainly due to several new leases related to branch expansions, higher vacancy reserves, as well as a prior year refund of property taxes related to a reassessment;
—: Outside services costs increased mainly due to higher costs of services related to title and escrow customers and higher recruiting expenses;
—: Professional services costs increased mainly due to higher legal costs, as well as higher consulting costs related to bank-wide efficiency and technology-related projects;
—: Provision for losses on off-balance sheet commitments increased primarily as a result of shifts in our risk grade mix and increases in certain loss factors; and
—: Other expenses increased due to higher regulatory fees (related to federal deposit insurance costs) as credits available from prior quarters were exhausted and higher writedowns related to Community Reinvestment Act (CRA) investments.

The primary contributors to our financial performance for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 are presented below.

•: We provided a total of $180 million for credit losses ($167 million for loan losses and $13 million for losses on off-balance sheet commitments) in the six months ended June 30, 2008. The provision increases were primarily attributable to higher criticized assets, increases in certain loss factors and strong loan growth.
•: Our net interest income was favorably influenced by higher volumes in most of our major loan categories, as well as by lower average rates on our interest bearing liabilities. Partly offsetting these positive influences to our net interest margin were lower average demand deposit balances (which resulted in a shift to more costly interest bearing liabilities) and lower average yields on our earning assets (see discussion under "Net Interest Income").

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

—: Trust and investment management fees were higher primarily due to an increase in total assets under administration on which fees are based;
—: Merchant banking income was higher compared to the prior year primarily due to higher referral fees and risk participation fees;
—: Net gains on private capital investments were lower compared to the prior year due to lower sales and capital distributions; and
—: In the first quarter of 2008, we recognized a $14.2 million gain on the partial redemption of Visa Inc. common stock related to the initial public offering (IPO), and, in the second quarter of 2008, a gain of $7.1 million on the partial redemption of our MasterCard Inc. common stock. These gains were partly offset by other gains in the prior year, including gains on the sale of fixed assets and syndicated loans held for sale.

The increase in noninterest expense was due to several factors:

—: Salaries and employee benefits increased mainly due to annual merit increases and higher performance-related incentives;
—: Net occupancy costs increased mainly due to several new leases related to branch expansions, higher vacancy reserves, as well as a prior year refund of property taxes related to a reassessment;
—: Provision for losses on off-balance sheet commitments increased primarily as a result of shifts in our risk grade mix and increases in certain loss factors; and
—: Other expenses increased due to higher regulatory fees (related to federal deposit insurance costs) as credits available from prior quarters were exhausted and higher writedowns related to CRA investments.

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
			June 30, 2007							June 30, 2008							Average Balance					Interest Income/ Expense⁽¹⁾
			Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		Average Balance			Interest Income/ Expense⁽¹⁾		Average Yield/ Rate⁽¹⁾⁽²⁾		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		$	14,610,728		$	238,175	6.54	%	$	16,987,504		$	229,612	5.44	%	$	2,376,776		16	%	$	(8,563	)	(4	)%
	Construction			2,296,098			44,047	7.69			2,566,207			30,794	4.83			270,109		12			(13,253	)	(30	)
	Residential mortgage			12,594,065			167,342	5.31			14,495,754			199,756	5.51			1,901,689		15			32,414		19
	Commercial mortgage			6,213,092			111,720	7.21			7,822,056			111,722	5.71			1,608,964		26			2		0
	Consumer			2,557,085			49,579	7.78			2,977,852			44,453	6.00			420,767		16			(5,126	)	(10	)
	Lease financing			568,701			7,341	5.16			644,788			1,171	0.73			76,087		13			(6,170	)	(84	)

	Total Loans			38,839,769			618,204	6.38			45,494,161			617,508	5.44			6,654,392		17			(696	)	(0	)
Securities—taxable				8,548,050			108,674	5.09			8,293,036			97,233	4.69			(255,014	)	(3	)		(11,441	)	(11	)
Securities—tax-exempt				56,084			1,164	8.30			52,742			1,105	8.38			(3,342	)	(6	)		(59	)	(5	)
Interest bearing deposits in banks				88,592			1,295	5.86			67,553			228	1.36			(21,039	)	(24	)		(1,067	)	(82	)
Federal funds sold and securities purchased under resale agreements				593,718			7,809	5.28			213,292			1,093	2.06			(380,426	)	(64	)		(6,716	)	(86	)
Trading account assets				317,020			1,601	2.03			814,274			1,119	0.55			497,254		nm			(482	)	(30	)

		Total earning assets		48,443,233			738,747	6.11			54,935,058			718,286	5.24			6,491,825		13			(20,461	)	(3	)

Allowance for loan losses				(331,820	)						(456,191	)						(124,371	)	(37	)
Cash and due from banks				2,000,688							1,662,638							(338,050	)	(17	)
Premises and equipment, net				480,578							482,950							2,372		0
Other assets				2,393,954							2,645,510							251,556		11

		Total assets	$	52,986,633						$	59,269,965						$	6,283,332		12	%

Liabilities
Deposits:
	Transaction accounts		$	14,075,542		$	102,833	2.93		$	15,550,970		$	59,513	1.54		$	1,475,428		10	%	$	(43,320	)	(42	)
	Savings and consumer time			4,326,199			28,858	2.68			3,846,404			13,918	1.46			(479,795	)	(11	)		(14,940	)	(52	)
	Large time			9,173,928			114,380	5.00			10,929,983			71,078	2.62			1,756,055		19			(43,302	)	(38	)

		Total interest bearing deposits		27,575,669			246,071	3.58			30,327,357			144,509	1.92			2,751,688		10			(101,562	)	(41	)

Federal funds purchased and securities sold under repurchase agreements				782,000			10,120	5.19			2,428,357			12,697	2.10			1,646,357		nm			2,577		25
Net funding allocated from (to) discontinued operations⁽⁴⁾				14,777			192	5.21			64,945			360	2.23			50,168		nm			168		88
Commercial paper				1,389,847			17,429	5.03			1,487,032			8,279	2.24			97,185		7			(9,150	)	(52	)
Other borrowed funds				333,000			4,685	5.64			3,201,612			19,624	2.47			2,868,612		nm			14,939		nm
Medium and long-term debt				2,033,377			28,973	5.72			2,629,308			19,692	3.01			595,931		29			(9,281	)	(32	)
Trust notes				14,714			238	6.48			14,261			238	6.68			(453	)	(3	)		—		—

		Total borrowed funds		4,567,715			61,637	5.41			9,825,515			60,890	2.49			5,257,800		nm			(747	)	(1	)

		Total interest bearing liabilities		32,143,384			307,708	3.84			40,152,872			205,399	2.06			8,009,488		25			(102,309	)	(33	)

Noninterest bearing deposits				14,989,222							12,875,823							(2,113,399	)	(14	)
Other liabilities				1,265,966							1,624,674							358,708		28

		Total liabilities		48,398,572							54,653,369							6,254,797		13
Stockholders' Equity
Common equity				4,588,061							4,616,596							28,535		1

		Total stockholders' equity		4,588,061							4,616,596							28,535		1

		Total liabilities and stockholders' equity	$	52,986,633						$	59,269,965						$	6,283,332		12	%

Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)							431,039	3.56	%					512,887	3.74	%							81,848		19
Less: taxable-equivalent adjustment							2,251							2,329									78		3

		Net interest income				$	428,788						$	510,558								$	81,770		19	%

Average Assets and Liabilities of Discontinued Operations for the Three Months Ended:	June 30, 2007			June 30, 2008
Assets	$	129,821		$	95,415
Liabilities	$	144,598		$	160,360
Net assets (liabilities)	$	(14,777	)	$	(64,945	)

⁽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 Six Months Ended														Increase (Decrease) in
			June 30, 2007							June 30, 2008							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		$	14,647,210		$	475,453	6.55	%	$	16,317,333		$	467,915	5.77	%	$	1,670,123		11	%	$	(7,538	)	(2	)%
	Construction			2,264,789			86,822	7.73			2,520,265			67,411	5.38			255,476		11			(19,411	)	(22	)
	Residential mortgage			12,490,760			331,108	5.30			14,244,248			392,541	5.51			1,753,488		14			61,433		19
	Commercial mortgage			6,139,042			218,686	7.18			7,536,401			224,692	5.96			1,397,359		23			6,006		3
	Consumer			2,549,836			98,558	7.79			2,832,243			90,843	6.45			282,407		11			(7,715	)	(8	)
	Lease financing			558,310			11,079	3.97			647,315			7,468	2.31			89,005		16			(3,611	)	(33	)

	Total Loans			38,649,947			1,221,706	6.36			44,097,805			1,250,870	5.69			5,447,858		14			29,164		2
Securities—taxable				8,564,087			215,941	5.04			8,324,489			202,196	4.86			(239,598	)	(3	)		(13,745	)	(6	)
Securities—tax-exempt				56,865			2,318	8.15			53,051			2,187	8.24			(3,814	)	(7	)		(131	)	(6	)
Interest bearing deposits in banks				84,102			2,404	5.76			48,711			356	1.47			(35,391	)	(42	)		(2,048	)	(85	)
Federal funds sold and securities purchased under resale agreements				719,183			18,961	5.32			270,718			3,786	2.81			(448,465	)	(62	)		(15,175	)	(80	)
Trading account assets				325,146			3,302	2.05			766,795			3,923	1.03			441,649		nm			621		19

		Total earning assets		48,399,330			1,464,632	6.08			53,561,569			1,463,318	5.48			5,162,239		11			(1,314	)	(0	)

Allowance for loan losses				(331,042	)						(427,801	)						(96,759	)	(29	)
Cash and due from banks				1,975,101							1,710,000							(265,101	)	(13	)
Premises and equipment, net				483,551							483,383							(168	)	(0	)
Other assets				2,386,515							2,623,959							237,444		10

		Total assets	$	52,913,455						$	57,951,110						$	5,037,655		10	%

Liabilities
Deposits:
	Transaction accounts		$	13,806,452		$	194,338	2.84		$	15,207,766		$	142,428	1.88		$	1,401,314		10	%	$	(51,910	)	(27	)
	Savings and consumer time			4,311,874			55,713	2.61			4,013,034			37,447	1.88			(298,840	)	(7	)		(18,266	)	(33	)
	Large time			8,806,573			218,175	5.00			11,446,331			185,294	3.26			2,639,758		30			(32,881	)	(15	)

		Total interest bearing deposits		26,924,899			468,226	3.51			30,667,131			365,169	2.39			3,742,232		14			(103,057	)	(22	)

Federal funds purchased and securities sold under repurchase agreements				913,489			23,644	5.22			2,189,525			28,263	2.60			1,276,036		nm			4,619		20
Net funding allocated from (to) discontinued operations⁽⁴⁾				14,930			387	5.23			40,667			509	2.52			25,737		nm			122		32
Commercial paper				1,585,714			39,693	5.05			1,347,271			18,071	2.70			(238,443	)	(15	)		(21,622	)	(54	)
Other borrowed funds				817,620			21,955	5.41			2,383,954			35,690	3.01			1,566,334		nm			13,735		63
Medium and long-term debt				1,704,240			48,668	5.76			2,238,097			39,149	3.52			533,857		31			(9,519	)	(20	)
Trust notes				14,770			476	6.45			14,318			476	6.66			(452	)	(3	)		—		—

		Total borrowed funds		5,050,763			134,823	5.38			8,213,832			122,158	2.99			3,163,069		63			(12,665	)	(9	)

		Total interest bearing liabilities		31,975,662			603,049	3.80			38,880,963			487,327	2.52			6,905,301		22			(115,722	)	(19	)

Noninterest bearing deposits				15,043,454							12,741,338							(2,302,116	)	(15	)
Other liabilities				1,344,991							1,661,380							316,389		24

		Total liabilities		48,364,107							53,283,681							4,919,574		10
Stockholders' Equity
Common equity				4,549,348							4,667,429							118,081		3

		Total stockholders' equity		4,549,348							4,667,429							118,081		3

		Total liabilities and stockholders' equity	$	52,913,455						$	57,951,110						$	5,037,655		10	%

Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)							861,583	3.56	%					975,991	3.65	%							114,408		13
Less: taxable-equivalent adjustment							4,366							4,855									489		11

		Net interest income				$	857,217						$	971,136								$	113,919		13	%

Average Assets and Liabilities of Discontinued Operations for the Six Months Ended:	June 30, 2007			June 30, 2008
Assets	$	131,783		$	109,594
Liabilities	$	146,713		$	150,261
Net assets (liabilities)	$	(14,930	)	$	(40,667	)

⁽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 second quarter of 2008, on a taxable-equivalent basis, increased 19 percent compared to the second quarter of 2007. Our net interest margin increased by 18 basis points. These results were primarily due to the following:

•: Average earning assets increased $6.5 billion, or 13 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a $2.4 billion increase in average commercial loans, which included a $1.1 billion decrease in lower yielding loans related to title and escrow customers, a $1.9 billion increase in average residential mortgages and a $1.6 billion increase in average commercial mortgages;
•: Yields on our earning assets were unfavorably impacted by the decreasing interest rate environment resulting in a lower average yield on average earning assets of 87 basis points, despite being positively impacted by higher hedge income, which increased by $32.3 million;
•: Average noninterest bearing deposits decreased $2.1 billion, or 14 percent. Average commercial noninterest bearing deposits, excluding title and escrow deposits, declined $0.8 billion, or 8 percent. Title and escrow deposits declined $1.1 billion, or 53 percent, primarily due to the slowdown in the real estate market. Consumer demand deposits decreased $0.2 billion, or 8 percent. Average noninterest bearing deposits represented 30 percent in the second quarter of 2008 compared to 35 percent of average total deposits in the second quarter of 2007; and
•: In the second quarter of 2008, the annualized average all-in cost of funds was 1.56 percent, reflecting an average deposit-to-loan ratio of 95 percent and a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In the second quarter of 2007, the annualized all-in cost of funds was 2.62 percent and our average deposit-to-loan ratio was 110 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 certain fixed-rate borrowings to floating rate. For loans, we had hedge income of $22.3 million and hedge expense of $10.0 million for the quarters ended June 30, 2008 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge income of $6.8 million and hedge expense of less than $0.1 million for the quarters ended June 30, 2008 and 2007, respectively.

Net interest income in the six months ended June 30, 2008, on a taxable-equivalent basis, increased 13 percent compared to the six months ended June 30, 2007. Our net interest margin increased by 9 basis points. These results were primarily due to the following:

•: Average earning assets increased $5.2 billion, or 11 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a $1.7 billion increase in average commercial loans, which included a $1.1 billion decrease in lower yielding loans related to title and escrow customers, a $1.8 billion increase in average residential mortgages and a $1.4 billion increase in average commercial mortgages;
•: Yields on our earning assets were unfavorably impacted by the declining interest rate environment resulting in a lower average yield on average earning assets of 60 basis points, despite being positively impacted by higher hedge income, which increased by $48.4 million;
•: Average noninterest bearing deposits decreased $2.3 billion, or 15 percent. Average commercial noninterest bearing deposits, excluding title and escrow deposits, declined $0.9 billion, or 9 percent. Title and escrow deposits declined $1.1 billion, or 51 percent, primarily due to the slowdown in the real estate market. Consumer demand deposits decreased $0.3 billion, or 11 percent. Average noninterest bearing deposits represented 29 percent in the six months ended June 30, 2008 compared to 36 percent of average total deposits in the six months ended June 30, 2007; and

•: In the six months ended June 30, 2008, the annualized average all-in cost of funds was 1.90 percent, reflecting an average deposit-to-loan ratio of 98 percent and a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In six months ended June 30, 2007, the annualized all-in cost of funds was 2.59 percent and our average deposit-to-loan ratio was 109 percent.

We use derivatives to hedge expected changes in the yields on our variable rate loans and CDs, and to convert certain fixed-rate borrowings to floating rate. For loans, we had hedge income of $28.1 million and hedge expense of $20.3 million for the six months ended June 30, 2008 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge income of $12.3 million and less than $0.1 million for the six months ended June 30, 2008 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 six months ended June 30, 2007 and 2008.

Noninterest Income

		For the Three Months Ended									For the Six Months Ended
						Increase (Decrease)										Increase (Decrease)
(Dollars in thousands)		June 30, 2007		June 30, 2008		Increase (Decrease)					June 30, 2007		June 30, 2008			Increase (Decrease)
(Dollars in thousands)		June 30, 2007		June 30, 2008		Amount			Percent		June 30, 2007		June 30, 2008			Amount			Percent
Service charges on deposit accounts		$	77,218	$	77,706	$	488		0.6	%	$	152,163	$	152,442		$	279		0.2	%
Trust and investment management fees			39,656		43,802		4,146		10.5			76,516		87,190			10,674		14.0
Trading account activities			13,838		16,687		2,849		20.6			28,678		27,699			(979	)	(3.4	)
Merchant banking fees			8,809		11,085		2,276		25.8			17,886		22,878			4,992		27.9
Brokerage commissions and fees			9,533		10,635		1,102		11.6			19,193		20,494			1,301		6.8
Card processing fees, net			7,824		8,167		343		4.4			14,951		15,931			980		6.6
Securities gains (losses), net			230		—		(230	)	(100.0	)		1,450		(2	)		(1,452	)	nm
Gains on private capital investments, net			20,171		1,282		(18,889	)	(93.6	)		29,266		2,352			(26,914	)	(92.0	)
Gain on the VISA IPO redemption			—		—		—		—			—		14,211			14,211		nm
Other			24,382		30,262		5,880		24.1			52,300		51,827			(473	)	(0.9	)

	Total noninterest income	$	201,661	$	199,626	$	(2,035	)	(1.0	)%	$	392,403	$	395,022		$	2,619		0.7	%

nm = not meaningful

Noninterest Expense

		For the Three Months Ended									For the Six Months Ended
						Increase (Decrease)									Increase (Decrease)
(Dollars in thousands)		June 30, 2007		June 30, 2008		Increase (Decrease)					June 30, 2007		June 30, 2008		Increase (Decrease)
(Dollars in thousands)		June 30, 2007		June 30, 2008		Amount			Percent		June 30, 2007		June 30, 2008		Amount			Percent
Salaries and other compensation		$	189,910	$	204,077	$	14,167		7.5	%	$	380,887	$	396,089	$	15,202		4.0	%
Employee benefits			42,029		39,222		(2,807	)	(6.7	)		88,476		88,880		404		0.5

	Salaries and employee benefits		231,939		243,299		11,360		4.9			469,363		484,969		15,606		3.3
Net occupancy			33,718		38,232		4,514		13.4			67,385		74,434		7,049		10.5
Outside services			17,150		20,295		3,145		18.3			35,119		37,304		2,185		6.2
Professional services			11,144		15,931		4,787		43.0			27,494		30,528		3,034		11.0
Equipment			15,804		15,141		(663	)	(4.2	)		31,814		30,488		(1,326	)	(4.2	)
Software			13,959		14,409		450		3.2			27,273		29,204		1,931		7.1
Advertising and public relations			10,226		12,857		2,631		25.7			18,391		20,956		2,565		13.9
Communications			8,278		9,111		833		10.1			17,413		18,486		1,073		6.2
Data processing			8,562		7,784		(778	)	(9.1	)		16,745		14,860		(1,885	)	(11.3	)
Intangible asset amortization			1,125		670		(455	)	(40.4	)		2,251		1,340		(911	)	(40.5	)
Foreclosed asset expense			9		83		74		nm			18		172		154		nm
Provision for losses on off-balance sheet commitments			—		5,000		5,000		nm			1,000		13,000		12,000		nm
Other			31,137		36,500		5,363		17.2			61,404		66,777		5,373		8.8

	Total noninterest expense	$	383,051	$	419,312	$	36,261		9.5	%	$	775,670	$	822,518	$	46,848		6.0	%

nm = not meaningful

Income Tax Expense

Our effective tax rate in the second quarter of 2008 was 31.4 percent, compared to 31.6 percent for the second quarter of 2007.

Our effective tax rate in the six months ended June 30, 2008 was 31.8 percent, compared to 32.5 percent for the six months ended June 30, 2007.

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 2007 Form 10-K.

Loans

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

										Increase (Decrease) June 30, 2008 From:
										June 30, 2007					December 31, 2007
(Dollars in thousands)				June 30, 2007		December 31, 2007		June 30, 2008		June 30, 2007					December 31, 2007
(Dollars in thousands)				June 30, 2007		December 31, 2007		June 30, 2008		Amount			Percent		Amount			Percent
Commercial, financial and industrial				$	13,052,803	$	14,563,477	$	16,602,393	$	3,549,590		27.2	%	$	2,038,916		14.0	%
Construction					2,303,089		2,406,729		2,622,740		319,651		13.9			216,011		9.0
Mortgage:
	Residential				12,936,691		13,827,241		14,852,058		1,915,367		14.8			1,024,817		7.4
	Commercial				6,292,157		7,021,299		7,912,592		1,620,435		25.8			891,293		12.7

		Total mortgage			19,228,848		20,848,540		22,764,650		3,535,802		18.4			1,916,110		9.2
Consumer:
	Installment				1,230,021		1,327,348		1,957,379		727,358		59.1			630,031		47.5
	Revolving lines of credit				1,335,117		1,334,132		1,295,047		(40,070	)	(3.0	)		(39,085	)	(2.9	)

		Total consumer			2,565,138		2,661,480		3,252,426		687,288		26.8			590,946		22.2
Lease financing					581,297		654,467		640,612		59,315		10.2			(13,855	)	(2.1	)

		Total loans held to maturity			37,731,175		41,134,693		45,882,821		8,151,646		21.6			4,748,128		11.5
		Total loans held for sale			12,047		69,495		158,537		146,490		nm			89,042		nm

			Total loans	$	37,743,222	$	41,204,188	$	46,041,358	$	8,298,136		22.0	%	$	4,837,170		11.7	%

nm = not meaningful

Commercial, Financial and Industrial Loans

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

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

The commercial, financial and industrial loan portfolio increased from June 30, 2007 to June 30, 2008 mainly due to increased loan demand primarily in the oil and gas and national corporate segments, as well as in the California middle market.

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 extended primarily to commercial property developers and to residential builders. As of June 30, 2008, the construction loan portfolio consisted of approximately three-quarters in the commercial income producing real estate industry and approximately one-quarter in the homebuilder industry. The construction loan portfolio increased from June 30, 2007 to June 30, 2008 primarily due to loan advances for income property projects with apartment, office and retail financing representing the largest components. We continue to experience negative risk grade trends in the homebuilder portfolio and weakening operating conditions in the homebuilder industry. Geographically, the outstanding homebuilder loan portfolio is distributed as follows: approximately one-third in the San Francisco bay area, approximately one-quarter in the Los Angeles/Orange County region, including the Inland Empire, approximately one-tenth in San Diego, and the remainder in other parts of California and other states.

The commercial mortgage loan portfolio consists of loans on commercial income properties primarily in California. The commercial mortgages portfolio increased from June 30, 2007 to June 30, 2008 mainly due to higher demand in the California middle market sector 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, private bankers, mortgage brokers, and loan-by-phone) throughout California, Oregon and Washington, and we periodically purchase loans in our market area.

At June 30, 2008, 67 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 66 percent. The remainder of the portfolio consists of balloon or regular amortizing loans.

We do not have a program for originating or purchasing 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 through the Retail Banking channel to existing clients for owner-occupied properties and eliminate the verification of both income and assets. "Low doc" loans are offered through all channels and 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 June 30, 2008 were lower than fully documented loans. At June 30, 2008, the total amount of "no doc" and "low doc" loans past due 30 days or more was $33.5 million, compared to $12.6 million at June 30, 2007. The total amount of residential mortgages delinquent 30 days or more was $74.8 million at June 30, 2008, compared to $32.0 million at June 30, 2007. Although delinquencies have risen since June 30, 2007, the delinquency ratio remains low compared to the industry average for California prime loans.

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

On February 13, 2008, President Bush signed into law the Economic Stimulus Act of 2008, which, among other provisions, authorizes the three federal mortgage loan conduits, the Federal National Mortgage Association (known as Fannie Mae), the Federal Home Loan Mortgage Corporation (known as Freddie Mac) and the Federal Housing Administration, to purchase new and existing "jumbo" residential mortgage loans originated after June 30, 2007. The legislation has taken effect and sets higher loan limits for each Standard Metropolitan Statistical Area, based on average housing prices, and increases the current limit on conforming loans which can be purchased by Fannie Mae and Freddie Mac to up to $729,750 from its prior maximum of $417,000. The purpose of the increased purchase authority, applies to all loans originated through the end of 2008, although legislation has been proposed to permanently extend this provision. The intent of the higher limits is to provide increased liquidity to the secondary market for "jumbo" residential loans, particularly on residential properties in a number of counties in the State of California where housing prices remain relatively high. To date, the impact in the marketplace has been minimal due to pricing and underwriting factors, but that could change over time, especially if the provision becomes permanent. Improved pricing and more flexible underwriting could result in an increased rate of loan originations and refinancings of loans on such properties, including properties secured by loans made by us. The degree to which this will occur and its overall effect on our residential mortgage loan portfolio is still not clear at this time.

On July 30, 2008, President Bush signed into law a housing bill which grants the Treasury Department broad authority to safeguard Fannie Mae and Freddie Mac and authorizes the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. It cannot be predicted whether this recent legislation will result in significant improvement in financial and economic conditions affecting the banking industry.

Consumer Loans

We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network and Private Banking Offices. The increase in consumer loans from June 30, 2007 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are classified as installment loans. Our total home equity loans and lines delinquent 30 days or more were $11.0 million at June 30, 2008, compared to $3.3 million at June 30, 2007. Although the percentage increase from June 30, 2007 is high, the dollar amount of the increase is not significant as compared to the industry average for California.

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. At June 30, 2008, we had leveraged leases of $548 million, which were net of non-recourse debt of approximately $1.2 billion. We utilize a number of special purpose entities for our leveraged leases. These entities serve legal and tax purposes and do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by law, the gross lease receivable is offset by the qualifying

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

Cross-Border Outstandings

Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of June 30 and December 31, 2007 and June 30, 2008 for Canada, the only country where such 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
June 30, 2007
	Canada	$	13	$	—	$	664	$	677
December 31, 2007
	Canada	$	6	$	—	$	817	$	823
June 30, 2008
	Canada	$	6	$	—	$	881	$	887

Provision for Credit Losses

We recorded a provision for loan losses of $95 million in the second quarter of 2008, compared with a provision for loan losses of $5 million in the second quarter of 2007. We recorded a $5 million provision for losses on off-balance sheet commitments in the second quarter of 2008, compared to no provision in the second quarter of 2007. 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 2007 Form 10-K.

Comparison of the Total Allowances and Related Provision for Credit Losses compared to December 31, 2007

At June 30, 2008, our total allowances for credit losses were $630 million, which consisted of $527 million for loan losses and $103 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $547 million and $83 million of allocated and unallocated allowance,

respectively. At June 30, 2008, our allowances for credit loss coverage ratios were 1.37 percent of total loans and 291 percent of total nonaccrual loans. At December 31, 2007, our total allowances for credit losses were $493 million, or 1.20 percent of the total loan portfolio and 885 percent of total nonaccrual loans.

In addition, the allowances incorporate 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 June 30, 2008 and December 31, 2007, total impaired loans were $218 million and $56 million, respectively, and the associated impairment allowances were $46 million and $11 million, respectively.

At June 30, 2008 and December 31, 2007, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses, was $103 million and $90 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for off-balance sheet commitment losses. Net charge offs were $32 million in the second quarter of 2008, compared to $2 million in the second quarter of 2007.

As a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the adverse impact of a continued slowdown in the housing market and the significant growth and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $95 million in the second quarter of 2008, compared to a provision for loan losses of $5 million in the second quarter of 2007. The increase in our provision for loan losses was substantially larger than anticipated. Overall, our loan portfolio experienced more declines in risk grade levels than previously expected and we increased certain loss factors, reflecting the continued deterioration in the economic environment. In addition, we experienced strong loan growth during the second quarter of 2008.

We expect to record a provision for credit losses for the full year 2008 of $290 million to $340 million. We also anticipate a slight acceleration of charge offs, as compared to our second quarter of 2008 level, during the remainder of 2008. The factors driving the increase in our projected provision during the remaining quarters of 2008 include management's belief that we are in a recessionary economic environment, which we believe will result in further deterioration in our loan portfolio.

During the second quarter of 2008, there were no material changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific allowances for credit losses.

Changes in the Allocated (Formula and Specific) Allowance

At June 30, 2008, the formula allowance increased to $489 million, compared to $395 million at December 31, 2007. The net increase was due primarily to an increase in criticized credits, mainly in our commercial real estate portfolio. At June 30, 2008, the specific allowance was $58 million, compared to $12 million at December 31, 2007.

Changes in the Unallocated Allowance

At June 30, 2008, the unallocated allowance decreased to $83 million, compared to $86 million at December 31, 2007, reflecting management's belief that maintaining the unallocated allowance near our December 31, 2007 level is appropriate based on the uncertainty that current economic conditions will impact our principal portfolio segments. Additionally, the reasons for which we believe an unallocated allowance is warranted are detailed below.

In our assessment as of June 30, 2008, management focused, in particular, on the factors and conditions set out below. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth.

Although in certain instances the downgrading of a loan resulting from the effects of the conditions described below has been reflected in the formula allowance, management believes that the impact of these events on the collectability of the applicable loans may not have been fully reflected in the level of nonperforming loans or in the internal risk grading process with respect to such loans. In addition, our formula allowance does not take into consideration sector-specific changes in the severity of losses that are expected to arise from the 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. In certain cases, we believe that credit migration is likely to be somewhat more severe than the long-run average, but a greater share of the inherent probable loss associated with this credit migration is captured in the allocated allowance. The 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 significant weakness in the residential building market and deteriorating trends in income property markets, which would be in the range of $25 million to $44 million.
•: With respect to concentrated sales, which include suppliers of "big box" stores and other companies that generate 15 percent or more of their revenues from one customer, we considered quarterly declines in same-store sales for certain home improvement stores, which would 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 would be in the range of $3 million to $12 million.
•: With respect to building material suppliers, we considered the weakness in the homebuilding industry, including weak home sales, and the effects on suppliers, which would be in the range of $5 million to $11 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 would be in the range of $4 million to $7 million.
•: With respect to contractors, we considered the decline in the residential housing market and its potential impact on commercial real estate (based on existing trends between the housing and non-residential construction markets), which would be in the range of $3 million to $5 million.

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 June 30,											For the Six Months Ended June 30,
										Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)										Increase (Decrease)											Increase (Decrease)
(Dollars in thousands)				2007			2008			Amount			Percent		2007			2008			Amount			Percent
Balance, beginning of period				$	332,679		$	462,943		$	130,264		39.2	%	$	331,077		$	402,726		$	71,649		21.6	%
Loans charged off:
	Commercial, financial and industrial				2,762			18,375			15,613		nm			5,840			28,180			22,340		nm
	Construction				—			9,550			9,550		nm			—			9,550			9,550		nm
	Mortgage				5			2,035			2,030		nm			5			2,275			2,270		nm
	Consumer				1,379			3,484			2,105		nm			2,720			6,540			3,820		140.4

		Total loans charged off			4,146			33,444			29,298		nm			8,565			46,545			37,980		nm

Recoveries of loans previously charged off:
	Commercial, financial and industrial				1,758			1,300			(458	)	(26.1	)		3,452			2,477			(975	)	(28.2	)
	Consumer				230			343			113		49.1			511			726			215		42.1
	Lease financing				79			193			114		144.3			87			208			121		139.1

		Total recoveries of loans previously charged off			2,067			1,836			(231	)	(11.2	)		4,050			3,411			(639	)	(15.8	)

			Net loans charged off		2,079			31,608			29,529		nm			4,515			43,134			38,619		nm
Provision for loan losses					5,000			95,000			90,000		nm			9,000			167,000			158,000		nm
Foreign translation adjustment and other net additions					352			66			(286	)	(81.3	)		390			(191	)		(581	)	(149.0	)

Ending balance of allowance for loan losses				$	335,952		$	526,401		$	190,449		56.7	%	$	335,952		$	526,401		$	190,449		56.7	%
Allowance for losses on off-balance sheet commitments					82,374			103,374			21,000		25.5			82,374			103,374			21,000		25.5

Allowances for credit losses				$	418,326		$	629,775		$	211,449		50.5	%	$	418,326		$	629,775		$	211,449		50.5	%

Allowance for loan losses to total loans⁽¹⁾					0.89	%		1.14	%							0.89	%		1.14	%
Allowances for credit losses to total loans⁽²⁾					1.11	%		1.37	%							1.11	%		1.37	%
(Reversal of) provision for loan losses to net loans charged off					240.50			300.56								199.34			387.17
Net loans charged off to average loans outstanding for the period⁽³⁾					0.02			0.28								0.02			0.20

⁽¹⁾: The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
⁽²⁾: The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
⁽³⁾: Annualized.

nm = not meaningful

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans 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 2007 Form 10-K. Restructured loans are loans in which the Bank has formally restructured all or a significant portion of the loan and provided a concession in the form of debt forgiveness, a modification of interest rate and/or

payment terms. The impairment (the shortfall between the present value of the loan under modified terms and the carrying value) is normally recorded in noninterest expense at the date of restructuring. Restructured loans are disclosed as nonperforming assets for the calendar year of restructuring, and, if in current status during this period may be disclosed as performing assets thereafter. 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) June 30, 2008 From:
												June 30, 2007					December 31, 2007
(Dollars in thousands)			June 30, 2007			December 31, 2007			June 30, 2008			June 30, 2007					December 31, 2007
(Dollars in thousands)			June 30, 2007			December 31, 2007			June 30, 2008			Amount			Percent		Amount		Percent
Commercial, financial and industrial			$	18,691		$	29,293		$	81,652		$	62,961		nm		$	52,359	nm
Construction				—			13,662			95,546			95,546		nm			81,884	nm
Commercial mortgage				9,565			12,775			38,904			29,339		nm			26,129	nm
Lease financing				456			—			—			(456	)	(100.0	)%		—	—

		Total nonaccrual loans		28,712			55,730			216,102			187,390		nm			160,372	nm
Restructured Loans
	Mortgage—Residential			—			—			1,458			1,458		nm			1,458	nm
Foreclosed assets				1,114			795			7,384			6,270		nm			6,589	nm

		Total nonperforming assets	$	29,826		$	56,525		$	224,944		$	195,118		nm		$	168,419	nm

Allowance for loan losses			$	335,952		$	402,726		$	526,401		$	190,449		56.7	%	$	123,675	30.7	%

Allowances for credit losses			$	418,326		$	493,100		$	629,775		$	211,449		50.5	%	$	136,675	27.7	%

Nonaccrual loans to total loans				0.08	%		0.14	%		0.47	%
Allowance for loan losses to nonaccrual loans⁽¹⁾				1,170.08			722.64			243.59
Allowances for credit losses to nonaccrual loans⁽²⁾				1,456.97			884.80			291.42
Nonperforming assets to total loans and foreclosed assets				0.08			0.14			0.49
Nonperforming assets to total assets				0.06			0.10			0.37

⁽¹⁾: The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
⁽²⁾: The allowances for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.

nm = not meaningful

The increase in nonaccrual loans from June 30, 2007 to June 30, 2008 was primarily due to an increase in commercial and construction loans (primarily related to our homebuilder loan portfolio), partially offset by loan pay downs and charge offs. During the six months ended June 30, 2008, we had three restructured residential loans totaling $1.5 million for which we recorded a $0.2 million impairment charge. During the second quarters of 2007 and 2008, we had no sales of nonperforming loans.

Loans 90 Days or More Past Due and Still Accruing

									Increase (Decrease) June 30, 2008 From:
									June 30, 2007					December 31, 2007
(Dollars in thousands)			June 30, 2007		December 31, 2007		June 30, 2008		June 30, 2007					December 31, 2007
(Dollars in thousands)			June 30, 2007		December 31, 2007		June 30, 2008		Amount			Percent		Amount		Percent
Commercial, financial and industrial			$	918	$	3,797	$	15,814	$	14,896		nm		$	12,017	nm
Mortgage:
	Residential			5,217		13,359		31,309		26,092		nm			17,950	nm
	Commercial			2,544		—		—		(2,544	)	(100.0	)%		—	nm

		Total mortgage		7,761		13,359		31,309		23,548		nm			17,950	nm
Consumer and other				995		2,982		4,109		3,114		nm			1,127	37.8	%

		Total loans 90 days or more past due and still accruing	$	9,674	$	20,138	$	51,232	$	41,558		nm		$	31,094	nm

nm = not meaningful

Quantitative and Qualitative Disclosures About Market Risk

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

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

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 direction for the Bank, and by approving the investment, derivatives and trading policies that govern the Bank's activities. ALCO is also responsible for the ongoing management of market risk and approves specific risk management programs, including those related to interest rate hedging, investment securities, wholesale funding and trading activities.

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

We have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For additional information about our market risk management, please see "Qualitative and Quantitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2007 Form 10-K.

Interest Rate Risk Management (Other Than Trading)

During the second quarter of 2008, our interest rate risk profile remained liability sensitive primarily as a result of trends in our balance sheet with strong loan growth funded primarily by wholesale borrowing and, to a lesser degree, from hedge programs executed during 2006 and 2007. During 2008, we added $500 million of interest rate floor hedges to maintain the Bank's liability sensitive interest rate risk profile (see discussion of "ALM Derivatives" below).

At June 30, 2008, Economic Net Interest Income (NII) sensitivity was liability sensitive to parallel rate shifts. A +200 basis point parallel shift would reduce 12-month Economic NII by 2.84 percent, while a similar downward shift would increase it by 2.93 percent. At June 30, 2007, a +200 basis point parallel shift would reduce 12-month Economic NII by 0.57 percent, while a similar downward shift would increase it by 1.41 percent. We caution that ongoing enhancements to our interest rate risk modeling may make prior-year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.

Economic NII

(Dollars in millions)	June 30, 2007			December 31, 2007			June 30, 2008
+200 basis points	$	(10.6	)	$	(17.4	)	$	(64.1	)
as a percentage of base case NII		(0.57	)%		(0.93	)%		(2.84	)%
-200 basis points	$	26.0		$	35.2		$	66.1
as a percentage of base case NII		1.41	%		1.87	%		2.93	%

The above table is presented on a continuing operations basis, with all assets and liabilities associated with the insurance brokerage business eliminated for June 30, 2008 and all assets and liabilities of the retirement recordkeeping business eliminated for December 31, 2007 and June 30, 2008. 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-term rates dropping and will contract from the curve further inverting with long-term rates dropping.

ALM Activities

During 2008, the Bank maintained a liability sensitive interest rate risk profile to stay protected from falling rates. The significant growth in loans during the year supported largely by shorter term funding coupled with lower rates on our interest bearing short-term liabilities, among other dynamics, has enabled us to position the Bank favorably for lower rates. In managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary. During the second quarter of 2008, 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 June 30, 2007 and 2008, our available for sale securities portfolio included $6.8 billion of securities for ALM purposes. At June 30, 2008, approximately $6.4 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the second quarter of 2008, we purchased approximately $677 million par value of securities, while approximately $463 million par value of ALM securities matured or were called.

The composition of the portfolio is expected to remain relatively stable in 2008. Based on current prepayment projections, the estimated ALM portfolio effective duration was 2.5 at June 30, 2008, compared to 2.3 at June 30, 2007. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.5 suggests an expected price change of approximately minus 2.5 percent for an immediate 1.0 percent parallel increase in interest rates.

ALM Derivatives

During 2008, the ALM derivatives portfolio was unchanged at $9.3 billion notional amount as $500 million of notional amount of LIBOR floor contracts were purchased to maintain the downside liability sensitivity of our overall risk position, offset by maturities of $500 million notional amount of receive fixed interest rate swaps and floors.

The fair value of the ALM derivative contracts increased as the value of our receive fixed interest rate swaps and floor option contracts benefited from the Federal Reserve Board's interest rate reductions, the expectation of lower future interest rates, higher volatility in interest rates and the purchase of $500 million in notional amount of floors partially offset by $500 million in maturities of swaps and floors. For additional discussion of derivative instruments and our hedging strategies, see Note 10 to the condensed consolidated financial statements in this Form 10-Q and Note 19 to our consolidated financial statements included in our 2007 Form 10-K.

The following table provides the notional value and the fair value of our ALM derivatives portfolio as of June 30, 2007, December 31, 2007, and June 30, 2008 and the change in fair value between December 31, 2007 and June 30, 2008.

(Dollars in thousands)			June 30, 2007			December 31, 2007		June 30, 2008		Increase / (Decrease) From December 31, 2007 to June 30, 2008
Total gross notional amount of positions held for purposes other than trading:			$	8,850,000		$	9,250,000	$	9,250,000	$	—
	of which, interest rate swaps pay fixed rates of interest			—			—		—		—

Fair value of positions held for purposes other than trading: Gross positive fair value			$	10,453		$	148,036	$	163,065	$	15,029
	Gross negative fair value			33,665			2,015		—		(2,015	)

		Positive (Negative) fair value of positions, net	$	(23,212	)	$	146,021	$	163,065	$	17,044

Trading Activities

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

As of June 30, 2008, we had $15.6 billion notional amount of interest rate derivative contracts, which included $7.4 billion notional amount of derivative contracts entered into as an accommodation for customers. The remaining $8.2 billion notional amount of futures and over-the-counter contracts transacted with major dealers neutralizes a portion 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 June 30, 2008, we had $5.6 billion notional amount of energy derivative contracts with approximately half of these energy derivative contracts entered into as an accommodation for customers and the remaining half entered into as matching contracts to remove our exposure to market risk on our customer accommodation transactions.

The following table provides the notional value and the fair value of our trading derivatives portfolio as of June 30, 2007, December 31, 2007, and June 30, 2008 and the change in fair value between December 31, 2007 and June 30, 2008.

(Dollars in thousands)			June 30, 2007		December 31, 2007		June 30, 2008		Increase / (Decrease) From December 31, 2007 to June 30, 2008
Total gross notional amount of positions held for trading purposes:
	Interest rate		$	9,814,616	$	12,585,978	$	15,640,686	$	3,054,708
	Foreign exchange			1,949,436		4,665,760		4,568,338		(97,422	)
	Energy			3,251,090		2,900,690		5,618,740		2,718,050

	Total		$	15,015,142	$	20,152,428	$	25,827,764	$	5,675,336

Fair value of positions held for trading purposes:
	Gross positive fair value		$	223,502	$	405,709	$	957,416	$	551,707
	Gross negative fair value			203,168		380,313		946,122		565,809

		Positive fair value of positions, net	$	20,334	$	25,396	$	11,294	$	(14,102	)

Liquidity Risk

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

Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our $32.3 billion in average core deposits, which includes demand deposits, money market demand accounts, savings and consumer time deposits, combined with average common stockholders' equity, funded 62.2 percent of average total assets of $59.3 billion in the second quarter of 2008. Most of the remaining funding was provided by variable rate borrowings from secured and unsecured sources.

Our securities portfolio provides additional enhancement to our liquidity position, which may be created through either securities sales or repurchase agreements. At June 30, 2008, we could have sold or transferred under repurchase agreements approximately $1.0 billion of our available for sale securities. 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 assets. The aggregate balance of these assets averaged $1.1 billion in the second quarter of 2008. Additional liquidity may be provided through loan maturities and sales.

The Bank has a $4 billion unsecured Bank Note Program. As of June 30, 2008, the remaining available funding under the Bank Note Program is $2.6 billion. The Bank has pledged collateral under secured borrowing facilities with the Federal Home Loan Bank of San Francisco (FHLB) and the Federal Reserve Bank (FRB). As of June 30, 2008, the Bank had $2.1 billion of borrowing outstanding with the FHLB, of which $1.2 billion is short-term and included in Other Borrowed Funds. As of June 30, 2008, the Bank had $2.0 billion in short-term borrowing outstanding with the FRB under the Term Auction Facility program, which provides access to short-term funds at generally favorable rates. As of June 30, 2008, the Bank had remaining unused borrowing capacity totaling a combined $16.3 billion from the FHLB and the FRB. The Bank has the capability to pledge additional portions of its unencumbered loan and securities portfolios to the FHLB and the FRB, which would increase the Bank's borrowing capacity.

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 with the Securities and Exchange Commission (SEC) permitting ready access to the public debt markets. As of June 30, 2008, $600 million of debt or other securities were available for issuance under this shelf registration. We do not have firm commitments in place to sell securities under either the Bank Note Program or the shelf registration. These sources, in addition to our core deposit and equity capital, provide a stable funding base. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs. The costs and ability to raise funds are influenced by our credit ratings. The following table provides our credit ratings as of June 30, 2008.

		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)	June 30, 2007		December 31, 2007		June 30, 2008
Capital Components
Tier 1 capital	$	4,401,490	$	4,533,763	$	4,774,046
Tier 2 capital		1,515,243		1,590,160		1,726,816

Total risk-based capital	$	5,916,733	$	6,123,923	$	6,500,862

Risk-weighted assets	$	51,254,273	$	54,606,527	$	59,996,170

Quarterly average assets	$	53,027,348	$	54,843,792	$	60,071,111

	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Capital Ratios
Total capital (to risk-weighted assets)	$	5,916,733	11.54	%	$	6,123,923	11.21	%	$	6,500,862	10.84	%	³	$4,799,694	8.0	%
Tier 1 capital (to risk-weighted assets)		4,401,490	8.59			4,533,763	8.30			4,774,046	7.96		³	2,399,847	4.0
Leverage⁽¹⁾		4,401,490	8.30			4,533,763	8.27			4,774,046	7.95		³	2,402,844	4.0

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

Union Bank of California, N.A.

(Dollars in thousands)	June 30, 2007		December 31, 2007		June 30, 2008
Capital Components
Tier 1 capital	$	4,301,020	$	4,449,368	$	4,783,201
Tier 2 capital		1,105,663		1,181,796		1,320,736

Total risk-based capital	$	5,406,683	$	5,631,164	$	6,103,937

Risk-weighted assets	$	50,805,715	$	54,234,495	$	59,763,156

Quarterly average assets	$	52,417,908	$	54,277,811	$	59,610,458

	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Capital Ratios
Total capital (to risk-weighted assets)	$	5,406,683	10.64	%	$	5,631,164	10.38	%	$	6,103,937	10.21	%	³	$4,781,052	8.0	%	³	$5,976,316	10.0	%
Tier 1 capital (to risk-weighted assets)		4,301,020	8.47			4,449,368	8.20			4,783,201	8.00		³	2,390,526	4.0		³	3,585,789	6.0
Leverage⁽¹⁾		4,301,020	8.21			4,449,368	8.20			4,783,201	8.02		³	2,384,418	4.0		³	2,980,523	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 December 31, 2007 was primarily due to an increase in risk-weighted assets stemming from growth in our loan portfolio. The decrease in our leverage ratios from December 31, 2007 was primarily due to the increase in our quarterly average assets, which was due to growth in our loan portfolio.

As of June 30, 2008 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

The various operating segments reporting under our Chief Operating Officer and the Group Head of Pacific Rim Corporate Group have been 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 compared to the prior year, for both of our reportable business segments. The information presented does not necessarily represent the businesses' financial condition and results of operations as if they were independent entities. We reflect a "market view" perspective in measuring our 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 and our discontinued operations. For further information on discontinued operations, see Note 3 to the condensed consolidated financial statements in this Form 10-Q.

		Retail Banking											Wholesale Banking
		As of and for the Three Months Ended June 30,						Increase/(decrease)					As of and for the Three Months Ended June 30,						Increase/(decrease)
		2007			2008			Amount			Percent		2007			2008			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	223,997		$	242,610		$	18,613		8	%	$	242,690		$	300,085		$	57,395		24	%
	Noninterest income (expense)		120,768			126,085			5,317		4			95,168			88,130			(7,038	)	(7	)

	Total revenue		344,765			368,695			23,930		7			337,858			388,215			50,357		15
	Noninterest expense (income)		224,626			242,216			17,590		8			138,525			149,711			11,186		8
	Credit expense (income)		6,262			6,842			580		9			26,859			49,416			22,557		84

	Income (loss) from continuing operations before income taxes		113,877			119,637			5,760		5			172,474			189,088			16,614		10
	Income tax expense (benefit)		43,558			45,761			2,203		5			53,651			55,273			1,622		3

	Income (loss) from continuing operations		70,319			73,876			3,557		5			118,823			133,815			14,992		13
	Income (loss) from discontinued operations, net of income taxes		—			—			—		na			—			—			—		na

	Net income (loss)	$	70,319		$	73,876		$	3,557		5		$	118,823		$	133,815		$	14,992		13

Average balances—Market View (dollars in millions):
	Total loans	$	16,462		$	18,837		$	2,375		14		$	22,372		$	26,696		$	4,324		19
	Total assets		17,274			19,677			2,403		14			27,136			31,463			4,327		16
	Total deposits		18,945			18,487			(458	)	(2	)		18,813			18,450			(363	)	(2	)
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		46	%		44	%							22	%		21	%
	Return on average assets⁽¹⁾		1.63			1.51								1.76			1.71
	Efficiency ratio⁽²⁾		65.15			65.67								41.00			38.56

		Other											Reconciling Items						UnionBanCal Corporation
		As of and for the Three Months Ended June 30,						Increase/(decrease)					As of and for the Three Months Ended June 30,						As of and for the Three Months Ended June 30,						Increase/(decrease)
		2007			2008			Amount			Percent		2007			2008			2007			2008			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(35,696	)	$	(28,991	)	$	6,705		19	%	$	(2,203	)	$	(3,146	)	$	428,788		$	510,558		$	81,770		19	%
	Noninterest income (expense)		1,967			6,184			4,217		nm			(16,242	)		(20,773	)		201,661			199,626			(2,035	)	(1	)

	Total revenue		(33,729	)		(22,807	)		10,922		32			(18,445	)		(23,919	)		630,449			710,184			79,735		13
	Noninterest expense (income)		29,862			40,189			10,327		35			(9,962	)		(12,804	)		383,051			419,312			36,261		9
	Credit expense (income)		(28,097	)		38,778			66,875		nm			(24	)		(36	)		5,000			95,000			90,000		nm

	Income (loss) from continuing operations before income taxes		(35,494	)		(101,774	)		(66,280	)	nm			(8,459	)		(11,079	)		242,398			195,872			(46,526	)	(19	)
	Income tax expense (benefit)		(17,316	)		(35,221	)		(17,905	)	(103	)		(3,235	)		(4,239	)		76,658			61,574			(15,084	)	(20	)

	Income (loss) from continuing operations		(18,178	)		(66,553	)		(48,375	)	nm			(5,224	)		(6,840	)		165,740			134,298			(31,442	)	(19	)
	Income (loss) from discontinued operations, net of income taxes		(386	)		7,047			7,433		nm			—			—			(386	)		7,047			7,433		nm

	Net income (loss)	$	(18,564	)	$	(59,506	)	$	(40,942	)	nm		$	(5,224	)	$	(6,840	)	$	165,354		$	141,345		$	(24,009	)	(15	)

Average balances—Market View (dollars in millions):
	Total loans	$	28		$	16		$	(12	)	(43	)	$	(22	)	$	(55	)	$	38,840		$	45,494		$	6,654		17
	Total assets		8,601			8,187			(414	)	(5	)		(24	)		(57	)		52,987			59,270			6,283		12
	Total deposits		5,641			6,852			1,211		21			(834	)		(586	)		42,565			43,203			638		2
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		na			na								na			na			na			na
	Return on average assets⁽¹⁾		na			na								na			na			1.25	%		0.91	%
	Efficiency ratio⁽²⁾		na			na								na			na			60.54			58.14

⁽¹⁾

Annualized.

⁽²⁾

The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the 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 Six Months Ended June 30,						Increase/(decrease)					As of and for the Six Months Ended June 30,						Increase/(decrease)
		2007			2008			Amount			Percent		2007			2008			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	451,810		$	466,474		$	14,664		3	%	$	484,047		$	566,369		$	82,322		17	%
	Noninterest income (expense)		234,307			246,747			12,440		5			181,646			165,806			(15,840	)	(9	)

	Total revenue		686,117			713,221			27,104		4			665,693			732,175			66,482		10
	Noninterest expense (income)		450,528			473,690			23,162		5			280,553			295,516			14,963		5
	Credit expense (income)		12,535			13,281			746		6			51,926			86,567			34,641		67

	Income (loss) from continuing operations before income taxes		223,054			226,250			3,196		1			333,214			350,092			16,878		5
	Income tax expense (benefit)		85,318			86,541			1,223		1			102,809			100,992			(1,817	)	(2	)

	Income (loss) from continuing operations		137,736			139,709			1,973		1			230,405			249,100			18,695		8
	Income (loss) from discontinued operations, net of income taxes		—			—			—		na			—			—			—		na

	Net income (loss)	$	137,736		$	139,709		$	1,973		1		$	230,405		$	249,100		$	18,695		8

Average balances—Market View (dollars in millions):
	Total loans	$	16,356		$	18,412		$	2,056		13		$	22,288		$	25,718		$	3,430		15
	Total assets		17,175			19,230			2,055		12			27,058			30,487			3,429		13
	Total deposits		18,708			18,443			(265	)	(1	)		18,536			18,379			(157	)	(1	)
Financial ratios—Market View
	Risk adjusted return on capital⁽¹⁾		45	%		44	%							22	%		20	%
	Return on average assets⁽¹⁾		1.62			1.46								1.72			1.64
	Efficiency ratio⁽²⁾		65.66			66.39								42.15			40.36

		Other											Reconciling Items						UnionBanCal Corporation
		As of and for the Six Months Ended June 30,						Increase/(decrease)					As of and for the Six Months Ended June 30,						As of and for the Six Months Ended June 30,						Increase/(decrease)
		2007			2008			Amount			Percent		2007			2008			2007			2008			Amount			Percent
Results of operations—Market View (dollars in thousands):
	Net interest income (expense)	$	(74,373	)	$	(56,400	)	$	17,973		24	%	$	(4,267	)	$	(5,307	)	$	857,217		$	971,136		$	113,919		13	%
	Noninterest income (expense)		8,422			20,515			12,093		144			(31,972	)		(38,046	)		392,403			395,022			2,619		1

	Total revenue		(65,951	)		(35,885	)		30,066		46			(36,239	)		(43,353	)		1,249,620			1,366,158			116,538		9
	Noninterest expense (income)		64,275			76,396			12,121		19			(19,686	)		(23,084	)		775,670			822,518			46,848		6
	Credit expense (income)		(55,413	)		67,213			122,626		nm			(48	)		(61	)		9,000			167,000			158,000		nm

	Income (loss) from continuing operations before income taxes		(74,813	)		(179,494	)		(104,681	)	(140	)		(16,505	)		(20,208	)		464,950			376,640			(88,310	)	(19	)
	Income tax expense (benefit)		(30,751	)		(59,859	)		(29,108	)	(95	)		(6,313	)		(7,730	)		151,063			119,944			(31,119	)	(21	)

	Income (loss) from continuing operations		(44,062	)		(119,635	)		(75,573	)	nm			(10,192	)		(12,478	)		313,887			256,696			(57,191	)	(18	)
	Income (loss) from discontinued operations, net of income taxes		1,078			(6,761	)		(7,839	)	nm			—			—			1,078			(6,761	)		(7,839	)	nm

	Net income (loss)	$	(42,984	)	$	(126,396	)	$	(83,412	)	nm		$	(10,192	)	$	(12,478	)	$	314,965		$	249,935		$	(65,030	)	(21	)

Average balances—Market View (dollars in millions):
	Total loans	$	28		$	12		$	(16	)	(57	)	$	(22	)	$	(44	)	$	38,650		$	44,098		$	5,448		14
	Total assets		8,703			8,280			(423	)	(5	)		(23	)		(46	)		52,913			57,951			5,038		10
	Total deposits		5,418			7,186			1,768		33			(694	)		(600	)		41,968			43,408			1,440		3
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			1.20	%		0.89	%
	Efficiency ratio⁽²⁾		na			na								na			na			61.78			59.03

⁽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, portfolio managers 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 attract new customers in these identified target markets. While the primary focus of Retail Banking's segment based strategy is deposit growth, additional focus continues to be on consumer and small business loan generation and fee generation from investments.

During the six months ended June 30, 2008, Retail Banking's net income increased by 1 percent compared to the same period in 2007. The increase in net income reflects higher net interest income and higher noninterest income, partially offset by higher noninterest expense. The increase in net interest income in 2008 is primarily due to strong loan growth and lower rates paid on interest bearing liabilities, partially offset by lower yields on earning assets and a deposit mix shift from noninterest bearing and low-cost deposits into higher-cost deposits.

Average assets grew by 12 percent during the six months ended June 30, 2008, compared to the same period in 2007. This increase was primarily driven by a 14 percent growth in average residential mortgage loans. Additionally, the focus on home equity loans and more effective cross-selling efforts resulted in an overall growth in consumer loans in the first half of 2008.

Average deposits decreased 1 percent during the six months ended June 30, 2008, compared to the same period in 2007. Retail Banking's strategy continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and improving sales resources, establishing new locations and new products. We expect that a larger branch network, along with this Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.

Noninterest income increased 5 percent during the six months ended June 30, 2008, compared to the same period in 2007. This increase was primarily due to growth in trust fees, partially offset by a decrease in deposit fees. Noninterest expense increased 5 percent in the first half of 2008, compared to the first half of 2007, primarily due to higher salaries and employee benefits and occupancy 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 333 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 may 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; and
—: through in-store branches.

•: 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 bank cards.

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

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

•

Wealth Management provides comprehensive private banking services to our individual wealth market clientele, professional service firms, foundations and endowments. 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, as well as attracting new 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 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, and provides escrow services and trustee services for project finance. Institutional Services provides defined benefit services, including trustee services and investment management. 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 and cash management services to middle market and large corporate businesses primarily headquartered in the western U.S. 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 six months ended June 30, 2008, Wholesale Banking's net income increased by 8 percent, compared to the same period in 2007, due to higher net interest income, partially offset by lower noninterest income and higher noninterest expense.

For the six months ended June 30, 2008, net interest income increased 17 percent, compared to the same period in 2007. The increase in net interest income was primarily due to a 15 percent increase in average loan balances, mainly in the Energy Capital and National Banking divisions, as well as the California middle market. Net interest income was negatively impacted by a decrease in noninterest bearing deposits and an increase in interest bearing deposits.

Noninterest income decreased by 9 percent during the six months ended June 30, 2008, compared to the same period in 2007, primarily due to lower gains on private capital investments, partially offset by higher merchant banking, deposit and trust fees. Noninterest expense was 5 percent higher in the six months ended June 30, 2008, compared to the same period in 2007, mainly due to higher salaries and employee benefits.

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. Commercial Deposit and Treasury Management Division provides processing services, including services such as Automated Clearing House (ACH), check processing and cash vault services.

Wholesale Banking is comprised of the following main divisions:

•: the Commercial Banking Division, which serves California, Oregon and Washington 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, in the U.S. and Canada;
•: 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 in defined industries, nationwide;
•: 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 limited merchant banking and investment banking related products and services to middle-market and large corporate clients in their defined industries and geographic markets;
•: Global Markets, which serves our customers with their foreign exchange and interest rate risk management and investment needs. The Global Markets Division offers energy derivative contracts to assist our energy sector client base with their hedging needs. The division takes market risk when buying and selling securities and entering into foreign exchange and interest rate derivative contracts for its own account, but takes no market risk when providing energy derivative contracts, since the market risk for this product is offset with third parties. The division also includes UnionBanc Investment Services LLC, which is a subsidiary of Union Bank of California; and
•: Pacific Rim Corporate Group, which 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 increased by $83.4 million in the six months ended June 30, 2008, compared to the same period in 2007, primarily due to higher credit expenses related to our increased loan loss provision and higher noninterest expense, partially offset by lower net interest expense and higher noninterest income.

"Other" includes the following items:

•: the funds transfer pricing results for our 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;
•: 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 discussion regarding these risk management activities, see "Quantitative and Qualitative Disclosures About Market Risk.");
•: 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 sales of our insurance brokerage and retirement recordkeeping businesses; and
•: the adjustment between the tax expenses calculated under RAROC using a tax rate of 38.25 percent and our effective tax rates.

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

•: net interest income (expense) is the result of differences between the net interest income earned by the consolidated enterprise and transfer pricing results, which include the credit for equity for the reportable segments under RAROC. Net interest expense decreased $18.0 million to ($56.4) million compared to the same period in 2007 primarily due to the changes in transfer pricing rates as market rates decreased;
•: credit expense (income) of $67.2 million was due to the difference between the $167.0 million provision for loan losses calculated under our US GAAP methodology and the $99.8 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
•: noninterest income of $20.5 million was driven by a $14.2 million gain from the partial redemption of Visa Inc. common stock and a $7.1 million gain from the partial redemption of MasterCard Inc. common stock,

•: noninterest expense of $76.4 million related to residual costs of support groups and corporate activities not directly related to either of the two business segments. Additionally, noninterest expense in the six months ended June 30, 2008 included a $13.0 million provision for losses on off-balance sheet commitments, compared to a $1.0 million provision in the same period of 2007;
•: income tax expense (income) of ($59.9) million resulted from the difference between the $119.9 million, or 31.8 percent effective tax rate, for our consolidated results and the actual tax expense calculated for reportable segments of $179.8 million using the RAROC effective rate; and
•: income (loss) from discontinued operations of ($6.8) million.

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

•: net interest income (expense) of ($74.4) million;
•: credit expense (income) of ($55.4) million was due to the difference between the $9.0 million provision for loan losses calculated under our US GAAP methodology and the $64.4 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
•: noninterest income of $8.4 million;
•: noninterest expense of $64.3 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 ($30.8) million was due to the difference between the $151.1 million, or 32.5 percent effective tax rate, for our consolidated results and the actual tax expense calculated for reportable segments of $181.9 million using the RAROC effective rate; and
•: income (loss) from discontinued operations of $1.1 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 required 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.

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 imposed a civil money penalty of $10 million and requires Union Bank of California to take actions to improve BSA/AML 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. Pursuant to the DPA, Union Bank of California also paid $21.6 million in the third quarter of 2007 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 June 30, 2008. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During the quarter ended June 30, 2008, 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 by DataTreasury Corporation, please refer to Item 3 of Part I of our 2007 Form 10-K.

For information relating to the Bank Secrecy Act and other anti-money laundering laws and regulations (BSA/AML) matters, please refer to "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.

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

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2007 Form 10-K, which is incorporated by reference herein, in addition to "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

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, 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 has resulted in annual assessments on deposits of Union Bank of California of approximately 5 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 offset the assessment for 2007. Since this credit was exceeded in the second quarter of 2008, the deposit insurance assessments Union Bank of California pays have increased our costs. In addition, an increase in the deposit insurance assessments that Union Bank of California pays could result from the recent increases in bank closures by the federal banking agencies, as well as FDIC action that may be taken in connection with other troubled financial institutions. Any future increases in the deposit insurance assessments Union Bank of California pays would further increase our costs.

The U.S. and global economies have experienced a slowing of economic growth, volatility in the financial markets, and significant deterioration in sectors of the U.S. residential real estate markets, all of which present challenges for the banking and financial services industry and for UnionBanCal Corporation

Commencing in 2007 and continuing into 2008, certain adverse financial developments have impacted the U.S. and global economies and financial markets and present challenges for the banking and financial services industry and for UnionBanCal. These developments include a general slowing of economic growth both globally and in the U.S. which has prompted the Congress to adopt an economic stimulus bill which President Bush signed into law on February 13, 2008, and which prompted the Federal Reserve Board to decrease its discount rate and the federal funds rate several times in the first half of 2008. These developments have contributed to substantial volatility in the equity securities markets, as well as volatility and a tightening of

liquidity in the credit markets. In addition, financial and credit conditions in the domestic residential real estate markets have deteriorated significantly, particularly in the subprime sector. These conditions in turn have led to significant deterioration in certain financial markets, particularly the markets for subprime residential mortgage-backed securities and for collateralized debt obligations backed by residential mortgage-backed securities. In addition, these conditions have rendered it more difficult for financial institutions and others to obtain transparent valuations for various portfolio debt securities, especially in the case of collateralized debt obligations backed by residential mortgage-backed securities or other collateral, including corporate obligations, as well as contributing to a widening of credit spreads and a general lack of liquidity in the marketplace, all of which can result in decreases in fair value of portfolio securities of these types. On July 30, 2008, President Bush signed into law a housing bill which grants the Treasury Department broad authority to safeguard Fannie Mae and Freddie Mac and authorizes the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. It cannot be predicted whether this recent legislation will result in significant improvement in financial and economic conditions affecting the banking industry. If, notwithstanding the federal government's recent fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present additional significant challenges for the U.S. banking and financial services industry and for UnionBanCal. While it is difficult to predict how long these conditions will exist and which markets and businesses of our company may be affected, these factors could continue to present risks for some time for the industry and our company.

Company Factors

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 further downturn in the residential real estate and housing industries in California could have an adverse effect on our operations and the quality of our real estate loan portfolio. Although we do not engage in subprime or negative amortization lending, effects of recent subprime market challenges, combined with the ongoing deterioration in the U.S. and California real estate markets, could result in further price reductions in single family home prices and a lack of liquidity in refinancing markets. These factors could adversely impact the quality of our residential construction and residential mortgage 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 home building industry, the commercial real estate industry, the communications/media industry, the retail industry, the energy industry and the technology industry. The home building industry in California has been especially adversely impacted by the deterioration in residential real estate markets, particularly in the subprime housing sectors, which has lead us to take additional provisions against credit losses in this portfolio as to which we expect an acceleration of charge offs during the rest of 2008. Continued 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.

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 second quarter of 2008.

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
April 2008		27,063	$	51.48	—	$	510,140,818
May 2008		1,449	$	54.65	—	$	510,061,627
June 2008		6,556	$	47.41	—	$	509,750,820	⁽²⁾

	Total	35,068	$	50.85	—

⁽¹⁾: All common stock repurchased during April, May and June 2008 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⁾: In the second quarter of 2008, UnionBanCal Corporation used $1.8 million from the $500 million repurchase program announced on April 26, 2006.

Item 4. Submission of Matters to a Vote of Security Holders

Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Stockholders on May 22, 2008:

Election of Directors: Each of the following persons was elected as a director to hold office until the 2009 Annual Meeting of Stockholders or until earlier retirement, resignation or removal.

NOMINEE	FOR	WITHHELD
Aida M. Alvarez	132,746,166	797,204
David R. Andrews	131,397,473	2,145,897
Nicholas B. Binkley	132,774,299	769,071
L. Dale Crandall	119,739,805	13,803,565
Murray H. Dashe	132,759,004	784,366
Richard D. Farman	130,413,759	3,129,611
Philip B. Flynn	132,164,759	1,378,611
Christine Garvey	132,765,448	777,922
Michael J. Gillfillan	132,786,653	756,717
Mohan S. Gyani	132,471,784	1,071,586
Ronald L. Havner, Jr.	132,770,398	772,972
Norimichi Kanari	132,223,434	1,319,936
Mary S. Metz	132,172,098	1,371,272
Shigemitsu Miki	108,165,304	25,378,066
J. Fernando Niebla	132,280,586	1,262,784
Kyota Omori	132,224,976	1,318,394
Barbara L. Rambo	132,752,414	790,956
Masaaki Tanaka	132,239,634	1,303,736
Dean A. Yoost	132,795,534	747,836

Proposal No. 2: To increase the number of shares of common stock that may be awarded under the Year 2000 UnionBanCal Corporation Management Stock Plan received the following votes:

FOR		118,865,877
AGAINST		11,443,203
ABSTAIN		616,643
NON-VOTES		2,617,647

Proposal No. 3: To ratify the selection of Deloitte & Touche LLP as independent registered public accounting firm of UnionBanCal Corporation received the following votes:

FOR		132,061,398
AGAINST		920,280
ABSTAIN		561,692

Item 5. Other Information

(a) Adoption of Amendment to Year 2000 UnionBanCal Corporation Management Stock Plan

On May 22, 2008, the stockholders of UnionBanCal Corporation ("UnionBanCal") approved an amendment to the Year 2000 UnionBanCal Corporation Management Stock Plan to increase the aggregate number of shares of UnionBanCal common stock which may be issued under the Plan from 20,000,000 to 27,000,000. A copy of the Year 2000 UnionBanCal Corporation Management Stock Plan, as amended, was attached as Appendix A to the Proxy Statement related to the 2008 Annual Meeting of Stockholders and is incorporated by reference as Exhibit 10.1 to this Form 10-Q.

Item 6. Exhibits

No.		Description
10.1		Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002⁽²⁾
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002⁽²⁾

⁽¹⁾: Incorporated by reference to Appendix A to the UnionBanCal Corporation Definitive Proxy Statement on Schedule 14A filed on April 18, 2008 (SEC File No. 001-15081).
⁽²⁾: 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: August 7, 2008	By:	/s/ MASAAKI TANAKA Masaaki Tanaka President and Chief Executive Officer (Principal Executive Officer)
Date: August 7, 2008	By:	/s/ DAVID I. MATSON David I. Matson Vice Chairman and Chief Financial Officer (Principal Financial Officer)
Date: August 7, 2008	By:	/s/ DAVID A. ANDERSON David A. Anderson Executive Vice President and Controller (Chief Accounting Officer)

EXHIBIT INDEX

No.		Description
10.1		Year 2000 UnionBanCal Corporation Management Stock Plan⁽¹⁾
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002⁽²⁾
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002⁽²⁾

⁽¹⁾: Incorporated by reference to Appendix A to the UnionBanCal Corporation Definitive Proxy Statement on Schedule 14A filed on April 18, 2008 (SEC File No. 001-15081).
⁽²⁾: Filed herewith.

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UnionBanCal Corporation and Subsidiaries TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES
EXHIBIT INDEX