-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dsl87ulgMPTK0wLrx/B0sgguCQR/F/YRFvg2XH7h8kA2WBWJzZhtyiOkQVq/y6au mgI/yT98FEVsegJcIAl4SQ== 0001047469-09-007816.txt : 20090814 0001047469-09-007816.hdr.sgml : 20090814 20090814160441 ACCESSION NUMBER: 0001047469-09-007816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090814 DATE AS OF CHANGE: 20090814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL CORP CENTRAL INDEX KEY: 0001011659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941234979 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15081 FILM NUMBER: 091015750 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 BUSINESS PHONE: 4157652969 MAIL ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 10-Q 1 a2193965z10-q.htm FORM 10-Q

Table of Contents

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, 2009

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

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

  Large accelerated filer o   Accelerated filer o

 

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

 

Smaller reporting company o

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

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

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


Table of Contents


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 Stockholder's 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—Privatization

  16
   

Note 4—Securities

  17
   

Note 5—Loans and Allowance for Loan Losses

  22
   

Note 6—Goodwill and Intangible Assets

  23
   

Note 7—Employee Pension and Other Postretirement Benefits

  25
   

Note 8—Other Noninterest Income and Noninterest Expense

  26
   

Note 9—Income Taxes

  27
   

Note 10—Borrowed Funds

  28
   

Note 11—Medium- and Long-Term Debt

  29
   

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

  30
   

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

  38
   

Note 14—Accumulated Other Comprehensive Loss

  44
   

Note 15—Discontinued Operations

  45
   

Note 16—Commitments, Contingencies and Guarantees

  48
   

Note 17—Business Segments

  50
   

Note 18—Subsequent Event

  53
 

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

   
   

Introduction

 
54
   

Executive Overview

  54
   

Critical Accounting Estimates

  56
   

Financial Performance

  58
   

Net Interest Income

  61
   

Noninterest Income and Noninterest Expense

  64
   

Income Tax Expense

  65
   

Discontinued Operations

  66
   

Securities

  66
   

Loans

  68
   

Cross-Border Outstandings

  70
   

Provision for Credit Losses

  70
   

Allowances for Credit Losses

  71
   

Nonperforming Assets

  74
   

Loans 90 Days or More Past Due and Still Accruing

  76
   

Fair Value of Financial Instruments

  76
   

Quantitative and Qualitative Disclosures About Market Risk

  77
   

Liquidity Risk

  80

2


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3


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NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

    Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our competitive position and prospects

    Our assessment of significant factors and developments that have affected or may affect our results

    Pending and recent legal and regulatory actions, and future legislative and regulatory developments, including the effects of The Economic Stimulus Act of 2008, the Financial Stability Plan, the Homeowner Affordability and Stability Plan and the American Recovery and Reinvestment Act of 2009 and other legislation or governmental measures introduced in response to the financial crises affecting the banking system, financial markets and the U.S. economy and changes to the Federal Deposit Insurance Corporation's deposit insurance assessment policies

    Regulatory controls and processes 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

    Credit quality and provision for credit losses, including our expectation that elevated levels of quarterly provisions for credit losses will continue during 2009 due to a continued recessionary economic environment and further deterioration in our loan portfolio

    Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, underwriting standards, and risk grade and credit migration trends and our delinquency rates compared to the industry average

    Our assessment of economic conditions and trends and credit cycles and their impact on our business

    Net interest income

    The impact of changes in interest rates

    Loan portfolio composition and risk grade trends, delinquency rates compared to the industry average and our underwriting standards

4


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    Our deposit base

    The adequacy of our insurance coverage

    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 investment 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, prepayment projections 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, Inc.'s taxable profits on our California State tax obligations and of expected tax credits or benefits, our intent to file our 2008 California tax return under a water's-edge election and our intent to file refund claims

    Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or change in accounting principle and future recognition of impairments for the fair value of assets

    Expected rates of return, yields 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., the impact of their credit rating on our credit ratings and actions that may or may not be taken by The Bank of Tokyo-Mitsubishi UFJ, Ltd., and Mitsubishi UFJ Financial Group, Inc.

    Our strategies and expectations regarding capital levels and liquidity, our funding base and intent to fund our operations on an independent basis

    The continued recessionary outlook for the U.S. economy

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

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

5


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

 
  As of and for the
Three Months Ended
   
 
(Dollars in thousands)   June 30,
2008
  June 30,
2009
  Percent
Change
 

Results of operations:

                   
 

Net interest income(1)

  $ 512,887   $ 553,094     7.84 %
 

Provision for loan losses

    95,000     360,000     nm  
 

Noninterest income

    199,626     183,213     (8.22 )
 

Noninterest expense

    419,312     532,058     26.89  
                 
 

Income (loss) before income taxes(1)

    198,201     (155,751 )   nm  
 

Taxable-equivalent adjustment

    2,329     2,748     17.99  
 

Income tax expense (benefit)

    61,574     (78,492 )   nm  
                 
 

Income (loss) from continuing operations

    134,298     (80,007 )   nm  
 

Income from discontinued operations, net of taxes

    7,047         100.00  
                 
 

Net income (loss)

  $ 141,345   $ (80,007 )   nm  
                 

Balance sheet (end of period):

                   
 

Total assets(2)

  $ 60,593,921   $ 73,984,788     22.10 %
 

Total loans

    46,041,358     48,896,520     6.20  
 

Nonperforming assets

    224,944     1,144,602     nm  
 

Total deposits

    42,604,419     58,338,959     36.93  
 

Medium- and long-term debt

    2,809,329     5,131,068     82.64  
 

Stockholder's equity

    4,708,790     7,429,500     57.78  

Balance sheet (period average)(3):

                   
 

Total assets

  $ 59,269,965   $ 71,495,226     20.63 %
 

Total loans

    45,494,161     49,556,222     8.93  
 

Earning assets

    54,935,058     65,008,223     18.34  
 

Total deposits

    43,203,180     54,352,412     25.81  
 

Stockholder's equity

    4,616,596     7,303,050     58.19  

Financial ratios(4):

                   
 

Return on average assets(3):

                   
   

From continuing operations

    0.91 %   (0.45 )%      
   

Net income (loss)

    0.96     (0.45 )      
 

Return on average stockholder's equity(3):

                   
   

From continuing operations

    11.70     (4.39 )      
   

Net income (loss)

    12.31     (4.39 )      
 

Efficiency ratio(5)

    56.94     68.28        
 

Net interest margin(1)(3)

    3.74     3.41        
 

Tangible equity ratio(6)

    7.22     6.56        
 

Tier 1 risk-based capital ratio(2)

    7.96     8.68        
 

Total risk-based capital ratio(2)

    10.84     11.54        
 

Leverage ratio(2)

    7.95     7.89        
 

Allowance for loan losses to(7):

                   
     

Total loans

    1.14     2.21        
     

Nonaccrual loans

    243.59     98.14        
 

Allowance for credit losses to(8):

                   
     

Total loans

    1.37     2.55        
     

Nonaccrual loans

    291.42     113.24        
 

Net loans charged off to average total loans(3)

    0.28     1.23        
 

Nonperforming assets to total loans and

                   
   

foreclosed assets

    0.49     2.34        
 

Nonperforming assets to total assets(2)

    0.37     1.55        

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

6


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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,
2008
  June 30,
2009
  Percent
Change
 

Results of operations:

                   
 

Net interest income(1)

  $ 975,991   $ 1,115,714     14.32 %
 

Provision for loan losses

    167,000     609,000     nm  
 

Noninterest income

    395,022     357,929     (9.39 )
 

Noninterest expense

    822,518     1,053,441     28.08  
               
 

Income (loss) before income taxes(1)

    381,495     (188,798 )   nm  
 

Taxable-equivalent adjustment

    4,855     5,365     10.50  
 

Income tax expense (benefit)

    119,944     (104,348 )   nm  
               
 

Income (loss) from continuing operations

    256,696     (89,815 )   nm  
 

Loss from discontinued operations, net of taxes

    (6,761 )       100.00  
               
 

Net income (loss)

  $ 249,935   $ (89,815 )   nm  
               

Balance sheet (end of period):

                   
 

Total assets(2)

  $ 60,593,921   $ 73,984,788     22.10 %
 

Total loans

    46,041,358     48,896,520     6.20  
 

Nonperforming assets

    224,944     1,144,602     nm  
 

Total deposits

    42,604,419     58,338,959     36.93  
 

Medium- and long-term debt

    2,809,329     5,131,068     82.64  
 

Stockholders' equity

    4,708,790     7,429,500     57.78  

Balance sheet (period average)(3):

                   
 

Total assets

  $ 57,951,110   $ 69,296,183     19.58 %
 

Total loans

    44,097,805     49,671,989     12.64  
 

Earning assets

    53,561,569     62,743,021     17.14  
 

Total deposits

    43,408,469     50,514,116     16.37  
 

Stockholders' equity

    4,667,429     7,319,518     56.82  

Financial ratios(4):

                   
 

Return on average assets(3):

                   
   

From continuing operations

    0.89 %   (0.26 )%      
   

Net income (loss)

    0.87     (0.26 )      
 

Return on average stockholders' equity(3):

                   
   

From continuing operations

    11.06     (2.47 )      
   

Net income (loss)

    10.77     (2.47 )      
 

Efficiency ratio(5)

    57.75     66.98        
 

Net interest margin(1)(3)

    3.65     3.56        
 

Tangible equity ratio(6)

    7.22     6.56        
 

Tier 1 risk-based capital ratio(2)

    7.96     8.68        
 

Total risk-based capital ratio(2)

    10.84     11.54        
 

Leverage ratio(2)

    7.95     7.89        
 

Allowance for loan losses to(7):

                   
     

Total loans

    1.14     2.21        
     

Nonaccrual loans

    243.59     98.14        
 

Allowance for credit losses to(8):

                   
     

Total loans

    1.37     2.55        
     

Nonaccrual loans

    291.42     113.24        
 

Net loans charged off to average total loans(3)

    0.20     1.09        
 

Nonperforming assets to total loans and

                   
   

foreclosed assets

    0.49     2.34        
 

Nonperforming assets to total assets(2)

    0.37     1.55        

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

7


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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)   2008   2009   2008   2009  

Interest Income

                         
 

Loans

  $ 615,656   $ 584,532   $ 1,247,242   $ 1,186,374  
 

Securities

    97,938     98,385     203,578     201,282  
 

Interest bearing deposits in banks

    228     3,550     356     4,450  
 

Federal funds sold and securities purchased under resale agreements

    1,093     97     3,786     238  
 

Trading account assets

    1,042     210     3,501     360  
                   
   

Total interest income

    715,957     686,774     1,458,463     1,392,704  
                   

Interest Expense

                         
 

Deposits

    144,509     100,186     365,169     205,224  
 

Federal funds purchased and securities sold under repurchase agreements

    13,057     19     28,772     72  
 

Commercial paper

    8,279     954     18,071     2,546  
 

Medium- and long-term debt

    19,692     29,415     39,149     56,944  
 

Trust notes

    238     238     476     476  
 

Other borrowed funds

    19,624     5,616     35,690     17,093  
                   
   

Total interest expense

    205,399     136,428     487,327     282,355  
                   

Net Interest Income

    510,558     550,346     971,136     1,110,349  
 

Provision for loan losses

    95,000     360,000     167,000     609,000  
                   
   

Net interest income after provision for loan losses

    415,558     190,346     804,136     501,349  
                   

Noninterest Income

                         
 

Service charges on deposit accounts

    77,706     71,843     152,442     143,165  
 

Trust and investment management fees

    43,802     34,130     87,190     68,037  
 

Trading account activities

    16,687     16,251     27,699     38,943  
 

Merchant banking fees

    11,085     19,924     22,878     33,756  
 

Brokerage commissions and fees

    10,635     8,506     20,494     16,813  
 

Card processing fees, net

    8,167     8,124     15,931     15,660  
 

Securities losses, net

        (172 )   (2 )   (172 )
 

Other

    31,544     24,607     68,390     41,727  
                   
   

Total noninterest income

    199,626     183,213     395,022     357,929  
                   

Noninterest Expense

                         
 

Salaries and employee benefits

    243,299     233,057     484,969     476,620  
 

Net occupancy

    38,232     43,222     74,434     85,143  
 

Intangible asset amortization

    670     40,281     1,340     81,168  
 

Regulatory agencies

    4,897     52,836     7,506     70,774  
 

Outside services

    20,295     22,948     37,304     41,782  
 

Professional services

    15,931     19,489     30,528     35,427  
 

Equipment

    15,141     16,602     30,488     32,015  
 

Software

    14,409     14,205     29,204     29,243  
 

Foreclosed asset expense

    83     3,282     172     4,168  
 

Provision for losses on off-balance sheet commitments

    5,000     15,000     13,000     41,000  
 

Privatization-related expense

        7,433         34,252  
 

Other

    61,355     63,703     113,573     121,849  
                   
   

Total noninterest expense

    419,312     532,058     822,518     1,053,441  
                   
 

Income (loss) from continuing operations before income taxes

    195,872     (158,499 )   376,640     (194,163 )
 

Income tax expense (benefit)

    61,574     (78,492 )   119,944     (104,348 )
                   

Income (Loss) from Continuing Operations

    134,298     (80,007 )   256,696     (89,815 )
                   
 

Income (loss) from discontinued operations before income taxes

    3,068         (14,517 )    
 

Income tax benefit

    (3,979 )       (7,756 )    
                   

Income (Loss) from Discontinued Operations

    7,047         (6,761 )    
                   

Net Income (Loss)

  $ 141,345   $ (80,007 ) $ 249,935   $ (89,815 )
                   

See accompanying notes to condensed consolidated financial statements.

8


Table of Contents


UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
 

Assets

                   

Cash and due from banks

  $ 1,800,313   $ 1,568,578   $ 1,285,780  

Interest bearing deposits in banks

    65,788     2,872,698     8,556,837  

Federal funds sold and securities purchased under resale agreements

    172,345     63,069     198,955  
               
   

Total cash and cash equivalents

    2,038,446     4,504,345     10,041,572  

Trading account assets:

                   
 

Pledged as collateral

        6,283     51,714  
 

Held in portfolio

    1,136,416     1,210,496     853,922  

Securities available for sale:

                   
 

Pledged as collateral

    1,079,491     54,525      
 

Held in portfolio

    7,396,824     8,140,013     7,403,173  

Securities held to maturity (fair value: June 30, 2009, $1,112,813)

            1,171,380  

Loans (net of allowance for loan losses: June 30, 2008, $526,401; December 31, 2008, $737,767; June 30, 2009, $1,081,633)

    45,514,957     48,847,783     47,814,887  

Due from customers on acceptances

    21,272     23,131     19,944  

Premises and equipment, net

    480,366     680,004     664,673  

Intangible assets, net

    5,117     713,485     641,406  

Goodwill

    355,287     2,369,326     2,369,326  

Other assets

    2,559,694     3,571,995     2,952,791  

Assets of discontinued operations to be disposed or sold

    6,051     4      
               
   

Total assets

  $ 60,593,921   $ 70,121,390   $ 73,984,788  
               

Liabilities

                   
 

Noninterest bearing

  $ 13,440,290   $ 13,566,873   $ 14,926,564  
 

Interest bearing

    29,164,129     32,482,896     43,412,395  
               
   

Total deposits

    42,604,419     46,049,769     58,338,959  

Federal funds purchased and securities sold under repurchase agreements

    2,296,587     172,758     203,205  

Commercial paper

    1,397,159     1,164,327     492,127  

Other borrowed funds

    4,719,809     8,196,597     606,019  

Trading account liabilities

    892,240     1,034,663     690,704  

Acceptances outstanding

    21,272     23,131     19,944  

Other liabilities

    1,012,403     1,685,412     1,059,508  

Medium- and long-term debt

    2,809,329     4,288,488     5,131,068  

Junior subordinated debt payable to subsidiary grantor trust

    14,206     13,980     13,754  

Liabilities of discontinued operations to be extinguished or assumed

    117,707     7,960      
               
   

Total liabilities

    55,885,131     62,637,085     66,555,288  
               

Commitments, contingencies and guarantees—See Note 16

                   

Stockholder's Equity

                   

Preferred stock:

                   
 

Authorized 5,000,000 shares; no shares issued or outstanding as of June 30, 2008, December 31, 2008 and June 30, 2009

             

Common stock, par value $1 per share:

                   
 

Authorized 300,000,000 shares; issued 157,811,268 shares as of June 30, 2008, 136,330,829 shares as of December 31, 2008 and 136,330,829 shares as of June 30, 2009

    157,811     136,331     136,331  

Additional paid-in capital

    1,182,978     3,195,023     3,195,023  

Treasury stock: 19,760,597 shares as of June 30, 2008, no shares as of December 31, 2008 and June 30, 2009

    (1,204,469 )        

Retained earnings

    5,018,601     4,964,802     4,874,987  

Accumulated other comprehensive loss

    (446,131 )   (811,851 )   (776,841 )
               
   

Total stockholder's equity

    4,708,790     7,484,305     7,429,500  
               
   

Total liabilities and stockholder's equity

  $ 60,593,921   $ 70,121,390   $ 73,984,788  
               

See accompanying notes to condensed consolidated financial statements.

9


Table of Contents


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

(In thousands, except shares)   Number of
shares
  Common
stock
  Additional
paid-in
capital
  Treasury
stock
  Retained
earnings
  Accumulated
other
comprehensive
income (loss)
  Total
stockholder's
equity
 

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, net of tax

                                        86,927  

EITF 06-4 adjustment

                            (236 )         (236 )

EITF 06-11 adjustment

                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(1)

                      (1,885 )               (1,885 )

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

                            (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  
                               

BALANCE DECEMBER 31, 2008

    136,330,829   $ 136,331   $ 3,195,023   $   $ 4,964,802   $ (811,851 ) $ 7,484,305  
                                 

Comprehensive loss:

                                           
 

Net loss—For the six months ended June 30, 2009

                            (89,815 )         (89,815 )
 

Other comprehensive income (loss), net of tax:

                                           
   

Net change in unrealized gains on cash flow hedges(3)

                                  (13,577 )   (13,577 )
   

Net change in unrealized losses on securities(3)

                                  40,985     40,985  
   

Foreign currency translation adjustment

                                  201     201  
   

Net change in pension and other benefits

                                  7,401     7,401  
                                           

Total comprehensive loss, net of tax

                                        (54,805 )
                                 

Net change

                      (89,815 )   35,010     (54,805 )
                               

BALANCE JUNE 30, 2009

    136,330,829   $ 136,331   $ 3,195,023   $   $ 4,874,987   $ (776,841 ) $ 7,429,500  
                               

(1)
Common stock repurchased includes commission costs.

(2)
Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.

(3)
Includes amortization of privatization adjustments. See Note 3 to these condensed consolidated financial statements for additional information on the Company's privatization transaction.

See accompanying notes to condensed consolidated financial statements.

10


Table of Contents


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

 
  For the Six Months
Ended June 30,
 
(Dollars in thousands)   2008   2009  

Cash Flows from Operating Activities:

             
 

Net income (loss)

  $ 249,935   $ (89,815 )
   

Loss from discontinued operations, net of taxes

    (6,761 )    
           
   

Income (loss) from continuing operations, net of taxes

    256,696     (89,815 )
 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

             
   

Provision for loan losses

    167,000     609,000  
   

Provision for losses on off-balance sheet commitments

    13,000     41,000  
   

Depreciation, amortization and accretion

    56,405     81,551  
   

Stock-based compensation—stock options and other share-based compensation

    19,050      
   

Provision for (reversal of) deferred income taxes

    60,065     (34,590 )
   

Net losses on sales of securities

    2     172  
   

Net decrease in accrued expenses

    (250,868 )   (253,101 )
   

Net (increase) decrease in trading account assets

    (533,083 )   311,143  
   

Net increase (decrease) in trading account liabilities

    541,183     (343,959 )
   

Net increase in prepaid expenses

    (7,243 )   (23,188 )
   

Net increase in fees and other receivables

    (14,961 )   (55,404 )
   

Net increase (decrease) in other liabilities

    185,301     (413,091 )
   

Net increase in other assets

    (159,142 )   (326,619 )
   

Loans originated for resale

    (382,759 )   (64,953 )
   

Net proceeds from sale of loans originated for resale

    258,831     37,531  
   

Excess tax benefit—stock-based compensation

    (190 )    
   

Other, net

    6,588     31,430  
   

Discontinued operations, net

    84,721     (6,027 )
           
     

Total adjustments

    43,900     (409,105 )
           
 

Net cash provided by (used in) operating activities

    300,596     (498,920 )
           

Cash Flows from Investing Activities:

             
 

Proceeds from sales of securities available for sale

    10,300     24,234  
 

Proceeds from matured and called securities available for sale

    807,237     1,191,246  
 

Purchases of securities available for sale

    (1,132,494 )   (1,513,612 )
 

Proceeds from matured securities held to maturity

        2,366  
 

Purchases of premises and equipment, net

    (43,141 )   (38,854 )
 

Net (increase) decrease in loans

    (4,767,468 )   442,279  
 

Other, net

    (32 )   (1,566 )
 

Discontinued operations, net

    3,732      
           
 

Net cash provided by (used in) investing activities

    (5,121,866 )   106,093  
           

Cash Flows from Financing Activities:

             
 

Net increase (decrease) in deposits

    (75,772 )   12,289,190  
 

Net increase in federal funds purchased and securities sold under repurchase agreements

    664,985     30,447  
 

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

    2,974,693     (7,262,778 )
 

Proceeds from issuance of medium- and long-term debt

    901,000     1,625,000  
 

Repayment of medium-term debt

        (750,000 )
 

Common stock repurchased

    (1,885 )    
 

Payments of cash dividends

    (143,462 )    
 

Stock options exercised

    10,281      
 

Other, net

    (217 )   201  
 

Discontinued operations, net

    7,905     (1,929 )
           
 

Net cash provided by financing activities

    4,337,528     5,930,131  
           

Net increase (decrease) in cash and cash equivalents

    (483,742 )   5,537,304  

Cash and cash equivalents at beginning of period

    2,521,633     4,504,345  

Effect of exchange rate changes on cash and cash equivalents

    555     (77 )
           

Cash and cash equivalents at end of period

  $ 2,038,446   $ 10,041,572  
           

Cash Paid During the Period For:

             
 

Interest

  $ 506,653   $ 304,247  
 

Income taxes, net

    147,689     289,040  

Supplemental Schedule of Noncash Investing and Financing Activities:

             
 

Securities available for sale transferred to securities held to maturity

  $   $ 1,144,036  
 

Loans transferred to foreclosed assets (OREO)

    8,612     32,371  

See accompanying notes to condensed consolidated financial statements.

11


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1—Basis of Presentation and Nature of Operations

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

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

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

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


Note 2—Recently Issued Accounting Pronouncements

    Business Combinations

        In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.

12


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

    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 was effective January 1, 2009. At adoption, there was no 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, was effective January 1, 2009. Disclosures required under this Statement are included in Note 13 to these condensed consolidated financial statements.

    Determination of the Useful Life of Intangible Assets

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

    Employers' Disclosures about Postretirement Benefit Plan Assets

        In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets," which expands the disclosure requirements related to an employer's defined benefit pension or other postretirement plan set forth in FAS No. 132 (R), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The FSP requires additional disclosure information, including how a company makes investment allocation decisions, the fair value of each major category of plan assets and the nature and amount of concentration risk within or across those plan asset categories. Additionally, the FSP requires disclosures about the valuation of plan assets similar to those required in SFAS No. 157, "Fair Value Measurements," including the level within the fair value hierarchy in which fair value measurements of plan assets fall and information about the inputs and valuation techniques used to measure the fair value of plan assets. The FSP, which applies only to disclosures, is effective December 31, 2009.

13


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

    Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies

        In April 2009, the FASB issued FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." The FSP requires that an asset or liability assumed in a business combination that arises from a contingency be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined during the measurement period, the accounting for the acquired contingency should follow the guidance of SFAS No. 5, "Accounting for Contingencies." The FSP was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.

    Interim Disclosures about Fair Value of Financial Instruments

        In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB) 28-1, "Interim Disclosures about Fair Value of Financial Instruments." The FSP requires the fair value disclosure of financial instruments mandated by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" to be reported for interim periods. The FSP, which applies only to disclosures, was effective April 1, 2009. Disclosures required under this FSP are included in Note 12 to these condensed consolidated financial statements.

    Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

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

    Recognition and Presentation of Other-Than-Temporary Impairments

        In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments." The FSP amends guidance for the determination and recognition of other-than-temporary impairment related to debt securities. The FSP establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. A company is required to assert whether it intends or it is more likely than not that it will need to sell a security with an unrealized loss before full recovery of the amortized cost basis. If it is likely that a security will be sold prior to full recovery, the security must be written down to its current fair value and the entire loss recognized in earnings immediately. If it is likely that the security will not be sold prior to recovery, but the amortized cost basis will not be collected, the security must be written down to its current fair value. However, in that case, only the credit loss component shall be recognized in earnings immediately with the remaining

14


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

non-credit related loss portion recorded in other comprehensive income. The FSP was effective April 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.

    Subsequent Events

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

    Accounting for Transfers of Financial Assets—an amendment of FASB Statement 140

        In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets-an amendment of FASB Statement 140." The Statement amends transfer of financial asset guidance to eliminate the concept of qualifying special purpose entities (QSPEs) and modifies financial asset derecognition guidance. The elimination of the QSPE concept will require many sponsors to consolidate these vehicles. The derecognition modifications require that companies consider all arrangements such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates when determining whether derecognition is appropriate for a transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a participating interest. The guidance also requires that all beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are also amended to require the disclosure of a company's continuing involvement with transferred financial assets and details regarding financial or other support provided. The Statement is effective January 1, 2010. Management is currently evaluating the impact this Statement may have on the Company's financial position and results of operations.

    Amendments to FASB Interpretation No. 46(R)

        In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." The Statement amends consolidation guidance related to variable interest entities (VIEs) by changing the approach for determining the primary beneficiary of a VIE. A company would be required to determine the primary beneficiary of a VIE based on a qualitative assessment of the power and economic structure and to continually reassess that conclusion. The Statement also states that if power is shared by multiple parties such that no one party has the power to direct the activities of the VIE, no party shall consolidate the VIE. Disclosures are also amended to require disclosure of continuing involvement with VIEs and judgments used in the consolidation analysis such as the method, significant judgments and assumptions used for determining the primary beneficiary. The Statement is effective January 1, 2010. Management is currently evaluating the impact this Statement may have on the Company's financial position and results of operations.

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 2—Recently Issued Accounting Pronouncements (Continued)

    The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162

        In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162." The Statement establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative US GAAP. The Codification does not significantly change current US GAAP and merely restructures the information in a topical format. The Codification is effective July 1, 2009. Management believes that, upon adoption, this Statement will not have a material impact on the Company's financial position or results of operations.


Note 3—Privatization

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

        After all of the fair value adjustments to the Company's assets and liabilities were assigned, the remainder of the purchase price was recorded as goodwill. The fair value adjustments are subject to revision for up to one year after the close of the privatization transaction in the event that better estimates are developed based on additional information. As of June 30, 2009, there were no revisions to the fair value adjustments.

        The amortization (accretion) of the fair value adjustments by category for the three and six months ended June 30, 2009, respectively, were $40 million and $80 million for intangibles, $2 million and $4 million for premises and equipment, ($22) million and ($55) million for loans, $4 million and $7 million for cash flow hedges, ($10) million and ($17) million for securities, and $1 million and $2 million for debt.

        During the three and six months ended June 30, 2009, the Company recorded expenses for the privatization transaction of $7 million and $34 million, respectively, which primarily consisted of compensation expense for amortization of bridge award compensation.

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 4—Securities

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

Securities Available for Sale

 
  December 31, 2008   June 30, 2009  
(Dollars in thousands)   Amortized
Cost(1)
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
  Amortized
Cost(1)
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 

Other U.S. government

  $ 761,000   $ 17,988   $   $ 778,988   $ 697,942   $ 12,188   $ 434   $ 709,696  

Residential mortgage-backed securities

    6,010,860     87,803     136,630     5,962,033     6,388,334     157,029     99,055     6,446,308  

State and municipal

    52,749     2,185     87     54,847     48,353     1,926     65     50,214  

Asset-backed and debt securities

    1,837,287     48,921     597,310     1,288,898     113,405         16,435     96,970  

Equity securities

    109,919     126     355     109,690     100,156     158     417     99,897  

Foreign securities

    82             82     88             88  
                                   
 

Total securities available for sale

  $ 8,771,897   $ 157,023   $ 734,382   $ 8,194,538   $ 7,348,278   $ 171,301   $ 116,406   $ 7,403,173  
                                   

Securities Held to Maturity

 
  June 30, 2009  
 
   
  Recognized in Other
Comprehensive Income (OCI)(2)
   
  Not recognized in
OCI(2)
   
 
(Dollars in thousands)   Amortized
Cost(1)
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 

Collateralized loan obligations (CLOs)

  $ 1,736,180   $   $ 564,800   $ 1,171,380   $ 49,218   $ 107,785   $ 1,112,813  
                               
 

Total securities held to maturity

  $ 1,736,180   $   $ 564,800   $ 1,171,380   $ 49,218   $ 107,785   $ 1,112,813  
                               

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

        For the three and six months ended June 30, 2009, interest income included $0.6 million and $1.3 million, respectively, from non-taxable securities.

Transfer of Securities from Available for Sale to Held to Maturity

        The Company's collateralized loan obligations (CLOs) consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, management reassessed the classification of its CLOs. On February 28, 2009, the Company reclassified its CLOs, which totaled $1.1 billion

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Securities (Continued)


at fair value, from available for sale to held to maturity. The related unrealized pre-tax loss of $589 million included in accumulated OCI remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the CLOs. However, there is no impact on earnings, as an equal fair value discount on the securities is being accreted through earnings over the remaining terms of the CLOs. No gain or loss was recognized at the time of reclassification. Accordingly, no change was recorded in the amortized cost basis of the securities as a result of the transfer. The Company considers the held to maturity classification to be more appropriate because the Company has the ability and the intent to hold these securities to maturity.

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

Maturity Schedule of Securities

Securities Available for Sale(1)

 
  June 30, 2009  
(Dollars in thousands)   Amortized
Cost(3)
  Fair
Value
 

Due in one year or less

  $ 203,076   $ 206,962  

Due after one year through five years

    803,152     815,420  

Due after five years through ten years

    1,419,870     1,455,758  

Due after ten years

    4,822,024     4,825,136  

Equity securities(2)

    100,156     99,897  
           
 

Total securities available for sale

  $ 7,348,278   $ 7,403,173  
           

Securities Held to Maturity

 
  June 30, 2009  
(Dollars in thousands)   Amortized
Cost(3)
  Fair
Value
 

Due in one year or less

  $   $  

Due after one year through five years

    7,628     5,893  

Due after five years through ten years

    1,196,858     813,233  

Due after ten years

    531,694     293,687  
           
 

Total securities held to maturity

  $ 1,736,180   $ 1,112,813  
           

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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Securities (Continued)

        For the six months ended June 30 2009, proceeds from sales of securities available for sale were $24.2 million with gross realized gains of $0.6 million and no gross realized losses. The specific identification method is used to calculate realized gains and losses.

Analysis of Unrealized Losses on Securities

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

Securities Available for Sale

 
  December 31, 2008  
 
  Less than 12 months   12 months or more   Total  
(Dollars in thousands)   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count  

Other U.S. government

  $   $       $   $       $   $      

Residential mortgage-backed securities

    519,865     54,567     35     791,135     82,063     93     1,311,000     136,630     128  

State and municipal

    3,242     74     5     1,669     13     7     4,911     87     12  

Asset-backed and debt securities

    38,221     9,261     3     1,088,480     588,049     218     1,126,701     597,310     221  

Equity securities

    5,085     355     3                 5,085     355     3  
                                       
 

Total securities available for sale

  $ 566,413   $ 64,257     46   $ 1,881,284   $ 670,125     318   $ 2,447,697   $ 734,382     364  
                                       

 

 
  June 30, 2009  
 
  Less than 12 months   12 months or more   Total  
(Dollars in thousands)   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count  

Other U.S. government

  $ 151,379   $ 434     4   $   $       $ 151,379   $ 434     4  

Residential mortgage-backed securities

    746,712     4,962     22     766,918     94,093     63     1,513,630     99,055     85  

State and municipal

    2,942     19     9     2,090     46     8     5,032     65     17  

Asset-backed and debt securities

    5,693     1,112     2     91,277     15,323     13     96,970     16,435     15  

Equity securities

    156     37     1     38     380     1     194     417     2  
                                       
 

Total securities available for sale

  $ 906,882   $ 6,564     38   $ 860,323   $ 109,842     85   $ 1,767,205   $ 116,406     123  
                                       

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Securities (Continued)

Securities Held to Maturity

 
  June 30, 2009  
 
  Less than 12 months   12 months or more   Total  
(Dollars in thousands)   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count   Fair
Value
  Unrealized
Losses
  Count  

Collateralized loan obligations

  $ 76,848   $ 33,365     20   $ 1,035,965   $ 639,220     202   $ 1,112,813   $ 672,585     222  
                                       
 

Total securities held to maturity

  $ 76,848   $ 33,365     20   $ 1,035,965   $ 639,220     202   $ 1,112,813   $ 672,585     222  
                                       

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

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

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

    Other U.S. Government Securities

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

    Agency and Non-Agency Residential Mortgage-Backed Securities

        Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The fair value of agency mortgage-backed securities in a loss position and the related unrealized losses at June 30, 2009 was $1,076.1 million and $8.6 million, respectively. The

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Securities (Continued)

unrealized losses on these securities resulted from rising interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than temporarily impaired at June 30, 2009.

        Non-agency residential mortgage backed securities are issued by financial institutions with no guarantee from GSEs. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily AAA rated. The fair value of non-agency mortgage-backed securities in a loss position and the related unrealized losses at June 30, 2009 was $437.5 million and $90.4 million, respectively. The unrealized losses on these securities resulted from rising interest rates subsequent to purchase and additional credit spreads widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. Based on this assessment of expected credit losses of each security, the Company concluded these securities were not other-than temporarily impaired at June 30, 2009.

    State and Municipal Securities

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

    Asset-Backed and Debt Securities

        Asset-backed and debt securities in a loss position at June 30, 2009 consist of $92.1 million in privately placed debt securities issued by power and utilities companies and $4.9 million in commercial mortgage-backed securities. Expected cash flows of debt securities to power and utilities companies are assessed to determine if the amortized cost basis of the securities is recoverable. Based on this assessment, the Company concluded that these securities were not other-than-temporarily impaired as of June 30, 2009.

    Collateralized Loan Obligations

        CLOs are classified as held to maturity (see discussion above). Certain of these CLOs are highly illiquid securities for which fair values are difficult to obtain. Unrealized losses arise from rising interest rates, widening credit spreads, credit quality of the underlying collateral, uncertainty regarding the valuation of such securities and the market's opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly on lower rated securities. Any security with a change in credit rating is also subject to cash flow analysis to determine whether or not an other-than-temporary impairment exists. The fair value of the CLO portfolio was adversely impacted in 2008 and 2009 by the overall financial market crisis. Although none of the CLOs in the Company's portfolio contain subprime loan assets, widening credit spreads caused their value to decline. An analysis was performed as of June 30, 2009, in accordance with FSP FAS 115-2 and FAS 124-2. Based on this analysis, an insignificant amount of impairment was recognized on one CLO security. Since no observable credit quality issues were present in the remaining CLO portfolio at June 30, 2009, the Company concluded that these securities were not other-than-temporarily impaired.

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 4—Securities (Continued)

    Securities Pledged as Collateral

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

        The Company reports securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. Trading securities pledged as collateral, which totaled $51.7 million at June 30, 2009, have been separately identified in the condensed consolidated balance sheet. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At June 30, 2009, the Company had $4.3 billion of securities available for sale pledged as collateral where the secured party can not resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($0.4 billion), to support unrealized losses on derivative transactions reported in trading liabilities ($0.3 billion) and to secure public and trust department deposits ($3.6 billion).

        At June 30, 2009, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $199.0 million, which included $168.0 million of collateral received that has been repledged to secure bankruptcy deposits. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.


Note 5—Loans and Allowance for Loan Losses

        A summary of loans, net of unearned interest and deferred fees (costs) of ($10) million, $14 million and $48 million, at June 30, 2008, December 31, 2008 and June 30, 2009, respectively, is as follows:

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
 

Commercial, financial and industrial

  $ 16,602,393   $ 18,469,023   $ 17,064,253  

Construction

    2,622,740     2,744,062     2,791,583  

Mortgage:

                   
 

Residential

    14,852,058     15,880,835     16,216,264  
 

Commercial

    7,912,592     8,186,388     8,255,659  
               
   

Total mortgage

    22,764,650     24,067,223     24,471,923  

Consumer:

                   
 

Installment

    1,957,379     2,201,602     2,353,090  
 

Revolving lines of credit

    1,295,047     1,435,494     1,508,078  
               
   

Total consumer

    3,252,426     3,637,096     3,861,168  

Lease financing

    640,612     645,765     657,339  
               
   

Total loans held to maturity

    45,882,821     49,563,169     48,846,266  
   

Total loans held for sale

    158,537     22,381     50,254  
               
     

Total loans

    46,041,358     49,585,550     48,896,520  
     

Allowance for loan losses

    526,401     737,767     1,081,633  
               
     

Loans, net

  $ 45,514,957   $ 48,847,783   $ 47,814,887  
               

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

        Changes in the allowance for loan losses were as follows:

 
  For the Six Months
Ended June 30,
 
(Dollars in thousands)   2008   2009  

Allowance for loan losses, beginning of period

  $ 402,726   $ 737,767  

Loans charged off

    46,545     271,050  

Recoveries of loans previously charged off

    3,411     3,093  
           
 

Total net loans charged off

    43,134     267,957  

Provision for loan losses

    167,000     609,000  

Adjustments related to privatization

        2,062  

Foreign translation adjustment

    (191 )   761  
           

Allowance for loan losses, end of period

    526,401     1,081,633  

Allowance for losses on off-balance sheet commitments

    103,374     166,374  
           

Allowances for credit losses, end of period

  $ 629,775   $ 1,248,007  
           

        The provision for loan losses increased by $442 million to $609 million for the six months ended June 30, 2009, primarily due to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans and increase in certain loss factors related to the consumer and small business portfolios.

        Nonaccrual loans totaled $216.1 million and $1.1 billion at June 30, 2008 and 2009, respectively. There were $1.5 million and $11.0 million ($1.5 million of which are on accrual status at June 30, 2009) of troubled debt restructured loans at June 30, 2008 and 2009, respectively. Effective January 1, 2009, consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans totaling $167.7 million ($5.7 million of which are restructured loans) have been placed on nonaccrual status as of June 30, 2009. Loans 90 days or more past due and still accruing totaled $51.2 million and $4.0 million at June 30, 2008 and 2009, respectively.


Note 6—Goodwill and Intangible Assets

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

    Goodwill

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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6—Goodwill and Intangible Assets (Continued)

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

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

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

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

    Intangible Assets

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

 
  June 30, 2008   December 31, 2008   June 30, 2009  
(Dollars in thousands)   Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Amount
  Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Amount
  Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Amount
 

Core deposit intangibles

  $ 43,114   $ (37,997 ) $ 5,117   $ 619,398   $ (79,585 ) $ 539,813   $ 619,397   $ (156,313 ) $ 463,084  

Trade name

                108,733     (683 )   108,050     108,733     (2,057 )   106,676  

Customer relationships

                53,761     (1,323 )   52,438     53,761     (3,427 )   50,334  

Other

                9,555         9,555     9,555     (962 )   8,593  
                                       

Subtotal—intangibles with a definite useful life

  $ 43,114   $ (37,997 ) $ 5,117   $ 791,447   $ (81,591 ) $ 709,856   $ 791,446   $ (162,759 ) $ 628,687  
                                       

Other intangibles with an indefinite useful life

                3,629         3,629     12,719         12,719  
                                       

Total intangibles

  $ 43,114   $ (37,997 ) $ 5,117   $ 795,076   $ (81,591 ) $ 713,485   $ 804,165   $ (162,759 ) $ 641,406  
                                       

        Total amortization expense for the six months ended June 30, 2008 and 2009 was $1.3 million and $81.2 million, respectively.

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6—Goodwill and Intangible Assets (Continued)

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

(Dollars in thousands)   Core Deposit
Intangibles (CDI)
  Trade Name   Customer
Relationships
  Other   Total identifiable
intangible assets
 

Estimated amortization expense for the years ending:

                               
 

Remaining 2009

  $ 76,728   $ 1,373   $ 2,104   $ 913   $ 81,118  
 

2010

    114,029     2,747     4,246     1,497     122,519  
 

2011

    88,016     2,747     3,968     1,490     96,221  
 

2012

    69,259     2,747     3,679     1,490     77,175  
 

2013

    44,743     2,747     3,436     1,490     52,416  
 

Thereafter

    70,309     94,315     32,901     1,713     199,238  
                       
 

Total estimated amortization expense

  $ 463,084   $ 106,676   $ 50,334   $ 8,593   $ 628,687  
                       

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


Note 7—Employee Pension and Other Postretirement Benefits

        The following tables summarizes the components of net periodic benefit cost for the three and six months ended June 30, 2008 and 2009.

 
  Pension Benefits   Other Benefits   Superannuation,
SERP and ESBP
 
 
  For the Three Months
Ended June 30,
  For the Three Months
Ended June 30,
  For the Three Months
Ended June 30,
 
(Dollars in thousands)   2008   2009   2008   2009   2008   2009  

Components of net periodic benefit cost

                                     

Service cost

  $ 12,521   $ 12,571   $ 1,939   $ 2,332   $ 234   $ 256  

Interest cost

    19,329     20,723     2,700     3,055     930     941  

Expected return on plan assets

    (33,413 )   (35,086 )   (3,376 )   (2,501 )        

Amortization of prior service cost

            (23 )   (16 )   51      

Amortization of transition amount

            510     328          

Recognized net actuarial loss

    2,328     3,036     603     2,153     423     305  
                           
 

Total net periodic benefit cost

  $ 765   $ 1,244   $ 2,353   $ 5,351   $ 1,638   $ 1,502  
                           

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


 
  Pension Benefits   Other Benefits   Superannuation, SERP and ESBP  
 
  For the Six Months
Ended June 30,
  For the Six Months
Ended June 30,
  For the Six Months
Ended June 30,
 
(Dollars in thousands)   2008   2009   2008   2009   2008   2009  

Components of net periodic benefit cost

                                     

Service cost

  $ 25,568   $ 26,188   $ 4,037   $ 4,664   $ 470   $ 511  

Interest cost

    38,823     41,534     5,642     6,110     1,861     1,882  

Expected return on plan assets

    (66,822 )   (70,305 )   (6,739 )   (5,002 )        

Amortization of prior service cost

            (48 )   (31 )   101      

Amortization of transition amount

            1,018     656          

Recognized net actuarial loss

    4,966     6,090     1,681     4,306     846     1,171  
                           
 

Total net periodic benefit cost

  $ 2,535   $ 3,507   $ 5,591   $ 10,703   $ 3,278   $ 3,564  
                           


Note 8—Other Noninterest Income and Noninterest Expense

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

Other Noninterest Income

 
  For the Three Months
Ended
  For the Six Months
Ended
 
(Dollars in thousands)   June 30,
2008
  June 30,
2009
  June 30,
2008
  June 30,
2009
 

Gains (losses) on private capital investments, net

  $ 1,282   $ (1,123 ) $ 2,352   $ (3,244 )

Gain on the VISA IPO redemption

            14,211      

Other

    30,262     25,730     51,827     44,971  
                   
 

Total other noninterest income

  $ 31,544   $ 24,607   $ 68,390   $ 41,727  
                   

Other Noninterest Expense

 
  For the Three Months
Ended
  For the Six Months
Ended
 
(Dollars in thousands)   June 30,
2008
  June 30,
2009
  June 30,
2008
  June 30,
2009
 

Advertising and public relations

  $ 12,857   $ 11,349   $ 20,956   $ 21,970  

Low income housing credit investment amortization

    8,493     11,026     17,632     21,192  

Communications

    9,111     9,192     18,486     17,910  

Data processing

    7,784     8,042     14,860     16,617  

Other

    23,110     24,094     41,639     44,160  
                   
 

Total other noninterest expense

  $ 61,355   $ 63,703   $ 113,573   $ 121,849  
                   

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 9—Income Taxes

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

 
  For the Three
Months Ended
June 30,
  For the Six
Months Ended
June 30,
 
 
  2008   2009   2008   2009  

Federal income tax rate

    35 %   (35 )%   35 %   (35 )%

Net tax effects of:

                         
 

State income taxes, net of federal income tax benefit

    2     (2 )   3      
 

Tax credits

    (7 )   (11 )   (7 )   (18 )
 

Other

    1     (2 )   1     (1 )
                   
   

Effective tax rate

    31 %   (50 )%   32 %   (54 )%
                   

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

        The change in the effective tax rate from the second quarter of 2008 was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes. The Company's effective tax rate for the second quarter of 2009 may not be indicative of the effective tax rate for future quarters and the full year. In addition, the quarterly effective tax rate in 2009 is being computed on an individual quarterly basis, as compared to the Company's historical computation, which was based on an estimated average effective tax rate for the year. During 2009, the effective tax rate, which will be impacted by expected tax credits, is expected to vary from quarter to quarter in relation to changes in the Company's pre-tax income or loss.

        In 2008, California enacted a new statute mandating a 20 percent penalty on corporate tax underpayments outstanding after May 31, 2009. During the second quarter of 2009, the Company filed amended tax returns and made payments of $187.0 million of tax and $43.7 million of interest with respect to tax positions taken in prior year worldwide unitary tax returns, which primarily involved the method of apportionment of worldwide income to California. The payments were made in order to protect the Company from potential penalties that may be asserted by the tax authorities. The Company intends to file refund claims and to defend its positions through negotiations with the California Franchise Tax Board and through the California courts, if necessary. The payments did not affect the recognition or measurement of unrecognized state tax benefits under FIN 48, and they had no impact on income tax expense.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 10—Borrowed Funds

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
 

Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 2.16%, 0.53% and 0.03% at June 30, 2008, December 31, 2008 and June 30, 2009, respectively(1)

  $ 2,296,587   $ 172,758   $ 203,205  

Commercial paper, with weighted average interest rates of 2.16%, 1.48%, and 0.47% at June 30, 2008, December 31, 2008 and June 30, 2009, respectively(1)

    1,397,159     1,164,327     492,127  

Other borrowed funds:

                   
 

Federal Home Loan Bank borrowings, with weighted average interest rates of 2.30%, 2.22% and 0.86% at June 30, 2008, December 31, 2008 and June 30, 2009, respectively(1)

    1,150,000     1,850,000     400,000  
 

Term federal funds purchased, with weighted average interest rates of 2.51%, 2.60% and 0.72% at June 30, 2008, December 31, 2008 and June 30, 2009, respectively(1)

    822,959     1,230,060     102,000  
 

Federal Reserve Bank Term Borrowings, with weighted average interest rate of 2.34% at June 30, 2008 and 0.79% at December 31, 2008(1)

    2,650,000     5,000,000      
 

All other borrowed, with weighted average interest rates of 4.78%, 5.42% and 1.29% at June 30, 2008, December 31, 2008 and June 30, 2009, respectively(1)

    96,850     116,537     104,019  
               
   

Total borrowed funds

  $ 8,413,555   $ 9,533,682   $ 1,301,351  
               

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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 11—Medium- and Long-Term Debt

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
 

Medium-Term senior debt:

                   
 

Floating rate notes due March 2009. These notes bear interest at 0.02% above 3-month London Interbank Offered Rate (LIBOR)

  $ 750,000   $ 750,000   $  
 

Federal Home Loan Bank Advances: Floating, which is at a spread above 3-month LIBOR, or fixed rate, at a weighted average rate of 2.75% at June 30, 2008, 3.21% at December 31, 2008 and 2.38% at June 30, 2009

    901,000     2,276,000     2,901,000  
 

Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.70% at June 30, 2009

            500,000  
 

Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.82% at June 30, 2009

            500,000  

Long-Term subordinated debt:

                   
 

Fixed rate 5.25% notes due December 2013

    410,216     451,930     441,422  
 

Fixed rate 5.95% notes due May 2016

    748,113     810,558     788,646  
               
   

Total medium- and long-term debt

  $ 2,809,329   $ 4,288,488   $ 5,131,068  
               

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

        As of June 30, 2008, December 31, 2008 and June 30, 2009, the Company had pledged loans of $31.0 billion, $40.2 billion and $39.5 billion, respectively, as collateral for short- and medium-term advances from the Federal Reserve Bank and Federal Home Loan Bank.

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

        Under the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity of more than 30 days and issued between October 14, 2008 and October 31, 2009 is guaranteed by the full faith and credit of the United States. As of June 30, 2009, the Company had $1.3 billion of remaining capacity

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Medium- and Long-Term Debt (Continued)


to issue guaranteed debt under the TLG Program. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or December 31, 2012.


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

        Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements," for most fair value measurements required for financial assets and liabilities. Under FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," the Company deferred application of SFAS No. 157 for one year and adopted the Statement effective January 1, 2009 for nonrecurring measurements of fair value for non-financial assets and liabilities, such as goodwill, intangible assets and other real estate owned. At adoption, there was no effect on the Company's financial position or results of operations.

    Fair Value 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., an exit price) in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy established under SFAS No. 157. This hierarchy is based on the quality and reliability of the information used to determine fair value.

    Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since the valuations are based on quoted prices that are readily available in an active market, they do 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 at least one significant unobservable input that is supported by little or no market activity and is significant to the fair value measurement. Values are determined using pricing models and discounted cash flow models that include management judgment and estimation which may be significant.

        In assigning 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 may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be many significant inputs that are readily observable.

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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


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.

Recurring Fair Value Measurements:

    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 readily available quoted market prices, if available. If such quoted market prices are not available, management utilizes third-party pricing services, broker quotations from dealers in the specific instruments. If no market prices or broker quotes are available, external pricing models are used. To the extent possible, these pricing model valuations utilize observable market inputs obtained for similar securities. Typical inputs include LIBOR and U.S. Treasury curves, benchmark yields, consensus prepayment estimates and credit spreads. Level 1 measured securities include U.S. government and agency securities. Level 2 measured securities include residential mortgage-backed securities and certain asset-backed securities.

    Derivatives:    The Company's derivatives are primarily 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 the credit reserve to reflect counterparty credit quality and to consider the creditworthiness of the Company. Derivatives, which are included in trading account assets, trading account liabilities and other assets, are generally measured as Level 2.

Nonrecurring Fair Value Measurements:

    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 GSEs. 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 loan values 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 based on the present value of the remaining expected cash flows. As a practical expedient, the loan may be measured based on a loan's observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent). 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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


    market conditions from the time of valuation, and management's knowledge of the client and the client's business. The loan's market price is determined using market pricing for similar assets, adjusted for management judgment. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly. Loans impaired under SFAS No. 114 that are valued based on underlying collateral or the loan's market price are classified as Level 3.

    Private Equity & Community Reinvestment Act (CRA) Investments:    Private equity and CRA investments are recorded either at cost or using the equity method and are 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 the investee's business model, current and projected financial performance, liquidity and overall economic and market conditions. Private equity & CRA investment measurements are classified as Level 3.

    Other Real Estate Owned (OREO):    OREO represents collateral acquired through foreclosure and is recorded at the lower of the loan's unpaid principal balance or the collateral's fair value, adjusted for disposition costs. OREO values are reviewed on an ongoing basis and any decline in value is recorded as a fair value adjustment. The value of OREO is determined based on independent appraisals and is generally classified as Level 3.

    Fair Value Measurements on a Recurring Basis

        The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, December 31, 2008 and June 30, 2009, by major category 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     6,116,012     1,514,836         8,476,315  

Other assets(2)

        163,065         (51,178 )   111,887  
                       
 

Total assets

  $ 880,404   $ 7,401,342   $ 1,514,836   $ (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.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

 
  December 31, 2008  
(Dollars in thousands)   Level 1   Level 2   Level 3   Netting
Adjustment(1)
  Fair Value  

Assets

                               

Trading account assets

  $ 72,860   $ 1,203,697   $   $ (59,778 ) $ 1,216,779  

Securities available for sale

    888,675     6,102,771     1,203,092         8,194,538  

Other assets(2)

        317,569         (93,599 )   223,970  
                       
 

Total assets

  $ 961,535   $ 7,624,037   $ 1,203,092   $ (153,377 ) $ 9,635,287  
                       

Liabilities

                               

Trading account liabilities

  $ 56,470   $ 1,131,570   $   $ (153,377 ) $ 1,034,663  
                       
 

Total liabilities

  $ 56,470   $ 1,131,570   $   $ (153,377 ) $ 1,034,663  
                       

(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.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

 
  June 30, 2009  
(Dollars in thousands)   Level 1   Level 2   Level 3   Netting
Adjustment(1)
  Fair Value  

Assets

                               

Trading account assets:

                               
 

U.S. Treasury

  $ 66,829   $   $   $   $ 66,829  
 

Other U.S. government

    46,895                 46,895  
 

State and municpal

        8,446             8,446  
 

Commercial paper

        47,194             47,194  
 

Derivatives

    1,985     801,314         (67,027 )   736,272  
                       

Total trading account assets

    115,709     856,954         (67,027 )   905,636  

Securities available for sale:

                               
 

U.S. Treasury

                       
 

Other U.S. government

    709,696                 709,696  
 

Residential Mortgage-backed securities

        6,446,308             6,446,308  
 

State and municpal

        45,466     4,748         50,214  
 

Asset-backed and debt securities

        96,970             96,970  
 

Equity securities

    98,337         1,560         99,897  
 

Foreign securities

        88             88  
                       

Total securities available for sale

    808,033     6,588,832     6,308         7,403,173  

Other assets(2)

        139,765         (50,126 )   89,639  
                       
 

Total assets

  $ 923,742   $ 7,585,551   $ 6,308   $ (117,153 ) $ 8,398,448  
                       

Liabilities

                               

Trading account liabilities:

                               
 

Derivatives

  $ 5,590   $ 757,265   $   $ (117,153 ) $ 645,702  
 

Securities sold, not yet purchased

    45,002                 45,002  
                       

Total trading account liabilities

    50,592     757,265         (117,153 )   690,704  
                       
 

Total liabilities

  $ 50,592   $ 757,265   $   $ (117,153 ) $ 690,704  
                       

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

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

 
  For the Three Months Ended  
(Dollars in thousands)   June 30, 2008   June 30, 2009  

Balance, beginning of period

  $ 1,494,114   $ 4,731  
 

Total gains/(losses) (realized/unrealized):

             
   

Included in income before taxes

    61      
   

Included in other comprehensive income

    20,264     39  
 

Purchases, issuances and settlements

    397     1,538  
 

Transfers in (out) Level 3

         
           

Balance, end of period

  $ 1,514,836   $ 6,308  
           

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

  $ 29   $  

 

 
  For the Six Months Ended  
(Dollars in thousands)   June 30, 2008   June 30, 2009  

Balance, beginning of period

  $ 1,765,497   $ 1,203,092  
 

Total gains/(losses) (realized/unrealized):

             
   

Included in income before taxes

    122     20  
   

Included in other comprehensive income

    (251,169 )   (54,711 )
 

Purchases, issuances and settlements

    386     1,721  
 

Transfers in (out) Level 3(1)

        (1,143,814 )
           

Balance, end of period

  $ 1,514,836   $ 6,308  
           

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

  $ 58   $  

(1)
The CLO portfolio was transferred out of Level 3 during the first quarter of 2009 as a result of the reclassification from available for sale to held to maturity. Held to maturity securities are not recorded at fair value and therefore are not subject to the SFAS No. 157 disclosure guidance.

    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. For assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2008 and 2009 that were still held on the condensed consolidated balance sheet as of the

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

 
  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 )
                           

 

 
  June 30, 2009    
   
 
(Dollars in thousands)   Carrying
Value
  Level 1   Level 2   Level 3   Loss for the Three
Months Ended
June 30, 2009
  Loss for the Six
Months Ended
June 30, 2009
 

Securities:

                                     
 

Held to maturity Investments

  $ 1,556   $   $   $ 1,556   $ (767 ) $ (767 )

Loans:

                                     
 

Loans Held for Sale

    24,506         8,525     15,981     (85 )   (85 )
 

Impaired Loans

    360,790             360,790     (75,345 )   (115,635 )

Other Assets:

                                     
 

OREO

    8,861             8,861     (2,224 )   (2,884 )
 

CRA Investments

    8,165             8,165     (5,103 )   (5,493 )
 

Private Equity Investments

    24,095             24,095     (2,473 )   (4,827 )
                           
   

Total

  $ 427,973   $   $ 8,525   $ 419,448   $ (85,997 ) $ (129,691 )
                           

        Securities held to maturity include investments classified as held to maturity that were written down to fair value during the period due to OTTI. Fair value was determined using a pricing model and broker quotes. The model uses internally developed assumptions and available market data obtained from market participants and credit rating agencies.

        Loans include residential mortgage and commercial loans held for sale measured at the lower of cost or fair value and loans impaired under SFAS No. 114 that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of fixed-rate residential mortgage loans was determined using whole loan forward prices obtained from GSEs. The fair value of commercial loans was determined using market pricing for similar assets, adjusted for management judgment. The fair value of SFAS No. 114 loans was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment.

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

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

    SFAS No. 107 Fair Value of Financial Instruments Disclosures

        In addition to financial instruments recorded at fair value in the Company's financial statements, SFAS No. 107 requires disclosure of the estimated fair value of financial instruments that are not carried at fair value. Excluded from this disclosure requirement are lease financing arrangements, investments accounted for under the equity method, employee pension and other postretirement obligations and all nonfinancial assets and liabilities, including goodwill and other intangible assets such as long-term customer relationships. The fair values presented are estimates for certain individual financial instruments and do not represent an estimate of the fair value of the Company as a whole.

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

        Although off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are not required to be recorded at fair value on the consolidated balance sheet, they are carried at amounts that approximate fair value. The carrying value of these off-balance sheet instruments represents the unamortized fee income assessed based on the credit quality and other covenants imposed on the borrower. Since the amount assessed represents the market rate that would be charged for similar agreements, management believes that the carrying value approximates the fair value of these instruments. Financial instruments for which their carrying values do not approximate fair value include loans, interest bearing deposits with stated maturities, other borrowed funds, medium- and long-term debt, and trust notes.

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

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

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

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

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

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

 
  December 31, 2008   June 30, 2009  
(Dollars in thousands)   Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
 

Assets

                         
 

Securities held to maturity

  $   $   $ 1,171,380   $ 1,112,813  
 

Loans, net of allowance for loan losses

    48,205,818     47,507,685     47,161,748     47,254,835  

Liabilities

                         
 

Interest bearing deposits

    32,482,896     32,528,349     43,412,395     43,411,251  
 

Other borrowed funds

    8,196,597     8,203,032     606,019     606,694  
 

Medium- and long-term debt

    4,288,488     4,067,878     5,131,068     4,932,075  
 

Junior subordinated debt payable to subsidiary grantor trust

    13,980     11,700     13,754     12,747  

Off-Balance Sheet Instruments

                         
 

Commitments to extend credit

    92,644     92,644     126,361     126,361  
 

Standby and commercial letters of credit

    6,465     6,465     5,504     5,504  


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

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

        Credit and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting agreements in order to reduce its exposure to credit risk. Master netting agreements mitigate credit risk by permitting the offset of amounts due from and to individual counterparties in the event of default. Additionally, the Company establishes a credit reserve for potential losses in the event of counterparty default. This reserve is reflected in the fair value amount of the derivative instrument. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable.

        Derivatives are used to manage exposure to interest rate and foreign currency risk, generate profits from proprietary trading and assist customers with their risk management objectives. The Company designates derivative instruments as those used for SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," hedge accounting purposes, trading or economic hedge purposes based on SFAS No. 133. All

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


derivative instruments are recognized as assets or liabilities on the condensed consolidated balance sheet at fair value.

        The table below presents the notional amounts, and the location and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheet, segregated by derivative instruments designated and qualifying as hedging instruments under SFAS No. 133 and all other derivative instruments as of June 30, 2009.

 
  June 30, 2009  
 
   
  Asset Derivatives(1)   Liability Derivatives(1)  
(Dollars in thousands)   Notional
Amount
  Balance
Sheet
Location
  Fair
Value
  Balance
Sheet
Location
  Fair
Value
 

Derivatives designated as hedging instruments under SFAS No. 133:

                           
 

Interest rate contracts(2)

  $ 6,250,000   Other assets   $ 139,765   Other liabilities   $  
                       

Total derivatives designated as hedging instruments under SFAS No. 133:

  $ 6,250,000       $ 139,765       $  
                       

Derivatives not designated as hedging instruments under SFAS No. 133:

                           
   

Foreign exchange contracts

  $ 3,138,371   Trading account assets   $ 51,673   Trading account liabilities   $ 42,479  
   

Energy contracts

    3,501,515   Trading account assets     255,498   Trading account liabilities     259,186  
   

Interest rate contracts

    24,859,280   Trading account assets     489,442   Trading account liabilities     454,504  
   

Equity contracts

    148,234   Trading account assets     6,686   Trading account liabilities     6,686  
   

Other contracts

    5,778   Other assets     194   Other liabilities     (1,043 )
                       

Total derivatives not designated as hedging instruments under SFAS No. 133

  $ 31,653,178       $ 803,493       $ 761,812  
                       

(1)
Asset and liability values are presented gross, excluding the impact of legally enforceable master netting agreements.
(2)
The fair value includes unamortized premium of $6.1 million related to terminated contracts.

        Certain of the Company's derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the Company's credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions. At June 30, 2009, the aggregate fair value of all derivative instruments with credit-risk- related contingent features that are in a liability position was $287.9 million. The Company has pledged securities collateral of $256.8 million in the normal course of business. If all of the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2009, the Company would have been required to provide an additional securities collateral of $31.1 million to settle these contracts.

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

    Derivatives used in Asset and Liability Management

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

    Cash Flow Hedges

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

        The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged risk being the variability in those payments due to changes in the designated benchmark rate, i.e., U.S. dollar LIBOR. In these strategies, the hedging instruments are matched with groups of similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of purchased floor, cap, collars and corridor options and interest rate swaps. At June 30, 2009, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 2.1 years.

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

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

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

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

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

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

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

        For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness or hedge components excluded from the assessment of hedge effectiveness are recognized in noninterest expense in the period in which they arise. Based upon amounts included in accumulated other comprehensive income at June 30, 2009, the Company expects to realize approximately $72.2 million in net interest income during the twelve months ending June 30, 2010. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to June 30, 2009.

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Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

Derivatives in SFAS No. 133 Cash Flow Hedging Relationships

                           

        Interest Income   $ 33,198            
 

Interest rate contracts

  $ 28,675   Interest Expense     41   Noninterest Expense   $ 61  
                       

Total

  $ 28,675       $ 33,239       $ 61  
                       

 

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

Derivatives in SFAS No. 133 Cash Flow Hedging Relationships

                           

        Interest Income   $ 65,336            
 

Interest rate contracts

  $ 35,657   Interest Expense     15   Noninterest Expense   $ 75  
                       

Total

  $ 35,657       $ 65,351       $ 75  
                       

    Fair Value Hedges

    Hedging Strategy for Subordinated Debt

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

    Trading Derivatives and Economic Hedges

        Derivative instruments classified as trading include both derivatives entered into for the Company's own account and as an accommodation for customers. Derivatives held for trading purposes are included in trading assets or trading liabilities with changes in fair value reflected in trading income or losses. The majority of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures. Derivatives used for economic hedges but not designated in a hedging relationship for accounting purposes, are included in derivative assets or derivative liabilities and include CDs tied to the changes in the Standard and Poor's 500 Index (S&P 500).

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

 
  Gain or (Loss) Recognized in Income on Derivative Instruments  
 
   
  For the Three Months Ended
June 30, 2009
  For the Six Months Ended
June 30, 2009
 
(Dollars in thousands)   Location   Amount   Amount  

Derivatives not Designated as Hedging Instruments under SFAS No. 133:

                 
 

Interest rate contracts

  Trading account activities   $ 3,976   $ 8,533  
 

Foreign exchange contracts

  Trading account activities     9,376     17,447  
 

Energy contracts

  Trading account activities     (3,882 )   453  
 

Equity contracts

  Trading account activities     681     1,108  
 

Other contracts

  Interest expense     (44 )   (82 )
               

Total

      $ 10,107   $ 27,459  
               

43


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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 14—Accumulated Other Comprehensive Loss

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

(Dollars in thousands)   Before
Tax
Amount
  Tax
Effect
  Net of
Tax
 

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 losses 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:

                   
 

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

    (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 loss

  $ (263,985 ) $ 100,977   $ (163,008 )
               

For the Six Months Ended June 30, 2009:

                   

Cash flow hedge activities:

                   
 

Unrealized net gains on hedges arising during the period

  $ 35,657   $ (14,010 ) $ 21,647  
 

Less: accretion of fair value adjustment

    7,330     (2,804 )   4,526  
 

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

    (65,351 )   25,601     (39,750 )
               

Net change in unrealized gains on hedges

    (22,364 )   8,787     (13,577 )
               

Securities:

                   
 

Unrealized holding gains arising during the period on securities available for sale

    54,706     (21,494 )   33,212  
 

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

    (598 )   235     (363 )
 

Less: accretion of fair value adjustment on securities available for sale

    (10,553 )   4,146     (6,407 )
 

Less: accretion of fair value adjustment on held-to-maturity securities

    (6,414 )   2,520     (3,894 )
 

Less: accretion of net unrealized losses on held-to-maturity securities

    30,369     (11,932 )   18,437  
               

Net change in unrealized losses on securities

    67,510     (26,525 )   40,985  
               

Foreign currency translation adjustment

    331     (130 )   201  
               

Reclassification adjustment for pension and other benefits included in net income:

                   
 

Amortization of prior service costs

    (31 )   12     (19 )
 

Amortization of transition amount

    656     (258 )   398  
 

Recognized net actuarial loss

    11,567     (4,545 )   7,022  
               

Net change in pension and other benefits

    12,192     (4,791 )   7,401  
               

Net change in accumulated other comprehensive loss

  $ 57,669   $ (22,659 ) $ 35,010  
               

44


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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 14—Accumulated Other Comprehensive Loss (Continued)

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

(Dollars in thousands)   Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges
  Net
Unrealized
Gains (Losses)
on Securities
  Foreign
Currency
Translation
Adjustment
  Pension and
Other
Benefits
Adjustment
  Accumulated
Other
Comprehensive
Loss
 

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 )
                       

Balance, December 31, 2008

 
$

73,308
 
$

(352,710

)

$

(1,113

)

$

(531,336

)

$

(811,851

)

Change during the period

    (13,577 )   40,985     201     7,401     35,010  
                       

Balance, June 30, 2009

  $ 59,731   $ (311,725 ) $ (912 ) $ (523,935 ) $ (776,841 )
                       


Note 15—Discontinued Operations

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

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

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

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

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15—Discontinued Operations (Continued)

    Retirement Recordkeeping Business Discontinued Operations

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
 

Assets

             

Premises and equipment

  $ 58   $  

Other assets

    5,993      
           

Assets of discontinued operations to be disposed or sold

  $ 6,051   $  
           

Liabilities

             

Interest bearing deposits

  $ 106,426   $ 1,929  

Other liabilities

    11,205     5,217  
           

Liabilities of discontinued operations to be extinguished or assumed

  $ 117,631   $ 7,146  
           

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

(Dollars in thousands)   For the Three Months Ended
June 30, 2008
  For the Six Months Ended
June 30, 2008
 

Net interest income

  $ 477   $ 1,314  

Noninterest income

    6,527     17,528  

Noninterest expense

    10,111     22,180  
           

Loss from discontinued operations before income taxes

    (3,107 )   (3,338 )

Income tax benefit

    (1,095 )   (1,164 )
           

Loss from discontinued operations

  $ (2,012 ) $ (2,174 )
           

        The RRB's net interest income for the three and six months ended June 30, 2008 included the allocation of interest income (based on its average net liabilities) of $0.6 million and $1.5 million, respectively. Noninterest income for the three and six months ended June 30, 2008 included trust fees of $3.1 million and $6.4 million, respectively. Noninterest income for the three and six months ended June 30, 2008 also included $4.1 million and $11.8 million, respectively, of servicing revenues from Prudential. For the three and six months ended June 30, 2008, noninterest expense included salaries and benefits expense of $4.7 million and $11.3 million, respectively.

46


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 15—Discontinued Operations (Continued)

    Insurance Brokerage Business Discontinued Operations

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
 

Assets

             

Other assets

  $   $ 4  
           

Assets of discontinued operations to be disposed or sold

  $   $ 4  
           

Liabilities

             

Other liabilities

  $ 77   $ 814  
           

Liabilities of discontinued operations to be extinguished or assumed

  $ 77   $ 814  
           

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

(Dollars in thousands)   For the
Three Months Ended
June 30, 2008
  For the
Six Months Ended
June 30, 2008
 

Net interest expense

  $ (213 ) $ (993 )

Noninterest income

    18,369     35,591  

Noninterest expense

    11,981     45,777  
           

Income (loss) from discontinued operations before income taxes

    6,175     (11,179 )

Income tax benefit

    (2,885 )   (6,592 )
           

Income (loss) from discontinued operations

  $ 9,060   $ (4,587 )
           

        The IBB's net interest expense for the three and six months ended June 30, 2008 was mainly comprised of the allocation of interest expense (based on its average net assets). Noninterest income for the three and six months ended June 30, 2008 included insurance commissions of $8.4 million and $25.7 million, respectively. Noninterest income for the three and six months ended June 30, 2008 also included a $9.8 million pre-tax gain from the sale of the IBB. Noninterest expense for the three and six months ended June 30, 2008 included salaries and benefits expense of $9.0 million and $20.7 million, 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 the IBB, which was based on indicative prices for insurance agencies.

47


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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


Note 16—Commitments, Contingencies and Guarantees

        The following table summarizes the Company's significant commitments.

(Dollars in thousands)   June 30, 2009  

Commitments to extend credit

  $ 21,657,392  

Standby letters of credit

    4,875,381  

Commercial letters of credit

    61,396  

Risk participations in bankers' acceptances

    70  

Commitments to fund principal investments

    105,027  

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

    158,189  

        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, 2009, the carrying value of the Company's risk participations in bankers' acceptances and standby and commercial letters of credit totaled $5.5 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the condensed consolidated balance sheet.

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

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

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

48


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16—Commitments, Contingencies and Guarantees (Continued)


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

        The Company is a fund manager for LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC investments that reduce the Company's ultimate exposure to loss. As of June 30, 2009, the Company's maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, or $199.8 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory performance of the underlying properties. The Company has a reserve of $7.1 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were recognized at inception.

        The Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantees of commercial paper obligations and leveraged lease transactions. The guarantee issued by the Bank for an affiliate's commercial paper program facilitates the sale of the commercial paper. As of June 30, 2009, the Bank had a maximum exposure to loss under the commercial paper program guarantee of $572.8 million. The Bank's guarantee has an average term of less than nine months and is fully collateralized by a pledged deposit placed with the Bank. The Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of June 30, 2009, the Company did not have any exposure to loss for these agreements.

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

        The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of June 30, 2009, the maximum exposure to loss under these contracts totaled $56.1 million. The risk that the Company would be required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by the Company based on the estimated probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those considered special mention, substandard, doubtful and loss. Based on these criteria, at June 30, 2009 the Company had a maximum exposure to loss under these contracts with a low, moderate, and high risk of

49


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 16—Commitments, Contingencies and Guarantees (Continued)


payment exposure of $11.4 million, $38.1 million, and $6.6 million, respectively. At June 30, 2009, the Company maintained a reserve of $2.0 million for losses related to these guarantees.

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

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


Note 17—Business Segments

        The various operating segments reporting under the Chief Operating Officer and the Group Head of Pacific Rim Corporate Group 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."

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

    Retail Banking aggregates those operating segments that offer a range of banking services, primarily to individuals, professional service firms and small businesses, delivered generally through a network of branches, private banking offices 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 trust, private banking, investment and asset management services for individuals and institutions, and risk management for small businesses and individuals. At June 30, 2008 and 2009, Retail Banking had $217.4 million and $1.2 billion, respectively, of goodwill.

50


Table of Contents


UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17—Business Segments (Continued)

    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 June 30, 2008 and 2009, Wholesale Banking had $137.9 million and $1.2 billion, respectively, of goodwill.

        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, 2008 and 2009.

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

        "Other" is comprised of certain non-bank subsidiaries of UnionBanCal Corporation, the elimination of the fully taxable-equivalent basis amount, the transfer pricing center, the amount of the provision for credit losses over/(under) the RAROC expected loss for the period, the earnings associated with the 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. The discontinued operations consist of two separate businesses: retirement recordkeeping services and insurance brokerage services. For further detail on discontinued operations, see Note 15 to these condensed consolidated financial statements. Except as discussed above, none of the items in "Other" is significant to the Company's business.

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

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17—Business Segments (Continued)

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

 
  Retail Banking   Wholesale Banking  
 
  As of and for the
Three Months Ended
June 30,
  As of and for the
Three Months Ended
June 30,
 
 
  2008   2009   2008   2009  

Results of operations—Market View (dollars in thousands):

                         
 

Net interest income (expense)

  $ 233,006   $ 280,147   $ 283,017   $ 414,070  
 

Noninterest income (expense)

    126,085     110,139     88,111     100,539  
                   
 

Total revenue

    359,091     390,286     371,128     514,609  
 

Noninterest expense (income)

    242,338     250,843     151,708     183,779  
 

Credit expense (income)

    6,842     7,364     49,397     86,462  
                   
 

Income (loss) from continuing operations before income taxes

    109,911     132,079     170,023     244,368  
 

Income tax expense (benefit)

    42,041     51,643     47,980     74,438  
                   
 

Income (loss) from continuing operations

    67,870     80,436     122,043     169,930  
 

Income from discontinued operations, net of income taxes

                 
                   
 

Net income (loss)

  $ 67,870   $ 80,436   $ 122,043   $ 169,930  
                   
 

Total assets, end of period—Market View (dollars in millions):

  $ 20,519   $ 23,826   $ 31,504   $ 34,489  
                   

 

 
  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,
 
 
  2008   2009   2008   2009   2008   2009  

Results of operations—Market View
(dollars in thousands):

                                     
 

Net interest income (expense)

  $ (3,205 ) $ (134,905 ) $ (2,260 ) $ (8,966 ) $ 510,558   $ 550,346  
 

Noninterest income (expense)

    6,198     (8,689 )   (20,768 )   (18,776 )   199,626     183,213  
                           
 

Total revenue

    2,993     (143,594 )   (23,028 )   (27,742 )   710,184     733,559  
 

Noninterest expense (income)

    37,845     109,616     (12,579 )   (12,180 )   419,312     532,058  
 

Credit expense (income)

    38,779     266,192     (18 )   (18 )   95,000     360,000  
                           
 

Income (loss) from continuing operations before income taxes

    (73,631 )   (519,402 )   (10,431 )   (15,544 )   195,872     (158,499 )
 

Income tax expense (benefit)

    (24,457 )   (198,495 )   (3,990 )   (6,078 )   61,574     (78,492 )
                           
 

Income (loss) from continuing operations

    (49,174 )   (320,907 )   (6,441 )   (9,466 )   134,298     (80,007 )
 

Income from discontinued operations, net of income taxes

    7,047                 7,047      
                           
 

Net income (loss)

  $ (42,127 ) $ (320,907 ) $ (6,441 ) $ (9,466 ) $ 141,345   $ (80,007 )
                           
 

Total assets, end of period—Market View (dollars in millions):

  $ 8,589   $ 15,707   $ (18 ) $ (37 ) $ 60,594   $ 73,985  
                           

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UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 17—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,
 
 
  2008   2009   2008   2009  

Results of operations—Market View (dollars in thousands):

                         
 

Net interest income (expense)

  $ 454,031   $ 528,849   $ 539,471   $ 756,442  
 

Noninterest income (expense)

    246,747     215,391     165,770     185,211  
                   
 

Total revenue

    700,778     744,240     705,241     941,653  
 

Noninterest expense (income)

    473,667     538,149     299,259     358,338  
 

Credit expense (income)

    13,281     15,143     86,540     155,030  
                   
 

Income (loss) from continuing operations before income taxes

    213,830     190,948     319,442     428,285  
 

Income tax expense (benefit)

    81,790     74,661     89,269     124,843  
                   
 

Income (loss) from continuing operations

    132,040     116,287     230,173     303,442  
 

Loss from discontinued operations, net of income taxes

                 
                   
 

Net income (loss)

  $ 132,040   $ 116,287   $ 230,173   $ 303,442  
                   
 

Total assets, end of period—Market View (dollars in millions):

  $ 20,519   $ 23,826   $ 31,504   $ 34,489  
                   

 

 
  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,
 
 
  2008   2009   2008   2009   2008   2009  

Results of operations—Market View (dollars in thousands):

                                     
 

Net interest income (expense)

  $ (18,603 ) $ (164,384 ) $ (3,763 ) $ (10,558 ) $ 971,136   $ 1,110,349  
 

Noninterest income (expense)

    20,543     (5,740 )   (38,038 )   (36,933 )   395,022     357,929  
                           
 

Total revenue

    1,940     (170,124 )   (41,801 )   (47,491 )   1,366,158     1,468,278  
 

Noninterest expense (income)

    72,284     180,184     (22,692 )   (23,230 )   822,518     1,053,441  
 

Credit expense (income)

    67,212     438,874     (33 )   (47 )   167,000     609,000  
                           
 

Income (loss) from continuing operations before income taxes

    (137,556 )   (789,182 )   (19,076 )   (24,214 )   376,640     (194,163 )
 

Income tax expense (benefit)

    (43,818 )   (294,384 )   (7,297 )   (9,468 )   119,944     (104,348 )
                           
 

Income (loss) from continuing operations

    (93,738 )   (494,798 )   (11,779 )   (14,746 )   256,696     (89,815 )
 

Loss from discontinued operations, net of income taxes

    (6,761 )               (6,761 )    
                           
 

Net income (loss)

  $ (100,499 ) $ (494,798 ) $ (11,779 ) $ (14,746 ) $ 249,935   $ (89,815 )
                           
 

Total assets, end of period—Market View (dollars in millions):

  $ 8,589   $ 15,707   $ (18 ) $ (37 ) $ 60,594   $ 73,985  
                           


Note 18—Subsequent Event

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

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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, 2009 in this Form 10-Q together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). Averages, as presented in the following tables, are substantially all based upon daily average balances.

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


Introduction

        We are a California-based financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. We had consolidated assets of approximately $74 billion at June 30, 2009.

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


Executive Overview

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

        Continued weakness in the global economy, rising unemployment and deteriorating credit quality challenged the banking industry in the second quarter of 2009. In the face of these severe market conditions, we continued to generate deposit growth, as well as grow net interest income. In the second quarter of 2009, our average total loans grew 9 percent from the second quarter of 2008 to $49.6 billion. This strong growth took place during the last half of 2008 and the first quarter of 2009 and was spread across all major categories, including commercial, residential real estate, consumer and commercial real estate, due to increased loan demand and reduced competition. However, overall loan levels were flat during the current quarter due to continued recessionary market conditions, combined with reduced borrower demand.

        During the second quarter of 2009, we provided $375 million for our allowances for credit losses compared to $100 million in the second quarter of 2008. The increase was primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business portfolios. We anticipate a continued recessionary environment during the remainder of 2009, resulting in additional deterioration in our loan portfolio. See further discussion below in "Allowances for Credit Losses."

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        Our nonperforming assets totaled $437 million and $1.1 billion at December 31, 2008 and June 30, 2009, respectively. The increase in nonperforming assets was primarily due to increases in the commercial, financial and industrial portfolio of $101 million, construction portfolio of $215 million, commercial real estate portfolio of $209 million and residential mortgage portfolio of $142 million. (See discussion below in "Nonperforming Assets" regarding our accounting policy change related to nonaccrual status of residential mortgage loans.) Net charge offs were $152 million in the second quarter of 2009, compared to $32 million in the second quarter of 2008.

        At December 31, 2008 and June 30, 2009, our allowances for credit losses as a percent of total loans were 1.74 percent and 2.55 percent, respectively. At December 31, 2008 and June 30, 2009, our allowances for credit losses as a percent of nonaccrual loans were 208 percent and 113 percent, respectively. At December 31, 2008 and June 30, 2009, our allowance for loan losses as a percent of total loans were 1.49 percent and 2.21 percent, respectively. At December 31, 2008 and June 30, 2009, our allowance for loan losses as a percent of nonaccrual loans were 178 percent and 98 percent, respectively.

        In the second quarter of 2009, our average noninterest bearing deposits increased 8 percent compared to the second quarter of 2008 to $13.9 billion. Average interest bearing deposits increased by 33 percent in the second quarter of 2009 compared to the second quarter of 2008 to $40.4 billion. The increase reflects deposit-gathering marketing initiatives in both the retail and commercial lines of business, as well as significant increases in money market account deposits from government agencies and institutional escrow clients. Average noninterest bearing deposits represented 26 percent of average total deposits in the second quarter of 2009, compared to 30 percent in the second quarter of 2008. The annualized average all-in-cost of funds improved to 0.88 percent, compared to 1.56 percent in the second quarter of 2008.

        In the second quarter of 2009, our net interest income increased 8 percent from the second quarter of 2008 to $533 million, primarily due to lower rates paid on interest bearing liabilities, strong loan growth, and purchase price accounting accretions related to our privatization, partially offset by lower yields on earning assets.

        In the second quarter of 2009, our noninterest income declined 8 percent from the second quarter of 2008 to $183 million primarily due to lower service charges on deposit accounts, lower trust and investment management fees, and a $7.1 million pre-tax gain on the partial redemption of MasterCard Inc. common stock in the second quarter of 2008, partially offset by higher merchant banking fees.

        In the second quarter of 2009, our noninterest expense grew by 27 percent from the second quarter of 2008 to $532 million. The increase was primarily due to privatization-related expenses and related intangible asset amortization, higher regulatory agencies expenses resulting from a one-time FDIC special assessment and an industry-wide FDIC deposit insurance assessment rate increase, and higher provision for losses on off-balance sheet commitments.

        Our effective tax rate was (49.5) percent in the second quarter of 2009, compared to 31.4 percent in the second quarter of 2008. The change in the effective tax rate was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes.

        In the fourth quarter of 2008, we elected to participate in the voluntary Temporary Liquidity Guarantee (TLG) Program established by the FDIC in October 2008. Under the TLG Program, all senior unsecured debt issued by insured depository institutions between October 14, 2008 and October 31, 2009 with a maturity of more than 30 days is guaranteed by the FDIC. In the first quarter of 2009, the Bank issued $1.0 billion principal amount of Senior Floating Rate Notes guaranteed through the TLG Program. As of June 30, 2009, we had $1.3 billion of remaining capacity to issue FDIC guaranteed debt under the TLG Program.

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

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Critical Accounting Estimates

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

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

        Our most significant estimates are approved by our 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 2008 Form 10-K filed with the Securities and Exchange Commission (the SEC). Other than the changes noted below, there have been no material changes to these critical accounting estimates during the first half of 2009.

    Annual Goodwill Impairment Analysis

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

        Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. Additionally, significant judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include: a significant decline in expected future cash flows, a significant adverse change in the business climate, unanticipated competition and/or slower than expected growth rates.

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

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

        The change in goodwill impairment testing date is deemed a change in accounting principle. Management believes that the change in accounting principle will not delay, accelerate, or avoid a goodwill impairment

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charge. Management determined that the change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively.

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

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

    Other-Than-Temporary Impairment

        The Company adopted FASB Staff Position (FSP) on Statement of Financial Accounting Standards (SFAS) No. 115-2 and SFAS No. 124-2 (FSP SFAS 115-2 and 124-2), "Recognition and Presentation of Other-Than-Temporary Impairments" on April 1, 2009. The FSP establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. At adoption, there was no impact on our financial position or results of operations.

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

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Financial Performance

Summary of Financial Performance

 
   
   
  Increase (Decrease)    
   
  Increase (Decrease)  
 
  For the Three Months
Ended June 30,
  For the Six Months
Ended June 30,
 
 
  2009 versus 2008   2009 versus 2008  
(Dollars in thousands)   2008   2009   Amount   Percent   2008   2009   Amount   Percent  

Results of Operations

                                                 

Net interest income(1)

  $ 510,558   $ 550,346   $ 39,788     7.8 % $ 971,136   $ 1,110,349   $ 139,213     14.3 %

Noninterest income

                                                 
 

Service charges on deposit accounts

    77,706     71,843     (5,863 )   (7.5 )   152,442     143,165     (9,277 )   (6.1 )
 

Trust and investment management fees

    43,802     34,130     (9,672 )   (22.1 )   87,190     68,037     (19,153 )   (22.0 )
 

Trading account activities

    16,687     16,251     (436 )   (2.6 )   27,699     38,943     11,244     40.6  
 

Merchant banking fees

    11,085     19,924     8,839     79.7     22,878     33,756     10,878     47.5  
 

Gain on the VISA IPO redemption

                    14,211         (14,211 )   (100.0 )
 

Other noninterest income

    50,346     41,065     (9,281 )   (18.4 )   90,602     74,028     (16,574 )   (18.3 )
                                       

Total noninterest income

    199,626     183,213     (16,413 )   (8.2 )   395,022     357,929     (37,093 )   (9.4 )
                                       

Total revenue

    710,184     733,559     23,375     3.3     1,366,158     1,468,278     102,120     7.5  

Provision for loan losses

    95,000     360,000     265,000     nm     167,000     609,000     442,000     nm  

Noninterest expense

                                                 
 

Salaries and other compensation

    204,077     191,104     (12,973 )   (6.4 )   396,089     379,327     (16,762 )   (4.2 )
 

Employee benefits

    39,222     41,953     2,731     7.0     88,880     97,293     8,413     9.5  
                                       
 

Salaries and employee benefits

    243,299     233,057     (10,242 )   (4.2 )   484,969     476,620     (8,349 )   (1.7 )
 

Net occupancy

    38,232     43,222     4,990     13.1     74,434     85,143     10,709     14.4  
 

Intangible asset amortization

    670     40,281     39,611     nm     1,340     81,168     79,828     nm  
 

Regulatory agencies

    4,897     52,836     47,939     nm     7,506     70,774     63,268     nm  
 

Professional services

    15,931     19,489     3,558     22.3     30,528     35,427     4,899     16.0  
 

Foreclosed asset expense

    83     3,282     3,199     nm     172     4,168     3,996     nm  
 

Provision for losses on off-balance sheet commitments

    5,000     15,000     10,000     nm     13,000     41,000     28,000     nm  
 

Privatization-related expense

        7,433     7,433     nm         34,252     34,252     nm  
 

Other noninterest expense

    111,200     117,458     6,258     5.6     210,569     224,889     14,320     6.8  
                                       

Total noninterest expense

    419,312     532,058     112,746     26.9     822,518     1,053,441     230,923     28.1  
                                       

Income (loss) from continuing operations before income taxes

    195,872     (158,499 )   (354,371 )   nm     376,640     (194,163 )   (570,803 )   nm  

Income tax expense (benefit)

    61,574     (78,492 )   (140,066 )   nm     119,944     (104,348 )   (224,292 )   nm  
                                       

Income (loss) from continuing operations

  $ 134,298   $ (80,007 ) $ (214,305 )   nm % $ 256,696   $ (89,815 ) $ (346,511 )   nm %
                                       

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

nm
= not meaningful

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

    We provided a total of $375 million for credit losses ($360 million for loan losses and $15 million for losses on off-balance sheet commitments) in the second quarter of 2009, compared to a total provision of $100 million for credit losses in the second quarter of 2008 ($95 million for loan losses and $5 million for losses on off-balance sheet commitments). The provision increases were primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business loan portfolios.

    Our net interest income was favorably influenced by higher volume in most of our major loan categories. Additionally, net interest income increased due to the accretion of fair value adjustments on loans and securities related to our privatization. Partly offsetting these positive influences to our net interest income were lower average yields on our earning assets and higher interest bearing liabilities (see discussion under "Net Interest Income").

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

      Trust and investment management fees were lower primarily due to a decline in assets under administration (on which fees are based). Managed assets decreased by approximately 15 percent, while non-managed assets decreased by approximately 2 percent from June 30, 2008 to June 30, 2009. Total assets under administration decreased by approximately 3 percent to $233.0 billion at June 30, 2009 driven primarily by market losses;

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      Service charges on deposit accounts decreased primarily due to lower overdraft fees resulting from changes in customer overdraft behavior; and

      Other income declined primarily due to a prior year gain on the partial redemption of our MasterCard Inc. common stock; partially offset by

      Merchant banking fees increased primarily due to higher syndicated loan activity, as well as higher risk participation fees.

        The increase in noninterest expense was due to several factors:

      Expenses related to our privatization transaction included intangible amortization of $39.9 million and other costs of $9.4 million, primarily consisting of amortization of bridge award compensation;

      Regulatory agency expenses increased as a result of an industry-wide increase in the FDIC deposit insurance assessment rate and a one-time FDIC special assessment of $34 million; and

      Provision for losses on off-balance sheet commitments increased primarily due to higher criticized credits and increases in certain loss factors.

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

    We provided a total of $650 million for credit losses ($609 million for loan losses and $41 million for losses on off-balance sheet commitments) in the first half of 2009, compared to a total provision of $180 million for credit losses in the first half of 2008 ($167 million for loan losses and $13 million for losses on off-balance sheet commitments). The provision increases were primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business loan portfolios.

    Our net interest income was favorably influenced by higher volume in most of our major loan categories as well as by lower average rates on our interest bearing liabilities. Additionally, net interest income increased due to the accretion of fair value adjustments on loans and securities related to our privatization. Partly offsetting these positive influences to our net interest income were lower average yields on our earning assets and higher interest bearing liabilities (see discussion under "Net Interest Income").

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

      Trust and investment management fees were lower primarily due to higher assets under administration (on which fees are based) for the first half of 2008;

      Service charges on deposit accounts decreased primarily due to lower overdraft fees resulting from changes in customer overdraft behavior;

      Prior year included gains on the partial redemption of our Visa Inc. common stock;

      Other income included a decrease in net gains on private capital investments due to lower sales and capital distributions, as well as current year writedowns on investments;

      Merchant banking fees increased primarily due to higher syndicated loan activity, higher referral fees, and higher risk participation fees; and

      Trading account activities increased primarily due to higher gains on agency securities and higher rate swap income, as well as prior year losses on the sale of distressed loans.

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        The increase in noninterest expense was due to several factors:

      Expenses related to our privatization transaction included intangible amortization of $80.4 million and other costs of $38.3 million, primarily consisting of amortization of bridge award compensation;

      Regulatory agency expenses increased as a result of an industry-wide increase in the FDIC deposit insurance assessment rate and a one-time special FDIC assessment of $34 million; and

      Provision for losses on off-balance sheet commitments increased primarily due to higher criticized credits and increases in certain loss factors.

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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, 2008   June 30, 2009   Average
Balance
  Interest
Income/
Expense(1)
 
 
  Average
Balance
  Interest
Income/
Expense(1)
  Average
Yield/
Rate(1)(2)
  Average
Balance
  Interest
Income/
Expense(1)
  Average
Yield/
Rate(1)(2)
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Assets

                                                             

Loans:(3)

                                                             
 

Commercial, financial and industrial

  $ 16,987,504   $ 229,612     5.44 % $ 17,920,408   $ 194,560     4.35 % $ 932,904     5 % $ (35,052 )   (15 )%
 

Construction

    2,566,207     30,794     4.83     2,788,671     20,658     2.97     222,464     9     (10,136 )   (33 )
 

Mortgage—Residential

    14,495,754     199,756     5.51     16,089,739     230,269     5.72     1,593,985     11     30,513     15  
 

Mortgage—Commercial

    7,822,056     111,722     5.71     8,254,595     91,689     4.44     432,539     6     (20,033 )   (18 )
 

Consumer

    2,977,852     44,453     6.00     3,841,202     44,116     4.61     863,350     29     (337 )   (1 )
 

Lease financing

    644,788     1,171     0.73     661,607     5,598     3.38     16,819     3     4,427     378  
                                                   
 

Total Loans

    45,494,161     617,508     5.44     49,556,222     586,890     4.74     4,062,061     9     (30,618 )   (5 )

Securities—taxable

    8,293,036     97,233     4.69     8,564,355     97,738     4.56     271,319     3     505     1  

Securities—tax-exempt

    52,742     1,105     8.38     48,176     1,016     8.44     (4,566 )   (9 )   (89 )   (8 )

Interest bearing deposits in banks

    67,553     228     1.36     5,594,318     3,550     0.25     5,526,765     nm     3,322     1457  

Federal funds sold and securities purchased under resale agreements

    213,292     1,093     2.06     203,529     97     0.19     (9,763 )   (5 )   (996 )   (91 )

Trading account assets

    814,274     1,119     0.55     1,041,623     231     0.09     227,349     28     (888 )   (79 )
                                                   
   

Total earning assets

    54,935,058     718,286     5.24     65,008,223     689,522     4.25     10,073,165     18     (28,764 )   (4 )
                                                         

Allowance for loan losses

    (456,191 )               (839,115 )               (382,924 )   (84 )            

Cash and due from banks

    1,662,638                 1,285,449                 (377,189 )   (23 )            

Premises and equipment, net

    482,950                 669,993                 187,043     39              

Other assets

    2,645,510                 5,370,676                 2,725,166     nm              
                                                         
   

Total assets

  $ 59,269,965               $ 71,495,226               $ 12,225,261     21 %            
                                                         

Liabilities

                                                             

Deposits:

                                                             
 

Transaction accounts

  $ 15,550,970   $ 59,513     1.54   $ 29,514,913   $ 66,549     0.90   $ 13,963,943     90 % $ 7,036     12  
 

Savings and consumer time

    3,846,404     13,918     1.46     4,328,326     13,546     1.26     481,922     13     (372 )   (3 )
 

Large time

    10,929,983     71,078     2.62     6,604,845     20,091     1.22     (4,325,138 )   (40 )   (50,987 )   (72 )
                                                   
   

Total interest bearing deposits

    30,327,357     144,509     1.92     40,448,084     100,186     0.99     10,120,727     33     (44,323 )   (31 )
                                                   

Federal funds purchased and securities sold under repurchase agreements

    2,428,357     12,697     2.10     163,381     19     0.05     (2,264,976 )   (93 )   (12,678 )   (100 )

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

    64,945     360     2.23                 (64,945 )   nm     (360 )   nm  

Commercial paper

    1,487,032     8,279     2.24     569,337     954     0.67     (917,695 )   (62 )   (7,325 )   (88 )

Other borrowed funds(5)

    3,201,612     19,624     2.47     2,124,419     5,616     1.06     (1,077,193 )   (34 )   (14,008 )   (71 )

Medium- and long-term debt

    2,629,308     19,692     3.01     5,137,901     29,415     2.30     2,508,593     95     9,723     49  

Trust notes

    14,261     238     6.68     13,809     238     6.90     (452 )   (3 )        
                                                   
   

Total borrowed funds

    9,825,515     60,890     2.49     8,008,847     36,242     1.82     (1,816,668 )   (18 )   (24,648 )   (40 )
                                                   
   

Total interest bearing liabilities

    40,152,872     205,399     2.06     48,456,931     136,428     1.13     8,304,059     21     (68,971 )   (34 )
                                                         

Noninterest bearing deposits

    12,875,823                 13,904,328                 1,028,505     8              

Other liabilities

    1,624,674                 1,830,917                 206,243     13              
                                                         
   

Total liabilities

    54,653,369                 64,192,176                 9,538,807     17              

Stockholder's Equity

                                                             

Common equity

    4,616,596                 7,303,050                 2,686,454     58              
                                                         
   

Total stockholder's equity

    4,616,596                 7,303,050                 2,686,454     58              
                                                         
   

Total liabilities and stockholder's equity

  $ 59,269,965               $ 71,495,226               $ 12,225,261     21 %            
                                                         

Net Interest Income/Margin

                                                             

Net interest income/margin (taxable-equivalent basis)

          512,887     3.74 %         553,094     3.41 %               40,207     8  

Less: taxable-equivalent adjustment

          2,329                 2,748                       419     18  
                                                         
   

Net interest income

        $ 510,558               $ 550,346                     $ 39,788     8 %
                                                         
Average Assets and Liabilities of
Discontinued Operations for the
Three Months Ended:
 
June 30, 2008
 
June 30, 2009
   
   
   
   
 

Assets

        $ 95,415               $                                

Liabilities

        $ 160,360               $                                

Net assets (liabilities)

        $ (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.
(5)
Includes interest bearing trading liabilities.

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Table of Contents

 
  For the Six Months Ended   Increase (Decrease) in  
 
  June 30, 2008   June 30, 2009   Average
Balance
  Interest
Income/
Expense(1)
 
 
  Average
Balance
  Interest
Income/
Expense(1)
  Average
Yield/
Rate(1)(2)
  Average
Balance
  Interest
Income/
Expense(1)
  Average
Yield/
Rate(1)(2)
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Assets

                                                             

Loans:(3)

                                                             
 

Commercial, financial and industrial

  $ 16,317,333   $ 467,915     5.77 % $ 18,210,574   $ 388,347     4.30 % $ 1,893,241     12 % $ (79,568 )   (17 )%
 

Construction

    2,520,265     67,411     5.38     2,761,302     39,919     2.92     241,037     10     (27,492 )   (41 )
 

Residential mortgage

    14,244,248     392,541     5.51     16,006,925     464,707     5.81     1,762,677     12     72,166     18  
 

Commercial mortgage

    7,536,401     224,692     5.96     8,253,963     194,078     4.70     717,562     10     (30,614 )   (14 )
 

Consumer

    2,832,243     90,843     6.45     3,782,055     90,655     4.83     949,812     34     (188 )   (0 )
 

Lease financing

    647,315     7,468     2.31     657,170     13,251     4.03     9,855     2     5,783     77  
                                                   
 

Total Loans

    44,097,805     1,250,870     5.69     49,671,989     1,190,957     4.81     5,574,184     13     (59,913 )   (5 )

Securities—taxable

    8,324,489     202,196     4.86     8,442,693     199,994     4.74     118,204     1     (2,202 )   (1 )

Securities—tax-exempt

    53,051     2,187     8.24     49,290     2,041     8.28     (3,761 )   (7 )   (146 )   (7 )

Interest bearing deposits in banks

    48,711     356     1.47     3,225,689     4,450     0.28     3,176,978     nm     4,094     nm  

Federal funds sold and securities purchased under resale agreements

    270,718     3,786     2.81     200,067     238     0.24     (70,651 )   (26 )   (3,548 )   (94 )

Trading account assets

    766,795     3,923     1.03     1,153,293     389     0.07     386,498     50     (3,534 )   (90 )
                                                   
   

Total earning assets

    53,561,569     1,463,318     5.48     62,743,021     1,398,069     4.47     9,181,452     17     (65,249 )   (4 )
                                                         

Allowance for loan losses

    (427,801 )               (774,142 )               (346,341 )   (81 )            

Cash and due from banks

    1,710,000                 1,300,479                 (409,521 )   (24 )            

Premises and equipment, net

    483,383                 671,995                 188,612     39              

Other assets

    2,623,959                 5,354,830                 2,730,871     nm              
                                                         
   

Total assets

  $ 57,951,110               $ 69,296,183               $ 11,345,073     20 %            
                                                         

Liabilities

                                                             

Deposits:

                                                             
 

Transaction accounts

  $ 15,207,766   $ 142,428     1.88   $ 26,025,374   $ 127,646     0.99   $ 10,817,608     71 % $ (14,782 )   (10 )
 

Savings and consumer time

    4,013,034     37,447     1.88     4,348,026     29,485     1.37     334,992     8     (7,962 )   (21 )
 

Large time

    11,446,331     185,294     3.26     6,917,071     48,093     1.40     (4,529,260 )   (40 )   (137,201 )   (74 )
                                                   
   

Total interest bearing deposits

    30,667,131     365,169     2.39     37,290,471     205,224     1.11     6,623,340     22     (159,945 )   (44 )
                                                   

Federal funds purchased and securities sold under repurchase agreements

    2,189,525     28,263     2.60     207,419     72     0.07     (1,982,106 )   (91 )   (28,191 )   (100 )

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

    40,667     509     2.52                 (40,667 )   nm     (509 )   nm  

Commercial paper

    1,347,271     18,071     2.70     644,956     2,546     0.80     (702,315 )   (52 )   (15,525 )   (86 )

Other borrowed funds(5)

    2,383,954     35,690     3.01     3,595,580     17,093     0.96     1,211,626     51     (18,597 )   (52 )

Medium- and long-term debt

    2,238,097     39,149     3.52     4,941,716     56,944     2.32     2,703,619     nm     17,795     45  

Trust notes

    14,318     476     6.66     13,865     476     6.87     (453 )   (3 )        
                                                   
   

Total borrowed funds

    8,213,832     122,158     2.99     9,403,536     77,131     1.65     1,189,704     14     (45,027 )   (37 )
                                                   
   

Total interest bearing liabilities

    38,880,963     487,327     2.52     46,694,007     282,355     1.22     7,813,044     20     (204,972 )   (42 )
                                                         

Noninterest bearing deposits

    12,741,338                 13,223,645                 482,307     4              

Other liabilities

    1,661,380                 2,059,013                 397,633     24              
                                                         
   

Total liabilities

    53,283,681                 61,976,665                 8,692,984     16              

Stockholder's Equity

                                                             

Common equity

    4,667,429                 7,319,518                 2,652,089     57              
                                                         
   

Total stockholder's equity

    4,667,429                 7,319,518                 2,652,089     57              
                                                         
   

Total liabilities and stockholder's equity

  $ 57,951,110               $ 69,296,183               $ 11,345,073     20 %            
                                                         

Net Interest Income/Margin

                                                             

Net interest income/margin (taxable-equivalent basis)

          975,991     3.65 %         1,115,714     3.56 %               139,723     14  

Less: taxable-equivalent adjustment

          4,855                 5,365                       510     11  
                                                         
   

Net interest income

        $ 971,136               $ 1,110,349                     $ 139,213     14 %
                                                         
Average Assets and Liabilities of
Discontinued Operations for the
Six Months Ended:
 
June 30, 2008
 
June 30, 2009
   
   
   
   
 

Assets

        $ 109,594               $                                

Liabilities

        $ 150,261               $                                

Net liabilities

        $ (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.
(5)
Includes interest bearing trading liabilities.

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        Net interest income in the second quarter of 2009, on a taxable-equivalent basis, increased $40.2 million, or 8 percent, compared to the second quarter of 2008. Our net interest margin decreased by 33 basis points to 3.41 percent. These results were primarily due to the following:

    Average earning assets increased $10.1 billion, or 18 percent, primarily due to an increase in average loans and interest-bearing deposits in banks. The increase in average loans was largely due to a $0.9 billion increase in average commercial loans, a $1.6 billion increase in average residential mortgages, and a $0.9 billion increase in average consumer loans. The increase in interest bearing deposits in banks was primarily due to growth in Federal Reserve Bank balances, which as of the current quarter are classified as earning assets since the Federal Reserve Bank began paying interest on deposits held;

    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 99 basis points, despite being positively impacted by higher hedge income, which increased by $5.6 million;

    Net interest income increased $27.5 million due to the accretion of fair value adjustments on loans, securities and debt related to our privatization transaction;

    Average interest bearing deposits increased $10.1 billion, or 33 percent. Average noninterest bearing deposits represented 26 percent of average total deposits in the second quarter of 2009, compared to 30 percent in the second quarter of 2008; and

    In the second quarter of 2009, the annualized average all-in cost of funds was 0.88 percent, reflecting an average deposit-to-loan ratio of 110 percent and what we believe is a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In the second quarter of 2008, the annualized all-in cost of funds was 1.56 percent and our average deposit-to-loan ratio was 95 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 LIBOR-indexed borrowings, and to convert certain fixed-rate borrowings to floating rate. For loans, we had hedge income of $22.3 million and $27.9 million for the quarters ended June 30, 2008 and 2009, respectively. For long-term fixed rate borrowings and LIBOR- indexed borrowings, we had hedge income of $6.8 million and $10.9 million for the second quarters of 2008 and 2009, respectively. In the first quarter of 2009, we terminated all of our fair value swaps, which were used to hedge our long-term fixed rate borrowings. These swaps were not replaced.

        Net interest income in the first half of 2009, on a taxable-equivalent basis, increased $139.7 million, or 14 percent, compared to the first half of 2008. Our net interest margin decreased by 9 basis points to 3.56 percent. These results were primarily due to the following:

    Average earning assets increased $9.2 billion, or 17 percent, primarily due to an increase in average loans and interest bearing deposits in banks. The increase in average loans was largely due to a $1.9 billion increase in average commercial loans, a $1.8 billion increase in average residential mortgages, a $0.7 billion increase in average commercial mortgages and a $0.9 billion increase in average consumer loans. The increase in interest bearing deposits in banks was primarily due to growth in Federal Reserve Bank balances, which are now classified as earning assets since the Federal Reserve Bank began paying interest on these deposits starting on October 1, 2008;

    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 101 basis points, despite being positively impacted by higher hedge income, which increased by $26.7 million;

    Net interest income increased $62.4 million due to the accretion of fair value adjustments on loans, securities and debt related to our privatization transaction;

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Table of Contents

    Average interest bearing deposits increased $6.6 billion, or 22 percent. Average noninterest bearing deposits represented 26 percent of average total deposits in the first half of 2009 compared to 29 percent in the first half of 2008; and

    In the first half of 2009, the annualized average all-in cost of funds was 0.95 percent, reflecting an average deposit-to-loan ratio of 102 percent and what we believe is a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In the first half of 2008, the annualized all-in cost of funds was 1.90 percent and our average deposit-to-loan ratio was 98 percent.

        We use derivatives to hedge expected changes in the yields on our variable rate loans and term CDs and LIBOR-indexed borrowings, and to convert certain fixed-rate borrowings to floating rate. For loans, we had hedge income of $28.1 million and $54.8 million for the first half of 2008 and 2009, respectively. For long-term fixed rate borrowings and LIBOR-indexed borrowings, we had hedge income of $12.3 million and $21.0 million for the six months ended June 30, 2008 and 2009, respectively. In the first quarter of 2009, we terminated all of our fair value swaps, which were used to hedge our long-term fixed rate borrowings. These swaps were not replaced.


Noninterest Income and Noninterest Expense

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


Noninterest Income

 
  For the Three Months Ended   For the Six Months Ended  
 
   
   
  Increase (Decrease)    
   
  Increase (Decrease)  
 
  June 30,
2008
  June 30,
2009
  June 30,
2008
  June 30,
2009
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Service charges on deposit accounts

  $ 77,706   $ 71,843   $ (5,863 )   (7.5 )% $ 152,442   $ 143,165   $ (9,277 )   (6.1 )%

Trust and investment management fees

    43,802     34,130     (9,672 )   (22.1 )   87,190     68,037     (19,153 )   (22.0 )

Trading account activities

    16,687     16,251     (436 )   (2.6 )   27,699     38,943     11,244     40.6  

Merchant banking fees

    11,085     19,924     8,839     79.7     22,878     33,756     10,878     47.5  

Brokerage commissions and fees

    10,635     8,506     (2,129 )   (20.0 )   20,494     16,813     (3,681 )   (18.0 )

Card processing fees, net

    8,167     8,124     (43 )   (0.5 )   15,931     15,660     (271 )   (1.7 )

Securities losses, net

        (172 )   (172 )   nm     (2 )   (172 )   (170 )   nm  

Gains (losses) on private capital investments, net

    1,282     (1,123 )   (2,405 )   nm     2,352     (3,244 )   (5,596 )   nm  

Gain on the VISA IPO redemption

                    14,211         (14,211 )   (100.0 )

Other

    30,262     25,730     (4,532 )   (15.0 )   51,827     44,971     (6,856 )   (13.2 )
                                       
 

Total noninterest income

  $ 199,626   $ 183,213   $ (16,413 )   (8.2 )% $ 395,022   $ 357,929   $ (37,093 )   (9.4 )%
                                       

nm = not meaningful

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Noninterest Expense

 
  For the Three Months Ended   For the Six Months Ended  
 
   
   
  Increase (Decrease)    
   
  Increase (Decrease)  
 
  June 30,
2008
  June 30,
2009
  June 30,
2008
  June 30,
2009
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Salaries and other compensation

  $ 204,077   $ 191,104   $ (12,973 )   (6.4 )% $ 396,089   $ 379,327   $ (16,762 )   (4.2 )%

Employee benefits

    39,222     41,953     2,731     7.0     88,880     97,293     8,413     9.5  
                                       
 

Salaries and employee benefits

    243,299     233,057     (10,242 )   (4.2 )   484,969     476,620     (8,349 )   (1.7 )

Net occupancy

    38,232     43,222     4,990     13.1     74,434     85,143     10,709     14.4  

Intangible asset amortization

    670     40,281     39,611     nm     1,340     81,168     79,828     nm  

Regulatory agencies

    4,897     52,836     47,939     nm     7,506     70,774     63,268     nm  

Outside services

    20,295     22,948     2,653     13.1     37,304     41,782     4,478     12.0  

Professional services

    15,931     19,489     3,558     22.3     30,528     35,427     4,899     16.0  

Equipment

    15,141     16,602     1,461     9.6     30,488     32,015     1,527     5.0  

Software

    14,409     14,205     (204 )   (1.4 )   29,204     29,243     39     0.1  

Advertising and public relations

    12,857     11,349     (1,508 )   (11.7 )   20,956     21,970     1,014     4.8  

Low income housing credit investment amortization

    8,493     11,026     2,533     29.8     17,632     21,192     3,560     20.2  

Communications

    9,111     9,192     81     0.9     18,486     17,910     (576 )   (3.1 )

Data processing

    7,784     8,042     258     3.3     14,860     16,617     1,757     11.8  

Foreclosed asset expense

    83     3,282     3,199     nm     172     4,168     3,996     nm  

Provision for losses on off-balance sheet commitments

    5,000     15,000     10,000     nm     13,000     41,000     28,000     nm  

Privatization-related expense

        7,433     7,433     nm         34,252     34,252     nm  

Other

    23,110     24,094     984     4.3     41,639     44,160     2,521     6.1  
                                       
 

Total noninterest expense

  $ 419,312   $ 532,058   $ 112,746     26.9 % $ 822,518   $ 1,053,441   $ 230,923     28.1 %
                                       

nm = not meaningful


Income Tax Expense

        Our effective tax rate in the second quarter of 2009 was (49.5) percent, compared to 31.4 percent for the second quarter of 2008. Our effective tax rate in the six months ended June 30, 2009 was (53.7) percent, compared to 31.8 percent for the six months ended June 30, 2008. A negative effective tax rate indicates a net income tax benefit. The change in the effective tax rate was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes. Our effective tax rate for the second quarter of 2009 may not be indicative of the effective tax rate for future quarters and the full year. In addition, the quarterly effective tax rate in 2009 is being computed on an individual quarterly basis, as compared to our historical computation, which was based on an estimated average effective tax rate for the year. During 2009, our effective tax rate, which will be impacted by our expected tax credits, is expected to vary from quarter to quarter in relation to changes in our pre-tax income or loss.

        In 2008, California enacted a new statute mandating a 20 percent penalty on corporate tax underpayments outstanding after May 31, 2009. During the second quarter of 2009, we filed amended tax returns and made payments of $187.0 million of tax and $43.7 million of interest with respect to tax positions taken in prior year worldwide unitary tax returns, which primarily involved the method of apportionment of worldwide income to California. The payments were made in order to protect us from potential penalties that may be asserted by the tax authorities. We intend to file refund claims and to defend our positions through negotiations with the California Franchise Tax Board and through the California courts, if necessary. The payments did not affect the recognition or measurement of unrecognized state tax benefits under FIN 48, and they had no impact on income tax expense.

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

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Discontinued Operations

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

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

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

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


Securities

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

        Our securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. The largest component of our securities available for sale is $7.2 billion for Asset and Liability Management (ALM) purposes. ALM securities are valued at fair value by a pricing service whose prices can be corroborated by recent security trading activities.

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

        At June 30, 2009, the fair value of our CLO securities had declined by approximately $24.4 million from December 31, 2008, primarily due to widening credit spreads and a general lack of liquidity in the marketplace. We estimate the fair value of our CLOs using an external pricing model, as well as broker quotes. The model is based on internally-developed assumptions, utilizing market data derived from market

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participants and credit rating agencies. These assumptions include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates. At June 30, 2009, 24 percent of our CLO securities were rated single-A or better by two of the three major rating agencies.

        We conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI). During the second quarter of 2009, we recognized an insignificant amount of OTTI on one CLO security. Since no observable credit quality issues were present in the remaining CLO portfolio at June 30, 2009, the securities were not other-than-temporarily impaired.


Analysis of Securities

        The following table shows the remaining contractual maturities and expected yields of the securities based upon amortized cost at June 30, 2009.

        Included in our securities available for sale portfolio at June 30, 2009 were securities used for ALM purposes of $7.2 billion. These securities had an expected weighted average maturity of 3.9 years.


Securities Available For Sale

 
  June 30, 2009    
   
 
 
  Maturity    
   
 
 
  One Year
or Less
  Over One Year
Through
Five Years
  Over Five Years
Through
Ten Years
  Over
Ten Years
  Total
Amortized Cost
 
(Dollars in thousands)   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield  

Other U.S. government

  $ 200,737     3.63 % $ 497,205     3.31 % $     % $     % $ 697,942     3.40 %

Residential mortgage-backed securities(1)(2)

    320     4.92     272,383     4.05     1,384,915     4.05     4,730,716     4.65     6,388,334     4.49  

State and municipal

    1,931     7.43     10,236     7.04     13,675     3.34     22,511     5.17     48,353     5.14  

Asset-backed and debt

                                                             
 

securities

            23,327     7.25     21,279     3.97     68,798     7.02     113,404     6.50  

Equity securities(3)

                                    100,157      

Foreign securities

    88     1.58                             88     1.58  
                                                     
   

Total securities available for sale

  $ 203,076     3.67 % $ 803,151     3.72 % $ 1,419,869     4.04 % $ 4,822,025     4.69 % $ 7,348,278     4.36 %
                                                     


Securities Held to Maturity

 
  June 30, 2009    
   
 
 
  Maturity    
   
 
 
  One Year
or Less
  Over One Year
Through
Five Years
  Over Five Years
Through
Ten Years
  Over
Ten Years
  Total
Amortized Cost
 
(Dollars in thousands)   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield  

Collateralized loan obligations

  $     % $ 7,628     5.35 % $ 1,196,858     1.75 % $ 531,694     1.67 % $ 1,736,180     1.74 %
                                                     
 

Total securities held to maturity

  $     % $ 7,628     5.35 % $ 1,196,858     1.75 % $ 531,694     1.67 % $ 1,736,180     1.74 %
                                                     

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

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Loans

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

 
   
   
   
  Increase (Decrease)
June 30, 2009 From:
 
 
   
   
   
  June 30,
2008
  December 31,
2008
 
(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
  Amount   Percent   Amount   Percent  

Commercial, financial and industrial

  $ 16,602,393   $ 18,469,023   $ 17,064,253   $ 461,860     2.8 % $ (1,404,770 )   (7.6 )%

Construction

    2,622,740     2,744,062     2,791,583     168,843     6.4     47,521     1.7  

Mortgage:

                                           
 

Residential

    14,852,058     15,880,835     16,216,264     1,364,206     9.2     335,429     2.1  
 

Commercial

    7,912,592     8,186,388     8,255,659     343,067     4.3     69,271     0.8  
                                   
   

Total mortgage

    22,764,650     24,067,223     24,471,923     1,707,273     7.5     404,700     1.7  

Consumer:

                                           
 

Installment

    1,957,379     2,201,602     2,353,090     395,711     20.2     151,488     6.9  
 

Revolving lines of credit

    1,295,047     1,435,494     1,508,078     213,031     16.4     72,584     5.1  
                                   
   

Total consumer

    3,252,426     3,637,096     3,861,168     608,742     18.7     224,072     6.2  

Lease financing

    640,612     645,765     657,339     16,727     2.6     11,574     1.8  
                                   
   

Total loans held to maturity

    45,882,821     49,563,169     48,846,266     2,963,445     6.5     (716,903 )   (1.4 )
   

Total loans held for sale

    158,537     22,381     50,254     (108,283 )   (68.3 )   27,873     nm  
                                   
     

Total loans

  $ 46,041,358   $ 49,585,550   $ 48,896,520   $ 2,855,162     6.2 % $ (689,030 )   (1.4 )%
                                   

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, 2008 to June 30, 2009 mainly due to increased loan demand and reduced competition primarily in the power and utilities, oil and gas and national corporate customers.

    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, 2009, the construction loan portfolio consisted of approximately 84 percent in the commercial income producing real estate industry and 16 percent with residential homebuilders. The construction loan portfolio increased from June 30, 2008 to June 30, 2009 primarily due to loan advances for income property projects with apartment financing representing the largest component. During the same period, the homebuilder portfolio fell by approximately 40 percent, or $283 million. Operating conditions continue to

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

        Geographically, the outstanding construction loan portfolio is concentrated 50 percent in California and 50 percent out of state. The California outstandings are distributed as follows: 39 percent in the Los Angeles/Orange County region, including the Inland Empire, 25 percent in the San Francisco Bay Area, 18 percent from Sacramento and Central Valley, 13 percent in San Diego, and 5 percent in the Central Coast region.

        The commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio increased from June 30, 2008 to June 30, 2009 due to increased demand and reduced competition in the California Middle Market sector for real estate related financing and a reduced rate of early loan repayments associated with the tightening of the credit markets.

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

        We do not have a program for originating or purchasing subprime loan products. However, we do have loan products that allow a customer to move more quickly through the loan origination process by reducing the need to verify the income or assets of the customer. We refer to these as portfolio express loans. Portfolio express loans are only available to existing clients for no-cash-out/rate and term refinance of existing residential mortgages with the Bank and eliminate the verification of both income and assets. "Low doc" and "no doc" (discontinued in 2008) loans comprise less than half of our residential loan portfolio, and the delinquency rates relative to the outstanding balances at June 30, 2009 were nearly the same as fully documented loans. At June 30, 2009, the total amount of "no doc" and "low doc" loans past due 30 days or more was $138.0 million, compared to $33.5 million at June 30, 2008. The total amount of residential mortgages delinquent 30 days or more was $279.9 million at June 30, 2009, compared to $74.8 million at June 30, 2008. Although delinquencies have risen since June 30, 2008 as a result of the declining real estate market and downturn in the economy, the delinquency rate remains low compared to the industry average for California prime loans. Our underwriting standards remain conservative and as described above, programs with higher risk have been suspended.

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

    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, 2008 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are classified as installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs we offer. At origination, these loans had relatively high credit scores and had weighted-average loan-to-value (LTV) ratios of approximately 60 percent. Our total home equity loans and lines delinquent 30 days or more were $36.8 million at June 30, 2009, compared to $11.0 million at June 30, 2008. Our annual review program reviews all equity secured lines with a commitment amount of

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$200,000 or more and an origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. Action is taken to reduce or freeze limits, as applicable, to minimize additional exposure in a declining market. In addition, to help mitigate the overall effect of the declining real estate market on new originations, we reduced by 5 percent the maximum loan to value allowable for any owner or non owner occupied property valued over $250,000. The change was effective January 1, 2009.

    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, 2009, we had leveraged leases of $549.8 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities serve legal and tax purposes and do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by law, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment.


Cross-Border Outstandings

        Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of June 30 and December 31, 2008 and June 30, 2009 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 funded by local currency borrowings.

(Dollars in millions)   Financial
Institutions
  Public
Sector
Entities
  Corporations
and Other
Borrowers
  Total
Outstandings
 

June 30, 2008

                         
 

Canada

  $ 6   $   $ 881   $ 887  

December 31, 2008

                         
 

Canada

  $ 111   $   $ 796   $ 907  

June 30, 2009

                         
 

Canada

  $ 69   $   $ 872   $ 941  


Provision for Credit Losses

        We recorded a provision for loan losses of $95 million and $360 million in the second quarters of 2008 and 2009, respectively. We recorded a provision for losses on off-balance sheet commitments of $5 million and $15 million in the second quarters of 2008 and 2009, respectively. The provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowances for Credit Losses" below.

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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 2008 Form 10-K.

    Comparison of the Total Allowances and Related Provision for Credit Losses Compared to December 31, 2008

        At June 30, 2009, our total allowances for credit losses were $1.2 billion, which consisted of $1,081.6 million for loan losses and $166.4 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $1,165.8 million and $82.2 million of allocated and unallocated allowance, respectively. At June 30, 2009, our allowances for credit loss coverage ratios were 2.55 percent of total loans and 113 percent of total nonaccrual loans. At December 31, 2008, our total allowances for credit losses were $863 million, or 1.74 percent of the total loan portfolio, and 208 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, 2009 and December 31, 2008, total impaired loans were $1.1 billion and $416 million, respectively, and the associated impairment allowances were $203 million and $107 million, respectively.

        At June 30, 2009 and December 31, 2008, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses was $166 million and $125 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for off-balance sheet commitment losses. Net charge offs were $152 million in the second quarter of 2009, compared to $32 million in the second quarter of 2008.

        As a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending portfolios (especially our commercial real estate portfolio) and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $360 million in the second quarter of 2009, compared to a provision for loan losses of $95 million in the second quarter of 2008. Overall, our loan portfolio experienced higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business portfolios, reflecting the continued deterioration in the economic environment.

        We expect the elevated levels of quarterly provisions for credit losses, which we experienced in the first half of 2009, to continue during 2009. The factors driving the increase in our projected provision during 2009 include management's belief that we are in a continued recessionary economic environment, which we believe will result in further deterioration in our loan portfolio.

        During the first quarter of 2009, the loss confirmation period (LCP) for residential mortgages and home equity loans and lines of credit products was updated to better reflect the impact of recent economic conditions on losses within these portfolios. As a result of our analyses and peer surveys, the LCP for consumer home equity loans and residential mortgages was changed from between 1.5 years and 2 years, to 1 year, which

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resulted in a lower provision for credit losses in the first quarter of 2009. In addition, during the second quarter of 2009, we reduced our commercial loan portfolio loss factors based on past charge off experience over a slightly shorter economic time frame, further adjusted for an updated analysis of the severity of the economic cycle.

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

    Changes in the Allocated (Formula and Specific) Allowance

        At June 30, 2009, the formula allowance increased to $943 million, compared to $682 million at December 31, 2008. The net increase was primarily due to an increase in criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and higher loss factors for our consumer loan and small business portfolios. At June 30, 2009, the specific allowance was $223 million, compared to $112 million at December 31, 2008.

    Changes in the Unallocated Allowance

        At June 30, 2009, the unallocated allowance increased to $82 million, compared to $69 million at December 31, 2008. Management believes that the current level of unallocated allowance is appropriate based on the weakening credit cycle and the level of uncertainty of the impact of the current economic conditions on our principal portfolio segments. Additionally, the reasons for which we believe an unallocated allowance is warranted are detailed below.

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

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

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

    With respect to commercial real estate, we considered the deteriorating trends in income property markets, including rising vacancies, falling rents and tighter credit and capital availability, which would be in the range of $30 million to $42 million.

    With respect to the current California budget crisis, beginning in the second quarter of 2009 we considered the impact the budget crisis may have on draws of unfunded commitments and the budget crisis effects on government suppliers, which would be in the range of $6 million to $10 million.

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    With respect to building material suppliers, we considered the weakness in the commercial building and homebuilding industries, including lower corporate expenditures and weak home sales, and the effects on suppliers, which would be in the range of $7 million to $11 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 the pricing pressure and competition among suppliers to big box retailers, as well as a slow down in consumer spending, which would be in the range of $5 million to $8 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, as well as their transition from paper to internet-based content delivery, which would be in the range of $4 million to $7 million.

    With respect to retailers, we considered the negative impact of the economic slowdown on consumer spending and retail margins, which would be in the range of $3 million to $6 million.

    With respect to our petroleum exploration and production customers, we considered the negative impact of lower, more volatile oil and natural gas prices on their businesses, which would be in the range of $2 million to $5 million.

    With respect to contractors, we considered the impact of the housing slump, tighter credit and the recession have had on contractors as construction and home improvement projects continue their downward trends, which would be in the range of $1 million to $3 million.

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    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,
  Increase (Decrease)   For the Six Months
Ended June 30,
  Increase (Decrease)  
(Dollars in thousands)   2008   2009   Amount   Percent   2008   2009   Amount   Percent  

Balance, beginning of period

  $ 462,943   $ 870,185   $ 407,242     88.0 % $ 402,726   $ 737,767   $ 335,041     83.2 %

Loans charged off:

                                                 
 

Commercial, financial and industrial

    18,375     85,870     67,495     367.3     28,180     181,638     153,458     544.6  
 

Construction

    9,550     23,153     13,603     142.4     9,550     25,469     15,919     166.7  
 

Commercial mortgage

    497     23,533     23,036     4,635.0     497     27,869     27,372     5,507.4  
 

Residential mortgage

    1,538     8,880     7,342     477.4     1,778     14,933     13,155     739.9  
 

Consumer

    3,484     11,731     8,247     236.7     6,540     21,141     14,601     223.3  
 

Lease financing

                nm                 nm  
                                       
   

Total loans charged off

    33,444     153,167     119,723     358.0     46,545     271,050     224,505     482.3  
                                       

Recoveries of loans previously charged off:

                                                 
 

Commercial, financial and industrial

    1,300     1,125     (175 )   (13.5 )   2,477     2,276     (201 )   (8.1 )
 

Construction

        150     150     nm         150     150     nm  
 

Commercial mortgage

        18     18     nm         225     225     nm  
 

Residential mortgage

        5     5     nm         20     20     nm  
 

Consumer

    343     290     (53 )   (15.5 )   726     422     (304 )   (41.9 )
 

Lease financing

    193         (193 )   (100.0 )   208         (208 )   (100.0 )
                                       

Total recoveries of loans previously charged off

    1,836     1,588     (248 )   (13.5 )   3,411     3,093     (318 )   (9.3 )
                                       
     

Net loans charged off

    31,608     151,579     119,971     379.6     43,134     267,957     224,823     521.2  

Provision for loan losses

    95,000     360,000     265,000     278.9     167,000     609,000     442,000     264.7  

Adjustments related to privatization

        2,062     2,062     nm         2,062     2,062        

Foreign translation adjustment and other net additions

    66     965     899     1,362.1     (191 )   761     952     (498.4 )
                                       

Ending balance of allowance for loan losses

  $ 526,401   $ 1,081,633   $ 555,232     105.5 % $ 526,401   $ 1,081,633   $ 555,232     105.5 %

Allowance for losses on off-balance sheet commitments

    103,374     166,374     63,000     60.9     103,374     166,374     63,000     60.9  
                                       

Allowances for credit losses

  $ 629,775   $ 1,248,007   $ 618,232     98.2 % $ 629,775   $ 1,248,007   $ 618,232     98.2 %
                                       

Allowance for loan losses to total loans(1)

    1.14 %   2.21 %               1.14 %   2.21 %            

Allowances for credit losses to total loans(2)

    1.37     2.55                 1.37     2.55              

Provision for loan losses to

                                                 
 

net loans charged off

    300.56     237.50                 387.17     227.28              

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

    0.28     1.23                 0.20     1.09              

(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. Effective on January 1, 2009, consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans totaling $167.7 million ($5.7 million of which is restructured) have been placed on nonaccrual status as of June 30, 2009. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to the Consolidated Financial Statements included in our 2008 Form 10-K.

        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

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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 performing under the modified terms for a sustained period, may be disclosed as performing assets in the subsequent calendar year.

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

        The following table sets forth an analysis of nonperforming assets.

 
   
   
   
  Increase (Decrease)
June 30, 2009 From:
 
 
   
   
   
  June 30,
2008
  December 31,
2008
 
 
  June 30,
2008
  December 31,
2008
  June 30,
2009
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Commercial, financial and industrial

  $ 81,652   $ 260,272   $ 361,118   $ 279,466     nm   $ 100,846     38.7 %

Construction

    95,546     98,934     313,790     218,244     nm     214,856     nm  

Commercial mortgage

    38,904     55,750     265,229     226,325     nm     209,479     nm  

Residential mortgage

            142,354     142,354     nm     142,354     nm  

Consumer

            19,635     19,635     nm     19,635     nm  
                                   
   

Total nonaccrual loans

    216,102     414,956     1,102,126     886,024     nm     687,170     nm  

Restructured loans

                                           
 

Commercial, financial and industrial

            300     300     nm     300     nm  
 

Commercial mortgage

            3,511     3,511     nm     3,511     nm  
 

Residential mortgage

    1,458     1,345     5,698     4,240     nm     4,353     nm  
                                   
   

Total restructured loans

    1,458     1,345     9,509     8,051     nm     8,164     nm  

Foreclosed assets

    7,384     20,214     32,967     25,583     nm     12,753     63.1  
                                   
   

Total nonperforming assets

  $ 224,944   $ 436,515   $ 1,144,602   $ 919,658     nm   $ 708,087     nm  
                                   

Restructured loans that continue to accrue interest

  $   $   $ 1,467   $ 1,467     nm   $ 1,467     nm  
                                   

Allowance for loan losses

  $ 526,401   $ 737,767   $ 1,081,633   $ 555,232     nm   $ 343,866     46.6 %
                                   

Allowances for credit losses

  $ 629,775   $ 863,141   $ 1,248,007   $ 618,232     98.2 % $ 384,866     44.6 %
                                   

Nonaccrual loans to total loans

    0.47 %   0.84 %   2.25 %                        

Allowance for loan losses to nonaccrual loans(1)

    243.59     177.79     98.14                          

Allowances for credit losses to nonaccrual loans(2)

    291.42     208.01     113.24                          

Nonperforming assets to total loans and foreclosed assets

    0.49     0.88     2.34                          

Nonperforming assets to total assets

    0.37     0.62     1.55                          

(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, 2008 to June 30, 2009 was primarily due to an increase in commercial, construction and commercial mortgage loans, primarily within the commercial real estate industry sector. Additionally, we had increases in residential and consumer home equity nonaccrual loans due to the change in our nonaccrual accounting policy effective January 1, 2009. During the second quarters of 2008 and 2009, we had no sales and $23.1 million in sales of nonperforming loans, respectively. Losses from these sales were reflected in charge offs.

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Loans 90 Days or More Past Due and Still Accruing

 
   
   
   
  Increase (Decrease)
June 30, 2009 From:
 
 
   
   
   
  June 30,
2008
  December 31,
2008
 
 
  June 30,
2008
  December 31,
2008
  June 30,
2009
 
(Dollars in thousands)   Amount   Percent   Amount   Percent  

Commercial, financial and industrial

  $ 15,814   $ 2,529   $ 3,699   $ (12,115 )   (76.6 )% $ 1,170     46.3 %

Construction

                             

Mortgage:

                                           
 

Residential(1)

    31,309     59,940         (31,309 )   (100.0 )   (59,940 )   (100.0 )
 

Commercial

        181                 (181 )   (100.0 )
                                   
   

Total mortgage

    31,309     60,121         (31,309 )   (100.0 )   (60,121 )   (100.0 )

Consumer and other(1)

    4,109     8,097     307     (3,802 )   (92.5 )   (7,790 )   (96.2 )
                                   
 

Total loans 90 days or more past

                                           
   

due and still accruing

  $ 51,232   $ 70,747   $ 4,006   $ (47,226 )   (92.2 ) $ (66,741 )   (94.3 )
                                   

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


Fair Value of Financial Instruments

        The following table reflects financial instruments measured at fair value on a recurring basis as of June 30, 2008, December 31, 2008 and June 30, 2009. For additional information on the fair value of financial instruments, see Note 12 to these condensed consolidated financial statements.

 
  June 30, 2008   December 31, 2008   June 30, 2009  
(Dollars in thousands)   Fair Value   Percentage
of Total
  Fair Value   Percentage
of Total
  Fair Value   Percentage
of Total
 

Financial instruments recorded at fair value on a recurring basis

                                     

Assets:

                                     
 

Level 1

  $ 880,404     9 % $ 961,535     10 % $ 923,742     11 %
 

Level 2

    7,401,342     76     7,624,037     79     7,585,551     90  
 

Level 3

    1,514,836     16     1,203,092     13     6,308      
 

Netting Adjustment(1)

    (71,964 )   (1 )   (153,377 )   (2 )   (117,153 )   (1 )
                           
   

Total

  $ 9,724,618     100 % $ 9,635,287     100 % $ 8,398,448     100 %
                           
 

As a percentage of total Company assets

          16 %         14 %         11 %
                                 

Liabilities:

                                     
 

Level 1

  $ 1,560     % $ 56,470     6 % $ 50,592     7 %
 

Level 2

    2,123,932     104     1,131,570     109     757,265     110  
 

Level 3

                         
 

Netting Adjustment(1)

    (71,964 )   (4 )   (153,377 )   (15 )   (117,153 )   (17 )
                           
   

Total

  $ 2,053,528     100 % $ 1,034,663     100 % $ 690,704     100 %
                           
 

As a percentage of total Company liabilities

          4 %         2 %         1 %
                                 

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

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Quantitative and Qualitative Disclosures About Market Risk

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

        The Board of Directors, directly or through its appropriate sub-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 Management (MRM) unit is responsible for the monitoring of market risk and MRM functions independently of all operating and management units.

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

    Interest Rate Risk Management (Other Than Trading)

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

        At June 30, 2009, Economic Net Interest Income (NII) sensitivity was asset sensitive to parallel rate shifts. A +200 basis point parallel shift would increase 12-month Economic NII by 1.11 percent, while a similar downward shift would decrease it by 3.00 percent. At June 30, 2008, 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. We caution that significant low levels of current interest rates and ongoing enhancements to our interest rate risk modeling may make prior-year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.

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Economic NII

(Dollars in millions)   June 30,
2008
  December 31,
2008
  June 30,
2009
 

+200 basis points

  $ (64.1 ) $ 0.2   $ 27.6  

as a percentage of base case NII

    (2.84 )%   0.01 %   1.11 %

-200 basis points

  $ 66.1   $ (40.8 ) $ (74.5 )

as a percentage of base case NII

    2.93 %   (1.75 )%   (3.00 )%

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

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

    ALM Activities

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

    ALM Securities

        At June 30, 2008 and 2009, our available for sale securities portfolio included $6.8 billion and $7.2 billion, respectively, of securities for ALM purposes. At June 30, 2009, approximately $4.3 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 2009, we purchased $450 million par value of securities, as part of our investment portfolio strategy, while approximately $657 million par value of ALM securities matured or were called.

        The portfolio is expected to remain predominately comprised of agency securities as our non-agency securities continue to run-off during the remainder of 2009. Based on current prepayment projections, the estimated ALM portfolio's effective duration was 2.4 at June 30, 2009, compared to 2.5 at June 30, 2008. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.4 suggests an expected price decrease of approximately 2.4 percent for an immediate 1.0 percent parallel increase in interest rates.

    ALM Derivatives

        During the first six months of 2009, the ALM derivatives portfolio increased by $850 million notional amount due to purchases of $2.7 billion notional amount of LIBOR cap contracts, offset by maturities of $900 million and terminations of $950 million notional amount of receive fixed interest rate swaps and floors.

        The fair value of the ALM derivative contracts decreased primarily due to maturities and terminations of interest rate swaps and floor option contracts, the market expectation of higher future interest rates offset by the realization of income. For additional discussion of derivative instruments and our hedging strategies, see Note 13 to the condensed consolidated financial statements in this Form 10-Q and Note 19 to our consolidated financial statements included in our 2008 Form 10-K.

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
  Increase (Decrease)
From December 31,
2008
to June 30,
2009
 

Total gross notional amount of positions held for purposes other than trading:

  $ 9,250,000   $ 5,400,000   $ 6,250,000   $ 850,000  
 

of which, interest rate swaps pay fixed rates of interest

                 
                   

Fair value of positions held for purposes other than trading:

                         
 

Gross positive fair value

  $ 163,065   $ 317,569   $ 139,765   $ (177,804 )
 

Gross negative fair value

                 
                   
 

Positive (negative) fair value of positions, net

  $ 163,065   $ 317,569   $ 139,765   $ (177,804 )
                   

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

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

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

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
  Increase (Decrease)
From December 31,
2008
to June 30,
2009
 

Total gross notional amount of positions held for trading purposes:

                         
 

Interest rate

  $ 15,640,686   $ 20,398,695   $ 24,859,280   $ 4,460,585  
 

Foreign exchange(1)

    4,568,338     7,112,873     2,406,591     (4,706,282 )
 

Equity

        10,914     148,234     137,320  
 

Energy

    5,618,740     3,757,674     3,501,515     (256,159 )
                   
 

Total

  $ 25,827,764   $ 31,280,156   $ 30,915,620   $ (364,536 )
                   

Fair value of positions held for trading purposes:

                         
 

Gross positive fair value

  $ 957,416   $ 1,145,208   $ 801,905   $ (343,303 )
 

Gross negative fair value

    946,122     1,137,724     761,488     (376,236 )
                   
 

Positive fair value of positions, net

  $ 11,294   $ 7,484   $ 40,417   $ 32,933  
                   

(1)
Excludes spot contracts with notional amounts of $0.7 billion, $1.1 billion and $0.7 billion at June 30, 2008, December 31, 2008 and June 30, 2009, respectively.

Liquidity Risk

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

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

        Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our $47.7 billion in average core deposits, which includes demand deposits, money market demand accounts, savings and consumer time deposits, combined with average stockholder's equity, funded 77.0 percent of average total assets of $71.5 billion in the second quarter of 2009. Most of the remaining funding was provided by wholesale borrowings from secured and unsecured sources of varying maturities.

        The Bank has pledged collateral under secured borrowing facilities with the FHLB and the Federal Reserve Bank of San Francisco (FRB). Beginning in 2008, the Bank increased its reliance on secured funding due to rate advantages compared to other financing sources. As of June 30, 2009, the Bank had $3.3 billion

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of borrowings outstanding with the FHLB, of which $0.4 billion is short-term and included in Other Borrowed Funds. During the second quarter of 2009, outstanding borrowings under the FRB Term Auction Facility program declined from $3.0 billion to zero. As of June 30, 2009, the Bank had a remaining combined unused borrowing capacity of $21.0 billion from the FHLB and the FRB.

        Our securities portfolio provides liquidity through either securities sales or repurchase agreements. At June 30, 2009, we had capacity under repurchase agreements of approximately $3.2 billion. In addition, cash and cash equivalents comprised a growing part of our liquidity position, which increased $6.1 billion from $3.9 billion at March 31, 2009 to $10.0 billion at June 30, 2009. This was primarily due to increased balances in our due from FRB accounts.

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

        The Temporary Liquidity Guarantee (TLG) Program was established by the Federal Deposit Insurance Corporation (FDIC) in October 2008. Under the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity date of more than 30 days and issued between October 14, 2008 and October 31, 2009 is guaranteed and backed by the full faith and credit of the United States. The Bank is eligible to issue up to a maximum of $2.4 billion in senior unsecured debt under the TLG Program. At June 30, 2009, a total of $1.1 billion of TLG Program guaranteed debt was outstanding, comprised of $1.0 billion in medium-term notes and the remainder of which are term fed funds. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or December 31, 2012.

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

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

 
   
  Union Bank, N.A.   UnionBanCal
Corporation
 

Standard & Poor's

  Long-term     A+     A  

  Short-term     A-1     A-1  

Moody's

 

Long-term

   

A2

   

 

  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)  

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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,
2008
  December 31,
2008
  June 30,
2009
  Minimum
Regulatory
Requirement
 

Capital Components

                         

Tier 1 capital

  $ 4,774,046   $ 5,466,713   $ 5,409,445        

Tier 2 capital

    1,726,816     1,773,391     1,780,922        
                     

Total risk-based capital

  $ 6,500,862   $ 7,240,104   $ 7,190,367        
                     

Risk-weighted assets

  $ 59,996,170   $ 62,251,070   $ 62,312,964        
                     

Quarterly average assets

  $ 60,071,111   $ 64,917,854   $ 68,585,363        
                     

 

Capital Ratios
  Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio  

Total capital (to risk-weighted assets)

  $ 6,500,862     10.84 % $ 7,240,104     11.63 % $ 7,190,367     11.54 % ³$ 4,985,037     8.0 %

Tier 1 capital (to risk-weighted assets)

    4,774,046     7.96     5,466,713     8.78     5,409,445     8.68   ³ 2,492,519     4.0  

Leverage(1)

    4,774,046     7.95     5,466,713     8.42     5,409,445     7.89   ³ 2,743,415     4.0  

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

Union Bank, N.A.

(Dollars in thousands)   June 30,
2008
  December 31,
2008
  June 30,
2009
  Minimum
Regulatory
Requirement
  "Well-Capitalized"
Regulatory
Requirement
 

Capital Components

                               

Tier 1 capital

  $ 4,783,201   $ 5,380,075   $ 5,189,386              

Tier 2 capital

    1,320,736     1,451,024     1,460,298              
                           

Total risk-based capital

  $ 6,103,937   $ 6,831,099   $ 6,649,684              
                           

Risk-weighted assets

  $ 59,763,156   $ 62,025,970   $ 62,228,803              
                           

Quarterly average assets

  $ 59,610,458   $ 64,737,767   $ 68,782,111              
                           

 

Capital Ratios
  Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio  

Total capital (to risk-weighted assets)

  $ 6,103,937     10.21 % $ 6,831,099     11.01 % $ 6,649,684     10.69 % ³$ 4,978,304     8.0 % ³$ 6,221,880     10.0 %

Tier 1 capital (to risk-weighted assets)

    4,783,201     8.00     5,380,075     8.67     5,189,386     8.34   ³ 2,489,152     4.0   ³ 3,733,728     6.0  

Leverage(1)

    4,783,201     8.02     5,380,075     8.31     5,189,386     7.54   ³ 2,751,284     4.0   ³ 3,439,106     5.0  

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

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

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


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."

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

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

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

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

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

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

        The reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred, our discontinued operations and the market view contribution. Our discontinued operations consist of two separate businesses: retirement

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recordkeeping services and insurance brokerage business. For further information on discontinued operations, see Note 15 to the condensed consolidated financial statements in this Form 10-Q.

 
  Retail Banking    
   
  Wholesale 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)
 
 
  2008   2009   Amount   Percent   2008   2009   Amount   Percent  

Results of operations—Market View

                                                 
 

(dollars in thousands):

                                                 
 

Net interest income (expense)

  $ 233,006   $ 280,147   $ 47,141     20 % $ 283,017   $ 414,070   $ 131,053     46 %
 

Noninterest income (expense)

    126,085     110,139     (15,946 )   (13 )   88,111     100,539     12,428     14  
                                       
 

Total revenue

    359,091     390,286     31,195     9     371,128     514,609     143,481     39  
 

Noninterest expense (income)

    242,338     250,843     8,505     4     151,708     183,779     32,071     21  
 

Credit expense (income)

    6,842     7,364     522     8     49,397     86,462     37,065     75  
                                       
 

Income (loss) from continuing operations before income taxes

    109,911     132,079     22,168     20     170,023     244,368     74,345     44  
 

Income tax expense (benefit)

    42,041     51,643     9,602     23     47,980     74,438     26,458     55  
                                       
 

Income (loss) from continuing operations

    67,870     80,436     12,566     19     122,043     169,930     47,887     39  
 

Income from discontinued operations, net of income taxes

                na                 na  
                                       
 

Net income (loss)

  $ 67,870   $ 80,436   $ 12,566     19   $ 122,043   $ 169,930   $ 47,887     39  
                                       

Average balances—Market View (dollars in millions):

                                                 
 

Total loans

  $ 18,837   $ 21,380   $ 2,543     14   $ 26,657   $ 28,254   $ 1,597     6  
 

Total assets

    19,677     23,625     3,948     20     31,424     35,646     4,222     13  
 

Total deposits

    18,487     25,572     7,085     38     18,378     28,199     9,821     53  

Financial ratios—Market View

                                                 
 

Risk adjusted return on capital(1)

    41 %   47 %               19 %   20 %            
 

Return on average assets(1)

    1.39     1.37                 1.56     1.91              
 

Efficiency ratio(2)

    67.46     64.17                 38.59     33.57              

 

 
  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)
 
 
  2008   2009   Amount   Percent   2008   2009   2008   2009   Amount   Percent  

Results of operations—Market View
(dollars in thousands):

                                                             
 

Net interest income (expense)

  $ (3,205 ) $ (134,905 ) $ (131,700 )   nm   $ (2,260 ) $ (8,966 ) $ 510,558   $ 550,346   $ 39,788     8 %
 

Noninterest income (expense)

    6,198     (8,689 )   (14,887 )   nm     (20,768 )   (18,776 )   199,626     183,213     (16,413 )   (8 )
                                               
 

Total revenue

    2,993     (143,594 )   (146,587 )   nm     (23,028 )   (27,742 )   710,184     733,559     23,375     3  
 

Noninterest expense (income)

    37,845     109,616     71,771     nm     (12,579 )   (12,180 )   419,312     532,058     112,746     27  
 

Credit expense (income)

    38,779     266,192     227,413     nm     (18 )   (18 )   95,000     360,000     265,000     nm  
                                               
 

Income (loss) from continuing operations before income taxes

    (73,631 )   (519,402 )   (445,771 )   nm     (10,431 )   (15,544 )   195,872     (158,499 )   (354,371 )   nm  
 

Income tax expense (benefit)

    (24,457 )   (198,495 )   (174,038 )   nm     (3,990 )   (6,078 )   61,574     (78,492 )   (140,066 )   nm  
                                               
 

Income (loss) from continuing operations

    (49,174 )   (320,907 )   (271,733 )   nm     (6,441 )   (9,466 )   134,298     (80,007 )   (214,305 )   nm  
 

Income from discontinued operations, net of income taxes

    7,047         (7,047 )   (100 )%           7,047         (7,047 )   (100 )
                                               
 

Net income (loss)

  $ (42,127 ) $ (320,907 ) $ (278,780 )   nm   $ (6,441 ) $ (9,466 ) $ 141,345   $ (80,007 ) $ (221,352 )   nm  
                                               

Average balances—Market View
(dollars in millions):

                                                             
 

Total loans

  $ 16   $ (87 ) $ (103 )   nm   $ (16 ) $ 9   $ 45,494   $ 49,556   $ 4,062     9  
 

Total assets

    8,185     12,233     4,048     49     (16 )   (9 )   59,270     71,495     12,225     21  
 

Total deposits

    6,852     2,029     (4,823 )   (70 )   (514 )   (1,448 )   43,203     54,352     11,149     26  

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     0.91 %   (0.45 )%            
 

Efficiency ratio(2)

    na     na                 na     na     56.94     68.28              

(1)
Annualized.
(2)
The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance sheet commitments, and low income housing investment credit (LIHC) amortization expense, as a percentage of net interest income and noninterest income.

na = not applicable

nm = not meaningful

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Table of Contents

 
  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)
 
 
  2008   2009   Amount   Percent   2008   2009   Amount   Percent  

Results of operations—Market View
(dollars in thousands):

                                                 
 

Net interest income (expense)

  $ 454,031   $ 528,849   $ 74,818     16 % $ 539,471   $ 756,442   $ 216,971     40 %
 

Noninterest income (expense)

    246,747     215,391     (31,356 )   (13 )   165,770     185,211     19,441     12  
                                       
 

Total revenue

    700,778     744,240     43,462     6     705,241     941,653     236,412     34  
 

Noninterest expense (income)

    473,667     538,149     64,482     14     299,259     358,338     59,079     20  
 

Credit expense (income)

    13,281     15,143     1,862     14     86,540     155,030     68,490     79  
                                       
 

Income (loss) from continuing operations before income taxes

    213,830     190,948     (22,882 )   (11 )   319,442     428,285     108,843     34  
 

Income tax expense (benefit)

    81,790     74,661     (7,129 )   (9 )   89,269     124,843     35,574     40  
                                       
 

Income (loss) from continuing operations

    132,040     116,287     (15,753 )   (12 )   230,173     303,442     73,269     32  
 

Loss from discontinued operations, net of income taxes

                na                 na  
                                       
 

Net income (loss)

  $ 132,040   $ 116,287   $ (15,753 )   (12 ) $ 230,173   $ 303,442   $ 73,269     32  
                                       

Average balances—Market View (dollars in millions):

                                                 
 

Total loans

  $ 18,412   $ 21,241   $ 2,829     15   $ 25,689   $ 28,524   $ 2,835     11  
 

Total assets

    19,230     23,491     4,261     22     30,458     35,554     5,096     17  
 

Total deposits

    18,443     24,489     6,046     33     18,293     24,823     6,530     36  

Financial ratios—Market View

                                                 
 

Risk adjusted return on capital(1)

    42 %   33 %               19 %   19 %            
 

Return on average assets(1)

    1.38     1.00                 1.52     1.72              
 

Efficiency ratio(2)

    67.57     72.20                 39.93     35.80              

 

 
  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)
 
 
  2008   2009   Amount   Percent   2008   2009   2008   2009   Amount   Percent  

Results of operations—Market View (dollars in thousands):

                                                             
 

Net interest income (expense)

  $ (18,603 ) $ (164,384 ) $ (145,781 )   nm   $ (3,763 ) $ (10,558 ) $ 971,136   $ 1,110,349   $ 139,213     14 %
 

Noninterest income (expense)

    20,543     (5,740 )   (26,283 )   (128 )%   (38,038 )   (36,933 )   395,022     357,929     (37,093 )   (9 )
                                               
 

Total revenue

    1,940     (170,124 )   (172,064 )   nm     (41,801 )   (47,491 )   1,366,158     1,468,278     102,120     7  
 

Noninterest expense (income)

    72,284     180,184     107,900     149     (22,692 )   (23,230 )   822,518     1,053,441     230,923     28  
 

Credit expense (income)

    67,212     438,874     371,662     nm     (33 )   (47 )   167,000     609,000     442,000     nm  
                                               
 

Income (loss) from continuing operations before income taxes

    (137,556 )   (789,182 )   (651,626 )   nm     (19,076 )   (24,214 )   376,640     (194,163 )   (570,803 )   nm  
 

Income tax expense (benefit)

    (43,818 )   (294,384 )   (250,566 )   nm     (7,297 )   (9,468 )   119,944     (104,348 )   (224,292 )   nm  
                                               
 

Income (loss) from continuing operations

    (93,738 )   (494,798 )   (401,060 )   nm     (11,779 )   (14,746 )   256,696     (89,815 )   (346,511 )   (135 )
 

Loss from discontinued operations, net of income taxes

    (6,761 )       6,761     (100 )           (6,761 )       6,761     100  
                                               
 

Net income (loss)

  $ (100,499 ) $ (494,798 ) $ (394,299 )   nm   $ (11,779 ) $ (14,746 ) $ 249,935   $ (89,815 ) $ (339,750 )   (136 )
                                               

Average balances—Market View
(dollars in millions):

                                                             
 

Total loans

  $ 12   $ (73 ) $ (85 )   nm   $ (15 ) $ (20 ) $ 44,098   $ 49,672   $ 5,574     13  
 

Total assets

    8,278     10,280     2,002     24     (15 )   (29 )   57,951     69,296     11,345     20  
 

Total deposits

    7,186     2,229     (4,957 )   (69 )   (514 )   (1,027 )   43,408     50,514     7,106     16  

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     0.89 %   (0.26 )%            
 

Efficiency ratio(2)

    na     na                 na     na     57.75     66.98              

(1)
Annualized.
(2)
The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance sheet commitments, and low income housing investment credit (LIHC) amortization expense, as a percentage of net interest income and noninterest income.

na = not applicable

nm = not meaningful

    Retail Banking

        Retail Banking provides financial products including credit, deposit, trust, investment management and risk management delivered through our branches, relationship managers, private bankers and trust

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administrators, to individuals, small businesses and institutional clients. Retail banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets. While the primary focus of Retail Banking's strategy is deposit growth, an additional focus continues to be consumer and small business loan generation.

        During the six months ended June 30, 2009, net income of Retail Banking decreased compared to the same period in 2008, reflecting a 14 percent increase in noninterest expense and a 13 percent decrease in noninterest income, partially offset by a 16 percent increase in net interest income.

        Average asset growth for the six months ended June 30, 2009 compared to the same period in 2008 was primarily driven by a 15 percent growth in average loans. The growth was primarily driven by increases of 12 percent in our average residential loan portfolio and 34 percent in our average consumer loan portfolio.

        Average deposits increased 33 percent during the six months ended June 30, 2009 compared to the same period in 2008. This increase was primarily due to the Retail Banking's strategy which continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and improving sales resources, establishing new locations and new products as well as deposit growth in balances held by our institutional clients. We expect that a larger branch network, along with this Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.

        Noninterest income decreased during the six months ended June 30, 2009 compared to the same period in 2008 by 13 percent mainly as a result of lower trust and deposit fees. Noninterest expense increased by 14 percent during the six months ended June 30, 2009, compared to the same period in 2008. This increase was primarily due to intangible asset amortization related to our privatization, staff costs, FDIC deposit insurance assessment rate increase, and costs associated with an increasing deposit base.

        Retail 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 331 full-service branches in California, 4 full-service branches in Oregon and Washington and 2 international offices. We own property occupied by 117 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 services.

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        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 financial services to our wealthy clientele. The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, financial planning, investment account management services, cash management and deposit and credit products. Key strategies of the Private Bank are to expand the business by leveraging existing Bank client relationships and developing niche expertise in order to acquire new Bank relationships. Through 15 existing locations, 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 with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s strategy is to expand distribution, to broaden its client base and to increase its assets under management.

    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, 2009, net income of Wholesale Banking increased 32 percent, compared to the same period in 2008, due to higher net interest income and higher noninterest income, partially offset by higher noninterest expense and higher credit expense. Net interest income increased by 40 percent during the six months ended June 30, 2009, compared to the same period in 2008, mainly due to higher loan volume in our commercial and industrial portfolio.

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        For the six months ended June 30, 2009, average loans increased 11 percent compared to the same period in 2008. This increase was primarily in the Energy Capital Services and National Banking divisions.

        Wholesale average deposit balances grew by 36 percent in the six months ended June 30, 2009 compared to the same period in 2008 due to deposit initiatives and higher government agency balances.

        Noninterest income increased 12 percent during the six months ended June 30, 2009, compared to the same period in 2008, primarily due to higher trading portfolio income and merchant banking fees reflected in the first quarter of 2008. Noninterest expense increased 20 percent in the six months ended June 30, 2009 compared to the same period in 2008 primarily due to intangible asset amortization related to our privatization, and higher FDIC deposit insurance assessments.

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

        Wholesale 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, nationwide;

    the Equipment Leasing Division, which provides lease financing services to corporate customers nationwide;

    the National Banking Division, which provides financing, deposits and traditional banking services to corporate clients in defined industries, nationwide;

    the Corporate Deposits and Global Treasury Management Division, which provides deposit and treasury management expertise to Middle Market and large corporate clients, government agencies, specialized industries and lending products to correspondent banks, title companies and municipalities. This division also manages Union Bank's web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development;

    the Capital Markets Division, which provides financing to Middle Market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services;

    the Global Markets Division, which serves our customers with their foreign exchange and interest rate risk management and investment needs. The Global Markets Division offers energy derivative contracts, on a limited basis, to serve our energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account and accepts limited market risk when providing derivative contracts, since a significant portion of the market risk for these products is offset with third parties. The division also includes our registered broker-dealer, UnionBanc Investment Services LLC, which is a subsidiary of Union Bank; and

    the 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.

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

    Other

        The net loss increased by $394.3 million in the six months ended June 30, 2009, compared to the same period in 2008, primarily due to a higher loan loss provision, higher noninterest expense and lower net interest 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 retirement recordkeeping and insurance brokerage businesses; and

    the adjustment between the tax expense calculated under RAROC using a tax rate of 39.1 percent and our effective tax rates.

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

    credit expense of $438.9 million was due to the difference between the $609.0 million provision for loan losses calculated under our US GAAP methodology and the $170.1 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;

    net interest income 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 income (expense) decreased $145.8 million to ($164.4) million compared to the same period in 2008 primarily due to the changes in transfer pricing rates as market rates decreased;

    noninterest income (expense) of ($5.7) million;

    noninterest expense (income) of $180.2 million related to residual costs of support groups and corporate activities not directly related to either of the two business segments. The increase in

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      noninterest expense includes a $34.3 million increase in privatization-related expenses and a $28.0 million increase in provision for losses on off-balance sheet commitments; and

    income tax expense (benefit) of ($294.4) million was due to the difference between the ($104.3) million or a (53.7) percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments (including reconciling items) of $190.1 million using the RAROC effective rate.

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

    net interest income (expense) of ($18.6) million;

    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 includes 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 $72.3 million related to residual costs of support groups and corporate activities not directly related to either of the two business segments. This amount included a $13.0 million provision for losses on off-balance sheet commitments;

    income tax expense (benefit) of ($43.8) million was due to the difference between the $119.9 million or a 31.8 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments (including reconciling items) of $163.7 million using the RAROC tax rate of 38.25%; and

    loss from discontinued operations of $6.8 million.

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, 2009. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

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

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

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

    Industry Factors

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

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

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

        In the third quarter of 2008, the volatility and disruption in the capital and credit markets reached unprecedented levels. On October 3, 2008, former President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the EESA) in response to the financial crises affecting the banking system and financial markets. The EESA was the result of a proposal by former Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008, in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to the EESA, the maximum deposit insurance amount was temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. On October 14, 2008, the FDIC announced the establishment of a Temporary Liquidity Guarantee Program under which the FDIC will fully guarantee until December 31, 2009, all non-interest-bearing transaction accounts of insured depository institutions that do not opt out of the program

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

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

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

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

        It cannot be predicted whether these recent governmental actions will result in significant improvement in financial and economic conditions affecting the banking industry and the U.S. economy. If, notwithstanding the federal government's recent fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present additional significant challenges for the U.S. banking and financial services industry and for our company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not been eligible to participate in some federal programs such as TARP and may not qualify for participation in future federal programs. While it is difficult to predict how long these conditions will exist and which markets and businesses of our company may be affected, we have been experiencing adverse

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business conditions and these factors could continue to present risks for some time for the industry and our company.

    Difficult market conditions have adversely affected our industry

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

    We expect to face increased regulation of our industry, including as a result of the EESA and other governmental measures. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

    Our ability to assess the creditworthiness of our customers and counterparties may be impaired if the models and approaches we use to select, manage, and underwrite our customers and counterparties become less predictive of future behaviors.

    The process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation, which may, in turn, impact the reliability of the process.

    Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.

    Significant fluctuations in the prices of equity and fixed income securities could adversely impact the revenues of our asset management and trust business. Fees charged are based upon asset values, and declines in values proportionately reduce fees charged.

    Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

    We may be required to incur goodwill impairment losses in future periods. See "Critical Accounting Estimates - Annual Goodwill Impairment Analysis."

    On December 16, 2008, the FDIC approved a uniform increase in assessment rates of 7 basis points (annual rate) for the first quarter of 2009, resulting in base annual assessment rates for institutions in Risk Category I of 12 to 14 basis points and in Risk Categories II, III and IV of 17, 35 and 50 basis points, respectively. As described further in the next risk factor below, on February 27, 2009, the Board of Directors of the FDIC voted to amend the restoration plan for the Deposit Insurance Fund; adopt an

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      interim rule (subject to comment) imposing an emergency special assessment on insured institutions of 20 basis points on June 30, 2009 (to be collected on September 30, 2009), and permitting the FDIC to impose an emergency special assessment after June 30, 2009, of up to 10 basis points if necessary; implement changes to the risk-based assessment system; and set rates beginning the second quarter of 2009. Banks in Risk Category I will pay initial base assessment rates ranging from 12 to 16 basis points on an annual basis, beginning on April 1, 2009, while the base annual assessment rates for institutions in Risk Categories II, III and IV will be adjusted to 22, 32 and 45 basis points, respectively. As a result, we may be required to pay significantly higher FDIC premiums to restore the reserve ratio of the Deposit Insurance Fund of the FDIC to at least 1.15 percent within seven years as required by the Reform Act and the amended restoration plan. In addition, to the extent that assessments of participants in the Temporary Liquidity Guarantee Program (as described above) are insufficient to cover the expenses or losses arising from the Temporary Liquidity Guarantee Program, the FDIC may impose one or more emergency special assessments on all FDIC-insured depository institutions.

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

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

        On February 27, 2009, the Board of Directors of the FDIC voted to amend the restoration plan for the Deposit Insurance Fund, adopt an interim rule (subject to comment) imposing an emergency special assessment on insured institutions of 20 basis points on June 30, 2009 (to be collected on September 30, 2009), implement changes to the risk-based assessment system, and set rates beginning the second quarter of 2009. The FDIC extended the restoration plan period to seven years, concluding that the problems facing the financial services sector and the economy at large constitute extraordinary circumstances permitting such extension. The interim rule would also permit the FDIC to impose an emergency special assessment after

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June 30, 2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance or if the reserve ratio of the Deposit Insurance Fund falls to a level which shall be zero or close to negative at the end of a calendar quarter. The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments designed to improve how the assessment system differentiates for risk. Under the final rule, banks in Risk Category I will pay initial base assessment rates ranging from 12 to 16 basis points on an annual basis, beginning on April 1, 2009, while the base annual assessment rates for institutions in Risk Categories II, III and IV will be adjusted to 22, 32 and 45 basis points, respectively. The final rule provides incentives in the form of a reduction in assessment rates for institutions that hold long-term unsecured debt and provides for increases in the base assessment rates for institutions that rely significantly on brokered deposits or secured liabilities.

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

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

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

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

        We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will likely continue in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or fines. International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future.

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

        We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent

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or unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.

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

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

    Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers

        In particular, there have been proposals made by President Obama, members of Congress and others that could reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution's ability to foreclose on mortgage collateral. For example, on February 18, 2009, President Obama announced "The Homeowner Affordability and Stability Plan" as part of a plan designed to help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. On April 28, 2009, the Obama Administration announced additional details of the "Making Home Affordable Program", a comprehensive three-part plan intended to stabilize the U.S. housing market that includes aggressive measures to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; a Home Affordable Refinance Program, which will provide new access to refinancing for up to 4 to 5 million homeowners; and a Home Affordable Modification Program, which will reduce monthly payments on existing first lien mortgages for up to 3 to 4 million at-risk homeowners. The Administration has also published detailed guidelines for the Home Affordable Modification Program and authorized servicers to begin modifications under the plan immediately. A Second Lien Program coordinates with the first mortgage modification program to lower payments on second liens. Twelve servicers, including the five largest, have now signed contracts and begun modifications under the program. Between loans covered by these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than 75 percent of all loans in the country are now covered by the Making Home Affordable Program. The implementation of these proposals, or other proposals limiting our rights as a creditor, could increase our credit losses or increase our expense in pursuing our remedies as a creditor.

    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, and could negatively impact our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in California could have an

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adverse effect on our operations and the quality of our real estate loan portfolio. Although we do not engage in subprime or negative amortization lending, effects of recent subprime market challenges, combined with the ongoing deterioration in the U.S. and California real estate markets, could result in further price reductions in single family home prices and a lack of liquidity in refinancing markets. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.

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

    Adverse California economic conditions could adversely affect our business

        The State of California currently faces economic and fiscal challenges, the long-term impact of which on the State's economy cannot be predicted with any certainty. A substantial majority of our assets, deposits and fee income are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including significant deterioration in the residential real estate sector, especially the subprime housing markets, and the California state government's budgetary and fiscal difficulties. Under the budget plan approved by the California Legislature and signed by Governor Arnold Schwarzenegger on February 20, 2009, the State of California will reduce services, increase sales and income taxes and other fees and take other expense reduction measures. In addition, California will fund a portion of the deficit through additional borrowings, which may include revenue anticipation warrants, a relatively high-cost form of financing. However, California voters did not approve ballot measures required to enact the budget during a special election held on May 19, 2009. The measures would have set a cap on state spending and institute a "rainy day" fund for periods of fiscal difficulty for the State's budget, authorize the State to sell bonds based on future lottery revenue, shift money from certain social programs, guarantee additional funds for schools and freeze lawmakers' pay when the State runs a deficit. The rejection of all of the revenue-related ballot measures has resulted in budget deficits which would need to be addressed later in 2009.

        On June 25, 2009, the State Controller's Office announced that it would begin to issue IOUs in the form of registered warrants in July as the budget impasse has left the State with insufficient cash. The registered warrants, with an annual interest rate for the IOUs at 3.75% for banks and other financial institutions willing to accept the warrants, are redeemable on October 2, 2009 subject to the availability of funds. Union Bank announced that it would accept the registered warrants from customers until no later than July 10, 2009. On July 24, 2009, the California legislature passed a new budget that Governor Schwarzenegger signed into law on July 28, 2009. This budget provides for significant spending cuts to services, including education and healthcare. The financial and economic consequences of this situation cannot be predicted with any certainty

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

Item 6.   Exhibits

No.   Description
  18.1   Preferability Letter of Independent Registered Public Accounting Firm(1)

 

31.1

 

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

 

31.2

 

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

 

32.1

 

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

 

32.2

 

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

(1)
Filed herewith.

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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 14, 2009

 

By:

 

/s/ MASAAKI TANAKA

Masaaki Tanaka
President and Chief Executive Officer
(Principal Executive Officer)

Date:    August 14, 2009

 

By:

 

/s/ DAVID I. MATSON

David I. Matson
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)

Date:    August 14, 2009

 

By:

 

/s/ DAVID A. ANDERSON

David A. Anderson
Executive Vice President and Controller
(Chief Accounting Officer)

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EXHIBIT INDEX

No.   Description
  18.1   Preferability Letter of Independent Registered Public Accounting Firm(1)

 

31.1

 

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

 

31.2

 

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

 

32.1

 

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

 

32.2

 

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

(1)
Filed herewith.

100



EX-18.1 2 a2193965zex-18_1.htm EXHIBIT 18.1
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Exhibit 18.1

August 14, 2009

UnionBanCal Corporation
400 California Street
San Francisco, California

Dear Sirs/Madams:

        At your request, we have read the description included in your Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarter ended June 30, 2009, of the facts relating to the change in UnionBanCal Corporation and its consolidated subsidiaries (the "Company") annual goodwill impairment test date from January 1st to April 1st. We believe, on the basis of the facts so set forth and other information furnished to us by appropriate officials of the Company, that the accounting change described in your Form 10-Q is to an alternative accounting principle that is preferable under the circumstances.

        We have not audited any consolidated financial statements of the Company as of any date or for any period subsequent to December 31, 2008. Therefore, we are unable to express, and we do not express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on the related information furnished to us by officials of the Company, or on the financial position, results of operations, or cash flows of the Company as of any date or for any period subsequent to December 31, 2008.

Yours truly,

DELOITTE & TOUCHE LLP

San Francisco, California




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EX-31.1 3 a2193965zex-31_1.htm EXHIBIT 31.1
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Exhibit 31.1


CERTIFICATION

I, Masaaki Tanaka, certify that:

    1.
    I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the "Registrant");

    2.
    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

    4.
    The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:

    a)
    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)
    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)
    evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

    d)
    disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting;

    5.
    The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):

    a)
    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date: August 14, 2009

    By:   /s/ MASAAKI TANAKA

Masaaki Tanaka
President and Chief Executive Officer



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CERTIFICATION
EX-31.2 4 a2193965zex-31_2.htm EXHIBIT 31.2
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Exhibit 31.2


CERTIFICATION

        I, David I. Matson, certify that:

    1.
    I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the "Registrant");

    2.
    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

    4.
    The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:

    a)
    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)
    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)
    evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

    d)
    disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting;

    5.
    The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):

    a)
    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date: August 14, 2009

    By:   /s/ DAVID I. MATSON

David I. Matson
Vice Chairman and Chief Financial Officer



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CERTIFICATION
EX-32.1 5 a2193965zex-32_1.htm EXHIBIT 32.1
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Exhibit 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of UnionBanCal Corporation (the "Company") on Form 10-Q for the quarter ending June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Masaaki Tanaka, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

    (1)
    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    (2)
    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2009

    By:   /s/ MASAAKI TANAKA

Masaaki Tanaka
Chief Executive Officer



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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EX-32.2 6 a2193965zex-32_2.htm EXHIBIT 32.2
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Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of UnionBanCal Corporation (the "Company") on Form 10-Q for the quarter ending June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David I. Matson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

    (1)
    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    (2)
    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2009

    By:   /s/ DAVID I. MATSON

David I. Matson
Chief Financial Officer



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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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