UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~June 30, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-15081

UnionBanCal Corporation

(Exact name of registrant as specified in its charter)

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

400 California Street
San Francisco, California 94104-1302

(Address and zip code of principal executive offices)

Registrant’s telephone number: (415) 765-2969

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

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

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

Number of shares of Common Stock outstanding at ~~April 30,~~July 31, 2007: ~~138,200,376~~138,399,605

UnionBanCal Corporation and Subsidiaries

TABLE OF CONTENTS

		Page Number
PART I
Financial Information
Condensed Consolidated Financial Highlights		5
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Income		67
Condensed Consolidated Balance Sheets		78
Condensed Consolidated Statements of Changes in Stockholders’ Equity		89
Condensed Consolidated Statements of Cash Flows		910
Notes to Condensed Consolidated Financial Statements		1011
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Introduction		2831
Executive Overview		2831
Discontinued Operations		2932
Critical Accounting ~~Policies~~Estimates		3033
Financial Performance		3134
Net Interest Income		3337
Noninterest Income and Noninterest Expense		3440
Income Tax Expense		3541
Loans		3642
Cross-Border Outstandings		3844
Provision for Credit Losses		3844
Allowances for Credit Losses		3844
Nonperforming Assets		4147
Loans 90 Days or More Past Due and Still Accruing		4248
Quantitative and Qualitative Disclosures About Market Risk		4248
Liquidity Risk		4551
Regulatory Capital		4753
Business Segments		4854
Regulatory Matters		5461
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		5562
ITEM 4. CONTROLS AND PROCEDURES		5563
PART II
Other Information
ITEM 1.	LEGAL PROCEEDINGS	5664
ITEM 1A.	RISK FACTORS	5664
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6472
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	73
ITEM 6.	EXHIBITS	6473
SIGNATURES		6574

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly from our forecasts and expectations. For a discussion of risk factors relating to the Company’s business, please refer to Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q (this Form 10-Q).

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

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

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

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

· Pending legal and regulatory actions, and future legislative and regulatory developments, including the effects of changes to the Federal Deposit Insurance Corporation’s deposit insurance assessment policies, the SEC and the Federal Reserve Board’s proposed Regulation R and the ~~proposed~~pending Basel II ~~and Basel IA~~ rule ~~proposals~~proposal

· Regulatory controls and processes and supervisory, enforcement or ~~enforcement~~other governmental actions currently pending or threatened against us regarding Bank Secrecy Act and anti-money laundering matters, and their impact on our business

· The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, or adverse facts and developments related thereto

· Our ability to meet regulatory requirements

· Credit quality and provision for credit losses, including the expected need to provide for credit losses due to anticipated loan growth, and ~~indications~~our belief that improvement in credit quality ~~could be at its peak~~has peaked

· Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance

· Net interest income and the effects on net interest income

· The impact of changes in interest rates on our net interest margin

· Loan growth rates, including growth in our residential mortgage loan portfolio

· Deposit pricing pressures and our deposit base, including trends in customers transferring funds from noninterest bearing deposits to interest bearing deposits or other investment alternatives and our belief that pricing has stabilized

· Our relatively high proportion of average noninterest bearing deposits to total deposits

· Deposit renewals

· Our ability and intent to hold various securities ~~assets~~

· The formation of financial subsidiaries

· Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook of any particular region of the U.S. including, in particular, California, Oregon and Washington

· The composition and market sensitivity of our securities portfolios, our trading and hedging strategies and our management of the sensitivity of our balance sheet

· Potential dividend restrictions

· Tax rates and taxes, including the possible effect of changes in Mitsubishi UFJ Financial Group’s taxable profits on our California State tax obligations

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

· Our insurance coverage

· Estimated pension and health care costs and contributions

· Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network or otherwise restructure, reorganize or change our business mix and their impact on our business

· The relationship between our business and that of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group, Inc. and actions that may or may not be taken by The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group, Inc.

· Our strategies and expectations regarding capital levels and returning excess capital to stockholders

· The impact of strategic investments or other acquisitions on our business and benefits of marketing alliances

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

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

PART I. FINANCIAL INFORMATION

UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Financial Highlights
(Unaudited)

										As of and for the
	As of and for the Three Months Ended									Three Months Ended
	March 31,			March 31,			Percent			June 30,			June 30,			Percent
(Dollars in thousands, except per share data)	2006			2007			Change			2006			2007			Change
Results of operations:
Net interest income(1)	$	466,341		$	430,627			(7.66	)%	$	469,000		$	431,124		(8.08	)%
(Reversal of) provision for loan losses	(7,000		)	4,000				nm		(1,000		)	5,000			nm
Noninterest income	217,910			222,558				2.13		219,228			229,845			4.84
Noninterest expense	414,544			422,091				1.82		413,030			411,865			(0.28	)
Income before income taxes(1)	276,707			227,094				(17.93	)	276,198			244,104			(11.62	)
Taxable-equivalent adjustment	1,248			2,115				69.47		1,358			2,251			65.76
Income tax expense	94,004			75,368				(19.82	)	92,203			76,499			(17.03	)
Income from continuing operations	181,455			149,611				(17.55	)	182,637			165,354			(9.46	)
Loss from discontinued operations, net of taxes	(8,510		)	—				100.00
Income from discontinued operations, net of taxes										274			—			(100.00	)
Net income	$	172,945		$	149,611			(13.49	)	$	182,911		$	165,354		(9.60	)
Per common share:
Basic earnings:
From continuing operations	$	1.26		$	1.08			(14.29	)%	$	1.28		$	1.20		(6.25	)%
Net income	1.20			1.08				(10.00	)	1.28			1.20			(6.25	)
Diluted earnings:
From continuing operations	1.24			1.07				(13.71	)	1.26			1.19			(5.56	)
Net income	1.18			1.07				(9.32	)	1.26			1.19			(5.56	)
Dividends(2)	0.41			0.47				14.63		0.47			0.52			10.64
Book value (end of period)	31.94			32.98				3.26		32.34			33.45			3.43
Common shares outstanding (end of period)(3)(4)	143,402,332			138,117,370				(3.69	)
Weighted average common shares outstanding—basic(3)(4)	143,878,106			137,942,320				(4.13	)
Weighted average common shares outstanding—diluted(3)(4)	146,026,188			139,729,681				(4.31	)
Common shares outstanding (end of period)(3)										142,533,794			138,314,564			(2.96	)
Weighted average common shares outstanding—basic(3)										142,723,271			137,476,765			(3.68	)
Weighted average common shares outstanding—diluted(3)										144,878,447			139,137,955			(3.96	)
Balance sheet (end of period):
Total assets(5)	$	48,800,945		$	54,616,849			11.92	%
Total assets(4)										$	50,800,136		$	53,173,833		4.67	%
Total loans	33,528,868			37,251,950				11.10		34,747,833			37,743,222			8.62
Nonperforming assets	42,392			41,744				(1.53	)	36,351			29,826			(17.95	)
Total deposits	39,155,904			43,797,924				11.86		40,544,251			42,090,306			3.81
Stockholders’ equity	4,579,878			4,555,439				(0.53	)	4,608,908			4,627,147			0.40
Balance sheet (period average):
Total assets	$	48,016,643		$	52,973,203			10.32	%	$	49,329,374		$	53,116,454		7.68	%
Total loans	34,052,067			38,458,014				12.94		35,146,976			38,839,769			10.51
Earning assets	43,084,349			48,354,950				12.23		44,358,594			48,443,246			9.21
Total deposits	38,856,033			41,483,062				6.76		39,692,052			42,684,022			7.54
Stockholders’ equity	4,538,679			4,510,205				(0.63	)	4,539,476			4,588,061			1.07
Financial ratios(6):
Return on average assets(7):
Financial ratios(5):
Return on average assets(6):
From continuing operations	1.53		%	1.15		%				1.49		%	1.25		%
Net income	1.46			1.15						1.49			1.25
Return on average stockholders’ equity(7):
Return on average stockholders’ equity(6):
From continuing operations	16.21			13.45						16.14			14.46
Net income	15.45			13.45						16.16			14.46
Efficiency ratio(8)	62.10			64.47
Efficiency ratio(7)										61.73			62.31
Net interest margin(1)	4.36			3.58						4.23			3.56
Dividend payout ratio	32.54			43.52						36.72			43.33
Tangible equity ratio	8.46			7.53
Tier 1 risk-based capital ratio(5)	9.09			8.42
Total risk-based capital ratio(5)	10.94			11.38
Leverage ratio(5)	8.80			8.12
Allowances for credit losses to total loans(9)	1.26			1.11
Allowances for credit losses to nonaccrual loans(9)	1,003.48			997.48
Net loans charged off to average total loans(7)	0.06			0.03
Tangible common equity ratio										8.19			7.87
Tier 1 risk-based capital ratio(4)										8.92			8.59
Total risk-based capital ratio(4)										12.05			11.54
Leverage ratio(4)										8.74			8.30
Allowances for credit losses to total loans(8)										1.17			1.11
Allowances for credit losses to nonaccrual loans(8)										1,130.05			1,456.97
Net loans charged off to average total loans(6)										0.12			0.02
Nonperforming assets to total loans and foreclosed assets	0.13			0.11						0.10			0.08
Nonperforming assets to total assets(5)	0.09			0.08
Nonperforming assets to total assets(4)										0.07			0.06

(1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.

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

(3) Common shares outstanding reflect common shares issued less treasury shares.

~~(4)At March 31, 2007, weighted~~ Weighted average common shares outstanding ~~(basic)~~—basic excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares. ~~The impact of this change on previous periods was not material.~~

~~(5)~~(4) End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.

~~(6)~~(5) Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.

~~(7)~~(6) Annualized.

~~(8)~~(7) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the (reversal of) provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income and is calculated for continuing operations only.

~~(9)~~(8) The allowances for credit losses ratios include the allowances for loan losses and losses on off-balance sheet commitments. These ratios relate to continuing operations only.

nm = not meaningful

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

	As of and for the
	Six Months Ended
	June 30,			June 30,			Percent
(Dollars in thousands, except per share��data)	2006			2007			Change
Results of operations:
Net interest income(1)	$	935,341		$	861,751			(7.87	)%
(Reversal of) provision for loan losses	(8,000		)	9,000				nm
Noninterest income	437,138			452,403				3.49
Noninterest expense	827,574			833,956				0.77
Income before income taxes(1)	552,905			471,198				(14.78	)
Taxable-equivalent adjustment	2,606			4,366				67.54
Income tax expense	186,207			151,867				(18.44	)
Income from continuing operations	364,092			314,965				(13.49	)
Loss from discontinued operations, net of taxes	(8,236		)	—				100.00
Net income	$	355,856		314,965				(11.49	)
Per common share:
Basic earnings:
From continuing operations	$	2.54		$	2.29			(9.84	)%
Net income	2.49			2.29				(8.03	)
Diluted earnings:
From continuing operations	2.51			2.26				(9.96	)
Net income	2.45			2.26				(7.76	)
Dividends(2)	0.88			0.99				12.50
Book value (end of period)	32.34			33.45				3.43
Common shares outstanding (end of period)(3)	142,533,794			138,314,564				(2.96	)
Weighted average common shares outstanding—basic(3)	143,098,104			137,708,257				(3.77	)
Weighted average common shares outstanding—diluted(3)	145,293,781			139,360,012				(4.08	)
Balance sheet (end of period):
Total assets(4)	$	50,800,136		$	53,173,833			4.67	%
Total loans	34,747,833			37,743,222				8.62
Nonperforming assets	36,351			29,826				(17.95	)
Total deposits	40,544,251			42,090,306				3.81
Stockholders’ equity	4,608,908			4,627,147				0.40
Balance sheet (period average):
Total assets	$	48,676,618		$	53,045,236			8.97	%
Total loans	34,602,546			38,649,947				11.70
Earning assets	43,724,990			48,399,343				10.69
Total deposits	39,276,352			42,086,858				7.16
Stockholders’ equity	4,539,080			4,549,348				0.23
Financial ratios(5):
Return on average assets(6):
From continuing operations	1.51		%	1.20		%
Net income	1.47			1.20
Return on average stockholders’ equity(6):
From continuing operations	16.18			13.96
Net income	15.81			13.96
Efficiency ratio(7)	61.91			63.38
Net interest margin(1)	4.29			3.57
Dividend payout ratio	34.65			43.23
Tangible common equity ratio	8.19			7.87
Tier 1 risk-based capital ratio(4)	8.92			8.59
Total risk-based capital ratio4)	12.05			11.54
Leverage ratio(4)	8.74			8.30
Allowances for credit losses to total loans(8)	1.17			1.11
Allowances for credit losses to nonaccrual loans(8)	1,130.05			1,456.97
Net loans charged off to average total loans(6)	0.09			0.02
Nonperforming assets to total loans and foreclosed assets	0.10			0.08
Nonperforming assets to total assets(4)	0.07			0.06

(1)Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.

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

(3)Common shares outstanding reflect common shares issued less treasury shares. Weighted average common shares outstanding—basic excludes nonvested restricted shares but includes the impact of those shares in the calculation of diluted shares.

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

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

(6)Annualized.

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

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

nm = not meaningful

Item 1. Financial Statements

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

For the Three Months

Ended March 31,

(Dollars in thousands, except per share data)

2006

2007

Interest Income

Loans

$
512,323

$
601,933

Securities

96,867

107,990

Interest bearing deposits in banks

736

1,109

Federal funds sold and securities purchased under resale agreements

3,845

11,152

Trading account assets

1,431

1,587

Total interest income

615,202

723,771

Interest Expense

Deposits

115,309

222,257

Federal funds purchased and securities sold under repurchase agreements

8,802

13,524

Commercial paper

12,448

22,264

Medium and long-term debt

10,397

19,695

Trust notes

238

238

Other borrowed funds

2,915

17,281

Total interest expense

150,109

295,259

Net Interest Income

465,093

428,512

(Reversal of) provision for loan losses

(7,000
)
4,000

Net interest income after (reversal of) provision for loan losses

472,093

424,512

Noninterest Income

Service charges on deposit accounts

81,635

74,945

Trust and investment management fees

50,115

48,560

Insurance commissions

19,518

20,250

Brokerage commissions and fees

7,795

9,660

Merchant banking fees

8,229

9,077

Foreign exchange gains, net

7,818

7,594

Card processing fees, net

6,697

7,127

Securities gains (losses), net

(214
)
1,220

Other

36,317

44,125

Total noninterest income

217,910

222,558

Noninterest Expense

Salaries and employee benefits

252,495

258,515

Net occupancy

32,837

35,137

Outside services

28,609

19,836

Professional services

14,547

17,087

Equipment

17,922

16,554

Software

16,344

14,196

Communications

10,552

9,791

Foreclosed asset expense (income)

(7,367
)
9

(Reversal of) provision for losses on off-balance sheet commitments

(3,000
)
1,000

Other

51,605

49,966

Total noninterest expense

414,544

422,091

Income from continuing operations before income taxes

275,459

224,979

Income tax expense

94,004

75,368

Income from Continuing Operations

181,455

149,611

Loss from discontinued operations before income taxes

(13,603
)
—

Income tax benefit

(5,093
)
—

Loss from Discontinued Operations

(8,510
)
—

Net Income

$
172,945

$
149,611

Income from continuing operations per common share—basic

$
1.26

$
1.08

Net Income per common share—basic

$
1.20

$
1.08

Income from continuing operations per common share—diluted

$
1.24

$
1.07

Net Income per common share—diluted

$
1.18

$
1.07

Weighted average common shares outstanding—basic

143,878

137,942

Weighted average common shares outstanding—diluted

146,026

139,730

~~See accompanying notes to condensed consolidated financial statements.~~

~~UnionBanCal Corporation and Subsidiaries~~
~~Condensed Consolidated Balance Sheets~~

(Unaudited)

(Unaudited)

March 31,

December 31,

March 31,

(Dollars in thousands)

2006

2006

2007

Assets

Cash and due from banks

$
2,035,544

$
2,213,782

$
1,913,937

Interest bearing deposits in banks

170,187

824,456

1,008,327

Federal funds sold and securities purchased under resale agreements

513,777

943,200

2,747,300

Total cash and cash equivalents

2,719,508

3,981,438

5,669,564

Trading account assets

329,703

376,321

297,998

Securities available for sale:

Securities pledged as collateral

88,152

89,184

62,026

Held in portfolio

8,394,318

8,667,038

8,524,615

Loans (net of allowance for loan losses: March 31, 2006, $339,443; December 31, 2006, $331,077; March 31, 2007, $332,679)

33,189,425

36,340,646

36,919,271

Due from customers on acceptances

20,541

17,834

18,099

Premises and equipment, net

511,095

495,302

491,088

Intangible assets

39,186

28,930

26,687

Goodwill

453,489

453,489

453,489

Other assets

2,814,603

2,148,954

2,154,012

Assets of discontinued operations to be disposed or sold

240,925

20,440

—

Total assets

$
48,800,945

$
52,619,576

$
54,616,849

Liabilities

Noninterest bearing

$
18,118,506

$
17,113,890

$
16,175,362

Interest bearing

21,037,398

24,855,478

27,622,562

Total deposits

39,155,904

41,969,368

43,797,924

Federal funds purchased and securities sold under repurchase agreements

292,758

1,083,927

549,545

Commercial paper

1,420,276

1,661,163

1,424,401

Other borrowed funds

66,472

432,401

892,852

Acceptances outstanding

20,541

17,834

18,099

Other liabilities

2,259,464

1,545,165

1,292,554

Medium and long-term debt

788,763

1,318,847

2,071,263

Junior subordinated debt payable to subsidiary grantor trust

15,225

14,885

14,772

Liabilities of discontinued operations to be extinguished or assumed

201,664

4,585

—

Total liabilities

44,221,067

48,048,175

50,061,410

Commitments, contingencies and guarantees—See Note 9

Stockholders’ Equity

Preferred stock:

Authorized 5,000,000 shares; no shares issued or outstanding as of March 31, 2006, December 31, 2006 and March 31, 2007

—

—

—

Common stock, par value $1 per share:

Authorized 300,000,000 shares; issued 154,832,175 shares as of March 31, 2006, 156,460,057 shares as of December 31, 2006 and 156,832,956 shares as of March 31, 2007

154,832

156,460

156,833

Additional paid-in capital

1,003,013

1,083,649

1,109,817

Treasury stock—11,429,843 shares as of March 31, 2006, 17,352,803 shares as of December 31, 2006 and 18,715,586 shares as of March 31,
2007

(692,783
)

(1,064,606
)

(1,150,090
)
Retained earnings

4,274,463

4,655,272

4,669,590

Accumulated other comprehensive loss

(159,647
)

(259,374
)

(230,711
)
Total stockholders’ equity

4,579,878

4,571,401

4,555,439

Total liabilities and stockholders’ equity

$
48,800,945

$
52,619,576

$
54,616,849

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands, except per share data)	2006			2007		2006			2007
Interest Income
Loans	$	547,256		$	616,558	$	1,059,578		$	1,218,491
Securities	103,542			109,418		200,409			217,408
Interest bearing deposits in banks	423			1,295		1,159			2,404
Federal funds sold and securities purchased under resale agreements	4,725			7,809		8,570			18,961
Trading account assets	1,554			1,417		2,986			3,004
Total interest income	657,500			736,497		1,272,702			1,460,268
Interest Expense
Deposits	143,677			246,175		258,986			468,432
Federal funds purchased and securities sold under repurchase agreements	8,455			10,120		17,257			23,644
Commercial paper	19,137			17,429		31,585			39,693
Medium and long-term debt	16,875			28,973		27,272			48,668
Trust notes	238			238		476			476
Other borrowed funds	1,476			4,689		4,391			21,970
Total interest expense	189,858			307,624		339,967			602,883
Net Interest Income	467,642			428,873		932,735			857,385
(Reversal of) provision for loan losses	(1,000		)	5,000		(8,000		)	9,000
Net interest income after (reversal of) provision for loan losses	468,642			423,873		940,735			848,385
Noninterest Income
Service charges on deposit accounts	81,837			77,218		163,472			152,163
Trust and investment management fees	48,380			51,585		98,495			100,145
Insurance commissions	17,752			16,501		37,270			36,751
Brokerage commissions and fees	10,330			9,533		18,125			19,193
Merchant banking fees	8,396			8,809		16,625			17,886
Foreign exchange gains, net	8,307			9,288		16,125			16,882
Card processing fees, net	7,206			7,824		13,903			14,951
Securities gains, net	1,993			230		1,779			1,450
Other	35,027			48,857		71,344			92,982
Total noninterest income	219,228			229,845		437,138			452,403
Noninterest Expense
Salaries and employee benefits	248,637			251,430		501,132			509,945
Net occupancy	34,519			35,244		67,356			70,381
Outside services	30,704			18,851		59,313			38,687
Equipment	16,846			16,367		34,768			32,921
Software	15,323			15,136		31,667			29,332
Professional services	17,038			11,970		31,585			29,057
Communications	10,061			8,855		20,613			18,646
Foreclosed asset expense (income)	(7,782		)	9		(15,149		)	18
(Reversal of) provision for losses on off-balance sheet commitments	(4,000		)	—		(7,000		)	1,000
Other	51,684			54,003		103,289			103,969
Total noninterest expense	413,030			411,865		827,574			833,956
Income from continuing operations before income taxes	274,840			241,853		550,299			466,832
Income tax expense	92,203			76,499		186,207			151,867
Income from Continuing Operations	182,637			165,354		364,092			314,965
Income (loss) from discontinued operations before income taxes	431			—		(13,172		)	—
Income tax expense (benefit)	157			—		(4,936		)	—
Income (loss) from Discontinued Operations	274			—		(8,236		)	—
Net Income	$	182,911		$	165,354	$	355,856		$	314,965
Income from continuing operations per common share—basic	$	1.28		$	1.20	$	2.54		$	2.29
Net Income per common share—basic	$	1.28		$	1.20	$	2.49		$	2.29
Income from continuing operations per common share—diluted	$	1.26		$	1.19	$	2.51		$	2.26
Net Income per common share—diluted	$	1.26		$	1.19	$	2.45		$	2.26
Weighted average common shares outstanding—basic	142,723			137,477		143,098			137,708
Weighted average common shares outstanding—diluted	144,878			139,138		145,294			139,360

See accompanying notes to condensed consolidated financial statements.

UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

	(Unaudited)							(Unaudited)
	June 30,			December 31,				June 30,
(Dollars in thousands)	2006			2006				2007
Assets
Cash and due from banks	$	2,192,483			$	2,213,782		$	1,863,482
Interest bearing deposits in banks	31,691				824,456			100,800
Federal funds sold and securities purchased under resale agreements	1,252,514				943,200			1,400,875
Total cash and cash equivalents	3,476,688				3,981,438			3,365,157
Trading account assets	405,728				376,321			307,012
Securities available for sale:
Securities pledged as collateral	83,229				89,184			112,974
Held in portfolio	8,573,909				8,667,038			8,742,740
Loans (net of allowance for loan losses: June 30, 2006, $328,338; December 31, 2006, $331,077; June 30, 2007, $335,952)	34,419,495				36,340,646			37,407,270
Due from customers on acceptances	21,850				17,834			18,969
Premises and equipment, net	498,555				495,302			488,719
Intangible assets	35,759				28,930			24,444
Goodwill	453,489				453,489			453,489
Other assets	2,787,288				2,148,954			2,253,059
Assets of discontinued operations to be disposed or sold	44,146				20,440			—
Total assets	$	50,800,136			$	52,619,576		$	53,173,833
Liabilities
Noninterest bearing	$	18,154,751			$	17,113,890		$	14,938,233
Interest bearing	22,389,500				24,855,478			27,152,073
Total deposits	40,544,251				41,969,368			42,090,306
Federal funds purchased and securities sold under repurchase agreements	281,593				1,083,927			1,281,162
Commercial paper	1,645,107				1,661,163			1,167,437
Other borrowed funds	320,837				432,401			606,896
Acceptances outstanding	21,850				17,834			18,969
Other liabilities	1,876,307				1,545,165			1,531,762
Medium and long-term debt	1,473,924				1,318,847			1,835,495
Junior subordinated debt payable to subsidiary grantor trust	15,111				14,885			14,659
Liabilities of discontinued operations to be extinguished or assumed	12,248				4,585			—
Total liabilities	46,191,228				48,048,175			48,546,686
Commitments, contingencies and guarantees—See Note 9
Stockholders’ Equity
Preferred stock:
Authorized 5,000,000 shares; no shares issued or outstanding as of June 30, 2006, December 31, 2006 and June 30, 2007	—				—			—
Common stock, par value $1 per share:
Authorized 300,000,000 shares; issued 155,719,517 shares as of June 30, 2006, 156,460,057 shares as of December 31, 2006 and 157,060,102 shares as of June 30, 2007	155,720				156,460			157,060
Additional paid-in capital	1,048,419				1,083,649			1,127,607
Treasury stock—13,185,723 shares as of June 30, 2006, 17,352,803 shares as of December 31, 2006 and 18,745,538 shares as of June 30, 2007	(813,571		)		(1,064,606		)	(1,151,985		)
Retained earnings	4,390,188				4,655,272			4,763,031
Accumulated other comprehensive loss	(171,848		)		(259,374		)	(268,566		)
Total stockholders’ equity	4,608,908				4,571,401			4,627,147
Total liabilities and stockholders’ equity	$	50,800,136			$	52,619,576		$	53,173,833

See accompanying notes to condensed consolidated financial statements.

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

																																	Accumulated				Total
																								Additional									other				stock-
																					Number	Common		paid-in			Treasury			Retained			comprehensive				holders’
(In thousands, except shares)	Number of shares		Common stock		Additional paid-in capital			Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)				Total stock- holders’ equity			of shares	stock		capital			stock			earnings			loss				equity
BALANCE DECEMBER 31, 2005	154,469,215		$	154,469	$	994,956		$	(612,732	)	$	4,141,400			$	(118,393	)	$	4,559,700
BALANCE—DECEMBER 31, 2005																					154,469,215	$	154,469	$	994,956		$	(612,732	)	$	4,141,400			$	(118,393	)	$	4,559,700
Comprehensive income
Net income—For the three months ended March 31, 2006											172,945							172,945
Net income—For the six months ended June 30, 2006																														355,856							355,856
Other comprehensive income, net of tax:
Net change in unrealized losses on cash flow hedges															(11,907		)	(11,907		)														(15,457		)	(15,457		)
Net change in unrealized losses on securities available for sale															(29,331		)	(29,331		)														(38,060		)	(38,060		)
Foreign currency translation adjustment															(16		)	(16		)														62			62
Total comprehensive income																		131,691																			302,401
Reclassification due to adoption of SFAS
Reclassifications due to adoption of SFAS
No. 123(R) implementation(1)					(19,035		)				19,035							—						(19,035		)				19,035							—
Stock options exercised																					1,053,833	1,054		41,574													42,628
Restricted stock granted, net of forfeitures	2,925		3		204													207			196,469	197		(197		)											—
Excess tax benefit—stock-based compensation																								10,745													10,745
Compensation expense—stock options					6,214													6,214						11,629													11,629
Compensation expense—restricted stock					3,105													3,105						7,063													7,063
Stock options exercised	360,035		360		13,669													14,029
Excess tax benefit—stock options		��			3,900													3,900
Compensation expense—performance share units																								1,684													1,684
Common stock repurchased(2)								(80,051		)								(80,051		)							(200,839		)								(200,839		)
Dividends declared on common stock, $0.41 per share(3)											(58,917		)					(58,917		)
Dividends declared on common stock, $0.88 per share(3)																														(126,103		)					(126,103		)
Net change			363		8,057			(80,051		)	133,063				(41,254		)	20,178				1,251		53,463			(200,839		)	248,788				(53,455		)	49,208
BALANCE MARCH 31, 2006	154,832,175		$	154,832	$	1,003,013		$	(692,783	)	$	4,274,463			$	(159,647	)	$	4,579,878
BALANCE DECEMBER 31, 2006	156,460,057		$	156,460	$	1,083,649		$	(1,064,606	)	$	4,655,272			$	(259,374	)	$	4,571,401
BALANCE—JUNE 30, 2006																					155,719,517	$	155,720	$	1,048,419		$	(813,571	)	$	4,390,188			$	(171,848	)	$	4,608,908
BALANCE—DECEMBER 31, 2006																					156,460,057	$	156,460	$	1,083,649		$	(1,064,606	)	$	4,655,272			$	(259,374	)	$	4,571,401
Comprehensive income
Net income—For the three months ended March 31, 2007											149,611							149,611
Net income—For the six months ended June 30, 2007																														314,965							314,965
Other comprehensive income, net of tax:
Net change in unrealized losses on cash flow hedges															7,588			7,588																2,383			2,383
Net change in unrealized losses on securities available for sale															17,919			17,919																(18,856		)	(18,856		)
Foreign currency translation adjustment															39			39																303			303
Pension and other benefits adjustment															3,117			3,117																6,978			6,978
Total comprehensive income																		178,274																			305,773
FIN No. 48 adjustment(4)											(49,300		)					(49,300		)										(49,300		)					(49,300		)
FSP FAS 13-2 adjustment(5)											(20,803		)					(20,803		)										(20,803		)					(20,803		)
Stock options exercised	370,626		371		14,457													14,828			577,828	578		23,150													23,728
Restricted stock granted, net of forfeitures	940		1		(1		)											—			17,005	17		(17		)											—
Performance share units vested	1,333		1		(1		)											—
Restricted stock and performance share units vested																					5,212	5		(5		)											—
Excess tax benefit—stock-based compensation					2,862													2,862						3,970													3,970
Compensation expense—stock options and other share-based awards					4,720													4,720
Compensation expense—stock options																								7,460													7,460
Compensation expense—restricted stock					3,760													3,760						7,318													7,318
Compensation expense—performance share units					371													371
Compensation expense—restricted stock units, performance share units and other share-based compensation																								2,082													2,082
Common stock repurchased(2)								(85,484		)								(85,484		)							(87,379		)								(87,379		)
Dividends declared on common stock, $0.47 per share(3)											(65,190		)					(65,190		)
Dividends declared on common stock, $0.99 per share(3)																														(137,103		)					(137,103		)
Net change			373		26,168			(85,484		)	14,318				28,663			(15,962		)		600		43,958			(87,379		)	107,759				(9,192		)	55,746
BALANCE MARCH 31, 2007	156,832,956		$	156,833	$	1,109,817		$	(1,150,090	)	$	4,669,590			$	(230,711	)	$	4,555,439
BALANCE—JUNE 30, 2007																					157,060,102	$	157,060	$	1,127,607		$	(1,151,985	)	$	4,763,031			$	(268,566	)	$	4,627,147

(1) Reclassification reflects a reduction in additional paid-in capital and a corresponding credit to retained earnings for unrecognized compensation expense on nonvested restricted stock as of January 1, 2006 upon adoption of SFAS No. 123(R) “Share-Based Payment.”

(2) Common stock repurchased includes commission costs.

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

(4) See Note 2 of these condensed consolidated financial statements for a description of the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (FIN No. 48).

(5) See Note 2 of these condensed consolidated financial statements for a description of the adoption of FASB Staff Position (FSP) FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.”

See accompanying notes to condensed consolidated financial statements.

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

	For the Three Months Ended March 31,						For the Six Months Ended June 30,
(Dollars in thousands)	2006			2007			2006			2007
Cash Flows from Operating Activities:
Net income	$	172,945		$	149,611		$	355,856		$	314,965
Loss from discontinued operations, net of taxes	(8,510		)	—			(8,236		)	—
Income from continuing operations, net of taxes	181,455			149,611			364,092			314,965
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for loan losses	(7,000		)	4,000			(8,000		)	9,000
(Reversal of) provision for losses on off-balance sheet commitments	(3,000		)	1,000			(7,000		)	1,000
Depreciation, amortization and accretion	35,223			30,211			70,988			60,666
Stock-based compensation—stock options and other share-based compensation	9,526			8,851			20,376			16,860
Provision for deferred income taxes	50,398			22,959			53,787			18,496
(Gains) losses on sales of securities available for sale, net	214			(1,220		)
Net decrease in accrued expenses	(58,878		)	(14,323		)
Gains on sales of securities available for sale, net							(1,779		)	(1,450		)
Net (increase) decrease in trading account assets	(17,047		)	78,323			(93,073		)	69,309
Net decrease in trading account liabilities	(1,594		)	(99,424		)
Net increase in prepaid expenses	(87,878		)	(52,738		)
Net increase (decrease) in other liabilities	816,410			(119,848		)
Net increase in fees and other charges receivable							(93,122		)	(101,099		)
Net increase in other liabilities							373,822			22,011
Net increase in other assets	(632,135		)	(37,403		)	(619,200		)	(120,893		)
Loans originated for resale	(58,529		)	(248,293		)	(230,874		)	(263,982		)
Net proceeds from sales of loans originated for resale	96,558			248,060			168,122			311,166
Excess tax benefit—stock-based compensation	(3,900		)	(2,862		)	(10,745		)	(3,970		)
Other, net	5,680			(5,552		)	(14,944		)	(13,134		)
Discontinued operations, net	126,736			14,518			197,538			14,518
Total adjustments	270,784			(173,741		)	(194,104		)	18,498
Net cash provided by (used in) operating activities	452,239			(24,130		)
Net cash provided by operating activities							169,988			333,463
Cash Flows from Investing Activities:
Proceeds from sales of securities available for sale	4,041			164,021			33,073			296,375
Proceeds from matured and called securities available for sale	389,888			367,395			801,731			775,608
Purchases of securities available for sale	(758,213		)	(331,751		)	(1,387,817		)	(1,200,525		)
Net (purchases) sales of premises and equipment	2,923			(15,887		)
Net purchases of premises and equipment							(22,277		)	(43,853		)
Net increase in loans	(482,202		)	(607,172		)	(1,590,712		)	(1,137,454		)
Other, net	708			27			15,477			21
Discontinued operations, net	622,138			1,337			719,130			1,337
Net cash used in investing activities	(220,717		)	(422,030		)	(1,431,395		)	(1,308,491		)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits	(926,336		)	1,828,556
Net decrease in federal funds purchased and securities sold under repurchase agreements	(358,771		)	(534,382		)
Net increase in commercial paper and other borrowed funds	672,236			223,689
Net increase in deposits							462,012			120,938
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements							(369,936		)	197,235
Net increase (decrease) in commercial paper and other borrowed funds							1,151,432			(319,231		)
Proceeds from issuance of medium-term debt	—			749,250			693,742			749,250
Payment of medium-term debt							—			(200,000		)
Common stock repurchased	(80,051		)	(85,484		)	(200,839		)	(87,379		)
Payments of cash dividends	(59,103		)	(65,859		)	(118,020		)	(131,049		)
Stock-based compensation exercised	17,929			17,690			53,373			27,698
Other, net	(16		)	789			3,562			1,053
Discontinued operations, net	(747,910		)	—			(908,067		)	—
Net cash provided by (used in) financing activities	(1,482,022		)	2,134,249
Net increase (decrease) in cash and cash equivalents	(1,250,500		)	1,688,089
Net cash provided by financing activities							767,259			358,515
Net decrease in cash and cash equivalents							(494,148		)	(616,513		)
Cash and cash equivalents at beginning of period	3,969,876			3,981,438			3,969,876			3,981,438
Effect of exchange rate changes on cash and cash equivalents	132			37			960			232
Cash and cash equivalents at end of period	$	2,719,508		$	5,669,564		$	3,476,688		$	3,365,157
Cash Paid During the Period For:
Interest	$	143,090		$	355,222		$	306,562		$	655,124
Income taxes	111,783			72,071			189,822			144,903
Supplemental Schedule of Noncash Investing and Financing Activities:
Loans transferred to foreclosed assets (OREO)							$	15		$	1,114

See accompanying notes to condensed consolidated financial statements.

910

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. The results of operations for the period ended ~~March 31,~~June 30, 2007 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in UnionBanCal Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K). The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

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

Under a previously announced stock repurchase program, the Company was authorized to repurchase ~~$64.1~~$62.2 million of the Company’s common stock as of ~~March 31,~~June 30, 2007. The Company repurchased ~~$85.5~~$1.9 million of common stock in the ~~first~~second quarter of 2007, compared to ~~$80~~$120.8 million in the ~~first~~second quarter of 2006. The Bank of ~~Tokyo-Mitsubishi~~Tokyo-Mitsubishi UFJ, Ltd. (BTMU), which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., owned approximately 65 percent of the Company’s outstanding common stock at ~~March 31,~~June 30, 2007.

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

Note 2—Recently Issued Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

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

The total amount of unrecognized tax benefits as of January 1, 2007 was $137.4 million. Included in total unrecognized tax benefits was $83.5 million that, if recognized, would result in adjustments to ~~other~~

UnionBanCal Corporation and Subsidiaries

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

Note 2—Recently Issued Accounting Pronouncements (Continued)

other income tax accounts, primarily deferred taxes. The amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $53.9 million.

Interest and penalties pertaining to unrecognized tax benefits are recognized in income tax expense. The Company had accrued $9.0 million of interest expense and no penalties related to unrecognized tax benefits as of the date of adoption. For the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company accrued $1.6 million of interest expense for its uncertain tax positions. The Company does not accrue interest income on income tax refunds until they are realized.

During the second quarter of 2007, the statute of limitations lapsed with respect to certain positions taken by the Company in prior year state tax returns. As a result, the total amount of unrecognized tax benefits decreased by $10.7 million, with a net impact to income tax expense (including interest) of $8.4 million.

During the next 12 months, it is reasonably possible that the statute of limitations pertaining to positions taken by the Company with respect to certain affiliates in prior year state tax returns may lapse. As a result, the total amount of unrecognized tax benefits may decrease by zero up to ~~$20~~$10 million, with a net impact to income tax expense (including interest) of up to ~~$13~~$8 million. The Company’s years open to examination by major jurisdictions are 2003 and forward for federal and ~~1998~~2002 and forward for state.

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

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

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115.” The Statement permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis, with changes in fair value recognized in earnings each

UnionBanCal Corporation and Subsidiaries

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

Note 2—Recently Issued Accounting Pronouncements (Continued)

reporting period. An entity can elect the fair value option for existing assets and liabilities at the date of initial adoption and when first recognizing eligible instruments. The Statement is effective January 1, ~~2008 with early adoption permitted within 120 days of the current fiscal year beginning January 1, 2007 prior to the issuance of interim financial statements.~~2008. Management is currently evaluating the potential impact of this Statement on the Company’s financial position and results of operations.

~~UnionBanCal Corporation and Subsidiaries~~

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

~~Note 2—Recently Issued Accounting Pronouncements (Continued)~~

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

Note 3—Discontinued Operations

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

The Company accounted for this transaction as a discontinued operation and restated its prior period financial statements. The assets of the discontinued operations were reclassified as “held for sale” and accounted for at the lower of cost or fair value less the costs to sell.

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

	March 31,		December 31,			June 30,		December 31,
(Dollars in thousands)	2006		2006			2006		2006
Assets
Cash and due from banks	$	108,284		$	18,422	$	31,343		$	18,422
Interest bearing deposits in banks	18,489			—
Loans	101,134			1,337		10,286			1,337
Due from customers on acceptances	3,542			377		911			377
Premises and equipment	3			—		1			—
Other assets	9,473			304		1,605			304
Assets of discontinued operations to be disposed or sold	$	240,925		$	20,440	$	44,146		$	20,440
Liabilities
Noninterest bearing deposits	$	124,321		$	—	$	9		$	—
Interest bearing deposits	36,440			—		594			—
Other liabilities	40,904			4,585		11,645			4,585
Liabilities of discontinued operations to be extinguished or assumed	$	201,665		$	4,585	$	12,248		$	4,585

Interest expense was allocated to discontinued operations based on average net assets. The amount of interest expense allocated to discontinued operations for the three months ended March 31, 2006 was $0.6 million. Noninterest expense for the three months ended March 31, 2006 included compliance expenses of $4.8 million.13

UnionBanCal Corporation and Subsidiaries

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

Note 3—Discontinued Operations (Continued)

The components of ~~loss~~income (loss) from discontinued operations for the three and six months ended ~~March 31,~~June 30, 2006 were:

For the Three

Months Ended

March 31,

(Dollars in thousands)

2006

Net interest income

$
1,725

Noninterest income

5,811

Noninterest expense

21,139

Loss from discontinued operations before income taxes

(13,603
)

Income tax benefit

(5,093
)

Loss from discontinued operations

$
(8,510
)

	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
(Dollars in thousands)	2006				2006
Net interest (expense) income		$	(86	)		$	1,639
Noninterest income		7,105				12,916
Noninterest expense		6,588				27,727
Income (loss) from discontinued operations before income taxes		431				(13,172		)
Income tax expense (benefit)		157				(4,936		)
Income (loss) from discontinued operations		$	274			$	(8,236	)

For the three and six months ended June 30, 2006, net interest income included the allocation of interest expense from continuing operations to discontinued operations of approximately $0.4 million and $1.1 million, respectively. Interest expense allocated to discontinued operations is calculated based on its average net assets and the corresponding cost of funds rate equivalent to the average federal funds purchased rate for the period. Noninterest income for the three and six months ended June 30, 2006 included a $4.0 million payment from Wachovia Bank, N.A., reflecting the final settlement upon the conversion of the international correspondent banking customer base to Wachovia Bank, N.A. Included in noninterest expense was compliance related expenses of $1.8 million and $7.1 million, for the three and six months ended June 30, 2006, respectively. Additionally, the Company recorded $1.4 million of expenses related to the termination of lease contracts in the second quarter 2006.

Note 4—Earnings Per Share

Basic earnings per share (EPS) ratio is computed by dividing net income by the weighted average number of common shares outstanding during the period. Subsequent to the quarter ended March 31, 2006, the Company no longer includes nonvested restricted shares in the weighted average number of common shares outstanding—basic but includes the impact of those shares in the calculation of diluted shares. The impact of this change for the quarter ended March 31, 2006 is immaterial. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options, nonvested restricted stock, nonvested restricted stock units and nonvested performance shares are common stock equivalents.

~~The following table presents a reconciliation of basic and diluted EPS for the three months ended March 31, 2006 and 2007.~~14

Three Months Ended March 31,

2006

2007

(Amounts in thousands, except per share data)

Basic

Diluted

Basic

Diluted

Income from continuing operations

$
181,455

$
181,455

$
149,611

$
149,611

Loss from discontinued operations

(8,510
)
(8,510
)
—

—

Net income

$
172,945

$
172,945

$
149,611

$
149,611

Weighted average common shares outstanding

143,878

143,878

137,942

137,942

Additional shares due to:

Assumed conversion of dilutive share-based compensation

—

2,148

—

1,788

Adjusted weighted average common shares outstanding

143,878

146,026

137,942

139,730

Income from continuing operations per share

$
1.26

$
1.24

$
1.08

$
1.07

Loss from discontinued operations per share

(0.06
)
(0.06
)
—

—

Net income per share

$
1.20

$
1.18

$
1.08

$
1.07

UnionBanCal Corporation and Subsidiaries

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

Note 4—Earnings Per Share (Continued)

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

	Three Months Ended June 30,								Six Months Ended June 30,
(Amounts in thousands, except	2006				2007				2006						2007
per share data)	Basic		Diluted		Basic		Diluted		Basic			Diluted			Basic		Diluted
Income from continuing operations	$	182,637	$	182,637	$	165,354	$	165,354	$	364,092		$	364,092		$	314,965	$	314,965
Income (loss) from discontinued operations	274		274		—		—		(8,236		)	(8,236		)	—		—
Net income	$	182,911	$	182,911	$	165,354	$	165,354	$	355,856		$	355,856		$	314,965	$	314,965
Weighted average common shares outstanding	142,723		142,723		137,477		137,477		143,098			143,098			137,708		137,708
Additional shares due to:
Assumed conversion of dilutive share-based compensation	—		2,155		—		1,661		—			2,196			—		1,652
Adjusted weighted average common shares outstanding	142,723		144,878		137,477		139,138		143,098			145,294			137,708		139,360
Income from continuing operations per share	$	1.28	$	1.26	$	1.20	$	1.19	$	2.54		$	2.51		$	2.29	$	2.26
Income (loss) from discontinued operations per share	—		—		—		—		(0.05		)	(0.06		)	—		—
Net income per share	$	1.28	$	1.26	$	1.20	$	1.19	$	2.49		$	2.45		$	2.29	$	2.26

The following table provides the number of options and the corresponding exercise prices for those options, which were not included in the computation of diluted earnings per share for the three and six months ended ~~March 31,~~June 30, 2006 and 2007 because they were anti-dilutive.

	For the Three Months Ended March 31,		For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2006	2007	2006		2007		2006		2007
Options outstanding	52,100	1,148,281	1,088,725		1,817,495		1,088,725		1,817,495
Exercise price of options	$69.18 - $71.23	$64.59 - $71.23	$	68.95 - $71.23	$	62.19 - $71.23	$	68.95 - $71.23	$	62.19 - $71.23

1415

UnionBanCal Corporation and Subsidiaries

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

Note 5—Accumulated Other Comprehensive ~~Income (Loss)~~Loss

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

	Before									Before
	Tax			Tax			Net of			Tax			Tax			Net of
(Dollars in thousands)	Amount			Effect			Tax			Amount			Effect			Tax
For the Three Months Ended March 31, 2006:
For the Six Months Ended June 30, 2006:
Cash flow hedge activities:
Unrealized net losses on hedges arising during the period	$	(25,004	)	$	9,564		$	(15,440	)	$	(42,215	)	$	16,147		$	(26,068	)
Reclassification adjustment for net losses on hedges included in net income	5,722			(2,189		)	3,533			17,184			(6,573		)	10,611
Net change in unrealized losses on hedges	(19,282		)	7,375			(11,907		)	(25,031		)	9,574			(15,457		)
Securities available for sale:
Unrealized holding losses arising during the period on securities available for sale	(47,713		)	18,250			(29,463		)	(59,856		)	22,895			(36,961		)
Reclassification adjustment for net losses on securities available for sale included in net income	214			(82		)	132
Reclassification adjustment for net gains on securities available for sale included in net income										(1,779		)	680			(1,099		)
Net change in unrealized losses on securities available for sale	(47,499		)	18,168			(29,331		)	(61,635		)	23,575			(38,060		)
Foreign currency translation adjustment	(26		)	10			(16		)	101			(39		)	62
Net change in accumulated other comprehensive income (loss)	$	(66,807	)	$	25,553		$	(41,254	)
For the Three Months Ended March 31, 2007:
Net change in accumulated other comprehensive loss										$	(86,565	)	$	33,110		$	(53,455	)
For the Six Months Ended June 30, 2007:
Cash flow hedge activities:
Unrealized net gains on hedges arising during the period	$	2,787		$	(1,066	)	$	1,721
Unrealized net losses on hedges arising during the period										$	(14,406	)	$	5,510		$	(8,896	)
Reclassification adjustment for net losses on hedges included in net income	9,502			(3,635		)	5,867			18,265			(6,986		)	11,279
Net change in unrealized losses on hedges	12,289			(4,701		)	7,588			3,859			(1,476		)	2,383
Securities available for sale:
Unrealized holding gains arising during the period on securities available for sale	30,238			(11,566		)	18,672
Unrealized holding losses arising during the period on securities available for sale										(29,087		)	11,126			(17,961		)
Reclassification adjustment for net gains on securities available for sale included in net income	(1,220		)	467			(753		)	(1,450		)	555			(895		)
Net change in unrealized losses on securities available for sale	29,018			(11,099		)	17,919			(30,537		)	11,681			(18,856		)
Foreign currency translation adjustment	63			(24		)	39			491			(188		)	303
Reclassification adjustment for pension and other benefits included in net income:
Amortization of prior service costs	573			(219		)	354			80			(31		)	49
Amortization of transition amount	(24		)	9			(15		)	1,018			(389		)	629
Recognized net actuarial loss	4,499			(1,721		)	2,778			10,202			(3,902		)	6,300
Net change in pension and other benefits	5,048			(1,931		)	3,117			11,300			(4,322		)	6,978
Net change in accumulated other comprehensive income (loss)	$	46,418		$	(17,755	)	$	28,663
Net change in accumulated other comprehensive loss										$	(14,887	)	$	5,695		$	(9,192	)

UnionBanCal Corporation and Subsidiaries

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

Note 5—Accumulated Other Comprehensive ~~Income (Loss)~~Loss (Continued)

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

	Net				Net															Net			Net
	Unrealized				Unrealized															Unrealized			Unrealized
	Gains (Losses)				Gains (Losses)				Foreign				Pension			Accumulated				Losses			Losses			Foreign			Pension			Accumulated
	on Cash				on Securites				Currency				and Other			Other				on Cash			on Securites			Currency			and Other			Other
	Flow				Available				Translation				Benefits			Comprehensive				Flow			Available			Translation			Benefits			Comprehensive
(Dollars in thousands)	Hedges				For Sale				Adjustment				Adjustment(1)			Income (Loss)				Hedges			For Sale			Adjustment			Adjustment(1)			Loss
Balance, December 31, 2005		$	(34,308	)		$	(74,099	)		$	264		$	(10,250	)		$	(118,393	)	$	(34,308	)	$	(74,099	)		$	264	$	(10,250	)		$	(118,393	)
Change during the period		(11,907		)		(29,331		)		(16		)	—				(41,254		)	(15,457		)	(38,060		)		62		—				(53,455		)
Balance, March 31, 2006		$	(46,215	)		$	(103,430	)		$	248		$	(10,250	)		$	(159,647	)
Balance, June 30, 2006																				$	(49,765	)	$	(112,159	)		$	326	$	(10,250	)		$	(171,848	)
Balance, December 31, 2006		$	(27,405	)		$	(57,878	)		$	223		$	(174,314	)		$	(259,374	)	$	(27,405	)	$	(57,878	)		$	223	$	(174,314	)		$	(259,374	)
Change during the period		7,588				17,919				39			3,117				28,663			2,383			(18,856		)		303		6,978				(9,192		)
Balance, March 31, 2007		$	(19,817	)		$	(39,959	)		$	262		$	(171,197	)		$	(230,711	)
Balance, June 30, 2007																				$	(25,022	)	$	(76,734	)		$	526	$	(167,336	)		$	(268,566	)

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

Note 6—Goodwill and Intangible Assets

The table below reflects the Company’s identifiable intangible assets and accumulated amortization at ~~March 31,~~June 30, 2006 and 2007.

	March 31, 2006								March 31, 2007								June 30, 2006								June 30, 2007
(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		Gross Carrying Amount		Accumulated Amortization				Net Carrying Amount
Core Deposit Intangibles	$	67,237		$	(47,368	)	$	19,869	$	58,956		$	(47,632	)	$	11,324	$	67,237		$	(49,760	)	$	17,477	$	58,956		$	(48,999	)	$	9,957
Rights-to-Expiration	36,608			(18,532		)	18,076		36,608			(22,120		)	14,488		36,608			(19,470		)	17,138		36,608			(22,921		)	13,687
Other	2,100			(859		)	1,241		2,100			(1,225		)	875		2,100			(956		)	1,144		2,100			(1,300		)	800
Total	$	105,945		$	(66,759	)	$	39,186	$	97,664		$	(70,977	)	$	26,687	$	105,945		$	(70,186	)	$	35,759	$	97,664		$	(73,220	)	$	24,444

Total amortization expense for the three months ended ~~March 31,~~June 30, 2006 and 2007 was $3.4 million and $2.2 million, respectively. For the six months ended June 30, 2006 and 2007, the expense was $6.9 million and $4.5 million, respectively.

(Dollars in thousands)	Core Deposit Intangibles			Rights-to- Expiration		Other		Total Identifiable Intangibles			Core Deposit Intangibles			Rights-to- Expiration		Other		Total Identifiable Intangibles
Estimated amortization expense for the years ending:
Remaining 2007		$	4,103	$	2,366	$	224		$	6,693		$	2,736	$	1,577	$	149		$	4,462
2008		3,245		2,675		230			6,150			3,245		2,687		230			6,162
2009		1,764		2,242		177			4,183			1,764		2,254		177			4,195
2010		807		1,859		137			2,803			807		1,870		137			2,814
2011		443		1,519		107			2,069			443		1,531		107			2,081
2012		336		1,217		—			1,553			336		1,229		—			1,565
thereafter		626		2,610		—			3,236			626		2,539		—			3,165
Total amortization expense after March 31, 2007		$	11,324	$	14,488	$	875		$	26,687
Total amortization expense after June 30, 2007												$	9,957	$	13,687	$	800		$	24,444

UnionBanCal Corporation and Subsidiaries

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

Note 6—Goodwill and Intangible Assets (Continued)

The changes in the carrying amount of goodwill during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 are shown below.

(Dollars in thousands)	2006			2007		2006			2007
Balance, January 1,	$	454,015		$	453,489	$	454,015		$	453,489
Adjustment for contingent consideration	(526		)	—		(526		)	—
Balance, March 31,	$	453,489		$	453,489
Balance, June 30,						$	453,489		$	453,489

Note 7—Business Segments

During 2006, the Company formally reorganized its operating segments by disaggregating the businesses that were formerly managed and reported under the Community Banking and Investment Services Group or the Commercial Financial Services Group. Management believes that this ~~new~~ organizational structure ~~will enhance~~has enhanced the Company’s focus on target markets and enterprise wide sales and service. The various operating segments reporting under the Chief Operating Officer and the Group Head of Pacific Rim Corporate Group ~~have been~~are aggregated into two reportable business segments entitled “Retail Banking” and “Wholesale Banking” based upon the aggregation criteria prescribed in ~~the~~ SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

· Retail Banking aggregates those operating segments that offer a range of banking services, primarily to individuals and small businesses, delivered generally through a network of branches and ATMs located in the western United States. These services include mortgages, home equity lines of credit, consumer and commercial loans, deposit services and cash management, as well as fiduciary, private banking, investment and asset management services for individuals and institutions and risk management for small businesses and individuals. At ~~March 31,~~June 30, 2006 and 2007, Retail Banking had $222.2 million of goodwill assigned to the operating segments.

· Wholesale Banking aggregates those operating segments that provide credit, depository and cash management services, insurance, investment and risk management products to businesses, individuals and target specialty niches. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and capital markets products. At ~~March 31,~~June 30, 2006 and 2007, Wholesale Banking had $231.3 million of goodwill assigned to the operating segments.

The information, set forth in the ~~table~~tables that ~~follows,~~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 ~~table,~~tables, within total assets, are the amounts of goodwill for each reportable business segment as of ~~March 31,~~June 30, 2006 and 2007.

The information in the ~~table~~tables is derived from the internal management reporting system used by management to measure the performance of the individual segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each operating segment based on internal management accounting policies. Net interest income is determined by the

UnionBanCal Corporation and Subsidiaries

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

Note 7—Business Segments (Continued)

Company’s internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to an operating segment are assigned to that operating segment. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the operating segment based on a predetermined percentage of usage. Under the Company’s risk-adjusted return on capital (RAROC) methodology, credit expense is charged to an operating segment based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks.

“Other” is comprised of certain non-bank subsidiaries of UnionBanCal Corporation, the elimination of the fully taxable-equivalent basis amount, the transfer pricing center, the amount of the provision for credit losses over/(under) the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowances for credit losses and the residual costs of support groups. In addition, “Other” includes Corporate Treasury, which is responsible for ~~Asset-Liability~~Asset Liability Management (ALM), wholesale funding, and the ALM investment securities and derivatives hedging portfolios, and the results of discontinued operations. Except as discussed above, none of the items in “Other” is significant to the Company’s business.

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

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

1819

UnionBanCal Corporation and Subsidiaries

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

Note 7—Business Segments (Continued)

	Retail Banking				Wholesale Banking				Retail Banking				Wholesale Banking
	As of and for the				As of and for the				As of and for the				As of and for the
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended June 30,				Three Months Ended June 30,
	2006		2007		2006		2007		2006		2007		2006		2007
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	230,231	$	229,878	$	252,535	$	241,576	$	237,613	$	226,010	$	262,781	$	242,891
Noninterest income (expense)	129,902		125,632		103,124		110,021		136,072		132,638		101,413		114,888
Total revenue	360,133		355,510		355,659		351,597		373,685		358,648		364,194		357,779
Noninterest expense (income)	236,373		242,804		167,580		165,840		244,521		240,632		165,646		161,650
Credit expense (income)	6,566		6,274		25,321		25,071		6,406		6,262		23,032		26,862
Income from continuing operations before income taxes	117,194		106,432		162,758		160,686
Income (loss) from continuing operations before income taxes									122,758		111,754		175,516		169,267
Income tax expense (income)	44,827		40,710		54,482		49,137		46,955		42,746		60,354		52,425
Income from continuing operations	72,367		65,722		108,276		111,549
Loss from discontinued operations, net of income taxes	—		—		—		—
Income (loss) from continuing operations									75,803		69,008		115,162		116,842
Income from discontinued operations, net of income taxes									—		—		—		—
Net income (loss)	$	72,367	$	65,722	$	108,276	$	111,549	$	75,803	$	69,008	$	115,162	$	116,842
Total assets, end of period—Market View (dollars in millions):	$	16,337	$	17,245	$	23,341	$	25,557	$	16,840	$	17,726	$	24,110	$	25,746

													UnionBanCal																					UnionBanCal
	Other						Reconciling Items						Corporation					Other								Reconciling Items								Corporation
	As of and for the						As of and for the						As of and for the					As of and for the								As of and for the								As of and for the
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,					Three Months Ended June 30,								Three Months Ended June 30,								Three Months Ended June 30,
	2006			2007			2006			2007			2006			2007		2006				2007				2006				2007				2006			2007
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	(15,274	)	$	(40,854	)	$	(2,399	)	$	(2,088	)	$	465,093		$	428,512		$	(30,314	)		$	(37,805	)		$	(2,438	)		$	(2,223	)	$	467,642		$	428,873
Noninterest income (expense)	2,853			5,930			(17,969		)	(19,025		)	217,910			222,558			2,614				1,807				(20,871		)		(19,488		)	219,228			229,845
Total revenue	(12,421		)	(34,924		)	(20,368		)	(21,113		)	683,003			651,070			(27,700		)		(35,998		)		(23,309		)		(21,711		)	686,870			658,718
Noninterest expense (income)	21,527			25,216			(10,936		)	(11,769		)	414,544			422,091			15,862				21,549				(12,999		)		(11,966		)	413,030			411,865
Credit expense (income)	(38,861		)	(27,317		)	(26		)	(28		)	(7,000		)	4,000			(30,419		)		(28,097		)		(19		)		(27		)	(1,000		)	5,000
Income from continuing operations before income taxes	4,913			(32,823		)	(9,406		)	(9,316		)	275,459			224,979
Income (loss) from continuing operations before income taxes																			(13,143		)		(29,450		)		(10,291		)		(9,718		)	274,840			241,853
Income tax expense (income)	(1,707		)	(10,916		)	(3,598		)	(3,563		)	94,004			75,368			(11,170		)		(14,955		)		(3,936		)		(3,717		)	92,203			76,499
Income from continuing operations	6,620			(21,907		)	(5,808		)	(5,753		)	181,455			149,611
Loss from discontinued operations, net of income taxes	(8,510		)	—			—			—			(8,510		)	—
Income (loss) from continuing operations																			(1,973		)		(14,495		)		(6,355		)		(6,001		)	182,637			165,354
Income from discontinued operations, net of income taxes																			274				—				—				—			274			—
Net income (loss)	$	(1,890	)	$	(21,907	)	$	(5,808	)	$	(5,753	)	$	172,945		$	149,611		$	(1,699	)		$	(14,495	)		$	(6,355	)		$	(6,001	)	$	182,911		$	165,354
Total assets, end of period—Market View (dollars in millions):	$	9,141		$	11,841		$	(18	)	$	(26	)	$	48,801		$	54,617		$	9,873			$	9,727			$	(23	)		$	(25	)	$	50,800		$	53,174

UnionBanCal Corporation and Subsidiaries

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

Note 7—Business Segments (Continued)

	Retail Banking				Wholesale Banking
	As of and for the				As of and for the
	Six Months Ended June 30,				Six Months Ended June 30,
	2006		2007		2006		2007
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	467,804	$	455,842	$	515,316	$	484,466
Noninterest income (expense)	265,974		258,270		204,536		224,910
Total revenue	733,778		714,112		719,852		709,376
Noninterest expense (income)	481,305		483,987		333,225		327,490
Credit expense (income)	12,972		12,535		48,353		51,933
Income (loss) from continuing operations before income taxes	239,501		217,590		338,274		329,953
Income tax expense (income)	91,609		83,228		114,836		101,561
Income (loss) from continuing operations	147,892		134,362		223,438		228,392
Loss from discontinued operations, net of income taxes	—		—		—		—
Net income (loss)	$	147,892	$	134,362	$	223,438	$	228,392
Total assets, end of period—Market View (dollars in millions):	$	16,840	$	17,726	$	24,110	$	25,746

													UnionBanCal
	Other						Reconciling Items						Corporation
	As of and for the						As of and for the						As of and for the
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2006			2007			2006			2007			2006			2007
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	(45,548	)	$	(78,613	)	$	(4,837	)	$	(4,310	)	$	932,735		$	857,385
Noninterest income (expense)	5,469			7,738			(38,841		)	(38,515		)	437,138			452,403
Total revenue	(40,079		)	(70,875		)	(43,678		)	(42,825		)	1,369,873			1,309,788
Noninterest expense (income)	36,980			46,216			(23,936		)	(23,737		)	827,574			833,956
Credit expense (income)	(69,280		)	(55,413		)	(45		)	(55		)	(8,000		)	9,000
Income (loss) from continuing operations before income taxes	(7,779		)	(61,678		)	(19,697		)	(19,033		)	550,299			466,832
Income tax expense (income)	(12,704		)	(25,642		)	(7,534		)	(7,280		)	186,207			151,867
Income (loss) from continuing operations	4,925			(36,036		)	(12,163		)	(11,753		)	364,092			314,965
Loss from discontinued operations, net of income taxes	(8,236		)	—			—			—			(8,236		)	—
Net income (loss)	$	(3,311	)	$	(36,036	)	$	(12,163	)	$	(11,753	)	$	355,856		$	314,965
Total assets, end of period—Market View (dollars in millions):	$	9,873		$	9,727		$	(23	)	$	(25	)	$	50,800		$	53,174

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

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

UnionBanCal Corporation and Subsidiaries

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

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

The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is the variability in those payments due to changes in the designated benchmark rate, i.e. U.S. dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of purchased floor, cap and corridor options and interest rate swaps. At ~~March 31,~~June 30, 2007, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately ~~1.8~~1.7 years.

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

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

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

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

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

The Company uses interest rate cap corridors to hedge the variable cash flows associated with the forecasted issuance and rollover of short-term, fixed rate CDs. In these hedging relationships, the Company hedges the LIBOR component of the CD rates, either 1-month LIBOR, 3-month LIBOR, or 6-month LIBOR, based on the original term to maturity of the CDs, which reflects their repricing frequency. Net payments to be received under the cap corridor contract offset the increase in deposit interest expense caused by the relevant LIBOR index rising above the corridor’s lower strike rate, but only to the extent the index rises to

UnionBanCal Corporation and Subsidiaries

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

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

~~relevant LIBOR index rising above the corridor’s lower strike rate, but only to the extent the index rises to~~ the upper strike rate. The corridor will not provide protection from increases in the relevant LIBOR index to the extent it rises above the corridor’s upper strike rate.

Hedging transactions are structured at inception so that the notional amounts of the hedge are matched with an equal principal amount of loans or CDs, the index and repricing frequencies of the hedge matches those of the loans or CDs and the period in which the designated hedged cash flows occurs is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. In the ~~first~~second quarter of 2007, the Company recognized a net gain of less than $0.1 million due to ineffectiveness, which is recognized in other noninterest expense, compared to a net loss of ~~less than~~ $0.1 million in the ~~first~~second quarter of 2006.

Fair Value Hedges

Hedging Strategy for Medium-Term Notes

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

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

Hedging Strategy for Subordinated Debt

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

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

Other

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

UnionBanCal Corporation and Subsidiaries

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

Note ~~8—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)~~

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

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

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

Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn, the total commitment amounts do not necessarily represent future cash-flow requirements. At June 30, 2007, the Company had total commitments to extend credit under legally binding agreements of $23.3 billion. Exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments.

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. The majority of these types of commitments have terms of one year or less. As of ~~March 31,~~June 30, 2007, the Company’s maximum exposure to loss for standby and commercial letters of credit was ~~$3.7~~$3.6 billion and ~~$57.4~~$71.7 million, respectively. At ~~March 31,~~June 30, 2007, the carrying value of the Company’s standby and commercial letters of credit totaled ~~$6.0~~$5.6 million. Exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the condensed consolidated balance sheet.

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. At ~~March 31,~~June 30, 2007, the Company had commitments to fund principal investments of ~~$116.7~~$107.2 million.

The Company is fund manager for limited liability companies issuing low-income housing credit (LIHC) investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees the timely completion of projects and delivery of tax benefits throughout the investment term. Guarantees may include a minimum rate of return, the availability of tax credits and operating deficit thresholds over an eleven-year weighted average period. Additionally, the Company receives project completion and tax credit guarantees from the limited liability companies issuing the LIHC investments that reduce the Company’s ultimate exposure to loss. As of ~~March 31,~~June 30, 2007, the Company’s maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, or $141.7 million. The Company maintains a reserve of $5.9 million for these guarantees.

UnionBanCal Corporation and Subsidiaries

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

Note 9—Commitments, Contingencies and Guarantees (Continued)

~~under these guarantees is limited to a return of investor capital and minimum investment yield, or $144.1 million. The Company maintains a reserve of $5.9 million for these guarantees.~~

The Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantees of commercial paper obligations and leveraged lease transactions. The guarantee issued by the Bank for an affiliate’s commercial paper program is done in order to facilitate the sale of the commercial paper. As of ~~March 31,~~June 30, 2007, the Bank had a maximum exposure to loss under the commercial paper program guarantee of ~~$1.4~~$1.2 billion. The Bank’s guarantee has an average term of less than nine months and is fully collateralized by a pledged deposit. The Company guarantees its subsidiaries’ leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company has no material obligation to be satisfied. As of ~~March 31,~~June 30, 2007, the Company had no exposure to loss for these agreements.

The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was ~~$2.6~~$2.9 billion at ~~March 31,~~June 30, 2007. The market value of the associated collateral was ~~$2.7~~$3.0 billion at ~~March 31,~~June 30, 2007.

The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of ~~March 31,~~June 30, 2007, the maximum exposure to loss under these contracts totaled ~~$2.8~~$2.5 million. At ~~March 31,~~June 30, 2007, the Company maintained a reserve of ~~$0.1~~$0.2 million for losses related to these guarantees.

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

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

2325

UnionBanCal Corporation and Subsidiaries

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

Note 10—Employee Pension and Other Postretirement Benefits

The following ~~table summarizes~~tables summarize the components of net periodic benefit cost for the three and six months ended ~~March 31,~~June 30, 2006 and 2007.

	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended June 30,						For the Three Months Ended June 30,
(Dollars in thousands)	2006			2007			2006			2007			2006			2007			2006			2007
Components of net periodic benefit cost
Service cost	$	13,625		$	12,186		$	1,785		$	2,058		$	13,379		$	12,931		$	1,785		$	2,108
Interest cost	16,049			17,516			2,240			2,788			16,524			18,080			2,240			2,895
Expected return on plan assets	(28,356		)	(31,579		)	(2,843		)	(3,470		)	(28,364		)	(31,594		)	(2,842		)	(3,486		)
Amortization of prior service cost	267			64			508			509			267			64			(22		)	(24		)
Amortization of transition amount	—			—			(23		)	(24		)	—			—			507			509
Recognized net actuarial loss	7,563			3,506			1,065			993			8,618			4,498			1,065			1,204
Total net periodic benefit cost	$	9,148		$	1,693		$	2,732		$	2,854		$	10,424		$	3,979		$	2,733		$	3,206

	Pension Benefits						Other Benefits
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2006			2007			2006			2007
Components of net periodic benefit cost
Service cost	$	27,004		$	25,117		$	3,570		$	4,166
Interest cost	32,573			35,596			4,480			5,682
Expected return on plan assets	(56,720		)	(63,173		)	(5,685		)	(6,956		)
Amortization of prior service cost	534			128			(45		)	(48		)
Amortization of transition amount	—			—			1,015			1,018
Recognized net actuarial loss	16,181			8,004			2,130			2,198
Total net periodic benefit cost	$	19,572		$	5,672		$	5,465		$	6,060

~~The Company made cash contributions of $50 million to the Pension Plan in the first quarter of 2007.~~ During 2007, the Company plans to make $20 million in contributions to the Other Benefits Plans for postretirement benefits.

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

Note 11—~~Medium-Term~~Medium and Long-Term Debt

On March 23, 2007, the Bank issued $750 million of Floating Rate Senior Bank Notes due on March 23, 2009. The Senior Notes were issued at 100 percent of their face value, and bear a floating interest rate of 3-Month LIBOR plus 2 basis points. Interest is payable and reset quarterly on the 23rd of March, June, September and December of each year, with the first interest payment and interest reset date on June 23, 2007. The Senior Notes are not redeemable at the option of the Bank prior to maturity or subject to repayment at the option of the holders prior to maturity.

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

UnionBanCal Corporation and Subsidiaries

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

Note 12—Management Stock Plans

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

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

~~UnionBanCal Corporation and Subsidiaries~~

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

~~Note 12—Management Stock Plans~~ ~~(Continued)~~

Under the 2000 Stock Plan, the Company grants stock options and restricted stock and issues shares of common stock upon vesting of performance shares and restricted stock units that are settled in common stock. The Company issues new shares of common stock upon exercise of outstanding stock options, granting of restricted stock awards and settlement of other awards under the stock plans. At ~~March 31,~~June 30, 2007, a total of ~~3,832,713~~3,196,990 shares were available for future grants under the 2000 Stock Plan as stock options, restricted stock or shares of common stock issued upon vesting of performance shares and restricted stock units settled in common stock. The remaining shares under the 1997 Stock Plan are not available for future grants.

Stock Options

The following is a summary of stock option transactions under the stock plans for the ~~three~~six months ended ~~March 31,~~June 30, 2007.

	For the Three Months Ended March 31, 2007										For the Six Months Ended June 30, 2007
	Number of Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value			Number of Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
								(in thousands)										(in thousands)
Options outstanding, beginning of the period(1)	8,326,241			$	49.24						8,326,241			$	49.24
Granted	—			—							627,548			63.42
Exercised	(370,626	)		40.01							(577,838	)		41.06
Forfeited	(9,351	)		67.84							(20,820	)		67.80
Options outstanding, end of the period(1)	7,946,264			$	49.64		5.23		$	116,821	8,355,131			$	50.82		5.04		$	89,167
Options exercisable, end of the period	5,586,713			$	44.12		4.91		$	108,285	6,675,629			$	47.11		4.82		$	89,125

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

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing ~~model.~~model that uses the assumptions noted in the following table. The Black-Scholes option pricing model uses tranches based on expected terms that result in ranges of input ~~assumptions.~~assumptions, such ranges are disclosed below. Expected volatilities are based on historical data and implied volatilities from trade options on the Company’s stock and other factors. The Company uses historical data to estimate option

UnionBanCal Corporation and Subsidiaries

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

Note 12—Management Stock Plans (Continued)

exercise and employee terminations within the valuation model. The expected term of an option granted is derived from the output of the option valuation model, which is based on historical data and represents the period of time that the option granted is expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant based on the expected term.

	For the Six Months Ended June 30, 2007
Weighted-average fair value—per share		$	8.78
Risk-free interest rate		4.5		%
Expected volatility		16.9 - 17.8		%
Weighted-average expected volatility		17.4		%
Expected term (in years)		3.8 - 4.4
Expected dividend yield		3.5		%

The weighted-average fair value of options granted during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 was ~~$11.85~~$12.30 and $8.78 per ~~share. There were no options granted during the three months ended March 31, 2007.~~share, respectively. The total intrinsic value of options exercised during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 was ~~$11.0~~$30.5 million and ~~$8.4~~$12.4 million, respectively. The total fair value of options vested during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 was ~~$0.8~~$25.7 million and ~~$0.5~~$19.2 million, respectively.

The Company recognized ~~$4.5~~$7.5 million of compensation cost for share-based payment arrangements related to stock option awards with ~~$1.7~~$2.8 million of corresponding tax benefit for the ~~three~~six months ended ~~March 31,~~June 30, 2007. As of ~~March 31,~~June 30, 2007, the total unrecognized compensation cost related to nonvested

~~UnionBanCal Corporation and Subsidiaries~~

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

~~Note 12—Management Stock Plans (Continued)~~

stock option awards was ~~$11.3~~$13.5 million and the weighted-average period over which it is expected to be recognized was ~~11 months.~~one year.

Restricted Stock

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

UnionBanCal Corporation and Subsidiaries

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

Note 12—Management Stock Plans (Continued)

The following is a summary of the Company’s nonvested restricted stock awards as of ~~March 31,~~June 30, 2007 and changes during the period ended ~~March 31,~~June 30, 2007.

	For the Three Months Ended March 31, 2007					For the Six Months Ended June 30, 2007
	Number of Shares		Weighted-Average Grant Date Fair Value			Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested restricted awards, beginning of the period	840,003			$	62.59	840,003			$	62.59
Granted	8,200			61.25		40,461			63.14
Vested	(8,543	)		66.52		(96,655	)		65.86
Forfeited	(7,260	)		63.21		(23,456	)		61.68
Nonvested restricted awards, end of the period	832,400			$	62.54	760,353			$	62.26

The total fair value of the restricted stock awards that vested during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 was ~~$0.1~~$3.3 million and ~~$0.6~~$6.4 million, respectively.

The Company recognized ~~$3.8~~$7.3 million of compensation cost for share-based payment arrangements related to restricted stock awards with ~~$1.4~~$2.8 million of corresponding tax benefit for the ~~three~~six months ended ~~March 31,~~June 30, 2007. As of ~~March 31,~~June 30, 2007, the total unrecognized compensation cost related to nonvested restricted awards was ~~$36.8~~$34.3 million and the weighted-average period over which it is expected to be recognized was ~~1.7~~1.6 years.

Restricted Stock Units

Starting in July 2006, the Company granted restricted stock units to non-employee directors. These restricted stock units consist of ~~a regular~~an annual grant, and in the case of new non-employee directors, ~~a regular~~an annual grant and an initial grant. In general, the ~~regular~~annual grant vests in full on the first anniversary of the grant date, and the initial grant vests in three equal installments on each of the first three anniversaries of the grant date. ~~At grant date, it was estimated that 7 percent of the units would forfeit by the vesting date.~~ During the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company granted 900 restricted stock units with a weighted-average grant date fair value of $61.17 per unit. There were no restricted stock units ~~vested or~~ forfeited during the ~~three~~six months ended ~~March 31,~~June 30, 2007. The total fair value of the restricted stock units that vested during the six months ended June 30, 2007 was $0.1 million. For the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company recognized ~~$0.2~~$0.4 million of compensation cost with a corresponding ~~$0.1~~$0.2 million in tax benefits related to these grants. As of ~~March 31,~~June 30, 2007, the total unrecognized compensation cost related

~~UnionBanCal Corporation and Subsidiaries~~

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

~~Note 12—Management Stock Plans (Continued)~~

to restricted stock units was ~~$0.3~~$0.2 million and the weighted-average period over which it is expected to be recognized was ~~9 months.~~1.2 years.

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

UnionBanCal Corporation and Subsidiaries

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

Note 12—Management Stock Plans (Continued)

Performance Share Plan

Effective January 1, 1997, the Company established a Performance Share Plan. At the discretion of the Committee, eligible participants may earn performance share awards to be redeemed in cash and/or shares three years after the date of grant. Performance shares are linked to stockholder value in two ways: (1) the market price of the Company’s common stock; and (2) return on equity, a performance measure closely linked to value creation. Eligible participants generally receive grants of performance shares annually. The plan was amended in 2004, increasing the total number of shares that can be granted under the plan to 2.6 million shares. There were ~~2,132,333~~2,063,656 performance shares remaining for future awards as of ~~March 31,~~June 30, 2007.

All performance shares granted prior to 2006 are redeemable in cash and are therefore being accounted for as liabilities. The value of a performance share under the liability method is equal to the average month-end closing price of the Company’s common stock for the final six months of the performance period. All cancelled or forfeited performance shares become available for future grants. The total fair value of the performance shares that vested during the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2007 was ~~$3.5~~$3.9 million and ~~$7.1~~$7.2 million, respectively. These amounts were paid in cash during the respective quarters, except for $0.3 million, which was deferred during the ~~three~~six months ended ~~March 31,~~June 30, 2006. There were no performance shares forfeited ~~for~~during the ~~three~~six months ended ~~March 31,~~June 30, 2007. At ~~March 31,~~June 30, 2006 and 2007, the Company’s liability for the cash settlement of the performance shares was ~~$14.3~~$13.3 million and ~~$5.1~~$5.3 million, respectively. The Company recognized ~~$0.4~~$0.8 million of compensation cost related to these grants with ~~$0.2~~$0.3 million of corresponding tax benefit for the ~~three~~six months ended ~~March 31,~~June 30, 2007. As of ~~March 31,~~June 30, 2007, the total unrecognized compensation cost related to these grants that are redeemable in cash was ~~$1.0~~$0.7 million and the weighted-average period over which it is expected to be recognized was 65 months.

During the ~~three~~six months ended ~~March 31,~~June 30, 2007, ~~there~~the Company granted 68,677 performance shares that are redeemable in shares, with a weighted-average grant date fair value of $63.42 per unit. There were no ~~grants or~~ forfeitures of performance shares that are redeemable in ~~shares.~~shares during the six months ended June 30, 2007. The total fair value of these performance shares which vested was ~~$0.2~~$0.3 million during the ~~three~~six months ended ~~March 31,~~June 30, 2007. For the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company recognized ~~$0.4~~$1.6 million of compensation cost with a corresponding ~~$0.1~~$0.6 million in tax benefits related to these grants. As of ~~March 31,~~June 30, 2007, the total unrecognized compensation cost related to ~~performance~~grants that are redeemable in shares was ~~$2.4~~$5.4 million and the weighted-average period over which it is expected to be recognized was 1 year. The Company issues new shares under the 2000 Stock Plan upon vesting of these grants that are redeemable in shares.

27Note 13—Subsequent Events

On July 25, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.52 per share of common stock. The dividend will be paid on October 5, 2007 to stockholders of record as of September 7, 2007.

On July 25, 2007, the Company’s Board of Directors authorized the repurchase of an additional $500 million of the Company’s common stock. When combined with the $62 million remaining on its previous repurchase authorizations, the Company had authorization to repurchase $562 million of the Company’s common stock at that date.

Item 2. ~~Management’s~~Management��s Discussion and Analysis of Financial Condition and Results of Operations

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

You should read the following discussion and analysis of our condensed consolidated financial condition and results of operations for the period ended ~~March 31,~~June 30, 2007 in this Form 10-Q together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K). Averages, as presented in the following tables, are substantially all based upon daily average balances.

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

Introduction

We are a California-based, bank holding company whose major subsidiary, Union Bank of California, N.A. (the Bank), is a commercial bank. We had consolidated assets of ~~$55~~$53 billion at ~~March 31,~~June 30, 2007. At ~~March 31,~~June 30, 2007, The Bank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately 65 percent of our outstanding common stock.

Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that impacted our ~~first~~second quarter 2007 results and that could impact our future results. Further detailed information will be found in other portions of this Form 10-Q that will ~~complete~~assist your understanding of trends, events and uncertainties that will impact us.

Average loans grew 1311 percent over the ~~first~~second quarter of 2006, with much of that growth coming from commercial, residential mortgage and construction lending. Although ~~the growth in~~ residential mortgage lending growth has slowed, ~~our~~ growth in that portfolio was still a solid 87 percent over the ~~first~~second quarter of 2006.

Our overall credit quality continues to be strong. Our nonperforming assets were ~~$42~~$30 million, ~~flat~~down 18 percent compared to ~~first~~second quarter 2006. Our net charge offs were $2 million in the ~~first~~second quarter of 2007 compared to $5$10 million in the ~~first~~second quarter of 2006. We provided $5 million for credit losses in the ~~first~~second quarter of 2007, compared with ~~reversals~~a reversal of ~~$10~~$5 million in the ~~first~~second quarter of 2006. ~~Our provision was due~~As our credit portfolio continues to ~~growth~~grow and as we believe that we have passed the turning point in ~~our loan portfolio, a shift in risk-grade mix and changes in our loss factors. We expect~~credit quality trends, we anticipate that we will continue to provide for credit losses throughout ~~2007 as our credit portfolio continues to grow.~~2007.

Offsetting our strong loan growth and credit quality was the decline in our noninterest bearing deposits. Compared to ~~first~~second quarter 2006, average noninterest bearing deposits declined by ~~$2.4~~$2.6 billion as our customers shifted their balances to ~~higher-cost deposits.~~interest bearing deposits or other investment alternatives. In addition, ~~between March 31, 2006 and March 31, 2007,~~ the average cost of interest bearing deposits rose from ~~2.19~~2.60 percent to ~~3.42~~3.57 percent ~~but~~from second quarter 2006 to second quarter 2007. However, we believe that pricing has ~~stabilized.~~stabilized as indicated by the more modest sequential quarter increase in our average cost of interest bearing deposits, which rose 15 basis points from 3.42 percent in first quarter 2007. Although our noninterest bearing deposits have declined, we continue to enjoy a relatively high proportion of average noninterest bearing deposits to total deposits compared to our peers. Based on the most recent statistics available, our percentage of average noninterest bearing deposits to average total deposits ranked us second ofamong the 50 largest 50 U.S. banks.

In the ~~first~~second quarter of 2007, our net interest income was ~~$428.5~~$429 million, a decline of ~~$36.6~~$39 million over the ~~first~~second quarter of 2006, continuing the trend experienced throughout 2006 as our higher funding costs outstripped interest income earned on our loan growth.

Noninterest income grew 24.8 percent in the ~~first~~second quarter of 2007 over the ~~first~~second quarter of 2006 as gains on private capital investments and higher trust and investment management fees offset reductions in our service charges on deposits.

Noninterest expense ~~increased approximately 2 percent~~declined slightly in the ~~first~~second quarter of 2007 compared to the ~~first~~second quarter of ~~2006.~~2006 primarily due to the decreased cost for outside services stemming from lower cost of services related to title and escrow deposit balances, a decline in compliance-related professional services expense and the favorable outcome of a lawsuit settlement. Although salary and employee benefits rose by 21.1 percent, employee benefits were lower as a result of the increase in the discount rate used to determine our pension obligations.

In the second quarter of 2007, we recorded a reserve of $10 million for the expected imposition of civil money penalties by the Office of the Comptroller of the Currency (OCC) and the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department related to compliance with Bank Secrecy Act and anti-money laundering regulations (BSA/AML). In addition, the ~~decreased cost~~OCC has indicated that it will institute a procedure for ~~outside services was primarily due~~a cease and desist order against us with regard to ~~the lower cost of services related to title~~our BSA/AML controls and ~~escrow deposit balances.~~processes. For additional information, see “Regulatory Matters.”

Our effective tax rate declined to ~~33.5~~31.6 percent compared to ~~34.1~~33.5 percent in the ~~first~~second quarter of 2006. The lower effective tax rate in 2007 ~~results~~resulted from ~~higher income~~the expiration of the statute of limitations on uncertain tax ~~credits expected during~~positions, partially offset by the ~~year.~~nondeductible BSA/AML penalty.

In the ~~first~~second quarter of 2007, we repurchased ~~1.4 million~~30 thousand shares of common stock for a total of ~~$85.5~~$2 million. At ~~March 31,~~June 30, 2007, we were authorized to repurchase an additional ~~$64.1~~$62 million.

Discontinued Operations

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

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

For the three and six months ended ~~March 31,~~June 30, 2006, ~~loss~~income (loss) from discontinued operations included the following:

For the Three Months Ended
March 31,

(Dollars in thousands)

2006

Net interest income

$
1,725

Noninterest income

5,811

Noninterest expense

21,139

Loss from discontinued operations before income taxes

(13,603
)

Income tax benefit

(5,093
)

Loss from discontinued operations

$
(8,510
)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
(Dollars in thousands)	2006				2006
Net interest (expense) income		$	(86	)		$	1,639
Noninterest income		7,105				12,916
Noninterest expense		6,588				27,727
Income (loss) from discontinued operations
before income taxes		431				(13,172		)
Income tax expense (benefit)		157				(4,936		)
Income (loss) from discontinued operations		$	274			$	(8,236	)

For the three and six months ended ~~March 31,~~June 30, 2006, net interest income included the allocation of interest expense from continuing operations to discontinued operations of approximately ~~$0.6 million.~~$0.4 million and $1.1 million, respectively. Interest expense allocated to discontinued operations is calculated based on its average net assets and the corresponding cost of funds rate equivalent to the average federal funds purchased rate for the period.

Noninterest income for the three and six months ended June 30, 2006 included a $4.0 million payment from Wachovia Bank, N.A., reflecting the final settlement upon the conversion of the international correspondent banking customer base to Wachovia Bank, N.A. Included in noninterest expense ~~were~~was compliance related expenses of ~~$4.8~~$1.8 million and $7.1 million, for the three and six months ended ~~March 31,~~June 30, 2006, respectively. Additionally, we recorded $1.4 million of expenses related to the termination of lease contracts in the second quarter 2006.

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

Critical Accounting ~~Policies~~Estimates

UnionBanCal Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and the general practices of the banking industry. The financial information contained within our statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In many instances, we use a discount factor to determine the present value of assets and liabilities. A change in the discount factor could increase or decrease the values of those assets and liabilities and such a change would result in either a beneficial or adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to determine the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use are employee turnover factors for pension purposes, residual values in our leasing portfolio, fair value of our derivatives and securities, expected useful lives of our depreciable assets and assumptions regarding our effective income tax rates. We enter into derivative contracts to accommodate our customers and for our own risk management purposes. The derivative contracts are generally swaps and option contracts indexed to energy commodities, interest rates or foreign currencies, although we could enter into other types of derivative contracts. We value these contracts at fair value, using either readily available, market quoted prices or information that can be extrapolated to approximate a market price. We are subject to US GAAP that may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Our most significant estimates are approved by our Chief Executive Officer Forum (CEO Forum), which is comprised of our most senior officers. For each financial reporting period, a review of these estimates is presented to and discussed with the Audit Committee of our Board of Directors.

Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical Accounting ~~Policies~~Estimates and our significant accounting policies are discussed in detail in our 2006 Form 10-K filed with the Securities and Exchange Commission (the SEC).

Financial Performance

Summary of Financial Performance

	For the Three Months					Increase (Decrease)						For the Three Months					Increase (Decrease)						For the Six Months					Increase (Decrease)
	Ended March 31,					2007 versus 2006						Ended June 30,					2007 versus 2006						Ended June 30,					2007 versus 2006
(Dollars in thousands)	2006			2007		Amount			Percent			2006			2007		Amount			Percent			2006			2007		Amount			Percent
Results of Operations
Net interest income(1)	$	465,093		$	428,512	$	(36,581	)		(7.9	)%	$	467,642		$	428,873	$	(38,769	)		(8.3	)%	$	932,735		$	857,385	$	(75,350	)		(8.1	)%
Noninterest income
Service charges on deposit accounts	81,635			74,945		(6,690		)		(8.2	)	81,837			77,218		(4,619		)		(5.6	)	163,472			152,163		(11,309		)		(6.9	)
Trust and investment management fees	50,115			48,560		(1,555		)		(3.1	)	48,380			51,585		3,205				6.6		98,495			100,145		1,650				1.7
Brokerage commissions and fees	7,795			9,660		1,865				23.9
Securities gains (losses), net	(214		)	1,220		1,434				nm
Gain on private capital investments, net	2,827			9,095		6,268				nm		3,702			20,171		16,469				nm		6,529			29,266		22,737				nm
Other noninterest income	75,752			79,078		3,326				4.4		85,309			80,871		(4,438		)		(5.2	)	168,642			170,829		2,187				1.3
Total noninterest income	217,910			222,558		4,648				2.1		219,228			229,845		10,617				4.8		437,138			452,403		15,265				3.5
Total revenue	683,003			651,070		(31,933		)		(4.7	)	686,870			658,718		(28,152		)		(4.1	)	1,369,873			1,309,788		(60,085		)		(4.4	)
(Reversal of) provision for loan losses	(7,000		)	4,000		11,000				nm		(1,000		)	5,000		6,000				nm		(8,000		)	9,000		17,000				nm
Noninterest expense
Salaries and employee benefits	252,495			258,515		6,020				2.4		248,637			251,430		2,793				1.1		501,132			509,945		8,813				1.8
Net occupancy	32,837			35,137		2,300				7.0
Outside services	28,609			19,836		(8,773		)		(30.7	)	30,704			18,851		(11,853		)		(38.6	)	59,313			38,687		(20,626		)		(34.8	)
Professional services	14,547			17,087		2,540				17.5		17,038			11,970		(5,068		)		(29.7	)	31,585			29,057		(2,528		)		(8.0	)
Software	16,344			14,196		(2,148		)		(13.1	)
Advertising and public relations	10,231			8,389		(1,842		)		(18.0	)
Foreclosed asset expense (income)	(7,367		)	9		7,376				nm		(7,782		)	9		7,791				nm		(15,149		)	18		15,167				nm
(Reversal of) provision for losses on off-balance sheet commitments	(3,000		)	1,000		4,000				nm		(4,000		)	—		4,000				100.0		(7,000		)	1,000		8,000				nm
Other noninterest expense	69,848			67,922		(1,926		)		(2.8	)	128,433			129,605		1,172				0.9		257,693			255,249		(2,444		)		(0.9	)
Total noninterest expense	414,544			422,091		7,547				1.8		413,030			411,865		(1,165		)		(0.3	)	827,574			833,956		6,382				0.8
Income from continuing operations before income taxes	275,459			224,979		(50,480		)		(18.3	)	274,840			241,853		(32,987		)		(12.0	)	550,299			466,832		(83,467		)		(15.2	)
Income tax expense	94,004			75,368		(18,636		)		(19.8	)	92,203			76,499		(15,704		)		(17.0	)	186,207			151,867		(34,340		)		(18.4	)
Income from continuing operations	$	181,455		$	149,611	$	(31,844	)		(17.5	)%	$	182,637		$	165,354	$	(17,283	)		(9.5	)%	$	364,092		$	314,965	$	(49,127	)		(13.5	)%

(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 ~~first~~second quarter of 2007 compared to the ~~first~~second quarter of 2006 are presented below.

· Overall credit quality remained excellent. However, we believe that the trend of improving credit quality is beyond its peak. (See our discussion under “Allowances for Credit Losses.”) After several years of reducing the level of our allowances for credit losses, we provided a total of $5 million for credit losses in the second quarter of 2007 primarily due to ~~loan growth,~~ a shift in risk-grade mix, increased concern about certain economic conditions and ~~changes~~a decline in our loss factors. ~~Overall credit quality remained excellent. However, we believe that the trend of improving credit quality could be at its peak. (See our discussion under “Allowances for Credit Losses.”)~~

· Our net interest income was unfavorably influenced by lower noninterest bearing deposit volumes and higher rates on interest bearing ~~liabilities, lower hedge income and lower noninterest bearing deposit volumes.~~liabilities. Offsetting these negative influences to our net interest income were higher earning asset volumes (including higher ~~volume~~volumes for commercial, financial and industrial loans, residential mortgages, construction loans and commercial mortgages) and higher average yields on our earning assets. (See our discussion under “Net Interest Income.”)

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

— Service charges on deposits decreased primarily due to lower account analysis fees;

— Trust and investment management fees were higher primarily due to an increase in the total assets under administration on which fees are based. Managed assets increased by approximately 7 percent, while non-managed assets increased by approximately 13 percent from June 30, 2006 to June 30, 2007. Total assets under administration increased by approximately 12 percent, to $243.4 billion, for the same period;

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

Other noninterest income included lower gain on sale of other assets due to a prior year quarter gain of $1.8 million that resulted from the share redemption by MasterCard Incorporated as part of its May 2006 initial public offering, lower securities gains due to a $1.2 million reversal of impairment on a called security in the prior year quarter and lower insurance commissions.

Our lower noninterest expense was due to several factors:

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

· annual merit increases; partially offset by

· lower pension expenses related to a change in the discount rate used to estimate future liabilities, which increased from 5.5% to 6.0%;

— Outside services expense decreased mainly due to lower cost of services related to a 19 percent decline in title and escrow deposits and a shift by our customers to an increased utilization of lower yielding title and escrow loans;

— Professional services expense decreased mainly due to lower compliance-related activities;

— Foreclosed asset income reflected a gain on the sale of a foreclosed property in the second quarter of 2006;

— There was no provision for losses on off-balance sheet commitments in the current quarter compared to a $4.0 million reversal of that provision in the prior year quarter; and

— Other noninterest expense included a reserve accrual of $10.0 million for the expected imposition of civil money penalties by the OCC and FinCEN relating to BSA/AML compliance, partially offset by a favorable outcome of a lawsuit settlement.

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

· Overall credit quality remained excellent. However, we believe that the trend of improving credit quality is beyond its peak. (See our discussion under “Allowances for Credit Losses.”) After several years of reducing the level of our allowances for credit losses, we provided a total of $10 million for credit losses in the first six months of 2007 primarily due to a shift in risk-grade mix, loan growth, net charge offs, increased concern about certain economic conditions and a decline in our loss factors.

· Our net interest income was unfavorably influenced by lower noninterest bearing deposit volumes and higher rates on interest bearing liabilities. Offsetting these negative influences to our net interest income were higher earning asset volumes (including higher volumes for commercial, financial and

industrial loans, residential mortgages and construction loans) and higher average yields on our earning assets. (See our discussion under “Net Interest Income.”)

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

— Service charges on deposits decreased primarily due to lower account analysis ~~fees stemming from an increase in the earnings credit rates on deposit balances, as well as from lower demand deposit balances;~~

— Trust and investment management fees were lower primarily due to a $3.8 million one-time increase in trust fees resulting from a refinement in accrual methodology in the first quarter of 2006, which was partly offset by an increase in fund fees in the first quarter of 2007 due to growth in asset balances and better rates of return. Managed assets increased by approximately 8 percent, while non-managed assets increased by approximately 11 percent from March 31, 2006 to March 31, 2007. Total assets under administration increased by approximately 11 percent, to $240.1 billion, for the same period;fees;

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

— ~~Insurance~~Other noninterest income included higher brokerage commissions, merchant banking fees and ~~gains on the sale of syndicated loans also increased our other noninterest income compared to first quarter 2006.~~card processing fees.

Our higher noninterest expense was due to several factors:

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

· annual merit increases; and

· higher bonuses and other performance-related incentives; partially offset by

· lower pension expenses related to a change in the discount rate used to estimate future liabilities, which increased from 5.5% to 6.0%;

— Outside services expense decreased mainly due to lower cost of services related to the 1216 percent decline in title and escrow deposits and a shift by our customers to ~~the~~an increased utilization of lower yielding title and escrow loans;

— ~~Professional services expense increased mainly due to compliance-related expenses;~~

— ~~Software expense decreased mainly due to a $1.4 million write-off~~Foreclosed asset income reflected higher gains on the sale of ~~a project~~foreclosed properties in ~~the first quarter of~~ 2006; and

— Provision for losses on off-balance sheet commitments increased asfrom a ~~result of higher growth in our loan commitments and a shift~~$7.0 million reversal in the ~~risk-grade mix, partially offset by declines in our loss factors; and~~

— ~~Foreclosed asset income reflected~~prior year to a ~~gain on the sale of a foreclosed property~~$1.0 million provision in the ~~first quarter of 2006.~~current year.

3236

Net Interest Income

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

	For the Three Months Ended
	March 31, 2006									March 31, 2007								Increase (Decrease) in												For the Three Months Ended
				Interest				Average					Interest			Average		Average						Interest Income/						June 30, 2006									June 30, 2007								Increase (Decrease) in
	Average			Income/				Yield/		Average			Income/			Yield/		Balance						Expense (1)						Average			Interest Income/			Average Yield/			Average			Interest Income/		Average Yield/			Average Balance						Interest Income/ Expense (1)
(Dollars in thousands)	Balance			Expense(1)				Rate(1)(2)		Balance			Expense(1)			Rate(1)(2)		Amount			Percent			Amount			Percent			Balance			Expense(1)			Rate(1)(2)			Balance			Expense(1)		Rate(1)(2)			Amount			Percent			Amount			Percent
Assets
Loans:(3)
Commercial, financial and industrial	$	12,371,594			$	195,952		6.42	%	$	14,684,098			$	237,278	6.55	%	$	2,312,504			19	%	$	41,326			21	%	$	12,957,301		$	214,068			6.63	%	$	14,610,728		$	238,175		6.54	%	$	1,653,427			13	%	$	24,107			11	%
Construction	1,523,270				26,958			7.18		2,233,131				42,775		7.77		709,861				47		15,817				59		1,723,868			33,061				7.69		2,296,098			44,047			7.69		572,230				33		10,986				33
Residential mortgage	11,446,831				143,340			5.01		12,386,306				163,766		5.29		939,475				8		20,426				14		11,734,930			149,869				5.11		12,594,065			167,342			5.31		859,135				7		17,473				12
Commercial mortgage	5,652,445				97,301			6.98		6,064,169				106,966		7.15		411,724				7		9,665				10		5,661,541			100,238				7.10		6,213,092			111,720			7.21		551,551				10		11,482				11
Consumer	2,489,296				45,095			7.35		2,542,507				48,979		7.81		53,211				2		3,884				9		2,505,651			47,576				7.62		2,557,085			49,579			7.78		51,434				2		2,003				4
Lease financing	568,631				4,342			3.05		547,803				3,738		2.73		(20,828		)		(4	)	(604		)		(14	)	563,685			3,205				2.27		568,701			7,341			5.16		5,016				1		4,136				129
Total Loans	34,052,067				512,988			6.09		38,458,014				603,502		6.34		4,405,947				13		90,514				18		35,146,976			548,017				6.25		38,839,769			618,204			6.38		3,692,793				11		70,187				13
Securities—taxable	8,233,854				96,053			4.67		8,580,315				107,268		5.00		346,461				4		11,215				12		8,349,759			102,733				4.92		8,548,063			108,675			5.09		198,304				2		5,942				6
Securities—tax-exempt	65,204				1,298			7.96		57,654				1,154		8.01		(7,550		)		(12	)	(144		)		(11	)	63,222			1,275				8.06		56,084			1,164			8.30		(7,138		)		(11	)	(111		)		(9	)
Interest bearing deposits in banks	59,847				736			4.99		79,562				1,109		5.65		19,715				33		373				51		34,462			423				4.92		88,592			1,295			5.86		54,130				157		872				206
Federal funds sold and securities purchased under resale agreements	345,342				3,845			4.52		846,042				11,152		5.35		500,700				145		7,307				190		379,412			4,725				4.99		593,718			7,809			5.28		214,306				56		3,084				65
Trading account assets	328,035				1,530			1.89		333,363				1,701		2.07		5,328				2		171				11		384,763			1,685				1.76		317,020			1,601			2.03		(67,743		)		(18	)	(84		)		(5	)
Total earning assets	43,084,349				616,450			5.77		48,354,950				725,886		6.06		5,270,601				12		109,436				18		44,358,594			658,858				5.95		48,443,246			738,748			6.11		4,084,652				9		79,890				12
Allowance for loan losses	(348,626		)							(330,277		)						18,349				(5	)							(334,556		)							(331,820		)						(2,736		)		(1	)
Cash and due from banks	2,119,926									1,949,232								(170,694		)		(8	)							2,107,846									2,000,691								(107,155		)		(5	)
Premises and equipment, net	527,001									493,055								(33,946		)		(6	)							506,607									486,776								(19,831		)		(4	)
Other assets	2,633,993									2,506,243								(127,750		)		(5	)							2,690,883									2,517,561								(173,322		)		(6	)
Total assets	$	48,016,643								$	52,973,203							$	4,956,560			10	%							$	49,329,374								$	53,116,454							$	3,787,080			8	%
Liabilities
Deposits:
Transaction accounts	$	13,261,888			$	62,358		1.91		$	13,534,373			$	91,505	2.74		$	272,485			2	%	$	29,147			47		$	12,614,869		$	65,457			2.08		$	14,075,542		$	102,833		2.93		$	1,460,673			12	%	$	37,376			57
Savings and consumer time	4,467,627				18,487			1.68		4,415,261				26,957		2.48		(52,366		)		(1	)	8,470				46		4,470,764			21,502				1.93		4,445,326			28,962			2.61		(25,438		)		(1	)	7,460				35
Large time	3,608,597				34,464			3.87		8,435,137				103,795		4.99		4,826,540				134		69,331				201		5,062,473			56,718				4.49		9,173,928			114,380			5.00		4,111,455				81		57,662				102
Total interest bearing deposits	21,338,112				115,309			2.19		26,384,771				222,257		3.42		5,046,659				24		106,948				93		22,148,106			143,677				2.60		27,694,796			246,175			3.57		5,546,690				25		102,498				71
Federal funds purchased and securities sold under repurchase agreements	874,055				9,410			4.37		1,046,439				13,524		5.24		172,384				20		4,114				44		748,050			8,902				4.77		782,000			10,120			5.19		33,950				5		1,218				14
Net funding allocated from (to) discontinued operations(4)	(57,088		)		(608		)	4.32		—				—		—		57,088				(100	)	608				(100	)	(36,123		)	(447		)		4.97		—			—			—		36,123				100		447				100
Commercial paper	1,242,465				12,448			4.06		1,783,758				22,264		5.06		541,293				44		9,816				79		1,650,266			19,137				4.65		1,389,847			17,429			5.03		(260,419		)		(16	)	(1,708		)		(9	)
Other borrowed funds	268,262				2,915			4.41		1,309,102				17,281		5.35		1,040,840				388		14,366				493		108,095			1,476				5.47		333,252			4,689			5.64		225,157				208		3,213				218
Medium and long-term debt	800,014				10,397			5.27		1,371,446				19,695		5.82		571,432				71		9,298				89		1,179,432			16,875				5.74		2,033,377			28,973			5.72		853,945				72		12,098				72
Trust notes	15,280				238			6.24		14,827				238		6.43		(453		)		(3	)	—				0		15,167			238				6.28		14,714			238			6.48		(453		)		(3	)	—				0
Total borrowed funds	3,142,988				34,800			4.49		5,525,572				73,002		5.36		2,382,584				76		38,202				110		3,664,887			46,181				5.05		4,553,190			61,449			5.41		888,303				24		15,268				33
Total interest bearing liabilities	24,481,100				150,109			2.49		31,910,343				295,259		3.75		7,429,243				30		145,150				97		25,812,993			189,858				2.95		32,247,986			307,624			3.83		6,434,993				25		117,766				62
Noninterest bearing deposits	17,517,921									15,098,291								(2,419,630		)		(14	)							17,543,946									14,989,226								(2,554,720		)		(15	)
Other liabilities	1,478,943									1,454,364								(24,579		)		(2	)							1,432,959									1,291,181								(141,778		)		(10	)
Total liabilities	43,477,964									48,462,998								4,985,034				11								44,789,898									48,528,393								3,738,495				8
Stockholders’ Equity
Common equity	4,538,679									4,510,205								(28,474		)		(1	)							4,539,476									4,588,061								48,585				1
Total stockholders’ equity	4,538,679									4,510,205								(28,474		)		(1	)							4,539,476									4,588,061								48,585				1
Total liabilities and stockholders’ equity	$	48,016,643								$	52,973,203							$	4,956,560			10	%							$	49,329,374								$	53,116,454							$	3,787,080			8	%
Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)					466,341			4.36	%					430,627		3.58	%							(35,714		)		(8	)				469,000				4.23	%				431,124			3.56	%							(37,876		)		(8	)
Less: taxable-equivalent adjustment					1,248									2,115										867				69					1,358									2,251											893				66
Net interest income					$	465,093								$	428,512									$	(36,581	)		(8	)%				$	467,642								$	428,873										$	(38,769	)		(8	)%

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

March 31,
2006

Assets

$
618,653

Liabilities

$
561,565

Net assets

$
57,088

Average Assets and Liabilities of Discontinued Operations for the Three Months Ended:	June 30, 2006
Assets	$	79,188
Liabilities	$	43,065
Net assets	$	36,123

(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.

	For the Six Months Ended
	June 30, 2006									June 30, 2007								Increase (Decrease) in
	Average			Interest Income/			Average Yield/			Average			Interest Income/		Average Yield/			Average Balance						Interest Income/ Expense(1)
(Dollars in thousands)	Balance			Expense(1)			Rate(1)(2)			Balance			Expense(1)		Rate(1)(2)			Amount			Percent			Amount			Percent
Assets
Loans:(3)
Commercial, financial and industrial	$	12,666,066		$	410,020			6.53	%	$	14,647,210		$	475,453		6.55	%	$	1,981,144			16	%	$	65,433			16	%
Construction	1,624,123			60,019				7.45		2,264,789			86,822			7.73		640,666				39		26,803				45
Residential mortgage	11,591,676			293,209				5.06		12,490,760			331,108			5.30		899,084				8		37,899				13
Commercial mortgage	5,657,018			197,539				7.04		6,139,042			218,686			7.18		482,024				9		21,147				11
Consumer	2,497,519			92,671				7.48		2,549,836			98,558			7.79		52,317				2		5,887				6
Lease financing	566,144			7,547				2.67		558,310			11,079			3.97		(7,834		)		(1	)	3,532				47
Total Loans	34,602,546			1,061,005				6.17		38,649,947			1,221,706			6.36		4,047,401				12		160,701				15
Securities—taxable	8,292,126			198,787				4.79		8,564,100			215,943			5.04		271,974				3		17,156				9
Securities—tax-exempt	64,207			2,572				8.01		56,865			2,318			8.15		(7,342		)		(11	)	(254		)		(10	)
Interest bearing deposits in banks	47,084			1,159				4.96		84,102			2,404			5.76		37,018				79		1,245				nm
Federal funds sold and securities purchased under resale agreements	362,471			8,570				4.77		719,183			18,961			5.32		356,712				98		10,391				nm
Trading account assets	356,556			3,215				1.82		325,146			3,302			2.05		(31,410		)		(9	)	87				3
Total earning assets	43,724,990			1,275,308				5.86		48,399,343			1,464,634			6.08		4,674,353				11		189,326				15
Allowance for loan losses	(341,568		)							(331,042		)						(10,526		)		(3	)
Cash and due from banks	2,113,853									1,975,104								(138,749		)		(7	)
Premises and equipment, net	516,748									489,898								(26,850		)		(5	)
Other assets	2,662,595									2,511,933								(150,662		)		(6	)
Total assets	$	48,676,618								$	53,045,236							$	4,368,618			9	%
Liabilities
Deposits:
Transaction accounts	$	12,936,591		$	127,815			1.99		$	13,806,452		$	194,338		2.84		$	869,861			7	%	$	66,523			52
Savings and consumer time	4,469,204			39,990				1.80		4,430,376			55,919			2.55		(38,828		)		(1	)	15,929				40
Large time	4,339,551			91,181				4.24		8,806,573			218,175			5.00		4,467,022				nm		126,994				nm
Total interest bearing deposits	21,745,346			258,986				2.40		27,043,401			468,432			3.49		5,298,055				24		209,446				81
Federal funds purchased and securities sold under repurchase agreements	810,704			18,312				4.55		913,489			23,644			5.22		102,785				13		5,332				29
Net funding allocated from (to) discontinued operations(4)	(46,548		)	(1,055		)		4.57		—			—			—		46,548				nm		1,055				nm
Commercial paper	1,447,492			31,585				4.40		1,585,714			39,693			5.05		138,222				10		8,108				26
Other borrowed funds	187,736			4,391				4.72		818,481			21,970			5.41		630,745				nm		17,579				nm
Medium and long-term debt	990,771			27,272				5.55		1,704,240			48,668			5.76		713,469				72		21,396				78
Trust notes	15,223			476				6.26		14,770			476			6.45		(453		)		(3	)	—				—
Total borrowed funds	3,405,378			80,981				4.80		5,036,694			134,451			5.38		1,631,316				48		53,470				66
Total interest bearing liabilities	25,150,724			339,967				2.73		32,080,095			602,883			3.79		6,929,371				28		262,916				77
Noninterest bearing deposits	17,531,006									15,043,457								(2,487,549		)		(14	)
Other liabilities	1,455,808									1,372,336								(83,472		)		(6	)
Total liabilities	44,137,538									48,495,888								4,358,350				10
Stockholders’ Equity
Common equity	4,539,080									4,549,348								10,268				0
Total stockholders’ equity	4,539,080									4,549,348								10,268				0
Total liabilities and stockholders’ equity	$	48,676,618								$	53,045,236							$	4,368,618			9	%
Net Interest Income/Margin
Net interest income/margin (taxable-equivalent basis)				935,341				4.29	%				861,751			3.57	%							(73,590		)		(8	)
Less: taxable-equivalent adjustment				2,606									4,366											1,760				68
Net interest income				$	932,735								$	857,385										$	(75,350	)		(8	)%

Average Assets and Liabilities of Discontinued Operations for the Six Months Ended:	June 30, 2006
Assets	$	347,431
Liabilities	$	300,883
Net assets	$	46,548

(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. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.

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

nm = not meaningful

Net interest income in the ~~first~~second quarter of 2007, on a taxable-equivalent basis, decreased 8 percent from the ~~first~~second quarter of 2006. Our net interest margin decreased by 7867 basis points. These results were primarily due to the following:

· Average earning assets increased ~~$5.3~~$4.1 billion, or ~~12.2~~9 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a ~~$2.3~~$1.6 billion increase in average commercial loans, including a ~~$0.7~~$0.6 billion increase in lower yielding loans related to title and escrow customers, ~~and~~ a $0.9 billion increase in average residential mortgages, a $0.6 billion increase in average construction loans and a $0.6 billion increase in average commercial mortgages;

· Yields on our earning assets were favorably impacted by the increasing interest rate environment resulting in a higher average yield on average earning assets of 2916 basis points, ~~despite being negatively impacted by~~which includes the favorable impact of $2.0 million in lower hedge ~~income, which decreased by $2.5 million;~~expense;

· Average noninterest bearing deposits decreased ~~$2.4~~$2.6 billion, or 1415 percent. Average commercial noninterest bearing deposits, excluding title and escrow deposits, declined ~~$1.7~~$1.6 billion, or 1514 percent, primarily due to changes in customer behavior in response to rising short-term interest rates. Consumer demand deposits decreased $0.4 billion, or 1213 percent. Average noninterest bearing deposits represented 3635 percent of average total deposits in the ~~first~~second quarter of 2007 compared to 4544 percent in the ~~first~~second quarter of 2006; and

· In the ~~first~~second quarter of 2007, the annualized average all-in cost of funds was ~~2.55~~2.61 percent, reflecting an average deposit-to-loan ratio of ~~108~~110 percent and a relatively high proportion of average noninterest bearing deposits to total deposits compared to our peers. In the ~~first~~second quarter of 2006, the annualized all-in cost of funds was ~~1.45~~1.76 percent and our average deposit-to-loan ratio was ~~114~~113 percent.

We use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit and other time deposits (CDs), and to convert our long-term, fixed-rate borrowings to floating rate. For loans, we had hedge expense of ~~$7.8~~$12.0 million and ~~$10.3~~$10.0 million for the quarters ended ~~March 31,~~June 30, 2006 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge expense of less than $0.1 million for both quarters ended June 30, 2006 and 2007.

Net interest income in the first six months of 2007, on a taxable-equivalent basis, decreased 8 percent from the first six months of 2006. Our net interest margin decreased by 72 basis points. These results were primarily due to the following:

· Average earning assets increased $4.7 billion, or 11 percent, primarily due to an increase in average loans. The increase in average loans was largely due to a $2.0 billion increase in average commercial loans, including a $0.6 billion increase in lower yielding loans related to title and escrow customers, a $0.9 billion increase in average residential mortgages, a $0.6 billion increase in average construction loans and a $0.5 billion increase in average commercial mortgages;

· Yields on our earning assets were favorably impacted by the increasing interest rate environment resulting in a higher average yield on average earning assets of 22 basis points;

· Average noninterest bearing deposits decreased $2.5 billion, or 14 percent. Average commercial noninterest bearing deposits, excluding title and escrow deposits, declined $1.7 billion, or 14 percent, primarily due to changes in customer behavior in response to rising short-term interest rates. Consumer demand deposits decreased $0.4 billion, or 13 percent. Average noninterest bearing deposits represented 36 percent of average total deposits in the first six months of 2007 compared to 45 percent in the first six months of 2006; and

· In the first six months of 2007, the annualized average all-in cost of funds was 2.58 percent, reflecting an average deposit-to-loan ratio of 109 percent and a relatively high proportion of average noninterest bearing deposits to total deposits compared to our peers. In the first six months of 2006, the annualized all-in cost of funds was 1.61 percent and our average deposit-to-loan ratio was 114 percent.

We use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit and CDs, and to convert our long-term, fixed-rate borrowings to floating rate. For loans, we had hedge expense of $19.8 million and $20.3 million for the first six months of 2006 and 2007, respectively. For deposits and long-term fixed rate borrowings, we had hedge income of ~~$0.9~~$0.8 million and less than $0.1 million for the ~~quarters ended March 31,~~first six months of 2006 and 2007, respectively.

Noninterest Income and Noninterest Expense

The following tables detail our noninterest income and noninterest expense that exceeded 1%1percent of our total revenues for the three and six months ended ~~March 31,~~June 30, 2006 and 2007.

Noninterest Income

For the Three Months Ended

March 31,

March 31,

Increase (Decrease)

(Dollars in thousands)

2006

2007

Amount

Percent

Service charges on deposit accounts

$
81,635

$
74,945

$
(6,690
)

(8.2
)%

Trust and investment management fees

50,115

48,560

(1,555
)

(3.1
)

Insurance commissions

19,518

20,250

732

3.8

Brokerage commissions and fees

7,795

9,660

1,865

23.9

Merchant banking fees

8,229

9,077

848

10.3

Foreign exchange gains, net

7,818

7,594

(224
)

(2.9
)

Card processing fees, net

6,697

7,127

430

6.4

Securities gains (losses), net

(214
)
1,220

1,434

nm

Gain on private capital investments, net

2,827

9,095

6,268

nm

Other

33,490

35,030

1,540

4.6

~~Total noninterest income~~

~~217,910~~

~~222,558~~

~~4,648~~

~~2.1~~

	For the Three Months Ended										For the Six Months Ended
	June 30,		June 30,		Increase (Decrease)						June 30,		June 30,		Increase (Decrease)
(Dollars in thousands)	2006		2007		Amount			Percent			2006		2007		Amount			Percent
Service charges on deposit accounts	$	81,837	$	77,218	$	(4,619	)		(5.6	)%	$	163,472	$	152,163	$	(11,309	)		(6.9	)%
Trust and investment management fees	48,380		51,585		3,205				6.6		98,495		100,145		1,650				1.7
Insurance commissions	17,752		16,501		(1,251		)		(7.0	)	37,270		36,751		(519		)		(1.4	)
Brokerage commissions and fees	10,330		9,533		(797		)		(7.7	)	18,125		19,193		1,068				5.9
Merchant banking fees	8,396		8,809		413				4.9		16,625		17,886		1,261				7.6
Foreign exchange gains, net	8,307		9,288		981				11.8		16,125		16,882		757				4.7
Card processing fees, net	7,206		7,824		618				8.6		13,903		14,951		1,048				7.5
Securities gains, net	1,993		230		(1,763		)		(88.5	)	1,779		1,450		(329		)		(18.5	)
Gain on private capital investments, net	3,702		20,171		16,469				nm		6,529		29,266		22,737				nm
Other	31,325		28,686		(2,639		)		(8.4	)	64,815		63,716		(1,099		)		(1.7	)
Total noninterest income	$	219,228	$	229,845	$	10,617			4.8	%	$	437,138	$	452,403	$	15,265			3.5	%

nm -= not meaningful

Noninterest Expense

	For the Three Months Ended											For the Three Months Ended											For the Six Months Ended
	March 31,			March 31,		Increase (Decrease)						June 30,			June 30,		Increase (Decrease)						June 30,			June 30,		Increase (Decrease)
(Dollars in thousands)	2006			2007		Amount			Percent			2006			2007		Amount			Percent			2006			2007		Amount			Percent
Salaries and other compensation	$	194,259		$	207,657	$	13,398			6.9	%	$	201,689		$	206,110	$	4,421			2.2	%	$	395,948		$	413,767	$	17,819			4.5	%
Employee benefits	58,236			50,858		(7,378		)		(12.7	)	46,948			45,320		(1,628		)		(3.5	)	105,184			96,178		(9,006		)		(8.6	)
Salaries and employee benefits	252,495			258,515		6,020				2.4		248,637			251,430		2,793				1.1		501,132			509,945		8,813				1.8
Net occupancy	32,837			35,137		2,300				7.0		34,519			35,244		725				2.1		67,356			70,381		3,025				4.5
Outside services	28,609			19,836		(8,773		)		(30.7	)	30,704			18,851		(11,853		)		(38.6	)	59,313			38,687		(20,626		)		(34.8	)
Professional services	14,547			17,087		2,540				17.5
Equipment	17,922			16,554		(1,368		)		(7.6	)	16,846			16,367		(479		)		(2.8	)	34,768			32,921		(1,847		)		(5.3	)
Software	16,344			14,196		(2,148		)		(13.1	)	15,323			15,136		(187		)		(1.2	)	31,667			29,332		(2,335		)		(7.4	)
Professional services												17,038			11,970		(5,068		)		(29.7	)	31,585			29,057		(2,528		)		(8.0	)
Advertising and public relations												11,270			10,476		(794		)		(7.0	)	21,501			18,865		(2,636		)		(12.3	)
Communications	10,552			9,791		(761		)		(7.2	)	10,061			8,855		(1,206		)		(12.0	)	20,613			18,646		(1,967		)		(9.5	)
Advertising and public relations	10,231			8,389		(1,842		)		(18.0	)
Data processing	7,398			8,241		843				11.4		7,845			8,626		781				10.0		15,243			16,867		1,624				10.7
Intangible asset amortization	3,430			2,243		(1,187		)		(34.6	)	3,427			2,243		(1,184		)		(34.5	)	6,857			4,486		(2,371		)		(34.6	)
Foreclosed asset expense (income)	(7,367		)	9		7,376				nm		(7,782		)	9		7,791				nm		(15,149		)	18		15,167				nm
(Reversal of) provision for losses on off-balance sheet commitments	(3,000		)	1,000		4,000				nm		(4,000		)	—		4,000				100.0		(7,000		)	1,000		8,000				nm
Other	30,546			31,093		547				1.8		29,142			32,658		3,516				12.1		59,688			63,751		4,063				6.8
Total noninterest expense	$	414,544		$	422,091	$	7,547			1.8	%	$	413,030		$	411,865	$	(1,165	)		(0.3	)%	$	827,574		$	833,956	$	6,382			0.8	%

nm -= not meaningful

Income Tax Expense

Our effective tax rate in the ~~first~~second quarter of 2007 was ~~33.5~~31.6 percent compared to ~~34.1~~33.5 percent for the ~~first~~second quarter of 2006. The lower effective tax rate was primarily due to the recognition of $8.4 million of tax benefits resulting from the expiration of the statute of limitations on uncertain tax positions during the second quarter of 2007, partially offset by $3.8 million in additional taxes due to the non-deductibility of the reserve for pending regulatory actions.

Our effective tax rate in the first six months of 2007 ~~was~~declined to 32.5 percent from 33.8 percent for the first six months of 2006 primarily due ~~primarily~~ to ~~higher tax credits in 2007.~~the same reasons identified above.

For further information regarding income tax expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Income Tax Expense” in our 2006 Form 10-K.

Loans

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

Increase (Decrease)
March 31, 2007 From:

March 31,

December 31,

March 31,

March 31,
2006

December 31,
2006

(Dollars in thousands)

2006

2006

2007

Amount

Percent

Amount

Percent

Commercial, financial and industrial

$
11,666,818

$
12,944,771

$
13,274,776

$
1,607,958

13.8
%

$
330,005

2.5
%

Construction

1,598,162

2,175,545

2,258,668

660,506

41.3

83,123

3.8

Mortgage:

Residential

11,570,355

12,343,792

12,419,376

849,021

7.3

75,584

0.6

Commercial

5,647,089

6,028,242

6,158,255

511,166

9.1

130,013

2.2

Total mortgage

17,217,444

18,372,034

18,577,631

1,360,187

7.9

205,597

1.1

Consumer:

Installment

947,881

1,137,401

1,192,442

244,561

25.8

55,041

4.8

Revolving lines of credit

1,532,671

1,401,173

1,341,608

(191,063
)

(12.5
)

(59,565
)

(4.3
)

Total consumer

2,480,552

2,538,574

2,534,050

53,498

2.2

(4,524
)

(0.2
)

Lease financing

563,491

581,203

548,624

(14,867
)

(2.6
)

(32,579
)

(5.6
)

Total loans held to
maturity

33,526,467

36,612,127

37,193,749

3,667,282

10.9

581,622

1.6

Total loans held for sale

2,401

59,596

58,201

55,800

nm

(1,395
)

(2.3
)

Total loans

$
33,528,868

$
36,671,723

$
37,251,950

$
3,723,082

11.1
%

$
580,227

1.6
%

								Increase (Decrease) June 30, 2007 from:
								June 30,						December 31,
	June 30,		December 31,			June 30,		2006						2006
(Dollars in thousands)	2006		2006			2007		Amount			Percent			Amount			Percent
Commercial, financial and industrial	$	12,218,058		$	12,944,771	$	13,052,803	$	834,745			6.8	%	$	108,032			0.8	%
Construction	1,849,236			2,175,545		2,303,089		453,853				24.5		127,544				5.9
Mortgage:
Residential	11,844,946			12,343,792		12,936,691		1,091,745				9.2		592,899				4.8
Commercial	5,649,504			6,028,242		6,292,157		642,653				11.4		263,915				4.4
Total mortgage	17,494,450			18,372,034		19,228,848		1,734,398				9.9		856,814				4.7
Consumer:
Installment	1,021,542			1,137,401		1,230,021		208,479				20.4		92,620				8.1
Revolving lines of credit	1,488,533			1,401,173		1,335,117		(153,416		)		(10.3	)	(66,056		)		(4.7	)
Total consumer	2,510,075			2,538,574		2,565,138		55,063				2.2		26,564				1.0
Lease financing	568,914			581,203		581,297		12,383				2.2		94				0.0
Total loans held to maturity	34,640,733			36,612,127		37,731,175		3,090,442				8.9		1,119,048				3.1
Total loans held for sale	107,100			59,596		12,047		(95,053		)		(88.8	)	(47,549		)		(79.8	)
Total loans	$	34,747,833		$	36,671,723	$	37,743,222	$	2,995,389			8.6	%	$	1,071,499			2.9	%

~~nm = not meaningful~~

Commercial, Financial and Industrial Loans

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

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

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

Construction and Commercial Mortgage Loans

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

The construction loan portfolio increase ~~in the first quarter of~~from June 30, 2006 to June 30, 2007 ~~from the first quarter of 2006~~ was primarily due to increased demand for income property ~~and residential construction~~ projects with apartment financing representing the largest component.

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

Residential Mortgage Loans

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

At ~~March 31,~~June 30, 2007, 6466 percent of our residential mortgage loans were interest only, of which none are negative amortizing. At origination, these interest only loans had relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 6566 percent. The remainder of the portfolio consists of balloon or regular amortizing loans.

We do not offer subprime loan products. However, we do have several loan products that allow a customer to move more quickly through the loan origination process by reducing or eliminating the need to verify the income or assets of the customer. We refer to these loans as “no doc” or “low doc” loans. “No doc” loans are only available for owner-occupied properties and eliminate the verification of both income and assets, while “low doc” loans require the verification of assets. In both cases, these loans require lower LTV ratios and higher FICO® credit scores than for fully documented residential loans. Although these loans comprise nearly half of our residential loan portfolio, the delinquency rates relative to the outstanding balances at ~~March 31,~~June 30, 2007 were ~~significantly~~ lower than fully documented loans. ~~At March 31, 2007, the~~The total amount of “no doc” and “low doc” loans past due 30 days or more was ~~$5.8 million.~~$12.6 million at June 30, 2007 compared to $5.7 million at December 31, 2006.

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

Consumer Loans

We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network. The ~~primary driver of the~~ increase in consumer loans from ~~the first quarter of~~June 30, 2006 was primarily in our “Flex Equity Line/Loan” product. The “Flex Equity Line/Loan” allows our customers the flexibility to manage a line of credit with as many as four fixed rate loans under a single product. When customers convert their “Flex Equity Lines/Loans” to fixed rate loans, these new loans are classified as ~~installments~~installment loans. WeIn addition, we offer a “Flex Equity High LTV” product, which allows our customers to draw up to 100 percent of the value of their real estate or $150 thousand, whichever is less. At June 30, 2007, the total amount outstanding of “Flex Equity High LTV” loans was $5.4 million with no delinquencies. Our total home equity loans and lines delinquent 30 days or more were $3.3 million at June 30, 2007 compared to $4.6 million at December 31, 2006.

Lease Financing

We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. Included in our lease portfolio are leveraged

leases of ~~$524~~$512 million, which are 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.

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

Cross-Border Outstandings

Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of ~~March 31,~~June 30, 2007 for ~~those countries~~one country where such outstandings exceeded 1 percent of total assets. For the periods ended ~~March 31,~~June 30, 2006 and December 31, 2006 there were no countries where such cross-border outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. For the ~~countries~~country shown in the table below, any significant local currency outstandings are either hedged or funded by local currency borrowings.

Public

Corporations

Financial

Sector

and Other

Total

(Dollars in millions)

Institutions

Entities

Borrowers

Outstandings

March 31, 2007

Canada

$
270

$
—

$
603

$
873

Germany

610

—

—

610

Switzerland

600

—

—

600

Public

Corporations

Financial

Sector

and Other

Total

(Dollars in millions)

Institutions

Entities

Borrowers

Outstandings

June 30, 2007

Canada

—

664

677

Provision for Credit Losses

We recorded a provision for loan losses of $4$5 million in the ~~first~~second quarter of 2007, compared with a reversal of the allowance for loan losses of $7$1 million in the ~~first~~second quarter of 2006. There was ~~a $1 million~~no provision for losses related to ~~the change in~~ the allowance for losses on off-balance sheet commitments in the ~~first~~second quarter of 2007 compared to a $3$4 million reversal of allowance for losses on off-balance sheet commitments in the ~~first~~second quarter of 2006. The provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management based on the factors discussed under “Allowances for Credit Losses” below.

Allowances for Credit Losses

Allowance Policy and Methodology

We maintain allowances for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowances for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of

operations. Accordingly, our significant policies and methodology on the allowances for credit losses are discussed in detail in Note 1 to our Consolidated Financial Statements and in the section “Allowances for Credit Losses” included in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Form 10-K.

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

At ~~March 31,~~June 30, 2007, our total allowances for credit losses were ~~$415~~$418 million, which consisted of ~~$333~~$336 million related to loans and $82 million related to off-balance sheet commitments. The allowances for credit losses consisted of ~~$358~~$356 million and ~~$57~~$62 million of allocated and unallocated allowance,

respectively. At ~~March 31,~~June 30, 2007, our allowances for credit loss coverage ratios were 1.11 percent of total loans and ~~997~~1,457 percent of total nonaccrual loans. At December 31, 2006, our total allowances for credit losses were $412 million, or 1.12 percent of the total loan portfolio and 987 percent of total nonaccrual loans.

In addition, the allowances 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 ~~both March 31,~~June 30, 2007, ~~and December 31, 2006,~~our total impaired loans were ~~$27~~$28 million and the associated impairment allowance was $6 million compared to total impaired loans of $27 million and an associated impairment allowance of $3 ~~million.~~million on December 31, 2006.

At ~~March 31,~~June 30, 2007 and December 31, 2006, the allowance for losses related to off-balance sheet commitments included within our total allowances for credit losses, was $82 million and $81 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for off-balance sheet commitment losses.

We recorded a provision for credit losses of $5 million in the ~~first~~second quarter of 2007, as a result of management’s assessment of factors, including the credit quality of our credit portfolio, slower future growth in the U.S. economy (including a ~~significant~~continued slow down in the housing market and the potential adverse impact of higher fuel prices on the economy) ~~and~~, growth and changes in the composition of our credit ~~portfolio.~~portfolio, the amount of net charge offs and changes in loss factors.

During the ~~first~~second quarter of 2007, there were no material changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific allowances for credit losses.

Changes in the Allocated (Formula and Specific) Allowance

At ~~March 31,~~June 30, 2007, the formula allowance ~~increased~~changed slightly to ~~$352~~$348 million from $347 million at December 31, 2006. The net increase ~~was due primarily to~~included a shift in the risk-grade mix of loans and growth in our loan portfolio, ~~partially~~ offset by declines in ~~our~~certain loss factors. At ~~March 31,~~June 30, 2007, the specific allowance ofwas $8 million compared to $6 million ~~was unchanged from~~at December 31, 2006.

Changes in the Unallocated Allowance

At ~~March 31,~~June 30, 2007, the unallocated allowance ~~decreased modestly~~increased to ~~$57~~$62 million from $59 million at December 31, 2006, reflecting management’s belief that maintaining the unallocated allowance near our December 31, 2006 assessment is appropriate based on continuing uncertainty associated with our principal portfolio segments, as we ~~approach a~~believe we have passed the turning point in credit quality trends. Additionally, the primary reasons for which we believe an unallocated allowance is warranted are detailed below.

In our assessment as of ~~March 31,~~June 30, 2007, management focused, in particular, on the factors and conditions set out below. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth.

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

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

The following describes some of the specific conditions we considered.

· With respect to commercial real estate, we considered the substantial weakness in the residential construction market, partly offset by ~~improvement~~continued strength in the commercial real estate construction sector, which could be in the range of $8$10 million to ~~$22~~$25 million.

· With respect to fuel prices, we considered the ability of borrowers to absorb higher fuel prices without anticipated negative effects, the prospects of high costs of oil and petroleum products and the impact across virtually all sectors of the economy, which could be in athe range of $3 million to $14 million.

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

· With respect to contractors, we considered the weakening residential housing market, partly offset by ~~an improvement~~continued strength in commercial real estate construction, which could be in the range of $5 million to $7 million.

· With respect to our customers whose revenues are dependent on advertising, we considered the pressures on earnings of newspapers and radio and television stations due to decreases in advertising sale revenues, which could be in the range of $2 million to $4 million.

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

Change in the Total Allowances for Credit Losses

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

	For the Three Months
	Ended March 31,						Increase (Decrease)					For the Three Months Ended June 30,						Increase (Decrease)						For the Six Months Ended June 30,						Increase (Decrease)
(Dollars in thousands)	2006			2007			Amount			Percent		2006			2007			Amount			Percent			2006			2007			Amount			Percent
Balance, beginning of period	$	351,532		$	331,077		$	(20,455	)	(5.8	)%	$	339,443		$	332,679		$	(6,764	)		(2.0	)%	$	351,532		$	331,077		$	(20,455	)		(5.8	)%
Loans charged off:
Commercial, financial and industrial	10,744			3,078			(7,666		)	(71.4	)	18,425			2,762			(15,663		)		(85.0	)	29,169			5,840			(23,329		)		(80.0	)
Mortgage												336			5			(331		)		(98.5	)	336			5			(331		)		(98.5	)
Consumer	918			1,341			423			46.1		876			1,379			503				57.4		1,794			2,720			926				51.6
Lease financing	19			—			(19		)	(100.0	)	3			—			(3		)		(100.0	)	22			—			(22		)		(100.0	)
Total loans charged off	11,681			4,419			(7,262		)	(62.2	)	19,640			4,146			(15,494		)		(78.9	)	31,321			8,565			(22,756		)		(72.7	)
Recoveries of loans previously charged off:
Commercial, financial and industrial	1,909			1,694			(215		)	(11.3	)	8,937			1,758			(7,179		)		(80.3	)	10,846			3,452			(7,394		)		(68.2	)
Mortgage	2			—			(2		)	(100.0	)	—			—			—				nm		2			—			(2		)		(100.0	)
Consumer	440			281			(159		)	(36.1	)	436			230			(206		)		(47.2	)	876			511			(365		)		(41.7	)
Lease financing	4,228			8			(4,220		)	(99.8	)	10			79			69				nm		4,238			87			(4,151		)		(97.9	)
Total recoveries of loans previously charged off	6,579			1,983			(4,596		)	(69.9	)	9,383			2,067			(7,316		)		(78.0	)	15,962			4,050			(11,912		)		(74.6	)
Net loans charged off	5,102			2,436			(2,666		)	(52.3	)	10,257			2,079			(8,178		)		(79.7	)	15,359			4,515			(10,844		)		(70.6	)
(Reversal of) provision for loan losses	(7,000		)	4,000			11,000			nm		(1,000		)	5,000			6,000				nm		(8,000		)	9,000			17,000				nm
Foreign translation adjustment and other net additions	13			38			25			nm		152			352			200				nm		165			390			225				nm
Ending balance of allowance for loan losses	$	339,443		$	332,679		$	(6,764	)	(2.0	)	328,338			335,952			7,614				2.3	%	328,338			335,952			7,614				2.3	%
Allowance for losses on off-balance sheet commitments	83,374			82,374			(1,000		)	(1.2	)	79,374			82,374			3,000				3.8		79,374			82,374			3,000				3.8
Allowances for credit losses	$	422,817		$	415,053		$	(7,764	)	(1.8	)%	$	407,712		$	418,326		$	10,614			2.6	%	$	407,712		$	418,326		$	10,614			2.6	%
Allowances for credit losses to total loans	1.26		%	1.11		%						1.17		%	1.11		%							1.17		%	1.11		%
(Reversal of) provision for loan losses to net loans charged off	nm			164.20								(9.75		)	240.50									(52.09		)	199.34
Net loans charged off to average loans outstanding for the period(1)	0.06			0.03								0.12			0.02									0.09			0.02

(1) Annualized.

nm = not meaningful

Total loans charged off in the ~~first~~second quarter of 2007 decreased from the ~~first~~second quarter of 2006, primarily due to the charge off of ~~four~~two commercial loans, ~~each~~one of which was in excess of $1$11 million, in the ~~first~~second quarter of 2006. Charge offs reflect the realization of losses in the portfolio that were recognized previously through provision for credit losses. In addition, ~~first~~second quarter 2007 recoveries of loans previously charged off decreased from the ~~first~~second quarter of 2006 primarily as result of the higher levels of loans charged off in periods prior to ~~March 31,~~June 30, 2006. Such fluctuations in loan recoveries from year-to-year are due to variability in timing of recoveries and tend to trail the periods in which charge offs are recorded.

Nonperforming Assets

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

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

The following table sets forth an analysis of nonperforming assets.

												Increase (Decrease) March 31, 2007 From:																							Increase (Decrease) June 30, 2007 from:
	March 31,			December 31,				March 31,				March 31, 2006						December 31, 2006							June 30,			December 31,				June 30,			June 30, 2006						December 31, 2006
(Dollars in thousands)	2006			2006				2007				Amount			Percent			Amount				Percent			2006			2006				2007			Amount			Percent			Amount			Percent
Commercial, financial and industrial	$	18,691			$	7,552			$	5,120		$	(13,571	)		(72.6	)%		$	(2,432	)		(32.2	)%	$	4,021			$	7,552		$	18,691		$	14,670			nm	%	$	11,139			nm	%
Commercial mortgage	8,257				19,187				21,489			13,232				nm			2,302				12.0		16,918				19,187			9,565			(7,353		)		(43.5	)	(9,622		)		(50.1	)
Lease financing	15,187				15,047				15,001			(186		)		(1.2	)		(46		)		(0.3	)	15,140				15,047			456			(14,684		)		(97.0	)	(14,591		)		(97.0	)
Total nonaccrual loans	42,135				41,786				41,610			(525		)		(1.2	)		(176		)		(0.4	)	36,079				41,786			28,712			(7,367		)		(20.4	)	(13,074		)		(31.3	)
Foreclosed assets	257				579				134			(123		)		(47.9	)		(445		)		(76.9	)	272				579			1,114			842				nm		535				92.4
Total nonperforming assets	$	42,392			$	42,365			$	41,744		$	(648	)		(1.5	)		$	(621	)		(1.5	)	$	36,351			$	42,365		$	29,826		$	(6,525	)		(17.9	)%	$	(12,539	)		(29.6	)%
Allowances for credit losses(1)	$	422,817			$	412,451			$	415,053		$	(7,764	)		(1.8	)%		$	2,602			0.6	%	$	407,712			$	412,451		$	418,326		$	10,614			2.6	%	$	5,875			1.4	%
Nonaccrual loans to total loans	0.13		%		0.11		%		0.11		%														0.10		%		0.11		%	0.08		%
Allowances for credit losses to nonaccrual loans	1,003.48				987.06				997.48																1,130.05				987.06			1,456.97
Nonperforming assets to total loans and foreclosed assets	0.13				0.12				0.11																0.10				0.12			0.08
Nonperforming assets to total assets	0.09				0.08				0.08																0.07				0.08			0.06

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

nm = not meaningful

During the ~~first~~second quarter of 2007, we had ~~$2.7 million in~~no sales of nonperforming loans compared to ~~$17.7~~approximately $9 million in sales in the ~~first~~second quarter of 2006. Losses and recoveries that result when the sale decision is made are reflected in our net charge offs.

Loans 90 Days or More Past Due and Still Accruing

																																	Increase (Decrease)
										Increase (Decrease) March 31, 2007 From:																							June 30, 2007 from:
	March 31,			December 31,			March 31,			March 31, 2006							December 31, 2006							June 30,			December 31,			June 30,			June 30, 2006						December 31, 2006
(Dollars in thousands)	2006			2006			2007			Amount				Percent			Amount				Percent			2006			2006			2007			Amount			Percent			Amount			Percent
Commercial, financial and industrial		$	412		$	3,085		$	648		$	236			57.3	%		$	(2,437	)		(79.0	)%		$	426		$	3,085		$	918		$	492		nm		$	(2,167	)		(70.2	)%
Mortgage:
Residential		2,968			2,359			3,793			825				27.8			1,434				60.8			1,480			2,359			5,217			3,737			nm		2,858				nm
Commercial		1,007			2,155			201			(806		)		(80.0	)		(1,954		)		(90.7	)		568			2,155			2,544			1,976			nm		389				18.1
Total mortgage		3,975			4,514			3,994			19				0.5			(520		)		(11.5	)		2,048			4,514			7,761			5,713			nm		3,247				71.9
Consumer and other		812			1,706			1,540			728				89.7			(166		)		(9.7	)		976			1,706			995			19			1.9	%	(711		)		(41.7	)
Total loans 90 days or more past due and still accruing		$	5,199		$	9,305		$	6,182		$	983			18.9	%		$	(3,123	)		(33.6	)%		$	3,450		$	9,305		$	9,674		$	6,224		nm		$	369			4.0	%

nm = not meaningful

Quantitative and Qualitative Disclosures About Market Risk

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

The Board of Directors, through its Finance and Capital Committee, approves our Asset ~~and~~ Liability Management, Investment and Derivatives Policy (ALM Policy), which governs the management of market risk and guides our investment and derivatives activities. The ALM Policy establishes the Bank’s risk

tolerance guidelines by outlining standards for measuring market risk, creates Board-level limits for specific

market risks, establishes guidelines for reporting market risk and requires independent review and oversight of market risk activities.

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

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

We have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For additional information about our market risk management, please see “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Form 10-K.

Interest Rate Risk Management (Other Than Trading)

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

At ~~March 31,~~June 30, 2007, Economic Net Interest Income (NII) sensitivity was neutral to slightly ~~liability sensitive~~liability-sensitive to parallel rate shifts. A +200 basis point parallel shift would reduce 12-month Economic NII by ~~0.36~~0.57 percent, while a similar downward shift would increase it by ~~1.07~~1.41 percent. ~~This compares with an estimated 1.01~~At June 30, 2006, a +200 basis point parallel shift would reduce the 12-month Economic NII by 0.36 percent, ~~increase and 1.21 percent decrease, respectively, at March 31, 2006.~~while a -200 basis point shift would reduce it by 0.13 percent. We caution that ongoing enhancements to our interest rate risk modeling may make ~~prior-year~~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,~~liability-sensitive, meaning that reported NII is more ~~asset sensitive~~asset-sensitive or less ~~liability sensitive~~liability-sensitive than Economic NII.

Economic NII

	March 31,				December 31,				March 31,				June 30,				December 31,				June 30,
(Dollars in millions)	2006				2006				2007				2006				2006				2007
+200 basis points		$	20.4			$	(7.0	)		$	(6.5	)		$	(7.3	)		$	(7.0	)		$	(10.6	)
as a percentage of base case NII		1.01		%		(0.37		)%		(0.36		)%		(0.36		)%		(0.37		)%		(0.57		)%
-200 basis points		$	(24.5	)		$	20.5			$	19.6			$	(2.6	)		$	20.5			$	26.0
as a percentage of base case NII		(1.21		)%		1.09		%		1.07		%		(0.13		)%		1.09		%		1.41		%	��

The figures in the above table are reported on a continuing operations basis, with all assets and liabilities associated with the disposal of the international correspondent banking business eliminated. We believe that this approach provides the best representation of our risk profiles.

In the case of non-parallel yield curve changes, our Economic NII is ~~liability sensitive~~liability-sensitive to changes in short-term rates (with long-term rates held constant) and ~~asset sensitive~~asset-sensitive to changes in long-term rates

~~(with~~ (with short-term rates held constant). In other words, our Economic NII will benefit from curve steepening with short (long) rates dropping (rising) and will contract from the curve further inverting with long (short) rates dropping (rising).

ALM Activities

During the first ~~quarter~~six months of 2007, our unhedged, core balance sheet became ~~significantly~~ less ~~asset sensitive~~asset-sensitive compared to the first ~~quarter~~six months of 2006. The change in the risk profile of the core balance sheet resulted primarily from a decline in core deposit balances and an increased asset growth funded by proportionally more short-term wholesale liabilities. At ~~March 31,~~June 30, 2007, the core balance sheet continues to be slightly ~~asset sensitive~~asset-sensitive, meaning that the current mix of assets reprices slightly faster than our current mix of liabilities. In managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary. During the first ~~quarter~~six months of 2007, we reinvested proceeds from maturing ALM securities into securities with like terms and asset allocation. New derivative hedges were also added during the ~~quarter~~year as described below.

ALM Securities

At ~~March 31,~~June 30, 2006 and 2007, our available for sale securities portfolio included ~~$6.6~~$6.7 billion and ~~$6.5~~$6.8 billion, respectively, of securities for ALM purposes. At ~~March 31,~~June 30, 2007, approximately ~~$2.8~~$3.0 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the first ~~quarter~~six months of 2007, we purchased approximately ~~$203~~$942 million of securities, while approximately ~~$361~~$767 million of ~~ALM~~ securities matured or were ~~called.~~called during the same period. The composition of the portfolio is expected to remain relatively stable in 2007. Based on current prepayment projections, the estimated ALM portfolio effective duration was ~~2.0~~2.3 at ~~March 31,~~June 30, 2007, compared to ~~2.3~~2.2 at ~~March 31,~~June 30, 2006.

Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of ~~2.0~~2.3 suggests an expected price change of approximately minus ~~2.0~~2.3 percent for an immediate 1.0 percent increase in interest rates.

ALM Derivatives

During the first ~~quarter~~six months of 2007, the ALM derivatives portfolio ~~decreased~~increased by a net ~~$300~~$600 million notional amount, as ~~$500 million~~$1.4 billion of notional amount of LIBOR floor contracts were purchased to maintain the downside neutral to ~~liability-sensitivity~~liability sensitivity of our overall risk position, offset partially by maturities of $800 million notional amount of receive fixed interest rate swaps.

The fair value of the ALM derivative contracts ~~increased~~decreased during the first ~~quarter~~six months of 2007 as ~~a result of maturities and declines in the remaining maturity of several interest rate swap contracts in a loss position. In addition,~~ the value of our ~~remaining~~ receive fixed interest rate swaps and floor option contracts ~~gained~~declined with the ~~decline~~increase in expected future interest rates. For additional discussion of derivative instruments and our hedging strategies, see Note 8 to the Condensed Consolidated Financial Statements included in this Form 10-Q and Note 19 to the Consolidated Financial Statements included in our 2006 Form 10-K.

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

																				Increase / (Decrease)
												June 30,			December 31,		June 30,			From December 31, 2006
(Dollars in thousands)	March 31, 2006			December 31, 2006		March 31, 2007		Increase / (Decrease) From December 31, 2006 to March 31, 2007				2006			2006		2007			to June 30, 2007
Total gross notional amount of positions held for purposes other than trading:	$	6,800,000		$	8,250,000	$	7,950,000		$	(300,000	)	$	7,300,000		$	8,250,000	$	8,850,000			$	600,000
Of which, interest rate swaps pay fixed rates of interest:	$	—		$	—	$	—		$	—		$	—		$	—	$	—			$	—
Fair value of positions held for purposes other than trading:
Gross positive fair value	$	13,370		$	44,720	$	46,739		$	2,019		$	1,757		$	44,720	$	10,453			$	(34,267	)
Gross negative fair value	$	69,746		$	37,682	$	25,411		$	(12,271	)	$	96,832		$	37,682	$	33,665			$	(4,017	)
Positive (Negative) Fair value of positions, net	$	(56,376	)	$	7,038	$	21,328		$	14,290		$	(95,075	)	$	7,038	$	(23,212	)		$	(30,250	)

Trading Activities

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

As of ~~March 31,~~June 30, 2007, we had ~~$10.6~~$9.8 billion notional amount of interest rate derivative contracts, which included approximately ~~$5.3~~$5.0 billion notional amount of derivative contracts entered into as an accommodation for customers. We act as an intermediary and ~~match these~~entered into approximately $4.8 billion notional amount of offsetting contracts with major dealers, at a credit spread, ~~to contracts with major dealers,~~ thus neutralizing the related market risk on all our customer accommodation transactions.

We market energy derivative contracts to existing energy industry customers, primarily oil and gas producers, in order to meet their hedging needs. ~~Consistent with our customer interest rate derivatives business, all~~All transactions are fully matched to remove our exposure to market risk, with income earned on the credit spread. As of ~~March 31,~~June 30, 2007, we had ~~$3.5~~$3.3 billion notional amount of energy derivative contracts ~~which included, approximately $1.8 billion notional amount~~with half of these energy derivative contracts entered into as an accommodation for ~~customers.~~

~~For information about~~customers and the remaining half entered into as matching contracts to remove our exposure to market risk ~~please see “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in~~on our ~~2006 Form 10-K.~~customer accommodation transactions.

Liquidity Risk

Liquidity risk is the undue risk to our earnings and capital, which would result from our inability to meet our obligations as they come due without incurring unacceptable costs. The management of liquidity risk is governed by the ALM Policy under the oversight of ALCO. Liquidity is managed using a total balance sheet perspective that analyzes both funding capacity available through increased liabilities and liquidation of assets relative to projected demands for liquidity. The primary sources of liquidity are core deposits, asset liquidation, including securities sold under repurchase agreements, and wholesale funding, which includes funds raised from interbank and other sources, both domestic and offshore. The Treasurer is responsible for operating management of liquidity through the funding and investment functions of

Corporate Treasury. ALCO also maintains a Liquidity Contingency Plan, the objective of which is to identify

actions to be taken to ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank’s normal funding activities.

Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our ~~$33~~$33.5 billion in average core deposits (which consists of demand deposits, money market demand accounts, savings and consumer time deposits), combined with average common stockholders’ equity, funded 7172 percent of average total assets of approximately $53 billion in the ~~first~~second quarter of 2007. Most of the remaining funding was provided by short-term borrowings in the form of certificates of deposit, large time deposits, federal funds purchased, securities sold under repurchase agreements, commercial paper and other borrowings. During the first ~~quarter~~six months of 2007, w~~e modestly~~we extended the weighted average maturity of our wholesale borrowing position to enhance our overall liquidity profile.

Our securities portfolio provides additional enhancement to our liquidity position, which may be created through either securities sales or repurchase agreements. At ~~March 31,~~June 30, 2007, we could have sold or transferred under repurchase agreements approximately ~~$4.2~~$4.5 billion of our available for sale securities including excess pledged securities available for withdrawal on short notice. Liquidity may also be provided by the sale or maturity of other assets such as interest-bearing deposits in banks, federal funds sold and trading account securities. The aggregate balance of these assets averaged ~~$1.3~~$1.0 billion in the ~~first~~second quarter of 2007. Additional liquidity may be provided through loan maturities and sales.

~~In first quarter~~On March 23, 2007, the Bank issued $750 million of two-year floating rate senior notes under the $4 billion Bank Note Program initiated in 2006. Combined with the $700 million, ten-year, fixed rate subordinated note issuance in 2006, the remaining available funding from the Bank Note Program is ~~$2.55~~$2.6 billion. In the first quarter 2007, thethe Bank completed the process to become an active member of the Federal Home Loan Bank of San Francisco. Membership will give the Bank an additional back-up source of liquidity.

In addition to the funding provided by our bank subsidiary, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration statement with the SEC permitting ready access to the public debt markets. As of ~~March 31,~~June 30, 2007, $600 million of debt or other securities were available for issuance under this shelf registration. Although we do not have firm commitments in place to sell securities under the Bank Note Program or the shelf registration statement, these sources, in addition to our core deposit and equity capital, provide a stable funding base. Management does not rely on any single source of liquidity and manages availability in response to changing balance sheet needs.

46Effective May 2007, Moody’s upgraded the long-term rating of Union Bank of California, N.A. and UnionBanCal Corporation as shown in the table below. The following table reflects our risk ratings as of June 30, 2007.

		Union Bank of		UnionBanCal
		California, N.A.		Corporation
Standard & Poor’s	Long-term Short-term		A+ A-1		A A-1
Moody’s	Long-term Short-term		Aa3 P-1		A1 P-1
Fitch	Long-term Short-term		A+ F1		A+ F1
DBRS	Long-term Short-term		A (high) R-1 (middle)		A R-1 (low)

Regulatory Capital

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

UnionBanCal Corporation

								Minimum								Minimum
	March 31,		December 31,			March 31,		Regulatory	June 30,		December 31,			June 30,		Regulatory
(Dollars in thousands)	2006		2006			2007		Requirement	2006		2006			2007		Requirement
Capital Components
Tier 1 capital	$	4,243,053		$	4,333,865	$	4,291,483		$	4,281,005		$	4,333,865	$	4,401,490
Tier 2 capital	862,051			1,509,338		1,511,809			1,503,898			1,509,338		1,515,243
Total risk-based capital	$	5,105,104		$	5,843,203	$	5,803,292		$	5,784,903		$	5,843,203	$	5,916,733
Risk-weighted assets	$	46,657,433		$	49,904,203	$	50,996,413		$	48,001,100		$	49,904,203	$	51,254,273
Quarterly average assets	$	48,200,458		$	51,353,681	$	52,858,843		$	48,983,260		$	51,353,681	$	53,027,348

Capital Ratios	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio
Total capital (to risk-weighted assets)	$	5,105,104	10.94	%	$	5,843,203	11.71	%	$	5,803,292	11.38	%	³$ 4,079,713		8.0	%	$	5,784,903	12.05	%	$	5,843,203	11.71	%	$	5,916,733	11.54	%	³$ 4,100,342		8.0	%
Tier 1 capital (to risk-weighted assets)	4,243,053		9.09		4,333,865		8.68		4,291,483		8.42		³ 2,039,857		4.0		4,281,005		8.92		4,333,865		8.68		4,401,490		8.59		³ 2,050,171		4.0
Leverage(1)	4,243,053		8.80		4,333,865		8.44		4,291,483		8.12		³ 2,114,354		4.0		4,281,005		8.74		4,333,865		8.44		4,401,490		8.30		³ 2,121,094		4.0

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

Union Bank of California, N.A.

								Minimum	Well-Capitalized							Minimum	“Well-Capitalized”
	March 31,		December 31,			March 31,		Regulatory	Regulatory	June 30,		December 31,		June 30,		Regulatory	Regulatory
(Dollars in thousands)	2006		2006			2007		Requirement	Requirement	2006		2006		2007		Requirement	Requirement
Capital Components
Tier 1 capital	$	4,377,832		$	4,179,359	$	4,218,036			$	4,404,052	$	4,179,359	$	4,301,020
Tier 2 capital	426,955			1,100,287		1,103,054				1,093,836		1,100,287		1,105,663
Total risk-based capital	$	4,804,787		$	5,279,646	$	5,321,090			$	5,497,888	$	5,279,646	$	5,406,683
Risk-weighted assets	$	45,943,246		$	49,385,397	$	50,527,546			$	47,398,029	$	49,385,397	$	50,805,715
Quarterly average assets	$	47,563,560		$	50,686,185	$	52,300,597			$	48,341,174	$	50,686,185	$	52,417,908

Capital Ratios	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio			Amount	Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio			Amount	Ratio
Total capital (to risk-weighted assets)	$	4,804,787	10.46	%	$	5,279,646	10.69	%	$	5,321,090	10.53	%	³$ 4,042,204		8.0	%	³$ 5,052,755		10.0	%	$	5,497,888	11.60	%	$	5,279,646	10.69	%	$	5,406,683	10.64	%	³$ 4,064,457		8.0	%	³$ 5,080,572		10.0	%
Tier 1 capital (to risk-weighted assets)	4,377,832		9.53		4,179,359		8.46		4,218,036		8.35		³ 2,021,102		4.0		³ 3,031,653		6.0		4,404,052		9.29		4,179,359		8.46		4,301,020		8.47		³ 2,032,229		4.0		³ 3,048,343		6.0
Leverage(1)	4,377,832		9.20		4,179,359		8.25		4,218,036		8.06		³ 2,092,024		4.0		³ 2,615,030		5.0		4,404,052		9.11		4,179,359		8.25		4,301,020		8.21		³ 2,096,716		4.0		³ 2,620,895		5.0

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

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

The decrease in ~~the~~UnionBanCal Corporation’s Tier 1 and Total capital ratios from June 30, 2006 and December 31, 2006 was primarily due to an increase in risk-weighted assets stemming from growth in our loan ~~portfolio and a~~portfolio. The decrease in capital ~~resulting~~from June 30, 2006 resulted from the adoption of FIN No. 48 and FSP FAS 13-2. For additional information on the impact of adoption of these accounting pronouncements, see Note 2 to the Condensed Consolidated Financial Statements ofin this Form 10-Q. The decrease in our ~~leverage~~Leverage ratios from December 31, 2006 was primarily due to the increase in our quarterly average ~~assets.~~assets resulting from the growth in our loan portfolio.

As of ~~March 31,~~June 30, 2007, management believes the capital ratios of Union Bank of California met all regulatory requirements of “well-capitalized” institutions, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio.

Business Segments

During 2006, we formally reorganized our operating segments by disaggregating the businesses that were formerly managed and reported under the Community Banking and Investment Services Group or the Commercial Financial Services Group. We believe that this ~~new~~ organizational structure ~~will enhance~~has enhanced our focus on target markets and enterprise wide sales and service. The various operating segments reporting under our Chief Operating Officer and the Group Head of Pacific Rim Corporate Group ~~have been~~are aggregated into two reportable business segments entitled “Retail Banking” and “Wholesale Banking” based upon the aggregation criteria prescribed in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

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

The ~~table~~tables that ~~follows reflects~~follow reflect the condensed income statements, selected average balance sheet items and selected financial ratios, including changes from the prior year, for each of our reportable business segments. The information presented does not necessarily represent the businesses’ financial condition and results of operations as if they were independent entities. In 2006, we changed our reporting to reflect a “market view” perspective in measuring our operating segments. The market view is a measurement of our customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the operating segment that provides the service and the operating segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in “Reconciling Items.” The market view approach fosters cross-selling with a total profitability view of the products and services being managed. For example, the Securities Trading and Sales unit within the Global Markets Division is a business unit that manages the fixed income securities activities for all retail and corporate customers throughout the Bank. This unit retains and also allocates revenues and expenses to divisions responsible for such retail and commercial customer relationships.

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

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

However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. Our management reporting system identifies balance sheet and income statement items for each business unit based on internal management accounting policies. Net

interest income is determined using our internal funds transfer pricing system, which assigns a cost of

funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are allocated to the business units based on a predetermined percentage of usage.

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

	Retail Banking												Wholesale Banking												Retail Banking												Wholesale Banking
	As of and for the three Months												As of and for the three Months												As of and for the Three Months												As of and for the Three Months
	Ended March 31,						Increase/(decrease)						Ended March 31,						Increase/(decrease)						Ended June 30,						Increase/(decrease)						Ended June 30,						Increase/(decrease)
	2006			2007			Amount			Percent			2006			2007			Amount			Percent			2006			2007			Amount			Percent			2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	230,231		$	229,878		$	(353	)		0	%	$	252,535		$	241,576		$	(10,959	)		(4	)%	$	237,613		$	226,010		$	(11,603	)		(5	)%	$	262,781		$	242,891		$	(19,890	)		(8	)%
Noninterest income (expense)	129,902			125,632			(4,270		)		(3	)	103,124			110,021			6,897				7		136,072			132,638			(3,434		)		(3	)	101,413			114,888			13,475				13
Total revenue	360,133			355,510			(4,623		)		(1	)	355,659			351,597			(4,062		)		(1	)	373,685			358,648			(15,037		)		(4	)	364,194			357,779			(6,415		)		(2	)
Noninterest expense (income)	236,373			242,804			6,431				3		167,580			165,840			(1,740		)		(1	)	244,521			240,632			(3,889		)		(2	)	165,646			161,650			(3,996		)		(2	)
Credit expense (income)	6,566			6,274			(292		)		(4	)	25,321			25,071			(250		)		(1	)	6,406			6,262			(144		)		(2	)	23,032			26,862			3,830				17
Income from continuing operations before income taxes	117,194			106,432			(10,762		)		(9	)	162,758			160,686			(2,072		)		(1	)
Income (loss) from continuing operations before income taxes																									122,758			111,754			(11,004		)		(9	)	175,516			169,267			(6,249		)		(4	)
Income tax expense (income)	44,827			40,710			(4,117		)		(9	)	54,482			49,137			(5,345		)		(10	)	46,955			42,746			(4,209		)		(9	)	60,354			52,425			(7,929		)		(13	)
Income from continuing operations	72,367			65,722			(6,645		)		(9	)	108,276			111,549			3,273				3
Loss from discontinued operations, net of income taxes	—			—			—				na		—			—			—				na
Income (loss) from continuing operations																									75,803			69,008			(6,795		)		(9	)	115,162			116,842			1,680				1
Income from discontinued operations, net of income taxes																									—			—			—				na		—			—			—				na
Net income (loss)	$	72,367		$	65,722		$	(6,645	)		(9	)	$	108,276		$	111,549		$	3,273			3		$	75,803		$	69,008		$	(6,795	)		(9	)	$	115,162		$	116,842		$	1,680			1
Average balances—Market View (dollars in millions):
Total loans	$	15,266		$	16,249		$	983			6		$	18,811		$	22,204		$	3,393			18		$	15,597		$	16,462		$	865			6		$	19,621		$	22,372		$	2,751			14
Total assets	16,137			17,087			950				6		23,446			27,131			3,685				16		16,468			17,290			822				5		24,391			27,297			2,906				12
Total deposits	19,158			18,592			(566		)		(3	)	18,440			18,256			(184		)		(1	)	19,025			19,069			44				0		18,127			18,814			687				4
Financial ratios—Market View
Risk adjusted return on capital(1)	46		%	40		%							21		%	20		%							47		%	42		%							22		%	21		%
Return on average assets(1)	1.82			1.56									1.87			1.67									1.85			1.60									1.89			1.72
Efficiency ratio(2)	65.63			68.29									49.19			47.17									65.44			67.09									47.62			45.18

																			UnionBanCal																													UnionBanCal
	Other												Reconciling Items						Corporation											Other												Reconciling Items						Corporation
	As of and for the three Months												As of and for the three Months						As of and for the three Months											As of and for the Three Months												As of and for the Three Months						As of and for the Three Months
	Ended March 31,						Increase/(decrease)						Ended March 31,						Ended March 31,						Increase/(decrease)					Ended June 30,						Increase/(decrease)						Ended June 30,						Ended June 30,						Increase/(decrease)
	2006			2007			Amount			Percent			2006			2007			2006			2007			Amount			Percent		2006			2007			Amount			Percent			2006			2007			2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	(15,274	)	$	(40,854	)	$	(25,580	)		(167	)%	$	(2,399	)	$	(2,088	)	$	465,093		$	428,512		$	(36,581	)	(8	)%	$	(30,314	)	$	(37,805	)	$	(7,491	)		(25	)%	$	(2,438	)	$	(2,223	)	$	467,642		$	428,873		$	(38,769	)		(8	)%
Noninterest income (expense)	2,853			5,930			3,077				108		(17,969		)	(19,025		)	217,910			222,558			4,648			2		2,614			1,807			(807		)		(31	)	(20,871		)	(19,488		)	219,228			229,845			10,617				5
Total revenue	(12,421		)	(34,924		)	(22,503		)		(181	)	(20,368		)	(21,113		)	683,003			651,070			(31,933		)	(5	)	(27,700		)	(35,998		)	(8,298		)		(30	)	(23,309		)	(21,711		)	686,870			658,718			(28,152		)		(4	)
Noninterest expense (income)	21,527			25,216			3,689				17		(10,936		)	(11,769		)	414,544			422,091			7,547			2		15,862			21,549			5,687				36		(12,999		)	(11,966		)	413,030			411,865			(1,165		)		0
Credit expense (income)	(38,861		)	(27,317		)	11,544				30		(26		)	(28		)	(7,000		)	4,000			11,000			157		(30,419		)	(28,097		)	2,322				8		(19		)	(27		)	(1,000		)	5,000			6,000				600
Income from continuing operations before income taxes	4,913			(32,823		)	(37,736		)		(768	)	(9,406		)	(9,316		)	275,459			224,979			(50,480		)	(18	)
Income (loss) from continuing operations before income taxes																														(13,143		)	(29,450		)	(16,307		)		(124	)	(10,291		)	(9,718		)	274,840			241,853			(32,987		)		(12	)
Income tax expense (income)	(1,707		)	(10,916		)	(9,209		)		(539	)	(3,598		)	(3,563		)	94,004			75,368			(18,636		)	(20	)	(11,170		)	(14,955		)	(3,785		)		(34	)	(3,936		)	(3,717		)	92,203			76,499			(15,704		)		(17	)
Income from continuing operations	6,620			(21,907		)	(28,527		)		(431	)	(5,808		)	(5,753		)	181,455			149,611			(31,844		)	(18	)
Loss from discontinued operations, net of income taxes	(8,510		)	—			8,510				100		—			—			(8,510		)	—			8,510			100
Income (loss) from continuing operations																														(1,973		)	(14,495		)	(12,522		)		(635	)	(6,355		)	(6,001		)	182,637			165,354			(17,283		)		(9	)
Income from discontinued operations, net of income taxes																														274			—			(274		)		(100	)	—			—			274			—			(274		)		(100	)
Net income (loss)	$	(1,890	)	$	(21,907	)	$	(20,017	)		(1,059	)	$	(5,808	)	$	(5,753	)	$	172,945		$	149,611		$	(23,334	)	(13	)	$	(1,699	)	$	(14,495	)	$	(12,796	)		(753	)	$	(6,355	)	$	(6,001	)	$	182,911		$	165,354		$	(17,557	)		(10	)
Average balances—Market View (dollars in millions):
Total loans	$	(8	)	$	30		$	38			475		$	(17	)	$	(25	)	$	34,052		$	38,458		$	4,406		13		$	(53	)	$	31		$	84			158		$	(18	)	$	(25	)	$	35,147		$	38,840		$	3,693			11
Total assets	8,457			8,783			326				4		(23		)	(28		)	48,017			52,973			4,956			10		8,493			8,558			65				1		(23		)	(29		)	49,329			53,116			3,787				8
Total deposits	1,846			5,189			3,343				181		(588		)	(554		)	38,856			41,483			2,627			7		5,413			5,635			222				4		(2,873		)	(834		)	39,692			42,684			2,992				8
Financial ratios—Market View
Risk adjusted return on capital(1)	na			na									na			na			na			na								na			na									na			na			na			na
Return on average assets(1)	na			na									na			na			1.53		%	1.15		%						na			na									na			na			1.49		%	1.25		%
Efficiency ratio(2)	na			na									na			na			62.10			64.47								na			na									na			na			61.73			62.31

(1)Annualized.

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

na = not applicable

4955

	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)
	2006			2007			Amount			Percent			2006			2007			Amount			Percent
Results of operations—Market View (dollars in thousands):
Net interest income (expense)	$	467,804		$	455,842		$	(11,962	)		(3	)%	$	515,316		$	484,466		$	(30,850	)		(6	)%
Noninterest income (expense)	265,974			258,270			(7,704		)		(3	)	204,536			224,910			20,374				10
Total revenue	733,778			714,112			(19,666		)		(3	)	719,852			709,376			(10,476		)		(1	)
Noninterest expense (income)	481,305			483,987			2,682				1		333,225			327,490			(5,735		)		(2	)
Credit expense (income)	12,972			12,535			(437		)		(3	)	48,353			51,933			3,580				7
Income (loss) from continuing operations
before income taxes	239,501			217,590			(21,911		)		(9	)	338,274			329,953			(8,321		)		(2	)
Income tax expense (income)	91,609			83,228			(8,381		)		(9	)	114,836			101,561			(13,275		)		(12	)
Income (loss) from continuing operations	147,892			134,362			(13,530		)		(9	)	223,438			228,392			4,954				2
Loss from discontinued operations, net of income taxes	—			—			—				na		—			—			—				na
Net income (loss)	$	147,892		$	134,362		$	(13,530	)		(9	)	$	223,438		$	228,392		$	4,954			2
Average balances—Market View (dollars in millions):
Total loans	$	15,432		$	16,356		$	924			6		$	19,218		$	22,288		$	3,070			16
Total assets	16,306			17,191			885				5		23,921			27,214			3,293				14
Total deposits	19,091			18,832			(259		)		(1	)	18,283			18,536			253				1
Financial ratios—Market View
Risk adjusted return on capital(1)	46		%	41		%							22		%	21		%
Return on average assets (1)	1.83			1.58									1.88			1.69
Efficiency ratio(2)	65.59			67.77									48.40			46.17

	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)
	2006			2007			Amount			Percent			2006			2007			2006			2007			Amount			Percent
Results of operations— Market View (dollars in thousands):
Net interest income (expense)	$	(45,548	)	$	(78,613	)	$	(33,065	)		(73	)%	$	(4,837	)	$	(4,310	)	$	932,735		$	857,385		$	(75,350	)		(8	)%
Noninterest income (expense)	5,469			7,738			2,269				41		(38,841		)	(38,515		)	437,138			452,403			15,265				3
Total revenue	(40,079		)	(70,875		)	(30,796		)		(77	)	(43,678		)	(42,825		)	1,369,873			1,309,788			(60,085		)		(4	)
Noninterest expense (income)	36,980			46,216			9,236				25		(23,936		)	(23,737		)	827,574			833,956			6,382				1
Credit expense (income)	(69,280		)	(55,413		)	13,867				20		(45		)	(55		)	(8,000		)	9,000			17,000				213
Income (loss) from continuing operations before income taxes	(7,779		)	(61,678		)	(53,899		)		(693	)	(19,697		)	(19,033		)	550,299			466,832			(83,467		)		(15	)
Income tax expense (income)	(12,704		)	(25,642		)	(12,938		)		(102	)	(7,534		)	(7,280		)	186,207			151,867			(34,340		)		(18	)
Income (loss) from continuing operations	4,925			(36,036		)	(40,961		)		(832	)	(12,163		)	(11,753		)	364,092			314,965			(49,127		)		(13	)
Loss from discontinued operations, net of income taxes	(8,236		)	—			8,236				100		—			—			(8,236		)	—			8,236				100
Net income (loss)	$	(3,311	)	$	(36,036	)	$	(32,725	)		(988	)	$	(12,163	)	$	(11,753	)	$	355,856		$	314,965		$	(40,891	)		(11	)
Average balances—Market View (dollars in millions):
Total loans	$	(29	)	$	31		$	60			207		$	(18	)	$	(25	)	$	34,603		$	38,650		$	4,047			12
Total assets	8,472			8,669			197				2		(22		)	(29		)	48,677			53,045			4,368				9
Total deposits	2,489			5,413			2,924				117		(587		)	(694		)	39,276			42,087			2,811				7
Financial ratios—Market View
Risk adjusted return on capital(1)	na			na									na			na			na			na
Return on average assets(1)	na			na									na			na			1.51		%	1.20		%
Efficiency ratio(2)	na			na									na			na			61.91			63.38

(1)Annualized.

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

na = not applicable

Retail Banking

Retail Banking provides financial products including credit, deposit, trust, investment management and risk management delivered through our branches, relationship managers, private bankers and trust administrators, to individuals, small businesses and institutional clients. Retail Banking is focused on

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

During the ~~first quarter of~~six months ended June 30, 2007, Retail Banking net income decreased 9 percent over the same period in 2006, primarily due to lower ~~noninterest~~net interest income and ~~higher noninterest expense.~~lower non-interest income. Net interest income was ~~flat~~down 3 percent as a result of lower noninterest bearing deposits and higher ~~loan balances, primarily residential mortgages, offset by lower loan spreads and lower deposit balances.~~interest expense.

Average total deposits ~~declined 3 percent in~~were essentially flat during the ~~first quarter of~~six months ended June 30, 2007, compared to the ~~first quarter of 2006, primarily from increased competition for interest bearing deposits. Despite the decline~~same period in ~~average deposits in the first quarter of 2007,~~2006. Retail Banking’s customer segmentation strategy continues to focus on retaining and attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and improving sales resources, establishing new locations and new products.

Noninterest income was 3 percent lower for the six months ended June 30, 2007 compared to the same period in ~~the first quarter of 2007.~~2006. Deposit fees contributed ~~2 percent to~~ the single biggest decrease, $3.5 million of the $7.7 million, due primarily ~~due~~ to lower overdraft fees. ~~Trust fees contributed 1 percent to~~Offsetting some of the decrease, ~~due to a one-time $3.8 million increase in fees in the first quarter of 2006 resulting from a refinement in accrual methodology, which~~ was ~~primarily offset by~~ an increase in ~~fund~~trust fees ~~due to growth in asset balances and better rates~~ of ~~return.~~$1.1 million.

Noninterest expense increased 3one percent ~~from~~in the six months ended June 30, 2007 compared to the prior ~~period due to higher allocated data processing and other overhead costs, offset by lower software expenses which resulted~~year primarily from ~~a $1.4 million write-off of a project in first quarter of 2006 as well as lower amortization of intangible assets.~~higher corporate overhead expenses.

Retail Bankingis 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 ~~317~~319 full-service branches in California, 4 full-service branches in Oregon and Washington and 2 international offices. We own property occupied by 116 of the domestic offices and lease the remaining properties for periods of five to twenty years. Customers also access our services 24 hours a day by telephone or through our website at www.unionbank.com. In addition, the branches offer automated teller and point-of-sale merchant services.

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

— through conveniently located banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of consumer financing and investment services;

— through our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services;

— through business banking centers, which serve small businesses;

— through in-store branches; and

— through our network of over 600 ATM machines.

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

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

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

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

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

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

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

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

Wholesale Banking

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

During the ~~first quarter of~~six months ended June 30, 2007, Wholesale Banking net income increased 32 percent from the same period in 2006, due to higher noninterest income, lower noninterest expense and higher tax credits associated with the financing of low income housing ~~projects.~~projects, partly offset by lower net interest income.

For the six months ended June 30, 2007, net interest income decreased 6 percent compared to the same period in 2006. The decrease in net interest income ~~of 4 percent from~~was primarily due to an increase in the ~~prior period resulted primarily from the impact of~~ title and escrow ~~loans~~loan portfolio, which ~~are~~is highly rate-advantaged ~~and volatile~~ compared to other commercial loans. Excluding title and escrow loans, average loans increased by 15approximately 13 percent, compared to the ~~first quarter of~~same period in 2006. This was primarily due to ~~increased~~an increase in commercial loan demand in the oil and gas and national corporate segments, as well as the California middle market. The construction loan portfolio also increased due to increased demand for ~~residential~~income property construction projects with apartment financing representing the largest component. Additionally, the margin on deposits was essentially flat as a higher credit for deposits offset the shift in customer balances from noninterest bearing to interest bearing accounts.

Noninterest income was 710 percent higher ~~than~~in the six months ended June 30, 2007 compared to the prior year due to higher net gains on private capital investments, partially offset by lower account analysis ~~fees resulting from a higher earnings credit.~~ fees.

Noninterest expense for the six months ended June 30, 2007 decreased 2 percent from prior year primarily as a result of lower deposit balances ~~in the~~of title and escrow ~~industries~~customers along with their increased usage of title and escrow loans, which when combined resulted in lower vendor billing expense incurred on behalf of these customers. Offsetting ~~these decreases~~this decrease in noninterest expense were foreclosed asset recoveries in the ~~first quarter of~~six months ended June 30, 2006, which did not occur in the same period in 2007.

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

Wholesale Bankingis comprised of the following main divisions:

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

· the Real Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing;

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

· the Equipment Leasing Division, which provides lease financing services to corporate customers nationwide;

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

· the Commercial Deposit and Treasury Management Division, which provides deposit and cash management expertise to middle-market and large corporate clients, government agencies and specialized industries. This division also manages Union Bank of California’s web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development;

· the Capital Markets Division, which provides financing to middle-market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services;

· the Global Markets Division, which serves our customers’ insurance, foreign exchange, interest rate risk management and investment needs. The Global Markets Division offers energy derivative contracts, on a limited basis, to serve our energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account, but takes no

market risk when providing insurance or derivative contracts, since the market risk for these products is offset with third parties. The division also includes UnionBanc Investment Services LLC, which is a subsidiary of Union Bank of California;

· the Insurance Services Division products are sold through UnionBanc Insurance Services, Inc., the insurance agency subsidiary of UBOC Insurance, Inc. ~~UBOC Insurance, Inc.~~, which is a subsidiary of Union Bank of California; and

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

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

Other

Net loss for “Other” increased by ~~$20.0~~$32.7 million in the ~~first quarter of~~six months ended June 30, 2007 ~~over~~compared to the same period in 2006 due to higher net interest expense primarily ~~related~~due to the ~~net~~ impact of ~~funds~~higher market rates on transfer pricing ~~as market rates increased,~~results, higher credit expense on expected loan and lease losses than calculated under our RAROC method (which is used to determine credit expenses at the business unit level), and higher noninterest expense, partly offset by higher noninterest income, a higher income tax credit adjustment and an ~~$8.5~~$8.2 million loss on our discontinued ~~operations in the first quarter of 2006.~~operations.

“Other” includes the following items:

· the funds transfer pricing results for the entire company, which allocates to the other business segments their cost of funds on all asset categories and credit for funds on all liability categories;

· 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 sale of our international correspondent banking business; and

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

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

· net interest income (expense) of ($78.6) million is the result of differences between the net interest income earned by UnionBanCal and transfer pricing results, which include the credit for equity for the reportable segments under RAROC. Net interest ~~income (expense) declined $25.6 million to ($40.9)~~expense increased by $33.1 million compared to 2006 primarily due to the ~~net~~ impact of ~~changes in~~higher market rates on transfer pricing ~~rates as market rates increased;~~results;

· credit expense (income) of ($~~27.3)~~55.4) million was due to the difference between the ~~$4.0~~$9.0 million provision for loan losses calculated under our US GAAP methodology and the ~~$31.3~~$64.4 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;

· noninterest income of ~~$5.9~~$7.7 million;

· noninterest expense of ~~$25.2~~$46.2 million, ~~related to~~which includes the residual costs of support groups and corporate activities not directly related to either of the two business ~~segments;~~segments, and $10.0 million for the expected imposition of a civil penalty by the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network;

· income tax expense (income) of ($~~10.9)~~25.6) million, was primarily due to the calculated tax on reported pretax loss and the difference between the ~~33.5~~32.5 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments using the RAROC effective rate of 38.25 percent. The lower effective tax rate was due to $8.4 million of tax benefits resulting from the expiration of the statute of limitations on uncertain tax positions in the second quarter of 2007, partially offset by $3.8 million in additional taxes due to the non-deductibility of the reserve for pending regulatory actions.

The ~~first quarter of 2006~~ financial results for the six months ended June 30, 2006 were impacted by the following factors:

· net interest income (expense) of ($~~15.3)~~45.5) million;

· credit expense (income) of ($~~38.9)~~69.3) million was due to the difference between the ~~$7.0~~$8.0 million reversal of provision for loan losses calculated under our US GAAP methodology and the ~~$31.9~~$61.3 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;

· noninterest income of ~~$2.9~~$5.5 million;

· noninterest expense of ~~$21.5~~$37.0 million related to residual costs of support groups and corporate activities not directly related to either of the two business segments;

· income tax expense (income) of ($~~1.7)~~12.7) million was due to the calculated tax on reported pretax income and the difference between the ~~34.1~~33.8 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments using the RAROC effective rate of 38.25 percent; and

· loss from discontinued operations, net of taxes, of ~~$8.5~~$8.2 million.

Regulatory Matters

In October 2004, Union Bank of California International entered into a written agreement with the Federal Reserve Bank of New York relating to Union Bank of California International’s Bank Secrecy Act and anti-money laundering (BSA/AML) controls and processes. With the liquidation of Union Bank of California International in March 2007, the written agreement is no longer effective. In March 2005, Union Bank of California entered into a memorandum of understanding with the Office of the Comptroller of the Currency, which requires Union Bank of California to strengthen its BSA/AML controls and processes. The memorandum of understanding remains in effect at the time of filing this Form 10-Q.

Management is committed to resolving the issues raised by the regulators and continues to take actions it believes to be appropriate to achieve this objective. We have committed significant resources to strengthening all of our BSA/AML controls and processes in order to meet regulatory requirements and expectations. However, our actions are subject to ongoing review and evaluation, the results of which may include further regulatory action. In recent years, ~~certain~~a number of banks and bank holding companies have been subject to regulatory actions, including cease and desist orders, formal written agreements and the assessment of significant civil money penalties, and criminal sanctions, including the imposition of significant fines, as a result of failures to comply with the Bank Secrecy Act and other anti-money laundering laws and regulations.

In October 2004, Union Bank of California International entered into a written agreement with the Federal Reserve Bank of New York relating to Union Bank of California International’s BSA/AML controls and processes. With the liquidation of Union Bank of California International in March 2007, the written agreement is no longer effective. In March 2005, Union Bank of California entered into a memorandum of understanding with the OCC, which requires Union Bank of California to strengthen its BSA/AML controls and processes. The memorandum of understanding remains in effect at the time of filing this Form 10-Q.

Management is committed to resolving the issues raised by the regulators and continues to take actions it believes to be appropriate to achieve this objective. We have committed significant resources to strengthen our BSA/AML controls and processes. Among other actions to enhance our controls and procedures, we engaged independent consultants to provide a comprehensive review of our suspicious activity monitoring and reporting, acquired new and upgraded our existing compliance systems, added numerous well qualified staff, enhanced training, and put in place an enhanced internal audit program. Notwithstanding these efforts, we have been advised by the OCC that the OCC will institute a procedure for a cease and desist order against us with respect to our BSA/AML controls and processes and will assess civil money penalties with respect to BSA/AML matters. We also have received notice from FinCEN that it will assess civil money penalties with respect to BSA/AML matters. We cannot ~~assure~~be certain what final terms, conditions, or monetary penalties will be imposed by the agencies. Based on discussions with the OCC and FinCEN, a reserve of $10 million has been established and is included in our financial statements in this report on Form 10-Q. We have also been advised that the ~~actions~~U.S. Department of Justice (DOJ) is conducting an investigation pertaining to certain past activities involving our now discontinued international banking business. We have been cooperating and will continue to cooperate with the DOJ in this matter and we ~~have taken or will take will be sufficient~~remain committed to ~~prevent further regulatory action or other sanctions relating to this subject.~~resolving all of our BSA/AML issues as soon as practicable.

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of ~~March 31,~~June 30, 2007. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During the quarter ended ~~March 31,~~June 30, 2007, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

5563

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

For information relating to BSA/AML matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters” in this Form 10-Q.

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

Item 1A. Risk Factors

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

Industry Factors

Fluctuations in interest rates on loans could adversely affect our business

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

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

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

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

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

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

Deposits of Union Bank of California, N.A. are insured up to statutory limits by the Federal Deposit Insurance Corporation (FDIC), and, accordingly, are subjected to deposit insurance assessments to maintain the Deposit Insurance Fund. In November 2006, the FDIC issued a final rule, effective January 1, 2007, that created a new assessment system designed to more closely tie what banks pay for deposit insurance to the risks they pose and adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the insurance fund. This new assessment system is expected to result in annual assessments on deposits of Union Bank of California of 5 to 7 basis points. Prior to this change, Union Bank of California was not paying any insurance assessments on deposits under the FDIC’s risk-related assessment system. An FDIC credit for prior contributions is expected to offset the assessment for 2007. Once the credit is exceeded, the deposit insurance assessments Union Bank of California pays will increase our costs. Any future increases in the deposit insurance assessments Union Bank of California pays would further increase our costs.

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

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

Substantial competition could adversely affect us

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

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

We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit Insurance Fund and not for the benefit of investors in our stock or other securities. In the past, our business has been materially affected by these regulations. This will likely continue in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or fines. International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi UFJ controlling ownership of us, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future.

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

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

Refer to “Supervision and Regulation” in our 2006 Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—Regulatory Matters” in this Form 10-Q for discussion of other laws and regulations that may affect our business, and certain pending or threatened regulatory or other governmental matters, including those relating to the Bank Secrecy Act and other anti-money laundering laws and ~~regulations, that may have~~regulations. Such matters include a ~~material effect on~~decision by the OCC to institute a procedure for a cease and desist order against us with respect to our ~~business, prospects, results of operations~~BSA/AML controls and ~~financial condition.~~processes and to assess civil money penalties with respect to BSA/AML matters, and a decision by the Financial Crimes Enforcement Network (FinCEN) to assess civil money penalties against us with respect to BSA/AML matters.

Changes in accounting standards could materially impact our financial statements

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

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

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

Company Factors

Adverse California economic conditions could adversely affect our business

A substantial majority of our assets, deposits and fee income are generated in California, and a substantial majority of our residential real estate loans are in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased

collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including the softening in the California real estate market and housing industry. If economic conditions in California decline, our level of problem assets could increase and our prospects for growth could be impaired.

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

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

We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors, including the commercial real estate industry, the communications/media industry, the retail industry, the energy industry and the technology industry. Increases in fuel prices and energy costs could adversely affect businesses in several of these industries. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge offs and a slowing of growth or reduction in our loan portfolio.

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

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

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

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

Banks, securities firms, and insurance companies can now combine as a “financial holding company.” Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have elected to become financial holding companies. A number of foreign banks have acquired financial holding companies in the U.S., further increasing competition in the U.S. market. Under current regulatory

interpretations, Mitsubishi UFJ Financial Group, Inc. would be required to make a financial holding company election in order for us to have the benefits of this status. Mitsubishi UFJ Financial Group is not presently a financial holding company.

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

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

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

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

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

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

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

The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group are also subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Japanese and U.S. regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action in the U.S. and in Japan against The Bank of Tokyo-Mitsubishi UFJ or Mitsubishi UFJ Financial Group. For additional information, see “MD&A—Regulatory Matters.”

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

The views of The Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Financial Group regarding possible new businesses, strategies, acquisitions, divestitures or other initiatives, including compliance and

risk management processes, may differ from ours. This may delay or hinder us from pursuing individual initiatives or cause us to incur additional costs and subject us to additional oversight.

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

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

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

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

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

Our ability to obtain regulatory approval of acquisitions is subject to constraints related to the Bank Secrecy Act and the CRA, as described in “Business—Supervision and Regulation” in our 2006 Form 10-K and in “MD&A—Regulatory Matters” in this Form 10-Q. Subject to our ability to address successfully these regulatory concerns, we may seek to acquire or invest in financial and non-financial companies that complement our business.

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

Acquisitions, divestitures or restructurings could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, higher than expected deposit attrition, divestitures required by regulatory authorities, the disruption of our business, the potential loss of key employees and unexpected contingent liabilities arising from any business we might acquire. We may not be successful in addressing these or any other significant risks encountered in connection with any acquisition we might make.

Privacy restrictions could adversely affect our business

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

We rely on third parties for important products and services

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

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

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

Significant legal ~~actions~~proceedings could subject us to substantial uninsured liabilities

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

Changes in our tax rates could affect our future results

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

We are subject to operational risks

We are subject to many types of operational risks throughout our organization. Operational risk is the potential loss from our operations due to factors, such as failures in internal control, systems failures or external events, that do not fall into the market risk or credit risk categories described in “MD&A—Business Segments.” Operational risk includes reputational risk, legal and compliance risk, the risk orof fraud or theft by employees, customers or outsiders, unauthorized transactions by employees or operational errors,

including clerical or record-keeping errors or those resulting from faulty or disabled computer or

telecommunications systems. A discussion of risks associated with regulatory compliance appears above under the caption “The effects of, changes in or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.”

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

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

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

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

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

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

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

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any disclosure controls and procedures or internal controls

and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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

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

Repurchases of Equity Securities

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

Approximate

Dollar

Total Number

Value of Shares that

of Shares Purchased

May Yet Be

Total Number of

Average Price Paid

as Part of Publicly

Purchased

Period

Shares Purchased(1)

per Share

Announced Programs

under the Programs

January 2007

(January 2-31, 2007)

241,234

$
63.08

239,100

$
134,396,304

February 2007

(February 1-26, 2007)

449,171

$
64.33

448,800

$
105,499,745

March 2007

(March 1-28, 2007)

672,378

$
61.54

671,101

$
64,123,856
(2)
Total

1,362,783

$
62.73

1,359,001

								Approximate
								Dollar
						Total Number		Value of Shares that
						of Shares Purchased		May Yet Be
	Total Number of		Average Price Paid			as Part of Publicly		Purchased
Period	Shares Purchased(1)		per Share			Announced Programs		under the Programs
April 2007 (April 1-6, 2007)		27,628		$	63.38		—		$	62,372,715
May 2007 (May 3-30, 2007)		1,819		$	61.50		—		$	62,260,838
June 2007 (June 3-19, 2007)		505		$	62.57		—		$	62,229,239	(2)
Total		29,952		$	63.26		—

(1) ~~Includes 2,134 shares, 371 shares and 1,277 shares of~~All common stock repurchased during ~~January, February~~April, May and ~~March~~June 2007 ~~respectively,~~were from employees for required personal income tax withholdings on the vesting of restricted stock issued under the Year 2000 UnionBanCal Corporation Management Stock Plan.

(2) In the ~~first~~second quarter of 2007, UnionBanCal Corporation used ~~$85.5~~$1.9 million from the $500 million repurchase program announced on April 26, 2006.

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

Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Stockholders on May 24, 2007:

Election of Directors: Each of the following persons was elected as a director to hold office until the 2008 Annual Meeting of Stockholders or until earlier retirement, resignation or removal.

NOMINEE	FOR	WITHHELD
Aida M. Alvarez	133,922,944	392,889
David R. Andrews	133,926,427	389,406
Nicholas B. Binkley	133,945,641	370,192
L. Dale Crandall	133,160,779	1,155,054
Murray H. Dashe	133,961,176	354,657
Richard D. Farman	133,254,558	1,061,275
Philip B. Flynn	133,080,560	1,235,273
Michael J. Gillfillan	133,968,303	347,530
Mohan S. Gyani	133,891,488	424,345
Ronald L. Havner, Jr.	133,672,803	643,030
Norimichi Kanari	111,284,153	23,031,680
Mary S. Metz	132,852,357	1,463,476
Shigemitsu Miki	110,978,643	23,337,190
J. Fernando Niebla	133,176,921	1,138,912
Masashi Oka	132,898,333	1,417,500
Kyoto Omori	132,893,457	1,422,376
Masaaki Tanaka	133,106,661	1,209,172

Proposal No. 2: To ratify the selection of Deloitte & Touche, LLP as independent registered public accounting firm of UnionBanCal Corporation for 2007 received the following votes:

FOR		133,202,052
AGAINST		1,023,823
ABSTAIN		89,958

Item 6. Exhibits

No.		Description
10.1		~~Union Bank~~Forms of ~~California, N.A. Separation Pay~~2007 Restricted Stock Unit Agreements for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

(1) Filed herewith.

6473

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 6, 2007		By:	/s/ MASAAKI TANAKA

~~Date: May 8, 2007~~	~~By:~~	~~/s/ TAKASHI MORIMURA~~Masaaki Tanaka
	~~Takashi Morimura~~
	President and Chief Executive Officer
			(Principal Executive Officer)
Date: ~~May 8,~~August 6, 2007		By:	/s/ DAVID I. MATSON
			David I. Matson
			Vice Chairman and Chief Financial Officer
			(Principal Financial Officer)
Date: ~~May 8,~~August 6, 2007		By:	/s/ DAVID A. ANDERSON
			David A. Anderson
			Executive Vice President and Controller
			(Chief Accounting Officer)

6574

EXHIBIT INDEX

No.		Description
10.1		~~Union Bank~~Forms of ~~California, N.A. Separation Pay~~Restricted Stock Unit Agreements for Non-Employee Directors under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

(1) Filed herewith.

6675

	Three Months Ended March 31,
	2006						2007
(Amounts in thousands, except per share data)	Basic			Diluted			Basic		Diluted
Income from continuing operations	$	181,455		$	181,455		$	149,611	$	149,611
Loss from discontinued operations	(8,510		)	(8,510		)	—		—
Net income	$	172,945		$	172,945		$	149,611	$	149,611
Weighted average common shares outstanding	143,878			143,878			137,942		137,942
Additional shares due to:
Assumed conversion of dilutive share-based compensation	—			2,148			—		1,788
Adjusted weighted average common shares outstanding	143,878			146,026			137,942		139,730
Income from continuing operations per share	$	1.26		$	1.24		$	1.08	$	1.07
Loss from discontinued operations per share	(0.06		)	(0.06		)	—		—
Net income per share	$	1.20		$	1.18		$	1.08	$	1.07

	For the Three Months Ended March 31,
(Dollars in thousands)	2006
Net interest income		$	1,725
Noninterest income		5,811
Noninterest expense		21,139
Loss from discontinued operations before income taxes		(13,603		)
Income tax benefit		(5,093		)
Loss from discontinued operations		$	(8,510	)