Notes to Consolidated Financial Statements

Hibernia Corporation and Subsidiaries
Unaudited

Note 1
Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and notes included in Hibernia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001.

Note 2
Goodwill and Other Intangible Assets

        Effective January 1, 2002 the Company adopted the requirements of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the provisions of SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules regarding accounting for goodwill and other intangible assets beginning in the first quarter of 2002.

        During the first quarter, the Company performed the first of the required impairment tests of goodwill as of January 1, 2002. The results of these tests did not indicate impairment of the Company’s recorded goodwill. The carrying amount of goodwill not subject to amortization totaled $206,625,000 at January 1, 2002 and is included in the Company’s reportable segments as follows: Commercial - - $58,276,000; Small Business - $48,340,000; Consumer - $100,001,000 and Investments and Public Funds - $8,000.

        On April 1, 2002, the Company purchased Friedler/LaRocca Financial Partners, L.L.C., a New Orleans based firm specializing in life insurance and other financial services for wealthy clients. Goodwill of $2,489,000 was recorded in the purchase transaction, and was added to the Commercial segment.

        The following table summarizes the purchase accounting intangible assets subject to amortization.

        The amortization expense of the purchase accounting intangibles for the three months ended June 30, 2002 and 2001 was $1,513,000 and $1,910,000, respectively and for the six months ended June 30, 2002 and 2001 was $3,097,000 and $3,891,000, respectively. Amortization expense for the remainder of 2002 is estimated to be $2,830,000. Estimated future amortization expense is as follows: 2003 - $5,008,000; 2004 - $4,335,000; 2005 - $3,741,000; 2006 -$2,217,000; 2007 - $719,000 and thereafter - $1,136,000. These estimates do not assume the addition of any new purchase accounting intangibles.

        Also included in intangible assets are capitalized mortgage servicing rights with net carrying amounts of $113,223,000 and $76,180,000 at June 30, 2002 and 2001, respectively. The carrying amounts are net of a reserve for temporary impairment of $17,001,000 and $3,225,000 at June 30, 2002 and 2001, respectively. Amortization expense of mortgage servicing rights totaled $7,219,000 and $3,069,000 for the three months ended June 30, 2002 and 2001, respectively, and $12,374,000 and $5,784,000 for the six months ended June 30, 2002 and 2001, respectively. Amortization expense includes additions to the impairment reserve of $1,700,000 in the second quarter of 2002 and $225,000 in the first quarter of 2001.

Note 3
Employee Benefit Plans

        The Company’s stock option plans provide incentive and nonqualified options to various key employees and non-employee directors. The Company’s practice has been to grant options at no less than the fair market value of the stock at the date of grant. Options granted to non-employee directors upon inception of service as a director and certain options granted to directors who retire as employees vest in six months. Until October 1997, those options were granted under the 1987 Stock Option Plan; after October 1997, those options are granted under the 1993 Director Stock Option Plan. Other options granted under the 1987 Stock Option Plan, the Long-Term Incentive Plan and the 1993 Director Stock Option Plan generally become exercisable in the following increments: 50% after the expiration of two years from the date of grant, an additional 25% three years from the date of grant and the remaining 25% four years from the date of grant. In the first quarter of 2001, an option was granted to a former chief executive officer, prior to his separation from the Company, under an individual stock option plan referred to as the 2001 Nonqualified Stock Option Plan.

        Options granted to employees and directors generally become immediately exercisable if the holder of the option dies while the option is outstanding. Options granted under the 1987 Stock Option Plan generally expire 10 years from the date granted unless the holder leaves the employ of the Company other than through retirement, death or disability, in which case the options expire at the date of termination. Options granted under the Long-Term Incentive Plan and the 1993 Director Stock Option Plan generally expire 10 years from the date of grant, although they may expire earlier if the holder dies, retires, becomes permanently disabled or leaves the employ of the Company (in which case the options expire at various times ranging from 90 days to 12 months). The option granted under the 2001 Nonqualified Stock Option Plan expires January 31, 2006, unless the holder dies, in which case the option expires one year following the death (but not later than January 31, 2006). All options vest immediately upon a change of control of the Company. Shares to be issued upon the exercise of the option granted under the 2001 Nonqualified Stock Option Plan are to be issued out of the Company’s treasury stock.

        The following tables summarize the option activity in the plans during the second quarter of 2002. During 1997, the 1987 Stock Option Plan was terminated; therefore, at June 30, 2002 there are no shares available for grant under this plan. The termination did not impact options outstanding under the 1987 Stock Option Plan. At June 30, 2002, all options outstanding are nonqualified. There are no shares available for grant under the 2001 Nonqualified Stock Option Plan.

        In addition to the above option activity in the plans, 16,995 shares of restricted stock were awarded under the Long-Term Incentive Plan during the second quarter of 2002.

Note 4
Net Income Per Common Share

        The following sets forth the computation of net income per common share and net income per common share - assuming dilution.

        The weighted average shares outstanding exclude average common shares held by the Company’s Employee Stock Ownership Plan which have not been committed to be released. These shares totaled 1,991,672 and 2,336,915 for the three months ended June 30, 2002 and 2001, respectively and 2,030,204 and 2,374,203 for the six months ended June 30, 2002 and 2001, respectively.

        Options with an exercise price greater than the average market price of the Company’s Class A Common Stock for the periods presented are antidilutive and, therefore, are not included in the computation of net income per common share - assuming dilution. During the three months ended June 30, 2002 and 2001 there were 135,000 antidilutive options outstanding with exercise prices ranging from $19.80 to $21.72 per option share, and 3,586,305 antidilutive options outstanding with exercise prices ranging from $16.09 to $21.72 per option share, respectively. During the six months ended June 30, 2002 and 2001 there were 218,500 antidilutive options outstanding with exercise prices ranging from $19.50 to $21.72 per option share, and 3,672,005 antidilutive options outstanding with exercise prices ranging from $15.13 to $21.72 per option share, respectively.

Note 5
Segment Information

        The Company’s segment information is presented by line of business. Each line of business is a strategic unit that provides various products and services to groups of customers that have certain common characteristics. The basis of segmentation and the accounting policies used by each segment are consistent with that described in the December 31, 2001 Annual Report to Shareholders. There are no significant intersegment revenues.

        The following table presents selected financial information for each segment.

        The following is a reconciliation of segment totals to consolidated totals.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

        Management’s Discussion presents a review of the major factors and trends affecting the performance of Hibernia Corporation (the “Company” or “Hibernia”) and its subsidiaries, principally Hibernia National Bank (the “Bank”). This discussion should be read in conjunction with the accompanying tables and consolidated financial statements.

SECOND-QUARTER 2002 HIGHLIGHTS

MERGER ACTIVITY

        On April 1, 2002, the Company enhanced its expertise in life insurance and financial planning by consummating the purchase of Friedler/LaRocca Financial Partners, L.L.C. (Friedler/LaRocca). Friedler/LaRocca, a New Orleans based firm specializing in life insurance and other financial services for wealthy clients, serves customers in shipping, financial services, legal and other key regional industries. They will operate as part of Hibernia’s Private Client Group and will continue to serve the needs of clients in such areas as life insurance, incentive-compensation and deferred compensation planning, estate and financial planning, retirement planning and other investment products. The Company did not consummate any mergers in 2001.

FINANCIAL CONDITION:

EARNING ASSETS

        Earning assets averaged $15.3 billion in the second quarter of 2002, a $65.5 million decrease from the second-quarter 2001 average of $15.4 billion. Year-to-date average earning assets at June 30, 2002 totaled $15.3 billion, down $220.8 million (1%) from $15.5 billion at June 30, 2001. The decrease in average earning assets is primarily due to decreases in commercial and consumer loans, partially offset by increases in securities available for sale, short-term investments and mortgage loans held for sale.

        Loans. Average loans for the second quarter of 2002 of $11.2 billion were relatively unchanged from first quarter 2002 and down $619.3 million (5%) compared to the second quarter of 2001. For the first six months of 2002 compared to the same period in 2001, average loans were down $798.2 million (7%) to $11.2 billion. In the second quarter of 2001, the Company securitized and sold $592.2 million of indirect auto loans from its consumer portfolio. This transaction further diversified the loan portfolio and reduced short-term borrowings.

        During 2001, Hibernia securitized $305.2 million of its residential first mortgages through the Federal National Mortgage Association (FNMA), of which $202.4 million and $102.8 million were securitized and classified as available for sale securities during the first and second quarters of 2001, respectively. These portions of the consumer portfolio were securitized with recourse provisions, and reserves have been established to cover potential losses. These transactions affect the categorization of individual line items on the balance sheet by reducing mortgage loans and increasing securities and related recourse reserves.

        Table 1 presents Hibernia’s commercial and small business loans classified by repayment source and consumer loans classified by type at June 30, 2002, March 31, 2002 and June 30, 2001. Total loans increased $265.2 million (2%) during the second quarter of 2002 compared to March 31, 2002 and $59.3 million (1%) compared to June 30, 2001.

        Consumer loans increased $177.3 million (3%) compared to March 31, 2002 and $291.1 million (5%) compared to June 30, 2001. The increase from the same period a year ago reflects the growth in the indirect loan portion of the consumer portfolio. While Hibernia originated $1.1 billion mortgage loans in the second quarter of 2002, the majority of these loans were fixed rate mortgages and sold with servicing rights retained.

        Small business loans increased $44.0 million (2%) compared to March 31, 2002 and $20.1 million (1%) compared to June 30, 2001. The small business portfolio continued to be impacted by slow demand for loans as a result of the soft economy.

        Commercial loans increased $43.9 million (2%) compared to March 31, 2002 and decreased $251.9 million (8%) compared to June 30, 2001. The decrease in commercial loans from the same period last year was primarily the result of management’s strategy to increase the granularity of the commercial portfolio and to decrease participation in shared national credits. This strategy focuses on lending to customers which operate in the Company’s markets, particularly those which use other Company services, and on retaining a smaller piece of the credit relationship. Shared national credits were relatively unchanged from the first quarter of 2002 and down 20% from the same period last year.

        Securities Available for Sale. Average securities available for sale increased $423.8 million (15%) in the second quarter of 2002 compared to the second quarter of 2001, and were up $432.7 million (15%) for the first six months of 2002 compared to the same period in 2001. These increases were primarily due to purchases of securities required to collateralize certain public fund deposits and repurchase agreements, as well as changes in unrealized gains and losses reflecting the changing interest rate environment. The securitization of residential first mortgages in the first and second quarters of 2001 also contributed to these increases. Securities available for sale primarily consist of mortgage-backed and U.S. government agency securities. Most securities held by the Company qualify as securities that may be pledged and are used for customer repurchase agreements and to collateralize public or trust deposits.

        Securities Held to Maturity. Hibernia’s held to maturity securities are comprised of U.S. government agency mortgage-backed securities. Average securities held to maturity in the second quarter of 2002 totaled $215.2 million, down $116.8 million (35%) from the second quarter of 2001. Average securities held to maturity for the first six months of 2002 totaled $226.6 million, down $117.3 million (34%) from the same period in 2001.

        Short-Term Investments. Short-term investments consist primarily of federal funds sold, securities purchased under agreements to resell (reverse repurchase agreements) and an interest only strip receivable resulting from the securitization of indirect auto loans in the second quarter of 2001. The interest only strip receivable, which totaled $12.3 million at June 30, 2002, is classified as a trading account asset. All other short-term investments are considered to be cash equivalents.

        Average short-term investments for the three months ended June 30, 2002 totaled $345.9 million, up $212.5 million (159%) compared to $133.4 million for the second quarter of 2001. The growth in short-term investments from the second quarter of 2001 resulted primarily from increases in federal funds sold due to increased levels of cash from the previously mentioned securitization of indirect auto loans. For the first six months of 2002 compared to the same period in 2001, average short-term investments increased $157.3 million (106%) to $305.3 million.

        Mortgage Loans Held For Sale. Mortgage loans held for sale are loans that have been originated and are pending securitization or sale in the secondary market. Since mortgage warehouse loans are generally held in inventory for a short period of time (30 to 60 days), there may be significant differences between average and period-end balances. Average mortgage loans held for sale for the second quarter of 2002 increased $34.3 million (11%) compared to the second quarter of 2001, and increased $104.7 million (45%) for the first six months of 2002 compared to the same period in 2001. As a result of lower interest rates, the Company experienced an increase in the level of fixed-rate mortgage loans originated. Generally, Hibernia retains adjustable-rate mortgage loans and sells fixed-rate mortgage loans, while retaining the associated servicing rights.

ASSET QUALITY

        Several key measures are used to evaluate and monitor the Company’s asset quality. These measures include the level of loan delinquencies, nonaccrual loans, restructured loans, charge-offs, foreclosed assets and excess bank-owned property, in addition to their related ratios.

        Table 2 shows loan delinquencies and delinquencies as a percentage of their related portfolio segment and in total for each of the last five quarters. Total managed delinquencies decreased $6.4 million (11%) from June 30, 2001 and $0.9 million (2%) from March 31, 2002. Accruing loans past due 90 days or more are primarily consumer loans.

        Managed consumer delinquencies include delinquencies related to indirect auto loans securitized. Total managed delinquencies as a percentage of total managed loans at June 30, 2002 were 0.46%, down from 0.51% a year ago and 0.48% at March 31, 2002. Consumer delinquencies decreased from the prior year driven primarily by the indirect auto portfolio. The decline in small business delinquencies in the current quarter was offset by increases in the consumer portfolio.

        Nonperforming loans consist of nonaccrual loans (loans on which interest income is not currently recognized) and restructured loans (loans with below-market rates or other concessions due to the deteriorated financial condition of the borrower). Nonperforming loans totaled $63.4 million at June 30, 2002, up from $61.2 million at June 30, 2001 but down from $72.1 million at March 31, 2002. The increase from a year ago was primarily due to a net increase in small business nonaccrual loans which was partially offset by charge-offs, sales and payments on commercial nonaccrual loans. The decrease from the prior quarter was primarily driven by payments and charge offs in the commercial loan portfolio. The majority of nonperforming consumer loans are residential mortgage loans on which no significant losses are expected.

        Foreclosed assets (assets to which title has been assumed in satisfaction of debt) totaled $6.4 million at June 30, 2002, down $0.2 million from a year earlier, and up $0.5 from March 31, 2002. Excess bank-owned property at June 30, 2002 was down $0.2 million from June 30, 2001, and $0.5 million from March 31, 2002.

        Nonperforming assets as a percentage of total loans plus foreclosed assets and excess bank-owned property (nonperforming asset ratio) is one measure of asset quality. At June 30, 2002 the Company’s nonperforming asset ratio was 0.62% virtually unchanged from a year ago and down from 0.72% at March 31, 2002.

        The composition of nonperforming loans, foreclosed assets and excess bank-owned property as well as certain asset quality ratios for the past five quarters are set forth in Table 3.

        At June 30, 2002 the recorded investment in loans considered impaired under Statement of Financial Accounting Standards (SFAS) No. 114 was $53.2 million. The related portion of the reserve for loan losses was $4.6 million. The comparable amounts at June 30, 2001 were $51.1 million and $9.9 million, respectively. These loans are included in nonaccrual loans in Table 3.

        Table 4 presents a summary of changes in nonperforming loans for the last five quarters. Loans totaling $9.7 million were added to nonperforming loans during the second quarter of 2002, down from $22.5 million in the prior quarter and was the lowest level of additions since the third quarter of 1998. The additions in the second quarter of 2002 were primarily in the small business loan portfolio. Payments and charge-offs totaling $15.7 million reduced nonperforming loans and more than offset the additions during the quarter. To the extent that nonaccrual loans that have been charged-off are recovered in subsequent periods, the recoveries would be reflected in the reserve for loan losses in Table 5 and not as a component of nonperforming loan activity.

        In addition to the nonperforming loans discussed above, other commercial loans that are subject to potential future classification as nonperforming or past due 90 days and still accruing totaled $27.9 million at June 30, 2002.

RESERVE AND PROVISION FOR LOAN LOSSES

        The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the risk of loss in the loan portfolio in light of current risk management strategies, economic conditions and market trends. The Company recorded a $20.0 million provision for loan losses in the second quarter of 2002 compared to $27.0 million in the second quarter of 2001 and $27.5 million in the prior quarter. The provision for loan losses for the quarter exceeded net charge-offs by $7.1 million and reflected a strengthening of reserves in view of current uncertain economic conditions.

        Net charge-offs totaled $12.9 million in the second quarter of 2002 compared to $22.0 million in the second quarter of 2001 and $18.0 million in the prior quarter. Net charge-offs for the first six months of 2002 totaled $30.9 million compared to $37.3 million for the first six months of 2001. As a percentage of average loans, annualized net charge-offs were 0.46% in the second quarter of 2002, down from 0.74% in the second quarter of 2001 and 0.65% in the prior quarter. Commercial net charge-offs decreased to $0.8 million in the second quarter of 2002 from $10.0 million in the same period of 2001, and $2.5 million in the prior quarter. The current quarter included a net recovery of $2.2 million as a result of a payment on a previously charged off loan. Net charge-offs of $5.5 million in the small business portfolio for the second quarter of 2002 increased from $4.5 million in the second quarter of 2001, and decreased from $6.3 million in the prior quarter. Consumer net charge-offs decreased to $6.6 million in the second quarter of 2002, down from $7.4 million in the second quarter of 2001 and $9.1 million in the prior quarter. The decrease in consumer net charge-offs from the prior year were across most segments of the consumer portfolio and reflected an increased focus on the collections function. The decline in consumer net charge-offs from the prior quarter also reflected lower net charge-offs in the indirect automobile portfolio which benefited from higher used car auction values.

        The reserve for loan losses is comprised of specific reserves (assessed for each loan that is reviewed for impairment or for which a probable loss has been identified), general reserves (based on historical loss factors) and an unallocated reserve for exposures arising from factors which are not addressed by the general and specific reserves.

        The Company continuously evaluates its reserve for loan losses to maintain an adequate level to absorb loan losses inherent in the loan portfolio. Reserves on impaired loans are based on discounted cash flows using the loan’s initial effective interest rate, the observable market value of the loan or the fair value of the collateral for certain collateral-dependent loans. Factors contributing to the determination of specific reserves include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General reserves are established based on historical charge-offs considering factors which include risk rating, industry concentration and loan type, with the most recent charge-off experience weighted more heavily. The unallocated reserve, which is judgmentally determined, generally serves to compensate for the uncertainty in estimating loan losses, particularly in times of changing economic conditions, and considers the possibility of improper risk ratings and possible over- or under-allocations of specific reserves. It also considers the lagging impact of historical charge-off ratios in periods where future charge-offs are expected to increase or decrease significantly. In addition, the unallocated reserve considers trends in delinquencies and nonaccrual loans, industry concentration, the volatility of risk ratings and the evolving portfolio mix in terms of collateral, relative loan size, the degree of seasoning in the various loan products and loans recently acquired through mergers. Changes in underwriting standards, credit administration and collection, regulation and other factors which impact the credit quality and collectibility of the loan portfolio also impact the unallocated reserve levels. The results of reviews performed by internal and external examiners are also considered.

        The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual and expected credit losses. These changes are reflected in both the general and unallocated reserves. The historical loss ratios, which are key factors in this analysis, are updated quarterly and are weighted more heavily for recent charge-off experience. The review of reserve adequacy is performed by executive management and presented to the Board of Directors for its review, consideration and ratification.

        There were no significant changes in the composition of the loan portfolio from the first quarter of 2002. The Company continued to proactively manage its problem loan exposure in the second quarter of 2002. The reserve coverage of total loans at June 30, 2002 increased from the prior quarter and from a year ago primarily due to an increase in the reserve. This reflects management’s assessment of reserve adequacy after consideration of the risk profile of the portfolio as indicated by the Company’s internal risk rating system and based on consistent application of the Company’s reserve methodology.

        Table 5 presents an analysis of the activity in the reserve for loan losses for the last five quarters.

        The basic assumptions and methodologies used in allocating the reserve were unchanged during the quarter, however refinements to the existing methodology continue to be made as evolving risk trends are identified. The allocations to the commercial portfolio decreased in the quarter and from a year ago, while the allocation to the consumer portfolio increased. The unallocated reserves increased during the quarter and from a year ago reflecting the higher level of provisioning as the Company continues to strengthen reserves in view of current economic conditions and indications of credit deterioration, primarily in the small business portfolio. These allocations are consistent with management’s expectations and the loan loss methodology which weights recent history more heavily and also reflects the current risk profile of the portfolio.

        The reserve coverage of annualized net charge-offs was 412% at June 30, 2002 compared to 285% at March 31, 2002 and 203% at June 30, 2001. The reserve for loan losses is established to provide for losses which are inherent in the portfolio. Therefore, a comparison of historical charge-offs to the reserve is not necessarily an appropriate measure of reserve adequacy, since the timing of charge-offs and recoveries impacts these ratios.

        The reserve for loan losses totaled $212.3 million, or 1.87% of total loans at June 30, 2002, compared to $178.6 million, or 1.58% of total loans at June 30, 2001 and $205.2 million, or 1.85% of total loans at March 31, 2002. The reserve for loan losses as a percentage of nonperforming loans was 335% at June 30, 2002, compared to 292% at June 30, 2001 and 284% at March 31, 2002. The present level of the reserve for loan losses is considered adequate to absorb probable loan losses inherent in the portfolio considering the level and mix of the loan portfolio, the level of delinquent and nonperforming loans, the Company’s risk management strategies, and current expectations with respect to economic conditions and market trends. Current forecasts for the overall U.S. economy for 2002 predict continued weak economic conditions as a result of continued slow demand, weakened investor confidence and anticipated declines in consumer expenditures. However, management expects that the Company will be only modestly impacted as the local economy in which it operates is not expected to be significantly affected by these factors. The Company will continue to evaluate these levels and trends and provide for losses accordingly.

FUNDING SOURCES:

DEPOSITS

        Average deposits totaled $12.8 billion in the second quarter of 2002, a $248.3 million (2%) increase from the second quarter of 2001. For the first six months of 2002 compared to the same period in 2001, average deposits increased $287.9 million (2%) to $12.8 billion. Table 6 presents the composition of average deposits for the periods presented.

        Average core deposits totaled $10.5 billion in the second quarter of 2002, a $407.6 million (4%) increase from the second quarter of 2001. Average noninterest-bearing deposits grew $247.1 million and average savings deposits increased $173.8 million in the second quarter of 2002 compared to the second quarter of 2001. NOW account average balances were down $18.8 million and average money market deposit accounts were up $293.0 million in the second quarter of 2002 compared to the second quarter of 2001. Excluding the effect of the Reserve Money Manager Sweep, average NOW account balances were up $250.6 million and average money market deposit accounts were up $23.6 million. Average consumer time deposits decreased $287.5 million in the second quarter of 2002 compared to the second quarter of 2001. The decrease in consumer time deposits was primarily due to the rate environment and the movement of longer-term deposit funds into more liquid deposit products as the volatility of the stock market has increased. The net increases in average core deposits were primarily a result of Hibernia’s emphasis on attracting new deposits and expanding current banking relationships.

        In an effort to grow lower-cost deposits and revenues through cross-selling opportunities, Hibernia launched a high performance checking campaign in March 2002, a simplified consumer-checking program that offers gifts to customers who open new personal checking accounts or refer prospects who then open new personal checking accounts. The campaign includes an extensive advertising and marketing program that is focused on Hibernia’s Completely Free Checking^SM product as well as other high performance checking products. The introduction of high performance checking products has exceeded the Company’s expectations for new accounts opened and is anticipated to grow core deposits for the rest of 2002 and beyond.

        Average noncore deposits were down $159.3 million from the second quarter of 2001 to $2.4 billion or 18% of total deposits. Average large denomination certificates of deposit decreased $112.2 million compared to the second quarter of 2001 as a result of competitive pricing in the market. Average foreign time deposits decreased $47.1 million due to a decrease in Eurodollar deposits by some larger commercial customers as compared to the same period in 2001.

        Total deposits at June 30, 2002 were $12.8 billion, up $102.5 million (1%) from June 30, 2001.

BORROWINGS

        Average borrowings (which include federal funds purchased; securities sold under agreements to repurchase; treasury, tax and loan account; and Federal Home Loan Bank (FHLB) advances) decreased $414.0 million (20%) to $1.7 billion for the second quarter of 2002 compared to the second quarter of 2001. For the first six months of 2002 compared to the first six months of 2001, average borrowings decreased $645.8 million (27%) to $1.7 billion. This decrease in borrowings reflects the reduction of federal funds purchased in June 2001 resulting from proceeds of $570.0 million from the securitization and sale of a portion of the indirect auto loan portfolio, discussed earlier. Borrowings at June 30, 2002 totaled $1.7 billion, down $212.7 million (11%) from $1.9 billion at June 30, 2001.

        Average FHLB advances for the second quarter of 2002 totaled $1.0 billion, down from $1.1 billion in the second quarter of 2001. The FHLB may demand payment of $200 million in callable advances at quarterly intervals. An additional $200 million becomes callable at quarterly intervals beginning June 2003. If called prior to maturity, replacement funding will be offered by the FHLB at a then-current rate.

        Of the $1.0 billion in FHLB advances outstanding at June 30, 2002, $640 million accrues interest at variable rates. Hibernia instituted partial hedges against the effect of rising interest rates on its variable rate debt by entering into interest rate swap agreements in the first and second quarters of 2001 whereby Hibernia will receive quarterly variable rate (LIBOR) payments and pay a fixed rate on a notional amount of $600 million. The estimated negative fair value of these interest rate swap agreements totaled $22.2 million at June 30, 2002, and is recorded on the balance sheet as a liability, with the corresponding offset, net of income taxes, recorded in other comprehensive income. Net settlements on the swap agreement are accrued monthly, effectively converting $600 million of FHLB advances from a variable rate to a fixed rate.

        The Company’s reliance on borrowings continues to be within parameters determined by management to be prudent in terms of liquidity and interest rate sensitivity.

INTEREST RATE SENSITIVITY

        The primary objective of asset/liability management is controlling interest rate risk. On a continuing basis, management monitors the sensitivity of net interest income to changes in interest rates through methods that include simulation models and Gap reports. Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital. Gap reports measure the net amount of assets or liabilities that reprice in the same time period over the remaining lives of those assets and liabilities. Using these tools, management attempts to optimize the asset/liability mix to minimize the impact of significant rate movements within a broad range of interest rate scenarios. Management may alter the mix of floating- and fixed-rate assets and liabilities, change pricing schedules, adjust maturities through the sale and purchase of securities available for sale, and enter into derivative contracts as a means of minimizing interest rate risk.

        Hibernia routinely runs various interest rate scenarios in order to measure and control the impact on earnings of changes in interest rates. The Company develops scenarios to simulate immediate and sustained parallel interest rate shocks and compares the resulting net interest income to the results of a flat rate scenario. Policy limits the after tax changes in net interest income to 15% of projected 12-month net income. Based on the results of a simulation of a 200-basis-point increase in interest rates at June 30, 2002, the Company would expect an increase in after-tax net interest income of $1.2 million. In a 100-basis-point decrease shock scenario (utilized in place of a 200-basis-point drop scenario due to the current low interest rate environment) after tax net interest income would decrease $2.4 million. Results of both scenarios are within the limits of Hibernia's policy objective. In addition, the Company projects an increase in after-tax net interest income of $0.3 million and a decrease of $1.2 million if interest rates gradually decrease or increase, respectively, by 100 basis points over the next year.

        On a limited basis, the Company has entered into interest rate and foreign exchange rate swap, forward and option contracts, and forward sales contracts, to hedge interest rate or foreign exchange rate risk on specific assets and liabilities on its own behalf and for customers. With the implementation of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” on January 1, 2001, instruments which previously were not reported on the balance sheet, primarily interest rate swaps and forward sales contracts, are now recorded as assets and liabilities. The effect of adopting SFAS No. 133 was not material.

        The Company enters into forward sales contracts relating to its mortgage origination activity. These contracts protect the Company against changes in the fair value of mortgage loans held for sale (including anticipated loan fundings) due to changes in market conditions, primarily the interest rate environment. The Company designates a portion of these forward sales contracts relating to mortgage loans held for sale as fair value hedges. Forward sales contracts with a notional value of $290.1 million and an estimated negative fair value of $6.3 million were designated as fair value hedges at June 30, 2002. The related hedged mortgage loans held for sale had a principal balance of $290.1 million and were increased by a positive change in fair value of $6.3 million at June 30, 2002, resulting in no impact on earnings related to the hedge. The forward sales contracts relating to interest rate lock commitments are not designated as hedges and are adjusted to fair value through income. At June 30, 2002 interest rate lock commitments had a notional amount of $435.3 million with a positive fair value of $6.1 million. The related forward sales contracts had a notional amount of $435.3 million and a negative fair value of $5.6 million at June 30, 2002.

        Derivative financial instruments are also held or issued by the Company to provide customers the ability to manage their own interest rate sensitivity. Matched positions are ordinarily established to minimize risk to the Company. The notional value of customer-related derivative financial instruments not designated as hedges totaled $1.9 billion at June 30, 2002, with positive fair values of $31.5 million and negative fair values of $27.9 million.

        Hibernia holds foreign exchange rate forward contracts that had notional amounts totaling $7.5 million at June 30, 2002, which minimize the Company’s exchange rate risk on loans to be repaid in foreign currencies.

        The interest rate swap agreements discussed in “Borrowings” were entered into by the Company to hedge against the effect of rising interest rates on portions of its variable rate Federal Home Loan Bank advances. Hibernia will receive quarterly variable rate (LIBOR) payments and pay fixed rates under the interest rate swap agreements on a total notional amount of $600 million. The estimated negative fair value of derivative financial instruments designated as cash flow hedges totaled $22.2 million at June 30, 2002.

RESULTS OF OPERATIONS:

NET INTEREST INCOME

        Taxable-equivalent net interest income for the second quarter of 2002 totaled $176.8 million, a $6.6 million (4%) increase from the second quarter of 2001. Taxable-equivalent net interest income for the first six months of 2002 totaled $349.9 million, a $18.3 million (6%) increase from the first six months of 2001.

        The increase in net interest income for the second quarter of 2002 over the second quarter of 2001 was primarily due to the impact of changes in interest rates on the Company’s balance sheet. The average yield on earning assets declined 134 basis points while the average cost on interest-bearing liabilities decreased 182 basis points. Over the past year, Hibernia has benefited from the significant Federal Reserve interest rate cuts because of its liability-sensitive position. As of June 30, 2002, the Company’s balance sheet was much less liability-sensitive, when compared to the same period a year ago.

        Table 7 shows the composition of earning assets for the most recent five quarters, reflecting the change in the mix of earning assets.

        Table 8 details the net interest margin for the most recent five quarters.

        The net interest margin was 4.63% for the second quarter of 2002, an increase of 19 basis points from the second quarter of 2001 and four basis points from the first quarter of 2002. The increase in the net interest margin from the second quarter of 2001 reflects the lower rate environment in addition to a significantly steeper yield curve.

        Table 9 presents an analysis of changes in taxable-equivalent net interest income between the second quarter of 2002 and the first quarter of 2002 and between the second quarter of 2002 and the second quarter of 2001.

        The analysis of Consolidated Average Balances, Interest and Rates on pages 26 and 27 of this discussion presents the Company’s taxable-equivalent net interest income and average balances for the three months ended June 30, 2002, March 31, 2002 and June 30, 2001 and the first six months of 2002 and 2001.