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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, 2003.

Note 2
Mergers

        On May 13, 2004, the Company purchased all of the outstanding stock and options of Coastal Bancorp, Inc. (Coastal) for $231,014,000 in cash (including withholding). Coastal was the parent of Coastal Banc Holding Company, Inc., which owned Coastal Banc ssb, a Texas-chartered FDIC-insured state savings bank headquartered in Houston, Texas. This transaction significantly increased the Company’s presence in the Houston area and provided entry into Austin, Corpus Christi, the Rio Grande Valley and other communities in South Texas.

        The acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” Under the purchase method of accounting, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values as of the purchase date. At May 13, 2004, the Company recorded fair values of $1,957,767,000 in loans, $2,738,087,000 in total assets, $1,695,936,000 in deposits and $2,498,754,000 in total liabilities. The excess of cost over the fair value of the net assets acquired (goodwill) totaled $116,934,000. Coastal goodwill was allocated to the Company’s reportable segments as follows: Consumer — $60,277,000, Small Business — $35,155,000 and Commercial — $21,502,000. In accordance with SFAS No. 142, the carrying amount of goodwill will not be amortized but will be subject to annual impairment testing. In addition, a core deposit intangible of $23,596,000 was recorded and is being amortized over 10 years. The results of operations of Coastal have been included in the Company’s consolidated financial statements since the date of acquisition.

        Unaudited pro forma consolidated operating results giving effect to the purchase of Coastal as if the transaction had occurred at the beginning of each period presented is included in the table below. These pro forma results combine historical results of Coastal into the Company’s operating results, with certain adjustments made for the estimated impact of purchase accounting adjustments and acquisition funding. In addition, pro forma information does not include the effect of anticipated savings resulting from the merger. Unaudited pro forma data is not necessarily indicative of the results that would have occurred had the acquisition taken place at the beginning of the periods presented or of future results.

        Included in the 2004 results are $3,180,000 of merger related expenses incurred by the Company. These merger-related expenses include items such as salaries and benefits, occupancy and equipment, data processing, advertising and other expenses associated with the merger and integration of Coastal.

        On April 28, 2004, Hibernia National Bank, a subsidiary of Hibernia Corporation, purchased 50% of the outstanding shares of The MerchantNet.com Corporation (MerchantNet), with an option to purchase the remaining 50% at a later date. MerchantNet is a provider of payment solutions for merchants and is currently doing business under the name “Hibernia Merchant Services.” MerchantNet is included in the Company’s consolidated financial statements as it meets the definition of a variable interest entity and the Company is the primary beneficiary as defined in Financial Accounting Standards Board Interpretation (FIN) No. 46(R), “Consolidation of Variable Interest Entities.” The transaction was accounted for as a purchase in accordance with SFAS No. 141. The purchase price of $12,500,000 was allocated to the assets acquired and liabilities assumed based on their estimated fair values, resulting in goodwill totaling $11,393,000, which is included in the Company’s Commercial reportable segment. The carrying amount of goodwill is not amortized but will be subject to annual impairment testing. In addition, a customer list intangible of $1,845,000 was recorded and is being amortized on an accelerated basis over 10 years. The results of MerchantNet’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. Because the Company does not own 100% of MerchantNet, a liability for the minority ownership interest of the subsidiary is included in other liabilities in the consolidated balance sheets and the net income relating to the minority interest, net of income tax, is deducted as a single line item in the consolidated income statements. Pro forma results of operations have not been presented as the effect of this acquisition was not considered material to the operations of the Company.

        MerchantNet has credit facilities with Hibernia National Bank totaling $3,500,000. The outstanding loan balance of $2,448,000 at June 30, 2004, is eliminated in consolidation. These instruments are secured by certain MerchantNet assets and guaranteed by Data Delivery Service, Inc., a company affiliated with some of the minority interest holders of MerchanNet. In addition, MerchantNet has guaranteed credit facilities between Data Delivery Service, Inc. and Hibernia National Bank totaling $1,150,000. These facilities are secured by a contractual right to certain assets of Data Delivery Service, Inc.

Note 3
Goodwill and Other Intangible Assets

        The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under these rules, goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. Other intangible assets are amortized over their useful lives.

        The carrying amount of goodwill not subject to amortization at June 30, 2004 and 2003 totaled $337,441,000 and $209,114,000, respectively, net of accumulated amortization of $66,914,000. Goodwill is included in the Company’s reportable segments as follows: Consumer — $162,767,000; Small Business — $83,495,000; Commercial — $91,171,000 and Investments and Public Funds — $8,000. The Company performed its annual impairment tests as of September 30, 2003 and 2002, which did not indicate impairment of the Company’s recorded goodwill. Management is not aware of any events or changes in circumstances since the impairment testing that would indicate that goodwill might be impaired.

        The Company records purchase accounting intangible assets that consist of core deposit intangibles, trust intangibles and customer lists intangibles, which are subject to amortization. These include both contractual and noncontractual customer relationships. The core deposit and trust intangibles reflect the value of deposit and trust customer relationships which arose from the purchases of financial institutions and branches. The customer lists intangibles represent the purchase of customer lists and contracts from a merchant processing company and individual insurance agents or agencies. The following table summarizes the Company’s purchase accounting intangible assets subject to amortization.

        The amortization expense of the purchase accounting intangibles for the three months ended June 30, 2004 and 2003 was $1,551,000 and $1,285,000, respectively, and for the six months ended June 30, 2004 and 2003 was $2,712,000 and $2,624,000, respectively. Estimated future amortization expense is as follows: 2004 — $3,770,000; 2005 — $6,626,000; 2006 — $4,925,000; 2007 — $3,343,000; 2008 — $3,036,000; 2009 — $2,911,000 and thereafter — $10,780,000. These estimates assume no additions to the current purchase accounting intangibles.

        Also included in intangible assets are capitalized mortgage servicing rights with net carrying amounts of $125,276,000 and $88,439,000 at June 30, 2004 and 2003, respectively. The carrying amounts are net of a reserve for temporary impairment of $9,114,000 and $61,072,000 at June 30, 2004 and 2003, respectively. Amortization expense of mortgage servicing rights, included in noninterest income, totaled $7,443,000 and $14,350,000 for the three months ended June 30, 2004 and 2003, respectively, and $16,673,000 and $26,454,000, for the six months ended June 30, 2004 and 2003, respectively. In the second quarter of 2004, the Company reversed $24,000,000 of previously recorded temporary impairment expense, resulting in a net reversal of $14,000,000 for the six months ended June 30, 2004. A provision expense for the temporary impairment of mortgage servicing rights of $28,000,000 was recorded in the second quarter of 2003, resulting in a total provision expense of $42,500,000 for the six months ended June 30, 2003. The Company also reclassified $6,529,000 and $19,928,000 in the second quarter of 2004 and 2003, respectively, of its reserve for temporary impairment of mortgage servicing rights from temporary to other-than-temporary, which reduced the impairment reserve and the mortgage servicing rights balance. For the six months ended June 30, 2004, a total of $8,007,000 of the reserve for temporary impairment of mortgage servicing rights was reclassified from temporary to other-than-temporary. This reclassification to other-than-temporary impairment resulted from continued loan payoffs in the second quarter and reflects decreased production due to the Company’s strategic decision to exit corresponding lending.

Note 4
Debt

        The following is a summary of debt as of June 30, 2004 and 2003.

        The Federal Reserve Home Loan Bank (FHLB) advances are secured by the Company’s investment in FHLB stock and by a blanket floating lien on portions of the Company’s residential mortgage loan portfolio. FHLB stock totaled $116,612,000 and $70,511,000 at June 30, 2004 and 2003, respectively, and is included in securities available for sale.

        The FHLB long-term advances include advances of $465,554,000 and $1,996,000 at June 30, 2004 and 2003, respectively, which accrue interest at fixed contractual rates; advances of $924,889,000 and $1,000,000,000 at June 30, 2004 and 2003, respectively, which accrue interest at variable rates; and $400,000,000 of convertible advances at June 30, 2004 and 2003. The long-term fixed-rate advances amortize and/or mature at various dates through 2019. The weighted average rate on the fixed rate advances totaled 2.51% and 6.63% at June 30, 2004 and 2003, respectively. The variable rate advances mature at various dates through 2009. The weighted average rate on the variable advances totaled 1.23% and 4.08% as of June 30, 2004 and 2003, respectively. The convertible advances require monthly interest payments. An advance in the amount of $200,000,000 matures in September 2004, accrues interest at a fixed rate of 5.65%, and is convertible to a floating rate at quarterly intervals which began in September 2001. Another $200,000,000 advance matures in June 2008, accrues interest at a fixed rate of 5.28%, and is convertible to a floating rate at quarterly intervals which began in June 2003. In connection with the Coastal acquisition, a fair value adjustment totaling $1,390,000 on FHLB advances was recorded on the Company's books and is being amortized over the lives of the related advances.

        As part of the financing for the purchase of Coastal Bancorp, Inc., Hibernia Corporation issued $100,000,000 in ten year 5.35% fixed-rate subordinated notes in April 2004 at a discount of $32,000. The discount is being amortized over the life of the subordinated notes. In March 2004, the Company entered into a $50,000,000 forward-start interest rate swap agreement and a $50,000,000 treasury interest rate lock agreement to protect against a rise in interest rates. The contracts were terminated upon the issuance of the subordinated debt, resulting in a gain of $4,692,000. This gain has been deferred and is being recognized over the life of the subordinated notes using the level-yield method, resulting in an effective rate of 4.97%.

        In connection with the Coastal merger, the Company assumed $51,546,000 aggregate principal amount of 9.0% junior subordinated debentures due June 30, 2032 issued by Coastal to Coastal Capital Trust I (CCTI) and became the sponsor of CCTI, a business trust, which issued 2,000,000 of 9.0% Cumulative Trust Preferred Securities with a liquidation amount of $25 per security that is traded on the Nasdaq National Market. The Company also assumed $10,310,000 aggregate principal amount of floating rate (LIBOR plus 3.05%, reset quarterly) junior subordinated debentures due June 23, 2033 issued by Coastal to Coastal Capital Trust II (CCTII) and became the sponsor of CCTII, a business trust, which issued 10,000 floating rate (LIBOR plus 3.05%, reset quarterly) trust preferred securities to a private institutional investor with a liquidation rate of $1,000 per security. The interest rate on these floating rate instruments was 4.16% at June 30, 2004. The trust preferred securities represent an interest in the Company’s junior subordinated debentures, which were purchased by the business trusts and have substantially the same payment terms as the trust preferred securities. The junior subordinated debentures are the only assets of CCTI and II and interest payments from the debentures, payable quarterly, finance the distributions paid on the trust preferred securities. The trust preferred securities are subject to mandatory redemption at the liquidation preference, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. The junior subordinated debentures are redeemable prior to the maturity date, at the option of the Company, in whole or in part, subject to the terms of the trust indentures, on or after June 30, 2007 and June 23, 2008, for the subordinated debentures payable to CCTI and II, respectively. The junior subordinated debentures are also redeemable at any time in whole, but not in part, upon the occurrence of specific events defined within the trust indentures. The Company has the option to defer distribution on either junior subordinated debenture for a period not to exceed 20 consecutive quarters. The subordinated debentures were recorded on the Company’s books at their fair value on May 13, 2004, which totaled $65,704,000. The fair value adjustment of $3,847,000 is being amortized over the estimated life of the subordinated debentures, which is the earliest redemption date. A portion of these subordinated debentures qualifies as Tier 1 Capital under Federal Reserve Bank regulatory capital rules.

        The other debt outstanding as of June 30, 2004 consists of a note payable by MerchantNet.

        The Company instituted hedges against the effect of rising interest rates on a portion of its variable rate debt outstanding at June 30, 2004 and 2003 by entering into interest rate swap agreements whereby the Company will receive quarterly variable rate (LIBOR) payments and pay fixed rates on notional amounts. These notional amounts totaled $400,000,000 and $700,000,000 at June 30, 2004 and 2003, respectively. The maturities of these interest rate swaps match the maturities of the underlying debt. Net settlements on the swap agreements are accrued monthly and effectively convert the related hedged debt from variable to fixed rates.

Note 5
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. From October 1997 through January 2003, options granted to non-employee directors were granted under the 1993 Directors’ Stock Option Plan. Under that plan, options granted to non-employee directors upon inception of service as a director and certain options granted to directors who retire as employees vest six months from the date of grant. Other options granted to directors under that plan and options granted to employees under the Long-Term Incentive Plan generally become exercisable in the following increments: 50% 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 under the plans described above generally become immediately exercisable if the holder of the option dies while the option is outstanding. Options granted under the Long-Term Incentive Plan and the 1993 Directors’ 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). All options vest immediately upon a change in control of the Company.

        During 2003, shareholders approved the 2003 Long-Term Incentive Compensation Plan (2003 Plan). The 2003 Plan supersedes and replaces the Company’s Long-Term Incentive Plan and replaces the 1993 Directors’ Stock Option Plan. Existing options granted under these plans remain outstanding under the original terms of the plans. Options granted under the 2003 Plan that vest based on length of service (as opposed to performance measures) generally are exercisable in the same increments as those issued under the Long-Term Incentive Plan, although they may vest earlier in the event of termination as a result of death, disability or retirement or in the event of a change in control of the Company. Options issued to non-employee directors under the 2003 Plan vest immediately. Stock issued to non-employee directors pursuant to the exercise of those options (other than those used to pay the exercise price, if permitted) is subject to a minimum one-year holding period. Options issued under the 2003 Plan generally expire 10 years from the grant date, although they may expire earlier if (i) the holder leaves the employ or service of the Company other than through retirement, death or disability, in which case vested options expire in 90 days (or at original expiration date, if earlier), or (ii) the holder retires, dies or becomes disabled, in which case vested options expire in 3 years (or at the original expiration date, if earlier). Unvested options are forfeited upon termination.

        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 date of death (but not later than January 31, 2006). 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 2004. There are no shares available for grant under the Long-Term Incentive Plan, the 1993 Directors’ Stock Option Plan and the 2001 Nonqualified Stock Option Plan. All options outstanding at June 30, 2004 are nonqualified.

        In addition to the above option activity in the plans, 16,825 shares of restricted stock were awarded under the 2003 Long-Term Incentive Compensation Plan during the second quarter of 2004.

        The following pro forma information was determined as if the Company had accounted for stock options using the fair-value-based method as defined in SFAS No. 123, in which the estimated fair value of the options granted is amortized to expense over the options’ vesting period. The fair value of the options was estimated using the Black-Scholes option valuation model.

        The Black-Scholes model estimates the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee and director stock options.

Note 6
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.

        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 1,380,450 and 1,648,629 for the three months ended June 30, 2004 and 2003, respectively and 1,405,018 and 1,676,205 for the six months ended June 30, 2004 and 2003, 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, 2004 and 2003 there were 2,597,171 antidilutive options outstanding (which had exercise prices ranging from $22.97 to $23.65 per option share), and 4,307,444 antidilutive options outstanding (which had exercise prices ranging from $18.28 to $21.72 per option share), respectively. During the six months ended June 30, 2004 and 2003 there were 2,592,671 antidilutive options outstanding (which had exercise prices ranging from $23.23 to $23.65 per option share), and 4,307,444 antidilutive options outstanding (which had exercise prices ranging from $18.28 to $21.72 per option share), respectively.

Note 7
Letters of Credit and Financial Guarantees

        The Company issues letters of credit and financial guarantees (standby letters of credit) whereby it agrees to honor certain financial commitments in the event its customers are unable to perform. The majority of the standby letters of credit consist of performance guarantees. Some letters of credit result in the recording of customer acceptance liabilities. Customer acceptance liabilities are recorded when funds are payable to another financial institution on behalf of the Company’s customer. At the time the amount is determined to be payable (due to a triggering event such as delivery of goods), a liability is recorded to reflect the amount payable, with a corresponding receivable recorded from the customer. Prior to the triggering event, the contractual amount of the agreement is included in the letters of credit amounts. Collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding standby letters of credit and customer acceptances, and the results of these reviews are considered in assessing the adequacy of the Company’s loss reserves. Management does not anticipate any material losses related to these instruments.

        The Company had contractual amounts of standby letters of credit of $602,943,000 and $513,691,000 at June 30, 2004 and 2003, respectively and customer acceptance liabilities of $300,000 and $118,000 at June 30, 2004 and 2003, respectively. At June 30, 2004, standby letters of credit had expiration dates ranging from 2004 to 2010.

        Effective January 1, 2003, the Company adopted the recognition and measurement provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The recognition and measurement provisions of the interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The fair values of the guarantees outstanding at June 30, 2004 and 2003, respectively, that have been issued since January 1, 2003, totaled $7,060,000 and $1,859,000, and are included in other liabilities.

Note 8
Segment Information

        The Company’s segment information is presented by lines of business. Each line of business is a strategic unit that provides various products and services to groups of customers with certain common characteristics. The basis of segmentation and the accounting policies used by each segment are consistent with those described in the December 31, 2003 Annual Report to Shareholders and “Segment Results” in Management’s Discussion and Analysis. The Company’s current analysis by segment includes Coastal’s operations in the Other segment. Future analysis will include Coastal by its lines of business. In 2004, the Company began to purchase brokered certificates of deposits. Brokered certificates of deposit are not included in deposits in the segment analysis and therefore are shown in the reconciliation of segment totals to consolidated totals. There are no significant intersegment revenues.

        The following table presents selected financial information for each segment.