Exhibit 99.1
PRELIMINARY UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The preliminary unaudited pro forma condensed combined financial information and explanatory notes present how the combined financial statements of Capital One, Hibernia and North Fork may have appeared had the businesses actually been combined at the beginning of the periods presented. The preliminary unaudited pro forma condensed combined financial information shows the impact of the North Fork merger on the combined balance sheets and the Hibernia merger and North Fork merger on the combined statements of income under the purchase method of accounting with Capital One treated as the acquiror. Under this method of accounting, the assets and liabilities of Hibernia and North Fork are recorded by Capital One at their estimated fair values as of the date the respective mergers are completed. The preliminary unaudited pro forma condensed combined balance sheet as of June 30, 2006 assumes the North Fork merger was completed on that date. The Hibernia merger was completed on November 16, 2005, and as such the actual fair values of the Hibernia assets and liabilities are reflected in the Capital One June 30, 2006 balance sheet. The preliminary unaudited pro forma income statements for the six months ended June 30, 2006 and for the year ended December 31, 2005 were prepared assuming the North Fork and Hibernia mergers were completed on January 1, 2005.
It is anticipated that the Hibernia and North Fork mergers will provide Capital One with financial benefits such as possible expense efficiencies and revenue enhancements, among other factors, although no assurances can be given that such benefits will actually be achieved. These benefits have not been reflected in the preliminary unaudited pro forma financial information. As required, the preliminary unaudited pro forma condensed combined financial information includes adjustments which give effect to events that are directly attributable to the transaction and factually supportable; as such, any planned adjustments affecting the balance sheet, income statement, or shares of common stock outstanding subsequent to the assumed merger completion date are not included. The preliminary unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined companies had the companies actually been combined at the beginning of each period presented. Note that Hibernia’s historical results for 2005 reflect significant one-time negative impacts resulting from the Gulf Coast Hurricanes; 2005 results may not be indicative of future results. In addition, as explained in more detail in the accompanying notes to the preliminary unaudited pro forma condensed combined financial information, the allocation of the purchase price reflected in the preliminary pro forma condensed combined financial information is subject to adjustment. The preliminary purchase price allocation for the North Fork merger will vary from the actual purchase price allocation that will be recorded upon the completion of the merger based upon changes in the estimated fair value of the assets and liabilities acquired from North Fork. In addition, subsequent to the merger completion dates, there may be further refinements of the purchase price allocation as additional information becomes available.
The preliminary unaudited pro forma condensed consolidated financial information is derived from and should be read in conjunction with the historical consolidated financial statements and related notes of Capital One and North Fork, which are incorporated into this document by reference.
The following preliminary unaudited pro forma condensed combined balance sheet as of June 30, 2006, combines the June 30, 2006 historical balance sheets of Capital One (which reflects completion of the Hibernia merger) and North Fork assuming the companies had been combined on June 30, 2006, on a purchase accounting basis.
Unaudited Pro Forma Condensed Balance Sheets
June 30, 2006 (In Thousands, Except Per Share Data) | Capital One | North Fork | Pro Forma Adjustments | Capital One North Fork Combined | ||||||||||||
| Assets: | ||||||||||||||||
Cash and due from banks | $ | 1,388,384 | $ | 1,000,195 | $ | — | $ | 2,388,579 | ||||||||
Federal funds sold and resale agreements | 339,613 | — | (1,345,000 | )(A) | (1,005,387 | ) | ||||||||||
Interest-bearing deposits at other banks | 870,049 | 22,295 | — | 892,344 | ||||||||||||
Cash and cash equivalents | 2,598,046 | 1,022,490 | (1,345,000 | ) | 2,275,536 | |||||||||||
Securities available for sale and held-to-maturity | 15,292,446 | 9,964,962 | (1,023 | )(B) | 25,256,385 | |||||||||||
Loans held-for-sale | — | 5,406,341 | 92,602 | (C) | 5,498,943 | |||||||||||
Loans | 60,602,803 | 35,551,560 | (580,275 | )(D) | 95,574,088 | |||||||||||
Less: Allowance for loan losses | (1,765,000 | ) | (224,571 | ) | — | (1,989,571 | ) | |||||||||
Net loans | 58,837,803 | 35,326,989 | (580,275 | ) | 93,584,517 | |||||||||||
Accounts receivable from securitizations | 4,818,512 | — | — | 4,818,512 | ||||||||||||
Premises and equipment, net | 1,467,922 | 447,633 | 162,165 | (E) | 2,077,720 | |||||||||||
Interest receivable | 526,267 | 213,492 | — | 739,759 | ||||||||||||
Goodwill | 3,933,621 | 5,918,116 | (5,918,116 | )(F) | 15,104,792 | |||||||||||
| 11,171,171 | (F) | |||||||||||||||
Core deposit intangibles and other intangibles | 358,298 | 96,373 | (96,373 | )(G) | 1,868,298 | |||||||||||
| 1,510,000 | (G) | |||||||||||||||
Other | 1,697,271 | 985,439 | 28,566 | (H) | 2,807,392 | |||||||||||
| 96,116 | (K) | |||||||||||||||
Total assets | $ | 89,530,186 | $ | 59,381,835 | $ | 5,119,833 | $ | 154,031,854 | ||||||||
| Liabilities: | ||||||||||||||||
Non-interest bearing deposits | $ | 4,487,837 | $ | 7,561,888 | $ | — | $ | 12,049,725 | ||||||||
Interest bearing deposits | 42,698,976 | 29,252,717 | 5,811 | (I) | 71,957,504 | |||||||||||
Senior and subordinated notes | 5,490,690 | 982,304 | (19,876 | )(I) | 9,653,118 | |||||||||||
| 3,200,000 | (A) | |||||||||||||||
Other borrowings | 16,836,398 | 11,730,377 | (84,683 | )(I) | 29,132,092 | |||||||||||
| 650,000 | (A) | |||||||||||||||
Interest payable | 349,091 | 135,351 | — | 484,442 | ||||||||||||
Other | 3,770,131 | 656,621 | 400,000 | (J) | 5,355,252 | |||||||||||
| 528,500 | (G) | |||||||||||||||
Total liabilities | 73,633,123 | 50,319,258 | 4,679,752 | 128,632,133 | ||||||||||||
| Stockholders’ Equity: | ||||||||||||||||
Common stock | 3,060 | 4,807 | (4,807 | )(L) | 4,105 | |||||||||||
| 1,045 | (L) | |||||||||||||||
Paid-in capital, net | 7,151,376 | 6,875,810 | (6,875,810 | )(L) | 16,652,989 | |||||||||||
| 9,398,955 | (L) | |||||||||||||||
| 102,658 | (M) | |||||||||||||||
Retained earnings | 8,797,836 | 2,779,501 | (2,779,501 | )(L) | 8,797,836 | |||||||||||
Cumulative other comprehensive income (loss) | 60,127 | (207,161 | ) | 207,161 | (L) | 60,127 | ||||||||||
Less: Treasury stock, at cost | (115,336 | ) | (390,380 | ) | 390,380 | (L) | (115,336 | ) | ||||||||
Total stockholders’ equity | 15,897,063 | 9,062,577 | 440,081 | 25,399,721 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 89,530,186 | $ | 59,381,835 | $ | 5,119,833 | $ | 154,031,854 | ||||||||
The following preliminary unaudited pro forma condensed combined income statement for the six months ended June 30, 2006, combines the historical income statements of Capital One and North Fork assuming the companies had been combined on January 1, 2005, on a purchase accounting basis.
Unaudited Pro Forma Condensed Statement of Income
Six Months Ended June 30, 2006 (In Thousands, Except Per Share Data) | Capital One | North Fork | Pro Forma Adjustments | Capital One North Fork Combined | ||||||||
| Interest Income: | ||||||||||||
Loans, including past-due fees | $ | 3,229,559 | $ | 1,177,272 | 41,448 | (D) | $ | 4,448,279 | ||||
Securities | 332,904 | 253,770 | — | 586,674 | ||||||||
Other | 213,276 | 1,112 | (26,250 | )(A) | 188,138 | |||||||
Total interest income | 3,775,739 | 1,432,154 | 15,198 | 5,223,091 | ||||||||
| Interest Expense: | ||||||||||||
Deposits | 819,841 | 371,612 | (2,906 | )(I) | 1,188,547 | |||||||
Senior and subordinated notes | 179,061 | 28,701 | 2,244 | (I) | 305,426 | |||||||
| 95,420 | (A) | |||||||||||
Other borrowings | 372,878 | 184,476 | 25,147 | (I) | 621,631 | |||||||
| 39,130 | (A) | |||||||||||
Total interest expense | 1,371,780 | 584,789 | 159,035 | 2,115,604 | ||||||||
Net interest income | 2,403,959 | 847,365 | (143,837 | ) | 3,107,487 | |||||||
Provision for loan losses | 532,715 | 18,000 | — | 550,715 | ||||||||
Net interest income after provision for loan losses | 1,871,244 | 829,365 | (143,837 | ) | 2,556,772 | |||||||
| Non-Interest Income: | ||||||||||||
Servicing and securitizations | 2,179,110 | — | — | 2,179,110 | ||||||||
Service charges and other customer-related fees | 849,129 | 81,394 | — | 930,523 | ||||||||
Interchange | 251,029 | 3,780 | — | 254,809 | ||||||||
Other | 288,896 | 241,465 | (3,498 | )(H) | 526,863 | |||||||
Total non-interest income | 3,568,164 | 326,639 | (3,498 | ) | 3,891,305 | |||||||
| Non-Interest Expense: | ||||||||||||
Salaries and associate benefits | 1,052,609 | 286,559 | 1,339,168 | |||||||||
Marketing | 680,466 | 8,701 | — | 689,167 | ||||||||
Communications and data processing | 341,938 | 32,236 | — | 374,174 | ||||||||
Supplies and equipment | 211,212 | 43,429 | — | 254,641 | ||||||||
Occupancy | 102,130 | 67,027 | 2,169 | (E) | 171,326 | |||||||
Other | 866,021 | 70,099 | (17,718 | )(N) | 1,065,034 | |||||||
| 146,632 | (G) | |||||||||||
Total non-interest expense | 3,254,376 | 508,051 | 131,083 | 3,893,510 | ||||||||
Income before income taxes and minority interest | 2,185,032 | 647,953 | (278,418 | ) | 2,554,567 | |||||||
Income taxes | 749,106 | 217,008 | (97,446 | )(O) | 868,668 | |||||||
Net income | $ | 1,435,926 | $ | 430,945 | (180,972 | ) | $ | 1,685,899 | ||||
Basic earnings per share | $ | 4.79 | $ | 0.95 | $ | 4.17 | ||||||
Diluted earnings per share | $ | 4.64 | $ | 0.94 | $ | 4.06 | ||||||
Dividends paid per share | $ | 0.05 | $ | 0.50 | $ | 0.05 | ||||||
Basic common shares | 300,047 | 104,537 | 404,584 | |||||||||
Dilutive potenial common shares | 309,559 | 105,622 | 415,181 | |||||||||
The following preliminary unaudited pro forma condensed combined income statement for the year ended December 31, 2005, combines the historical income statements of Capital One, Hibernia, and North Fork assuming the companies had been combined on January 1, 2005, on a purchase accounting basis.
Unaudited Pro Forma Condensed Statement of Income
(In Thousands, Except Per | Capital One Twelve Months Ended December 31, 2005 | Hibernia January 1, 2005 - November 15, 2005 | Pro Forma Adjustments | Capital One Hibernia Combined | North Fork Twelve Months Ended December 31, 2005 | Pro Forma Adjustments | Capital One North Fork Combined | |||||||||||||||||
| Interest Income: | ||||||||||||||||||||||||
Loans, including past-due fees | $ | 5,010,839 | $ | 867,358 | 24,647 | (BB) | $ | 5,902,844 | $ | 2,165,518 | 82,896 | (D) | $ | 8,151,258 | ||||||||||
Securities | 388,576 | 167,656 | — | 556,232 | 610,605 | — | 1,166,837 | |||||||||||||||||
Other | 327,466 | 29,943 | (48,574 | )(AA) | 308,835 | 2,358 | (52,500 | )(A) | 258,693 | |||||||||||||||
Total interest income | 5,726,881 | 1,064,957 | (23,927 | ) | 6,767,911 | 2,778,481 | 30,396 | 9,576,788 | ||||||||||||||||
| Interest Expense: | ||||||||||||||||||||||||
Deposits | 1,173,137 | 283,985 | 504 | (CC) | 1,457,626 | 525,252 | (5,811 | )(I) | 1,977,067 | |||||||||||||||
Senior and subordinated notes | 421,218 | 17,513 | 246 | (CC) | 438,977 | 49,460 | 4,488 | (I) | 683,765 | |||||||||||||||
| 190,840 | (A) | |||||||||||||||||||||||
Other borrowings | 452,284 | 55,420 | (2,589 | )(CC) | 532,634 | 393,888 | 50,294 | (I) | 1,055,075 | |||||||||||||||
| 27,519 | (AA) | 78,259 | (A) | |||||||||||||||||||||
Total interest expense | 2,046,639 | 356,918 | 25,680 | 2,429,237 | 968,600 | 318,070 | 3,715,907 | |||||||||||||||||
Net interest income | 3,680,242 | 708,039 | (49,607 | ) | 4,338,674 | 1,809,881 | (287,674 | ) | 5,860,881 | |||||||||||||||
Provision for loan losses | 1,491,072 | 237,792 | — | 1,728,864 | 36,000 | — | 1,764,864 | |||||||||||||||||
Net interest income after provision for loan losses | 2,189,170 | 470,247 | (49,607 | ) | 2,609,810 | 1,773,881 | (287,674 | ) | 4,096,017 | |||||||||||||||
| Non-Interest Income: | ||||||||||||||||||||||||
Servicing and securitizations | 3,945,183 | 17,987 | — | 3,963,170 | — | — | 3,963,170 | |||||||||||||||||
Service charges and other customer-related fees | 1,493,690 | 234,622 | — | 1,728,312 | 166,872 | — | 1,895,184 | |||||||||||||||||
Interchange | 514,196 | 4,389 | — | 518,585 | 7,826 | — | 526,411 | |||||||||||||||||
Other | 405,036 | 123,446 | — | 528,482 | 530,813 | (6,996 | )(H) | 1,052,299 | ||||||||||||||||
Total non-interest income | 6,358,105 | 380,444 | — | 6,738,549 | 705,511 | (6,996 | ) | 7,437,064 | ||||||||||||||||
| Non-Interest Expense: | ||||||||||||||||||||||||
Salaries and associate benefits | 1,749,738 | 328,977 | — | 2,078,715 | 549,981 | — | 2,628,696 | |||||||||||||||||
Marketing | 1,379,938 | 30,598 | — | 1,410,536 | 18,994 | — | 1,429,530 | |||||||||||||||||
Communications and data processing | 580,992 | 53,819 | — | 634,811 | 66,626 | — | 701,437 | |||||||||||||||||
Supplies and equipment | 355,734 | 44,893 | — | 400,627 | 87,525 | — | 488,152 | |||||||||||||||||
Occupancy | 152,090 | 43,893 | 373 | (DD) | 197,929 | 123,364 | 4,338 | (E) | 325,631 | |||||||||||||||
| 1,573 | (EE) | |||||||||||||||||||||||
Other | 1,499,781 | 121,665 | (5,864 | )(FF) | 1,680,035 | 178,359 | (36,643 | )(N) | 2,107,528 | |||||||||||||||
| 63,652 | (GG) | 285,777 | (G) | |||||||||||||||||||||
| 801 | (EE) | |||||||||||||||||||||||
Total non-interest expense | 5,718,273 | 623,845 | 60,535 | 6,402,653 | 1,024,849 | 253,472 | 7,680,974 | |||||||||||||||||
Income before income taxes and minority interest | 2,829,002 | 226,846 | (110,142 | ) | 2,945,706 | 1,454,543 | (548,142 | ) | 3,852,107 | |||||||||||||||
Income taxes | 1,019,855 | 79,098 | (38,550 | )(HH) | 1,060,403 | 505,696 | (191,850 | )(O) | 1,374,250 | |||||||||||||||
Minority interest, net of income tax expense | — | (92 | ) | — | (92 | ) | — | — | (92 | ) | ||||||||||||||
Net income | $ | 1,809,147 | $ | 147,840 | (71,592 | ) | $ | 1,885,395 | $ | 948,847 | (356,292 | ) | $ | 2,477,949 | ||||||||||
Basic earnings per share | $ | 6.98 | $ | 6.55 | $ | 2.03 | $ | 6.31 | ||||||||||||||||
Diluted earnings per share | $ | 6.73 | $ | 6.43 | $ | 2.01 | $ | 6.13 | ||||||||||||||||
Dividends paid per share | $ | 0.11 | $ | 0.11 | $ | 0.91 | $ | 0.11 | ||||||||||||||||
Basic common shares | 259,159 | 28,870 | 288,029 | 104,537 | 392,566 | |||||||||||||||||||
Dilutive potential common shares | 268,908 | 29,825 | 298,733 | 105,622 | 404,355 | |||||||||||||||||||
NOTES TO THE PRELIMINARY UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
Note 1 – Basis of Preliminary Pro Forma Presentation
The preliminary unaudited pro forma condensed combined financial information related to the merger is included as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005. The historical financial statements of North Fork and Hibernia have been adjusted to reflect reporting reclassifications necessary to conform to the presentation of the historical financial statements of Capital One. The preliminary unaudited pro forma condensed combined financial information reflects the application of GAAP as of and for the six months ended June 30, 2006 and for the year ended December 31, 2005. The adoption of new or changes to existing GAAP subsequent to the pro forma financial statement dates may result in changes to the presentation of the preliminary unaudited pro forma condensed combined financial information, if material. No pro forma adjustment to the carrying value of loans or allowances have been recorded in accordance with the Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, reflecting the insignificant level of North Fork Non-performing assets for the periods presented.
The preliminary unaudited pro forma condensed combined financial information includes estimated adjustments to record the assets and liabilities of North Fork at their respective fair values based on management’s best estimate using the information available at this time and includes the actual adjustments to record the assets and liabilities of Hibernia at their respective fair values at November 16, 2005, the completion date of the Hibernia merger. The pro forma adjustments may be revised as additional information becomes available and as additional analysis is performed. The final allocation of the North Fork purchase price will be determined after the merger is completed and after the completion of a final analysis to determine the fair values of North Fork’s tangible and identifiable intangible assets and liabilities as of the closing date. The final purchase price accounting adjustments may differ materially from the pro forma adjustments presented in this document. Increases or decreases in fair value of certain balance sheet amounts and other items of North Fork as compared to the information presented in this document may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact the statement of income due to adjustments in yield and/or amortization of adjusted assets and liabilities.
The pro forma basic and diluted potential common shares were calculated using the actual weighted-average shares outstanding for the Company for the periods presented, plus the incremental shares issued or expected to be issued and the dilutive impact of stock options granted or expected to be granted in connection with the Hibernia and North Fork acquisitions, assuming the transactions occurred at the beginning of the periods presented.
The preliminary unaudited pro forma condensed combined financial information presented in this document does not necessarily indicate the results of operations or the combined financial position that would have resulted had the mergers been completed at the beginning of the applicable periods presented, nor is it indicative of the results of operations in future periods or the future financial position of the combined company.
North Fork Acquisition
The preliminary pro forma adjustments include purchase price adjustments based on the conversion of each share of North Fork common stock into $31.18 in cash or 0.3467 of a share of Capital One common stock, which is the cash or fraction of a share of Capital One common stock that North Fork stockholders who receive cash or stock, respectively, would receive in the merger for each share of North Fork common stock, assuming the average of the closing prices of Capital One common stock on the NYSE for the five trading days ending the day before the completion of the merger was $89.92, which was the closing price of Capital One common stock on March 10, 2006, the last trading day before announcement of the transaction. The actual amount of cash or fraction of a share of Capital One common stock that North Fork stockholders who receive cash or stock, respectively, in the merger will receive may differ depending on the average of the closing stock prices for Capital One common stock during the five trading days ending the day before completion of the merger. The total estimated consideration of $14.8 billion includes the value of outstanding stock options and will be paid with the issuance of approximately 104.5 million shares of Capital One’s common stock and approximately $5.2 billion in cash consideration. Upon completion of the merger, outstanding options and other equity-based awards of North Fork will be exchanged for options and other equity-based awards of Capital One with the number of options, other equity-based awards and option price adjusted for the exchange ratio.
The merger will be accounted for using the purchase method of accounting, and accordingly, the assets acquired (including identifiable intangible assets and goodwill) and liabilities assumed of North Fork will be recognized at fair value on the date the transaction is completed. The merger will qualify as a tax-free reorganization for federal income tax purposes.
Hibernia Acquisition
On November 16, 2005, Capital One acquired 100% of the outstanding common stock of Hibernia, a financial holding company with operations in Louisiana and Texas. Hibernia offers a variety of banking products and services, including consumer, commercial and small business loans and demand and term deposit accounts.
The acquisition was accounted for under the purchase method of accounting, and, as such, the assets and liabilities of Hibernia were recorded at their respective fair values as of November 16, 2005. The results of Hibernia’s operations were included in Capital One’s consolidated statement of income commencing November 16, 2005. The merger qualified as a tax-free reorganization for federal income tax purposes.
The total consideration of $5.0 billion, which included the value of outstanding stock options, was settled through the issuance of 32.9 million shares of Capital One’s common stock and payment of $2.2 billion in cash. Under the terms of the transaction, each share of Hibernia common stock was exchanged for $30.46 in cash or 0.3792 shares of Capital One’s common stock or a combination of common stock and cash based on the aforementioned conversion rates, based on the average of the closing prices on the NYSE of Capital One’s common stock during the five trading days ending the day before the completion of the merger, which was $80.32.
Note 2 – Preliminary Pro Forma Adjustments
The preliminary unaudited pro forma condensed combined financial information for the merger includes the preliminary pro forma balance sheet as of June 30, 2006, assuming the merger with North Fork was completed on June 30, 2006. The preliminary pro forma income statements for the six months ended June 30, 2006 and for the year ended December 31, 2005 were prepared assuming the mergers with North Fork and Hibernia were completed on January 1, 2005.
North Fork Acquisition Pro Forma Adjustments
The preliminary unaudited pro forma condensed combined financial information reflects the issuance of approximately 104.5 million shares of Capital One common stock and approximately $5.2 billion in cash consideration. Common stock issued in conjunction with this transaction was valued using the exchange ratio noted above in Note 1 –Basis of Preliminary Pro Forma Presentation.
A reconciliation of the excess consideration paid by Capital One over North Fork’s net assets acquired (“goodwill”) is as follows:
(in thousands) | June 30, 2006 | |||
Costs to acquire North Fork: | ||||
Capital One common stock issued | $ | 9,400,000 | (L) | |
Cash consideration paid | 5,195,000 | (A) | ||
Estimated fair value of employee stock options | 102,658 | (M) | ||
Investment banking, legal, and consulting fees | 50,000 | (J) | ||
Total consideration paid for North Fork | 14,747,658 | |||
North Fork’s net assets at fair value: | ||||
North Fork’s stockholders’ equity at June 30, 2006 | 9,062,577 | (L) | ||
Elimination of North Fork’s intangibles (including goodwill) | (6,014,489 | )(F,G) | ||
Estimated adjustments to reflect assets acquired at fair value: | ||||
Securities held to maturity | (1,023 | )(B) | ||
Net loans | (487,673 | )(C,D) | ||
Premises and equipment, net | 162,165 | (E) | ||
Mortgage servicing rights | 28,566 | (H) | ||
Deferred tax assets | 96,116 | (K) | ||
Estimated adjustments to reflect liabilities assumed at fair value: | ||||
Interest-bearing deposits | (5,811 | )(I) | ||
Senior and subordinated notes | 19,876 | (I) | ||
Other borrowings | 84,683 | (I) | ||
Personnel related liabilities | (350,000 | )(J) | ||
Less: Adjusted identifiable net assets acquired | (2,594,987 | ) | ||
Core deposit intangibles: | ||||
Adjustment to recognize core deposit intangibles | (1,510,000 | )(G) | ||
Adjustment to recognize deferred tax liability from core deposit intangibles | 528,500 | (G) | ||
Less: core deposit intangibles and related deferred tax liability | (981,500 | ) | ||
Total estimated goodwill | $ | 11,171,171 | ||
| (A) | Adjustment to recognize cash consideration paid and debt undertaken to complete the acquisition. Capital One currently intends to finance the cash portion of the acquisition through a combination of short term liquidity conversions and debt offerings. Specifically, Capital One intends to acquire the common shares by liquidating $1.0 billion of federal funds sold and resale agreements and by issuing $3.2 billion of senior and subordinated debt and $995.0 million of trust preferred capital securities ($345.0 million of which was issued in June 2006 and reflected in Capital One’s historical balance sheet as of June 30, 2006). The preliminary pro forma combined income statement impact of the reduction in federal funds sold and resale agreements resulted in a pre-tax decreases to interest income of $26.3 million and $52.5 million for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The preliminary pro forma combined income statement impact of the additional borrowings issued resulted in pre-tax increases to interest expense of $134.6 million and $269.1 million for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. Capital One has calculated the cost of the borrowings needed to complete the transaction using a weighted average interest rate of approximately 6.41% per annum. The final financing of the cash portion of the transaction may differ from these preliminary adjustments. The cost of the borrowings may be significantly different based on changes in market rates and Capital One may choose to repay any such additional borrowings with cash from operations, net securities maturities or future market borrowings. |
| (B) | Adjustments to recognize securities previously held to maturity by North Fork at fair value in accordance with Statement of Financial Accounting Standard No. 141, Business Combinations, (“SFAS 141”). The related preliminary pro forma income statement impact for this adjustment is considered to be immaterial. The final adjustment may be significantly different. |
| (C) | Adjustment to fair value North Fork’s loans held-for-sale loan portfolio. The adjustment reflected is based upon currently available fair value information. The related preliminary pro forma combined income statement impact for the adjustment was not recognized as the duration for which the loans will be held and the associated future gains cannot be estimated at this time. The final adjustment may be significantly different. |
| (D) | Adjustment to fair value North Fork’s loan portfolio. The adjustment will be recognized over the estimated remaining life of the loan portfolio using the effective yield method. The adjustment reflected is based upon currently available fair value information. The preliminary pro forma combined income statement impact for the fair value adjustment resulted in increases to interest income of $41.4 million and $82.9 million for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The final adjustment may be significantly different. |
| (E) | Adjustment to recognize the pro forma income statement impact to fair value North Fork’s property, plant, and equipment. The $162.2 million adjustment will be recognized over the remaining useful life of 20 years for buildings. The pro forma combined income statement impact for the adjustment resulted in increases to occupancy expense of $2.2 million and $4.3 million for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The final adjustment may be significantly different. |
| (F) | Adjustment to eliminate historical North Fork goodwill and recognize goodwill resulting from the acquisition. See purchase price allocation table above for more information. |
| (G) | Adjustment to eliminate North Fork’s historical core deposit intangibles of $96.1 million and other intangibles of $0.3 million, recognize core deposit intangibles associated with the acquisition, the related deferred tax liability for the newly recognized core deposit intangibles, and the related preliminary pro forma combined income statement impact resulting from the acquisition. The preliminary pro forma combined income statement impact for the adjustment resulted in increases to other non-interest expense of $146.6 million and $285.8 million for the core deposit intangibles amortization for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The final adjustment may be significantly different. See Note 4 – Core Deposit Intangibles for more information. |
| (H) | Adjustment to fair value North Fork’s mortgage servicing rights in accordance with SFAS 141. The adjustment will be recognized over the estimated remaining life of the mortgage servicing rights. The preliminary pro forma combined income statement impact for the adjustment resulted in a decrease to other non-interest income of $3.5 million and $7.0 million for the six months ended June 30, 2006 and for the year ended December 31, 2005, respectively. The final adjustment may be significantly different. |
| (I) | Adjustment to fair value North Fork’s interest-bearing deposits, senior and subordinated notes, and other borrowings in accordance with SFAS 141. The adjustment will be recognized over the estimated remaining life of the respective liabilities using the effective yield method. The preliminary pro forma combined income statement impact for the adjustments resulted in decreases to interest expense of $2.9 million and $5.8 million for interest-bearing deposits for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The preliminary pro forma combined income statement also included increases to interest expense of $2.2 million and $4.5 million for the senior and subordinated notes and $25.1 million and $50.3 million for other borrowings for the six months ended June 30, 2006 and the year ended December 31, 2005, respectively. The final adjustments may be significantly different. |
| (J) | Adjustment to other liabilities to recognize estimated merger related liabilities that qualify for recognition under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. Adjustment includes an estimated $50.0 million in costs related to investment banking, legal, and consulting fees to be incurred directly in connection with the acquisition and an estimated $350.0 million in costs related to North Fork executive change-in-control agreements that existed prior to the acquisition consummation date. The final adjustments may be significantly different. (See Note 3 – North Fork Merger Related Costs for disclosure of other merger related costs.) |
| (K) | Adjustment to recognize deferred tax assets resulting from the fair value adjustments in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes Combinations, (“SFAS 109”). |
| (L) | Adjustment to eliminate North Fork’s historical stockholders’ equity. The acquisition will result in the issuance of approximately 104.5 million shares of Capital One common stock, in addition to the cash consideration discussed in preliminary pro forma adjustment A. The issuance of Capital One common stock is recognized in the preliminary pro forma balance sheet at a value of $89.92 per share, which was the closing price of Capital One common stock on the NYSE on the last trading day prior to announcement of the transaction, which results in an increase to Capital One’s total stockholders’ equity of $9.4 billion. For more detail of the structure of the transaction see Note 1 – Basis of Preliminary Pro Forma Presentation. The final adjustment may be significantly different. |
| (M) | Adjustment to reflect the conversion of North Fork stock options outstanding at the closing of the merger to options to purchase Capital One common stock. In accordance with the terms of North Fork’s stock option agreements, outstanding stock options fully vest upon a change in control and therefore the adjustment presented assumes that all North Fork stock options will be converted to fully vested options to purchase Capital One common stock. The adjustment assumes the issuance of 3.5 million vested options to purchase Capital One common stock at a fair value of $29.74 per option. The number of stock options expected to be issued was based on the number of outstanding North Fork stock options at June 30, 2006, multiplied by the assumed exchanged ratio of 0.3467. The preliminary estimated fair value per option of $29.74 was calculated using the Black-Scholes option pricing model and applying the assumptions used for Capital One’s 2006 stock option grants (see page 16 of Capital One’s Form 10-Q for the six months ended June 30, 2006 for more information). The final estimate of fair value will be calculated using the Black-Scholes option pricing model and applying the prevailing assumptions to each tranche of the remaining converted North Fork options outstanding at the merger close date for expected life, volatility, dividend yield and risk-free interest rate. The estimated weighted average exercise price of $61.67 for the converted options was calculated using the weighted average exercise price of the North Fork stock options divided by the assumed exchange ratio of 0.3467. The final adjustment may be significantly different. |
| (N) | Adjustment to eliminate $17.7 million and $36.6 million of amortization for intangible assets recorded on North Fork’s historical income statement for the six months ended June 30, 2006 and the year ended December 31, 2005. |
| (O) | Adjustment to record the net tax effect of the preliminary pro forma adjustments using an effective tax rate of 35.0%. The final adjustment may be significantly different. |
| (P) | The pro forma basic and diluted potential common shares for the incremental shares issued and dilutive impact of stock options granted in connection with the North Fork acquisition, assuming the transaction occurred at the beginning of the periods presented. |
Hibernia Acquisition Pro Forma Adjustments
The following explanations refer to the pro forma income statement adjustment for the period January 1, 2005 to November 15, 2005, the completion date of the Hibernia merger.
| (AA) | Adjustments to recognize the pro forma income statement impact of the liquidity utilized and the debt undertaken to complete the acquisition. Capital One financed the cash portion of the transaction by liquidating approximately $1.4 billion of federal funds sold and other resale agreements and drawing $840.0 million from other short term borrowings. The pro forma combined income statement impact of the reduction in federal funds sold and resale agreements resulted in a pre-tax decrease to interest income of $48.6 million for the year ended December 31, 2005. The pro forma combined income statement impact of the additional borrowings issued resulted in pre-tax increases to interest expense of $27.5 million for the period. |
| (BB) | Adjustment to recognize the pro forma income statement impact to fair value Hibernia’s loan portfolio. The $174.9 million adjustment will be recognized over the estimated remaining life of the loan portfolio using the effective yield method. The pro forma combined income statement impact for the fair value adjustment resulted in an increase to interest income of $24.6 million for the period. |
| (CC) | Adjustments to recognize the pro forma income statement impact to fair value Hibernia’s interest-bearing deposits, senior and subordinated notes, and other borrowings in accordance with SFAS 141. The adjustments for the $1.4 million increase for interest-bearing deposits and $7.4 million decrease for the senior and subordinated notes and other borrowings will be recognized over the estimated remaining life of the respective liabilities using the effective yield method. The pro forma combined income statement impact for the adjustments resulted in increases to interest expense of $0.5 million for interest-bearing deposits and $0.2 million for the senior and subordinated notes and a decrease to interest expense of $2.6 million for other borrowings for the period. |
| (DD) | Adjustment to recognize the pro forma income statement impact to fair value Hibernia’s property, plant, and equipment. The $69.3 million adjustment will be recognized over the remaining useful life of 20 years for buildings and 5 years for equipment. The pro forma combined income statement impact for the adjustment resulted in an increase to occupancy expense of $0.4 million for the period. |
| (EE) | Adjustments to recognize the pro forma income statement impact of amortization for intangible assets, other than goodwill, identified from the acquisition. The pro forma combined income statement impact for the $20.7 million adjustment resulted in increases to other non-interest expense of $2.4 million for the period. |
| (FF) | Adjustment to eliminate $5.9 million of amortization for intangible assets recorded on Hibernia’s historical income statement for the period. |
| (GG) | Adjustment to recognize the pro forma income statement impact for the amortization of $380.0 million core deposit intangibles recorded in connection with the acquisition. The pro forma combined income statement impact for the adjustment resulted in an increase to other non-interest expense of $63.7 million for the period. |
| (HH) | Adjustment to record the net tax effect of the pro forma adjustments using an effective tax rate of 35.0%. |
| (II) | The pro forma basic and diluted potential common shares for the incremental shares issued and dilutive impact of stock options granted in connection with the Hibernia acquisition, assuming the transaction occurred at the beginning of the period presented. |
Note 3 – North Fork Merger Related Costs
Certain merger related costs are estimated at $180.0 million. These estimated merger related costs will be incurred by Capital One and either treated as an acquisition liability capitalized or expensed as incurred based on the nature of cost and Capital One’s accounting policies for these costs. Given the preliminary stages of integration discussions, the accounting for these estimated merger related costs in accordance with EITF 95-3 has not been determined and as such these costs have not been included in the preliminary pro-forma condensed combined balance sheet or income statements.
A summary of these costs, based on Capital One’s preliminary estimates, is listed below:
(in thousands) | ||||
Merger related compensation and severance | $ | 80,000 | ||
Facilities and systems | 60,000 | |||
Other merger related costs | 40,000 | |||
Total estimated pre-tax merger related costs | 180,000 | |||
Tax benefit | (63,000 | ) | ||
Net estimated merger related costs | $ | 117,000 | ||
Merger related compensation and severance costs include employee severance, compensation arrangements and related employee benefit expenses. Facilities and system costs include costs associated with the rebranding of branch offices. Also reflected are certain technology conversion costs. Refinements to the foregoing estimates may occur subsequent to the completion of the merger.
Note 4 – North Fork Core Deposit Intangibles
The purchase accounting adjustments include the establishment of core deposit intangibles of $1.5 billion as of June 30, 2006. The adjustments include the elimination of $96.1 million relating to the North Fork’s core deposit intangibles as of June 30, 2006. The $1.5 billion was based on a preliminary valuation by an independent third party using a combination of North Fork specific deposit information and industry specific benchmarks. A final analysis and valuation of the core deposit intangibles will be performed with the assistance of the independent third party upon completion of the merger. The amortization of the core deposit intangibles resulting from the acquisition in the pro forma statement of income for the six months ended June 30, 2006 and the year ended December 31, 2005 was assumed to be over a 10-year period using an accelerated amortization method.
The following table summarizes the amortization of the core deposit intangibles made in connection with the acquisition at an effective annual tax rate of 35.0%:
(in thousands) | Gross Amortization | Net After- Tax Impact | ||||
Year 1 | $ | 285,777 | $ | 185,755 | ||
Year 2 | 255,826 | 166,287 | ||||
Year 3 | 225,876 | 146,819 | ||||
Year 4 | 195,926 | 127,352 | ||||
Year 5 | 165,975 | 107,884 | ||||
Year 6 and thereafter | 380,620 | 247,403 | ||||
Total | $ | 1,510,000 | $ | 981,500 | ||