The Corporation acquired 205 new endorsements from organizations and added 5.3 million new accounts during the six months ended June 30, 2003, respectively.
The Corporation’s return on average total assets for the three and six months ended June 30, 2003, was 3.93% and 3.61%, as compared to 3.97% and 3.64% for the same periods in 2002, respectively. The decreases were primarily the result of net income growing at a slower rate than average total assets.
The Corporation’s return on average stockholders’ equity was 22.39% and 20.72% for the three and six months ended June 30, 2003, as compared to 22.89% and 21.20% for the same periods in 2002, respectively. The decreases were primarily the result of net income growing at a slower rate than average stockholders’ equity.
Tables 2 and 3 provide further detail regarding the Corporation's average balances, yields and rates, interest income and expense, and the impact that rate and volume changes had on the Corporation’s net interest income for the three and six months ended June 30, 2003, and 2002, respectively.
Net interest income represents interest income on total interest-earning assets, on a fully taxable equivalent basis where appropriate, less interest expense on total interest-bearing liabilities. A fully taxable equivalent basis represents the income on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the prevailing incremental federal income tax rate, and adjusted for nondeductible carrying costs and state income taxes, where applicable. Yield calculations, where appropriate, include these adjustments. Net interest income, on a fully taxable equivalent basis, increased $74.3 million or 14.7% to $579.4 million for the three months ended June 30, 2003, as compared to $505.1 million for the same period in 2002. Average interest-earning asse ts increased $7.7 billion or 21.5% to $43.6 billion for the three months ended June 30, 2003, as compared to $35.9 billion for the same period in 2002.
The increase in average interest-earning assets for the three months ended June 30, 2003 was primarily a result of an increase in average loan receivables of $3.5 billion and an increase in average investment securities and money market instruments of $4.3 billion. The yield on average interest-earning assets decreased 118 basis points to 8.84% for the three months ended June 30, 2003, as compared to 10.02% for the same period in 2002. The decrease in the yield on average interest-earning assets was primarily the result of the decrease in the yield earned on average loan receivables and average investment securities and money market instruments combined with an increase in lower yielding average investment securities and money market instruments as a percentage of average interest-earning assets.
Average interest-bearing liabilities increased $6.7 billion or 19.1% to $42.0 billion for the three months ended June 30, 2003, as compared to $35.3 billion for the same period in 2002. The increase in average interest-bearing liabilities was the result of an increase of $4.5 billion in average interest-bearing deposits and an increase of $2.2 billion in average borrowed funds. The decrease in the rate paid on average interest-bearing liabilities of 80 basis points to 3.64% for the three months ended June 30, 2003, from 4.44% for the same period in 2002, reflects actions by the Federal Open Market Committee (“FOMC”) throughout 2001 and in the fourth quarter of 2002 that impacted overall market interest rates and lowered the Corporation’s cost of funds.
Net interest income, on a fully taxable equivalent basis, increased $116.6 million or 11.4% to $1.1 billion for the six months ended June 30, 2003, as compared to $1.0 billion for the same period in 2002. Average interest-earning assets increased $6.6 billion or 18.5% to $42.5 billion for the six months ended June 30, 2003, as compared to $35.9 billion for the same period in 2002. The increase in average interest-earning assets was primarily the result of an increase in average loan receivables of $3.5 billion and an increase in average investment securities and money market instruments of $3.3 billion. The yield on average interest-earning assets decreased 115 basis points to 9.04% for the six months ended June 30, 2003, as compared to 10.19% for the same period in 2002. The decrease in the yield on average interest-earning assets was primarily the result of the decrease in the yield earned on average loan receivables and average investment securities and money market instruments combined with an increase in lower yielding average investment securities and money market instruments as a percentage of average interest earning assets.
Average interest-bearing liabilities increased $6.4 billion or 18.2% to $41.5 billion for the six months ended June 30, 2003, as compared to $35.1 billion for the same period in 2002. The increase in average interest-bearing liabilities was the result of an increase of $4.2 billion in average interest-bearing deposits and an increase of $2.2 billion in average borrowed funds. The decrease in the rate paid on average interest-bearing liabilities of 82 basis points to 3.74% for the six months ended June 30, 2003, from 4.56% for the same period in 2002, reflect actions by the FOMC throughout 2001 and in the fourth quarter of 2002 that impacted overall market interest rates and lowered the Corporation’s cost of funds.
The Corporation’s net interest margin, on a fully taxable equivalent basis, was 5.33% and 5.39% for the three and six months ended June 30, 2003, as compared to 5.65% and 5.73% for the same periods in 2002, respectively. The net interest margin represents net interest income on a fully taxable equivalent basis expressed as a percentage of average total interest-earning assets. The 32 basis point and 34 basis point decreases in the net interest margin for the three and six months ended June 30, 2003, respectively, was primarily the result of the yield earned on average interest-earning assets decreasing more than the rate paid on average interest-bearing liabilities combined with the increase in lower yielding average investment securities and money market instruments as of percentage of average interest-earning assets.
The Corporation seeks to maintain its investment securities and money market instruments at a level appropriate for the Corporation’s liquidity needs. The Corporation’s average investment securities and average money market instruments are affected by the timing of receipt of funds from asset securitization transactions, deposits, loan payments, and long-term debt and bank note issuances. Funds received from these sources are generally invested in short-term, liquid money market instruments and investment securities available-for-sale until the funds are needed for loan growth and other liquidity needs.
Average investment securities and money market instruments as a percentage of average interest-earning assets were 27.4% and 26.1% for the three and six months ended June 30, 2003, as compared to 21.3% and 21.8% for the same periods in 2002, respectively. Money market instruments increased during the three and six months ended June 30, 2003, to provide liquidity to support portfolio acquisition activity and anticipated loan growth. Also, during the three and six months ended June 30, 2003, the Corporation increased its liquidity position in anticipation of possible market disruptions due to uncertainty created by world events and capital market conditions.
Interest income on investment securities, on a fully taxable equivalent basis, decreased $6.6 million or 18.6% to $28.7 million and $10.8 million or 15.3% to $59.6 million for the three and six months ended June 30, 2003, as compared to $35.2 million and $70.4 million for the same periods in 2002, respectively. The decrease in interest income on investment securities for the three and six months ended June 30, 2003, was primarily the result of a 73 basis point and 72 basis point decrease in the yield earned on average investment securities, partially offset by an increase in average investment securities of $57.1 million and $172.7 million for the three and six months ended June 30, 2003, from the same periods in 2002, respectively.
Interest income on money market instruments increased $10.7 million or 53.1% to $30.9 million and $15.2 million or 36.5% to $56.9 million for the three and six months ended June 30, 2003, as compared to $20.2 million and $41.7 million for the same periods in 2002, respectively. The increase in interest income on money market instruments was primarily the result of an increase in average money market instruments of $4.2 billion and $3.1 billion for the three and six months ended June 30, 2003, partially offset by a 59 basis point and 47 basis point decrease in the yield earned on average money market instruments, as compared to the same periods in 2002, respectively. Money market instruments include interest-earning time deposits in other banks and federal funds sold.
Other interest-earning assets include the Corporation’s retained interests in securitization transactions, which are the interest-only strip receivable, cash reserve accounts, accrued interest and fees on securitized loans and other subordinated retained interests. Also included in other interest-earning assets is Federal Reserve Bank stock. The Corporation accrues interest income related to its retained beneficial interests in its securitization transactions accounted for as sales in the Corporation’s consolidated financial statements. The Corporation includes these retained interests in accounts receivable from securitization in the consolidated statements of financial condition (see “Note H: Asset Securitization” for further discussion).
Interest income on other interest-earning assets decreased $10.6 million or 12.3% to $75.3 million and $35.1 million or 18.9% to $150.4 million for the three and six months ended June 30, 2003, as compared to $85.9 million and $185.5 million for the same periods in 2002, respectively. The decrease in interest income on other interest-earning assets for the three and six months ended June 30, 2003, was primarily the result of a decrease in the yield earned on average other interest-earning assets of 97 basis points and 166 basis points combined with a decrease of $59.3 million and $77.9 million in average other interest-earning assets, as compared to the same periods in 2002, respectively. The decrease in the yield earned on average other interest-earning assets was primarily the result of the decreas e in the discount rate assumptions used in the valuation of the Corporation’s retained beneficial interests in its securitization transactions.
Loan receivables consist of the Corporation’s loans held for securitization and the loan portfolio.
Interest income generated by the Corporation’s loan receivables increased $70.7 million or 9.4% to $825.3 million and $123.2 million or 8.1% to $1.6 billion for the three and six months ended June 30, 2003, as compared to $754.7 million and $1.5 billion for the same periods in 2002, respectively. The increase in interest income on loan receivables for the three and six months ended June 30, 2003, was primarily the result of an increase in average loan receivables of $3.5 billion from the same periods in 2002. The yield earned by the Corporation for the three and six months ended June 30, 2003, on average loan receivables decreased 55 basis points and 69 basis points to 11.91% and 11.97%, respectively, as compared to 12.46% and 12.66% for the same periods in 2002.
Table 4 presents the Corporation's loan receivables at period end distributed by loan type, excluding securitized loans. Loan receivables were $29.3 billion at June 30, 2003, as compared to $28.7 billion at December 31, 2002.
Domestic credit card loan receivables decreased $232.4million or 1.5% to $15.3 billion at June 30, 2003, as compared to$15.6 billion at December 31, 2002.The decrease in domestic credit card loan receivables at June 30, 2003, was primarily the result of a net increase in securitized domestic credit card loan receivables. This decrease was partially offset by domestic credit card loans originated through marketing programs and domestic credit card loan acquisitions.
During the six months ended June 30, 2003, the Corporation securitized $5.3 billion of domestic credit card loan receivables, offset by an increase of $3.7 billion in the Corporation's loan portfolio when certain securitization transactions were in their scheduled accumulation period and the trusts used principal payments on securitized loans to pay the investors rather than to purchase new loan principal receivables.The Corporation acquired $859.8 million of domestic credit card loan receivables during the six months ended June 30, 2003.
The yield on average domestic credit card loan receivables was 11.45% and 11.55% for the three and six months ended June 30, 2003, as compared to 11.91% and 12.15% for the same periods in 2002, respectively. The decrease of 46 basis points and 60 basis points for the three and six months ended June 30, 2003, respectively, in the yield on average domestic credit card loan receivables reflects lower average promotional and non-promotional interest rates offered to attract and retain Customers and to grow loan receivables.
Domestic credit card loans held for securitization decreased $851.8million or 9.3% to $8.3 billion at June 30, 2003, as compared to$9.2 billion at December 31, 2002. The decrease reflects lower anticipated domestic credit card securitizations.
Domestic other consumer loan receivablesincreased $28.3 million to $6.4 billion at June 30, 2003,as compared to $6.3 billion at December 31, 2002. The yield on average domestic other consumer loan receivables was 13.80% and 13.88% for the three and six months ended June 30, 2003, as compared to 14.09% and 14.23% for the same periods in 2002, respectively. The Corporation’s domestic other consumer loans typically have higher delinquency and charge-off rates than the Corporation’s domestic credit card loans. As a result, the Corporation generally charges higher interest rates on its domestic other consumer loans than on its domestic credit card loans. The decrease in the yield on average domestic other consumer loan rec eivables reflects an increase in the percentage of unsecured lending products and a decrease in the percentage of sales finance products as compared to total domestic other consumer loans. The Corporation generally charges a higher interest rate for its sales finance products than its other unsecured lending products.
Foreign loan receivablesincreased $765.9 million or 11.2% to $7.6 billion at June 30, 2003, as compared to$6.8 billion at December 31, 2002. The growth in foreign loan receivables for the six months ended June 30, 2003 was a result of loan originations through marketing programs at the Corporation’s two foreign bank subsidiaries, MBNA Europe and MBNA Canada, partially offset by a net increase in securitization activity. During the six months ended June 30, 2003, the Corporation securitized $1.0 billion of foreign credit card loan principal receivables, partially offset by an increase of $394.0 million in the Corporation's foreign loanportfolio , when certain securitizations entered their scheduled accumulation period and the trusts used principal payments to pay the investors rather than to purchase new loan principal receivables from the Corporation. The weakening of the U.S. dollar against foreign currencies also increased foreign loan receivables by $237.1 million at June 30, 2003, as compared to December 31, 2002. The yield on average foreign loan receivables was 11.13% and 11.10% for the three and six months ended June 30, 2003, as compared to 11.88% and 12.03% for the same periods in 2002, respectively. The decrease in the yield on average foreign loan receivables reflects lower average promotional and non-promotional interest rates offered to attract and retain Customers and to grow loan receivables.
Table 4: Loan Receivables Distribution
(dollars in thousands) (unaudited)
| | | June 30, | December 31, |
| | | 2003
| 2002
|
| Loans held for securitization (a): | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 8,305,944 | | $ | 9,157,751 | |
| Other consumer | | | 91,732 | | | 40,962 | |
| | |
| |
| |
| Total domestic loans held for securitization | | | 8,397,676 | | | 9,198,713 | |
| Foreign | | | 2,074,629 | | | 1,830,914 | |
| | |
| |
| |
| Total loans held for securitization | | | 10,472,305 | | | 11,029,627 | |
| Loan portfolio: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | | 7,032,508 | | | 6,413,116 | |
| Other consumer | | | 6,263,318 | | | 6,285,751 | |
| | |
| |
| |
| Total domestic loans portfolio | | | 13,295,826 | | | 12,698,867 | |
| Foreign | | | 5,520,248 | | | 4,998,014 | |
| | |
| |
| |
| Total loan portfolio | | | 18,816,074 | | | 17,696,881 | |
| | |
| |
| |
| Total loan receivables | | $ | 29,288,379 | | $ | 28,726,508 | |
| | |
| |
| |
(a) Loans held for securitization includes loans originated through certain endorsing organizations or financial institutions who have the contractual right to purchase the loans from the Corporation at fair value andthe lesser of loan principal receivables eligible for securitization or sale or loan principal receivables whichmanagement intends to securitizeor sell within one year. |
Effective January 1, 2003, the Corporation reclassified capitalized computer software from other assets to premises and equipment in the Corporation’s consolidated statements of financial condition. Also effective January 1, 2003, the Corporation reclassified amortization of capitalized computer software from the other expense component of other operating expenses to furniture and equipment expense in the Corporation’s consolidated statements of income. Capitalized computer software was $385.9 million (net of accumulated amortization of $256.7 million) and $330.5 million (net of accumulated amortization of $216.2 million) at June 30, 2003, and December 31, 2002, respectively. Amortization of capitalized computer software was $31.4 million and $61.8 million for the three and six months ended June 30, 2003, as compared to $25.0 million and $49.4 million for the same periods in 2002, respectively. For purposes of comparability, prior period amounts have been reclassified.
In 2002, the Corporation launched a multi-phase project to extend the use of the Corporation’s U.S. core Customer information systems to MBNA Europe’s business in the U.K. and Ireland. MBNA Canada already uses this system. The capital expenditures associated with this project are recorded in capitalized software and the amounts capitalized at June 30, 2003 and December 31, 2002 were $145.1 million and $89.4 million, respectively. The Corporation anticipates total capital expenditures of approximately $300 million related to this project.
Accounts receivable from securitization increased $889.9 million or 12.8% to $7.8 billion at June 30, 2003, as compared to $6.9 billion at December 31, 2002. The increase in accounts receivable from securitization is primarily related to an increase in the amount due from the trusts due to the accumulation of principal payments on maturing securitizations, and the increase in cash reserve accounts due to the new securitizations in 2003.
Prepaid expenses and deferred charges increased $80.8 million or 19.6% to $493.4 million at June 30, 2003, as compared to $412.6 million at December 31, 2002. The increase was primarily the result of increases in prepaid postage expense, prepaid royalties to endorsing organizations, prepaid employee benefit plan costs, and deferred loan origination costs of $35.8 million, $17.5 million, $17.4 million, and $15.0 million, respectively.
Other assets increased $395.3 million or 23.6% to $2.1 billion at June 30, 2003, as compared to $1.7 billion at December 31, 2002. The increase is primarily the result of an increase in the fair market value of the Corporation’s interest rate swap agreements and foreign exchange swap agreements accounted for as fair value hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“Statement No. 133”), as amended (see “Note 3: Significant Accounting Policies-Derivative Financial Instruments and Hedging Activities” contained in the Annual Report on Form 10-K for the year ended December 31, 2002). The increase in the fair market value of the Corporation’s interest rate swap agreements and foreign exchange swap agreements that qualified for, and are accounted for, as fair value hedges were partially offset by cha nges in the carrying value of the corresponding hedged long-term debt and bank notes.
Total interest expense on deposits decreased $18.6 million or 6.1% to $286.4 million and $49.3 million or 7.9% to $579.2 million for the three and six months ended June 30, 2003, as compared to $304.9 million and $628.6 million for the same periods in 2002, respectively. The decrease in interest expense on deposits for the three and six months ended June 30, 2003, was primarily the result of a decrease of 93 basis points and 98 basis points in the rate paid on average interest-bearing deposits, partially offset by an increase of $4.5 billion and $4.2 billion in average interest-bearing deposits for the three and six months ended June 30, 2003, respectively. The decrease in the rate paid on average interest-bearing deposits reflects actions by the FOMC throughout 2001 and in the fourth quarter of 2002, that impacted overall market interest rates and decreased the Corporation’s funding costs.
The Corporation’s money market deposit accounts are variable-rate products. In addition, the Corporation’s foreign time deposits, although fixed-rate, generally mature within one year. Therefore, the decrease in market interest rates in the fourth quarter of 2002 permitted the Corporation to decrease the rate paid on average money market deposit accounts and average foreign time deposits during the three and six months ended June 30, 2003, as compared to the same period in 2002, respectively. The Corporation’s domestic time deposits are primarily fixed-rate deposits with maturities that range from three months to five years. Therefore, the Corporation realized the benefits of lower market rates on domestic time deposits more slowly than the benefits of lower market rates on money marke t deposits.
Borrowed funds include both short-term borrowings and long-term debt and bank notes.
Interest expense on short-term borrowings increased $782,000 or 8.7% to $9.8 million for the three months ended June 30, 2003, as compared to $9.0 million for the same period in 2002. The increase in interest expense on short-term borrowings for the three months ended June 30, 2003 was primarily the result of an increase of 29 basis points in the rate paid on average short-term borrowings, from the same period in 2002, partially offset by a decrease of $4.7 million in average short-term borrowings. Interest expense on short-term borrowings decreased $398,000 or 1.9% to $20.1 million for the six months ended June 30, 2003, as compared to $20.5 million for the same period in 2002. The decrease in interest expense on short-term borrowings for the six months ended June 30, 2003 was primarily the result o f a decrease of $93.1 million in average short-term borrowings, partially offset by an increase of 20 basis points in the rate paid on average short-term borrowings from the same period in 2002.
Interest expense on long-term debt and bank notes increased $7.8 million or 10.1% to $84.6 million and $25.7 million or 17.8% to $169.8 million for the three and six months ended June 30, 2003, as compared to $76.8 million and $144.1 million for the same periods in 2002, respectively. The increase in interest expense on long-term debt and bank notes during the three and six months ended June 30, 2003, from the same periods in 2002 was primarily the result of an increase in average long-term debt and bank notes of $2.2 billion and $2.3 billion, as compared to the same periods in 2002, partially offset by a decrease in the rate paid on average long-term debt and bank notes of 54 basis points and 36 basis points, respectively.
Interest expense on domestic long-term debt and bank notes increased $3.9 million and $10.3 million during the three and six months ended June 30, 2003, as compared to the same periods in 2002, respectively. The increase in interest expense on domestic long-term debt and bank notes was primarily the result of a $2.0 billion increase in average domestic long-term debt and bank notes for both the three and six months ended June 30, 2003, partially offset by a decrease of 63 basis points and 58 basis points in the rate paid on average domestic long-term debt and bank notes, respectively. The Corporation issued additional long-term debt and bank notes during the past 12 months to fund loan and other asset growth and to diversify funding sources. The decrease in the rate paid on average domestic long-term debt and bank notes reflects actions by the FOMC in the fourth quarter of 2002 that impacted overall market interest rates.
Interest expense on foreign long-term debt and bank notes increased $3.9 million and $15.4 million during the three and six months ended June 30, 2003, as compared to the same periods in 2002, respectively. The increase in interest expense on foreign long-term debt and bank notes was primarily the result of an increase in average foreign long-term debt and bank notes of $267.5 million and $314.4 million to $2.7 billion and $2.6 billion for three and six months ended June 30, 2003, as compared to the same period in 2002, combined with an increase of 3 basis points and 55 basis points in the rate paid on average foreign long-term debt and bank notes, respectively.
The Corporation uses interest rate swap agreements and foreign exchange swap agreements to change a portion of fixed-rate long-term debt and bank notes to floating-rate long-term debt and bank notes in order to more closely match the interest rate sensitivity of the Corporation’s assets. The Corporation also uses foreign exchange swap agreements to minimize its foreign currency exchange risk on a portion of long-term debt and bank notes issued by MBNA Europe.
Noninterest-bearing deposits increased $1.4 billion to $2.3 billion at June 30, 2003, as compared to $915.7 million at December 31, 2002. This increase was a result of the change in the timing of the remittance of principal collections on securitized loans to the trusts. Since the second quarter of 2003, the Corporation is no longer obligated to transfer principal collections on the Corporation’s primary domestic credit card trust on a daily basis. These funds are now retained on behalf of the trust with the Corporation until remittance on a montly basis.
Accumulated other comprehensive income increased $94.5 million to $179.2 million at June 30, 2003, as compared to $84.7 million at December 31, 2002. The increase was primarily attributable to favorable foreign currency translation adjustment related to the weakening of the U.S. dollar against foreign currencies.
Total other operating income increased $218.2 million or 13.4% to $1.9 billion and $409.9 million or 12.7% to $3.6 billion for the three and six months ended June 30, 2003, as compared to $1.6 billion and $3.2 billion for the same periods in 2002, respectively. Total other operating income includes securitization income, interchange income, credit card fees, other consumer loan fees and insurance income. Table 5 presents the components of other operating income for the periods indicated.
Table 5: Components of Other Operating Income
(dollars in thousands) (unaudited)
| | | For the Three Months | For the Six Months |
| | | Ended June 30,
| Ended June 30,
|
| | | 2003 | 2002 | 2003 | 2002 |
| | |
| |
| |
| |
| |
| Securitization Income | | | | | | | | | | | | | |
| Excess servicing fees (a) | | $ | 1,138,349 | | $ | 1,109,881 | | $ | 2,206,508 | | $ | 2,180,409 | |
| Loan servicing fees (a) | | | 381,694 | | | 345,364 | | | 751,652 | | | 685,063 | |
Gain from the sale of loan principal receivables for new securitizations(b) | | | 32,992 | | | 45,598 | | | 58,256 | | | 64,568 | |
| Net revaluation of interest only strip receivable (b) | | | (25,128 | ) | | (150,732 | ) | | (13,009 | ) | | (225,480 | ) |
| | |
| |
| |
| |
| |
| Total securitization income | | | 1,527,907 | | | 1,350,111 | | | 3,003,407 | | | 2,704,560 | |
| Interchange income | | | 101,034 | | | 87,595 | | | 190,700 | | | 162,514 | |
| Credit card fees | | | 121,093 | | | 98,405 | | | 247,877 | | | 191,425 | |
| Other consumer loan fees | | | 28,987 | | | 27,321 | | | 55,062 | | | 51,981 | |
| Insurance income | | | 55,841 | | | 40,958 | | | 109,328 | | | 86,767 | |
| Other | | | 16,942 | | | 29,239 | | | 33,439 | | | 32,648 | |
| | |
| |
| |
| |
| |
| Total other operating income | | $ | 1,851,804 | | $ | 1,633,629 | | $ | 3,639,813 | | $ | 3,229,895 | |
| | |
| |
| |
| |
| |
| (a) Total securitization servicing fees include excess servicing fees and loan servicing fees. |
(b) The net gain (or loss) from securitization activity includes the gain from the sale of loan principal receivables and the net revaluation of the interest-only strip receivable. |
Securitization income includes excess servicing and loan servicing fees, the gain on sale recognized on new securitizations, and revaluation of the Corporation’s interest-only strip receivable. The Corporation has the rights to all excess revenue generated from the securitized loans arising after the trusts absorb the cost of funds, loan servicing fees and credit losses (“excess servicing fees”). The Corporation continues to service the securitized loans and receives an annual contractual servicing fee of approximately 2% of the investor principal outstanding (“loan servicing fees”). The Corporation recognizes a gain from the sale of loan principal receivables. Securitization income is also impacted by revaluation of the Corporation’s interest-only strip receivable as a result of changes in estimated excess spread to be earned in the future and the impact of a series within the trusts that is in the accumulation period. The accumulation period occurs when the trusts begin using principal collections to make payments to the investors, instead of purchasing new loan principal receivables from the Corporation.
Securitization income increased $177.8 million or 13.2% to $1.5 billion and $298.8 million or 11.0% to $3.0 billion for the three and six months ended June 30, 2003, as compared to $1.4 billion and $2.7 billion for the same periods in 2002, respectively. The components of securitization income are discussed separately below.
Total Securitization Servicing Fees
Total securitization servicing fees include both excess servicing fees and loan servicing fees. The Corporation is contractually entitled to a fee for servicing the securitized loans and it has the rights to the excess cash remaining in the trust after the payment of all trust expenses, including the loan servicing fees. The excess servicing fees and loan servicing fees are separate obligations of the securitization trusts. These items are discussed below.
Excess Servicing Fees
Excess servicing fees increased $28.5 million or 2.6% to $1.1 billion and $26.1 million or 1.2% to $2.2 billion for the three and six months ended June 30, 2003, as compared to $1.1 billion and $2.2 billion for the same periods in 2002, respectively. The increase was a result of an increase in the net interest income and other fee income earned on securitized loans offset by an increase in net charge-offs.
The net interest income earned on securitized loans increased excess servicing fees by $137.3 million and $272.6 million for the three and six months ended June 30, 2003. Securitized net interest income was affected by the growth in average securitized loans, which increased $7.0 billion or 9.5% to $80.8 billion and $6.7 billion or 9.1% to $79.8 billion for the three and six months ended June 30, 2003, as compared to $73.8 billion and $73.1 billion for the same periods in 2002, respectively. This growth in average securitized loans is consistent with the overall growth in the Corporation’s average managed loans, which increased 10.7% and 10.4% for the three and six months ended June 30, 2003, as compared to the same periods in 2002, respectively. In addition, the net interest margin on securitiz ed interest-earning assets decreased to 10.08% and 10.17% for the three and six months ended June 30, 2003, as compared to 10.32% and 10.37% for the same periods in 2002, respectively. The securitized net interest margin represents securitized net interest income for the period expressed as a percentage of average securitized interest-earning assets. Refer to “Asset Securitization – Impact of Securitization Transactions on the Corporation’s Results” for a reconciliation of the Corporation’s net interest margin on securitized interest-earning assets to the net interest margin. Changes in the yield earned on average securitized loans and the interest rate paid to investors in the Corporation’s securitization transactions impact the securitized net interest margin. The yield earned on average securitized loans was 12.00% and 12.14% for the three and six months ended June 30, 2003, as compared to 12.74% and 12.84% for the same periods in 2002, respectively. The decrease in the yield earned on average securitized loans, reflects lower average promotional and non-promotional interest rates offered to attract and retain Customers and to grow managed loans. The average interest rate paid to investors in the Corporation’s securitization transactions was 2.03% and 2.07% for the three and six months ended June 30, 2003, as compared to 2.50% and 2.51% for the same periods in 2002, respectively. The decrease in the average interest rate paid to investors in 2003 reflects actions by the FOMC in the fourth quarter of 2002 that impacted overall market interest rates. The interest rate paid to investors generally resets on a monthly basis.
Other fee income generated by securitized loans increased excess servicing fees by $66.6 million and $139.9 million for the three and six months ended June 30, 2003, primarily as a result of higher average securitized loans.
The net charge-off rate on securitized loans increased 23 basis points to 5.50% and 37 basis points to 5.55% for the three and six months ended June 30, 2003, as compared to the same periods in 2002, respectively. This increase is consistent with the overall trend in the Corporation’s managed loan portfolio. This increase in the net charge-off rate for the three and six months ended June 30, 2003, decreased excess servicing fees by $139.1 million and $319.9 million for the three and six months ended June 30, 2003.
An additional decrease to excess servicing fees was a result of the increase in loan servicing fees described below.
Loan Servicing Fees
Loan servicing fees during the three and six months ended June 30, 2003 increased $36.3 million or 10.5% to $381.7 million and $66.6 million or 9.7% to $751.7 million, as compared to the same period in 2002, respectively. This increase was a result of a $7.0 billion or 9.5% and $6.7 billion or 9.1% increase in the average securitized loans for the three and six months ended June 30, 2003, respectively, as compared to the same period in 2002. This growth in average securitized loans reflects the overall growth in the Corporation’s average managed loans, which increased 10.7% and 10.4% for the three and six months ended June 30, 2003, respectively, as compared to the same period in 2002.
Net Gain (or Loss) from Securitization Activity
The net gain (or loss) from securitization activity consists of gains associated with the sale of new loan principal receivables (net of securitization transaction costs), changes in the projected excess spread used to value the interest-only strip receivable for securitized credit card and other consumer loan principal receivables, and all other changes in the fair value of the interest-only strip receivable. The net gain from securitization activity was a $7.9 million and $45.2 million net gain during the three and six months ended June 30, 2003, as compared to a $105.1 million and $160.9 million net loss for the same periods in 2002, respectively, resulting in an increase in securitization income of $113.0 million and $206.2 million for the three and six months ended June 30, 2003. Certain compone nts of the net gain (or loss) from securitization activity are discussed separately below.
Gain from the Sale of Loan Principal Receivables
The gain from the sale of loan principal receivables for new securitization transactions that the Corporation recognizes as sales in accordance with Statement No. 140 is included in securitization income in the Corporation’s consolidated statements of income. The gain was $33.0 million (net of securitization transaction costs of $16.7 million) and $58.3 million (net of securitization transaction costs of $25.4 million) for the three and six months ended June 30, 2003, (on the sale of $3.5 billion and $6.3 billion of credit card loan principal receivables for the three and six months ended June 30, 2003, respectively), as compared to $45.6 million (net of securitization transaction costs of $12.4 million) and $64.6 million (net of securitization transaction costs of $25.2 million) for the three a nd six months ended June 30, 2002, (on the sale of $4.9 billion and $7.0 billion of credit card loan principal receivables for the three and six months ended June 30, 2002, respectively).
Net Revaluation of Interest-Only Strip Receivable
The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was 4.85% at June 30, 2003, as compared to 4.94% at March 31, 2003. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was an approximate $18 million decrease in securitization income for the three months ended June 30, 2003. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of a decrease in projected interest yields on securitized credit card loan principal receivables partially offset by a decrease in the projected interest rate paid to investors. The projected excess spread used to value the interest-o nly strip receivable for securitized other consumer loan principal receivables was 1.92% at June 30, 2003, as compared to 2.02% at March 31, 2003. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was an approximate $5 million decrease in securitization income for the three months ended June 30, 2003. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of higher projected charge-off rates on securitized other consumer loan principal receivables.
The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was 4.85% at June 30, 2003, as compared to 4.84% at December 31, 2002. The impact of the increase in the projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was an approximate $2 million increase in securitization income for the six months ended June 30, 2003. The increase in the projected excess spread used to value the interest-only strip receivable was the result of an increase in projected interest yields on securitized credit card loan principal receivables. The projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was 1.92% at June 30, 2003, as compared to .91% at December 31, 2002. The impact of the increase in the projected excess spread used t o value the interest-only strip receivable for securitized other consumer loan principal receivables was an approximate $46 million increase in securitization income for the six months ended June 30, 2003. The increase in the projected excess spread used to value the interest-only strip receivable was the result of lower projected charge-off rates on securitized other consumer loan principal receivables.
The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was 4.27% at June 30, 2002, as compared to 4.94% at March 31, 2002. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was an approximate $140 million decrease in securitization income for the three months ended June 30, 2002. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of a decrease in the projected interest yields on securitized credit card loan principal receivables resulting from the Corporation’s pricing decisions to attract and retain Customers and to grow loans, along with an increase in the projected interest rate paid to investors. These changes were partially offset by a projected decline in the charge-off rates on securitized credit card loan principal receivables. The projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was 2.18% at June 30, 2002, as compared to 2.32% at March 31, 2002. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was an approximate $6 million decrease in securitization income for the three months ended June 30, 2002. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of an increase in projected charge-off rates on securitized other consumer loan principal receivables, along with an increase in the projected interest rate paid to investors.
The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was 4.27% at June 30, 2002, as compared to 5.14% at December 31, 2001. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was an approximate $183 million decrease in securitization income for the six months ended June 30, 2002. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of a decrease in the projected interest yields on securitized credit card loan principal receivables resulting from the Corporation’s pricing decisions to attract and retain Customers and to grow loans, along with an increase i n the projected interest rate paid to investors. These changes were partially offset by a projected decline in the charge-off rates on securitized credit card loan principal receivables. The projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was 2.18% at June 30, 2002, as compared to 2.60% at December 31, 2001. The impact of the decrease in the projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables was an approximate $18 million decrease in securitization income for the six months ended June 30, 2002. The decrease in the projected excess spread used to value the interest-only strip receivable was the result of a decrease in the projected interest yields on securitized other consumer loan principal receivables resulting from the Corporation’s pricing decisions to attract and retain Customers and to grow loans, along with an increase in projected charg e-off rates on securitized other consumer loan principal receivables.
Note H provides further detail regarding the sensitivity to changes in the key assumptions and estimates used in determining the estimated value of the interest-only strip receivable.
Interchange Income
Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network as compensation for risk, grace period, and other operating costs. Such fees are set annually by MasterCard International Inc. and Visa U.S.A. Inc.
Interchange income increased $13.4 million or 15.3% to $101.0 million and $28.2 million or 17.3% to $190.7 million for the three and six months ended June 30, 2003, as compared to $87.6 million and $162.5 million for the same periods in 2002, respectively. The increase in interchange income was primarily the result of increases in cardholder sales volume. Interchange income on securitized loans is included in securitization income.
Credit Card Fees
Credit card fees include annual, late, overlimit, returned check, cash advance, express payment, and other miscellaneous fees on credit card loans.
Credit card fees increased $22.7 million or 23.1% to $121.1 million and $56.5 million or 29.5% to $247.9 million for the three and six months ended June 30, 2003, as compared to $98.4 million and $191.4 million for the same periods in 2002, respectively. The increase in credit card fees for the three and six months ended June 30, 2003, was primarily the result of the growth in the Corporation’s outstanding loan receivables, the number of accounts, and an increase in the average fees assessed related to the implementation of a modified fee structure in the first quarter of 2002, which included higher late and over-limit fees. Credit card fees on securitized loans are included in securitization income.
Insurance Income
The Corporation’s insurance income primarily relates to fees received for marketing credit related life and disability insurance and credit protection products to its loan Customers. The Corporation recognizes insurance income over the policy or contract period as earned.
Insurance income increased $14.9 million or 36.3% to $55.8 million and $22.6 million or 26.0% to $109.3 million for the three and six months ended June 30, 2003, as compared to $41.0 million and $86.8 million for the same periods in 2002, respectively. The increase was primarily the result of an increase in the number of accounts using credit related insurance products and the fees associated with these products. Insurance income on securitized loans is included in securitization income.
Total other operating expense increased $93.7 million or 8.2% to $1.2 billion and $214.9 million or 9.3% to $2.5 billion for the three and six months ended June 30, 2003, as compared to $1.1 billion and $2.3 billion for the same periods in 2002, respectively. The growth in other operating expense reflects the Corporation’s continued investment in attracting, servicing, and retaining domestic and foreign credit card and other consumer loan Customers. The Corporation added 5.3 million new accounts during the six months ended June 30, 2003, compared to 6.3 million new accounts for the same period in 2002, which included 1.2 million accounts from the Wachovia portfolio acquisition. The Corporation added 205 new endorsements from organizations during the six months ended June 30, 2003, compared to 21 4 new endorsements for the same period in 2002.
Salaries and Employee Benefits
Salaries and employee benefits increased $47.0 million or 10.1% to $512.2 million for the three months ended June 30, 2003, as compared to $465.3 million for the same period in 2002, respectively. This increase is primarily the result of an increase in employee salary levels and benefit costs.
Salaries and employee benefits increased $94.5 million or 10.0% to $1.0 billion for the six months ended June 30, 2003, as compared to $944.2 million for the same period in 2002, respectively. This increase is primarily the result of an increase in employee salary levels and benefit costs. This increase also includes the release of restrictions on restricted stock awards of $21.5 million.
At June 30, 2003 and 2002, the Corporation had approximately 25,500 full-time equivalent employees.
Table 6 provides further detail regarding the Corporation’s other operating expenses.
Table 6: Other Expense Component of Other Operating Expense
(dollars in thousands) (unaudited)
| | | For the Three Months | For the Six Months |
| | | Ended June 30, | Ended June 30, |
| | |
|
| | | 2003 | 2002 | 2003 | 2002 |
| | |
|
|
|
|
| | | |
| Purchased services | | $ | 138,835 | | $ | 134,783 | | $ | 284,351 | | $ | 252,958 | |
| Advertising | | | 103,619 | | | 83,380 | | | 207,651 | | | 170,185 | |
| Collection | | | 17,381 | | | 13,476 | | | 33,981 | | | 25,749 | |
| Stationery and supplies | | | 9,120 | | | 11,032 | | | 18,991 | | | 21,824 | |
| Service bureau | | | 20,483 | | | 18,781 | | | 39,121 | | | 35,858 | |
| Postage and delivery | | | 122,313 | | | 98,157 | | | 224,897 | | | 208,042 | |
| Telephone usage | | | 21,507 | | | 20,451 | | | 43,424 | | | 42,886 | |
| Loan receivable fraud losses | | | 32,860 | | | 36,206 | | | 66,999 | | | 80,368 | |
| Amortization of intangible assets | | | 99,675 | | | 82,424 | | | 196,310 | | | 159,052 | |
| Other | | | 26,139 | | | 51,376 | | | 106,916 | | | 120,481 | |
| | |
| |
| |
| |
| |
| Total other expense | | $ | 591,932 | | $ | 550,066 | | $ | 1,222,641 | | $ | 1,117,403 | |
| | |
| |
| |
| |
| |
Purchased Services
Purchased services increased $4.1 million or 3.0% to $138.8 million and $31.4 million or 12.4% to $284.4 million for the three and six months ended June 30, 2003, as compared to $134.8 million and $253.0 million for the same periods in 2002, respectively. The increase in purchased services for the six months ended June 30, 2003, reflect the costs of interim servicing related to the Alliance & Leicester plc portfolio acquisition and increased third party telemarketing services.
Advertising Expense
Advertising expense increased $20.2 million or 24.3% to $103.6 million and $37.5 million or 22.0% to $207.7 million for the three and six months ended June 30, 2003, as compared to $83.4 million and $170.2 million for the same periods in 2002, respectively. The increases in advertising for the three and six months ended June 30, 2003, are a result of the Corporation’s efforts to increase the activity on newly established accounts.
Collection Expense
Collection expense increased $3.9 million or 29.0% to $17.4 million and $8.2 million or 32.0% to $34.0 million for the three and six months ended June 30, 2003, as compared to $13.5 million and $25.7 million for the same periods in 2002, respectively. The increase for the three and six months ended June 30, 2003, was primarily due to an increase in the use of collection agencies to collect on delinquent accounts during 2003.
Postage And Delivery Expense
Postage and delivery expense increased $24.2 million or 24.6% to $122.3 million and $16.9 million or 8.1% to $224.9 million for the three and six months ended June 30, 2003, as compared to $98.2 million and $208.0 million for the same periods in 2002, respectively. The increases in postage and delivery expense for the three and six months ended June 30, 2003, are a result of the Corporation’s growth in domestic mail volumes.
Loan Receivable Fraud Losses
Loan receivable fraud losses decreased $3.3 million or 9.2% to $32.9 million and $13.4 million or 16.6% to $67.0 million for the three and six months ended June 30, 2003, as compared to $36.2 million and $80.4 million for the same periods in 2002, respectively. The decreases in loan receivable fraud losses for the three and six months ended June 30, 2003, was primarily the result of an increase in the number of employees dedicated to fraud detection and improved fraud detection strategies.
Amortization Of Intangible Assets
Amortization of intangible assets increased $17.3 million or 20.9% to $99.7 million and $37.3 million or 23.4% to $196.3 million for the three and six months ended June 30, 2003, as compared to $82.4 million and $159.1 million for the same periods in 2002, respectively. The increase for the three and six months ended June 30, 2003, was the result of increased amortization costs, related to higher levels of PCCRs, primarily from the Wachovia and Alliance & Leicester plc credit card portfolio acquisitions, which were acquired in the second and third quarters of 2002, respectively.
The Corporation’s recognized applicable income taxes increased $42.7 million or 16.1% to $307.0 million and $73.5 million or 15.4% to $551.3 million for the three and six months ended June 30, 2003, as compared to $264.3 million and $477.9 million for the same periods in 2002, respectively. These amounts represent an effective tax rate of 36.1% for the three and six months ended June 30, 2003, and 36.6% for the same periods in 2002, respectively. The reduction in the effective tax rate was primarily driven by favorable resolution of tax examination issues at the federal and state levels.
The Corporation’s loan quality at any time reflects, among other factors, the credit quality of the Corporation’s credit card and other consumer loans, general economic conditions, the success of the Corporation’s collection efforts, the composition of credit card and other consumer loans included in the Corporation’s loan receivables, and the seasoning of the Corporation’s loans. As new loans season, the delinquency and charge-off rates on these loans normally rise and then stabilize. The Corporation’s financial results are sensitive to changes in delinquencies and net credit losses related to the Corporation’s loans. During an economic downturn, delinquencies and net credit losses are more likely to increase. The Corporation considers the levels of delinquent loan s, renegotiated loans, which include nonaccruing loans and reduced-rate loans, re-aged loans and other factors in determining appropriate reserves for possible credit losses and uncollectible billed interest and fees. The following loan quality discussion includes delinquency, renegotiated loan programs, re-age data, net credit losses, the reserve for possible credit losses and the estimate of uncollectible interest and fees (see “Critical Accounting Policies – Reserve For Possible Credit Losses” for further discussion).
The entire balance of an account is contractually delinquent if the minimum payment is not received by the specified date on the Customer's billing statement. Interest and fees continue to accrue on the Corporation’s delinquent loans. Delinquency is reported on loans that are 30 or more days past due. Delinquency as a percentage of the Corporation's loan receivables was 3.71% at June 30, 2003, as compared with 4.36% at December 31, 2002. The Corporation's delinquency as a percentage of managed loans was 4.46% at June 30, 2003, as compared to 4.88% at December 31, 2002.
Table 7 presents a reconciliation of the Corporation’s loan receivables delinquency ratio to the managed loans delinquency ratio.
Loan delinquency on domestic credit card loan receivables was 3.80% at June 30, 2003, as compared to 4.64% at December 31, 2002. Loan delinquency on domestic other consumer loan receivables was 5.29% at June 30, 2003, as compared to 6.19% at December 31, 2002. Loan delinquency on foreign loan receivables was 2.19% at June 30, 2003, as compared to 2.01% at December 31, 2002. The delinquency rate on the Corporation’s foreign loan receivables is typically lower than the delinquency rate on the Corporation’s domestic credit card loan receivables. The Corporation’s domestic other consumer loan receivables typically have a higher delinquency and charge-off rate than the Corporation’s domestic credit card loan receivables, as a result, the Corporation generally charges higher interest ra tes on domestic other consumer loan receivables. The reduction in the Corporation’s delinquency rates was primarily due to increased collection efforts by the Corporation during 2003.
| | | | | |
| (dollars in thousands) (unaudited) | | | |
| | | | |
| | |
June 30, 2003
|
December 31, 2002
|
| | | | |
| | | | | | | | | |
| Loan receivables: | | | | | | | | | | | | | |
| Loan receivables outstanding | | $ | 29,288,379 | | | | | $ | 28,726,508 | | | | |
| Loan receivables delinquent: | | | | | | | | | | | | | |
| 30 to 59 days | | $ | 361,300 | | | 1.23 | % | $ | 439,911 | | | 1.53 | % |
| 60 to 89 days | | | 233,689 | | | .80 | | | 273,103 | | | .95 | |
| 90 or more days (c) | | | 490,224 | | | 1.68 | | | 538,589 | | | 1.88 | |
| | |
| |
| |
| |
| |
| Total | | $ | 1,085,213 | | | 3.71 | % | $ | 1,251,603 | | | 4.36 | % |
| | |
| |
| |
| |
| |
| Loan receivables delinquent by geographic area: | | | | | | | | | | | | | |
| Domestic: | | | | | | | | | | | | | |
| Credit card | | $ | 582,227 | | | 3.80 | % | $ | 722,988 | | | 4.64 | % |
| Other consumer | | | 336,297 | | | 5.29 | | | 391,568 | | | 6.19 | |
| | |
| | | |
| | | |
| Total domestic | | | 918,524 | | | 4.23 | | | 1,114,556 | | | 5.09 | |
| Foreign | | | 166,689 | | | 2.19 | | | 137,047 | | | 2.01 | |
| | |
| | | |
| | | |
| Total | | $ | 1,085,213 | | | 3.71 | | $ | 1,251,603 | | | 4.36 | |
| | |
| | | |
| | | |
| Securitized loans: | | | | | | | | | | | | | |
| Securitized loans outstanding | | $ | 81,220,815 | | | | | $ | 78,531,334 | | | | |
| Securitized loans delinquent: | | | | | | | | | | | | | |
| 30 to 59 days | | $ | 1,222,506 | | | 1.50 | % | $ | 1,374,779 | | | 1.75 | % |
| 60 to 89 days | | | 773,981 | | | .95 | | | 844,811 | | | 1.08 | |
| 90 or more days (c) | | | 1,848,722 | | | 2.28 | | | 1,758,318 | | | 2.24 | |
| | |
| |
| |
| |
| |
| Total | | $ | 3,845,209 | | | 4.73 | % | $ | 3,977,908 | | | 5.07 | % |
| | |
| |
| |
| |
| |
| Securitized loans delinquent by geographic area: | | | | | | | | | | | | | |
| Domestic: | | | | | | | | | | | | | |
| Credit card | | $ | 3,170,826 | | | 4.85 | % | $ | 3,248,814 | | | 5.09 | % |
| Other consumer | | | 364,258 | | | 6.42 | | | 401,469 | | | 7.07 | |
| | |
| | | |
| | | |
| Total domestic | | | 3,535,084 | | | 4.97 | | | 3,650,283 | | | 5.25 | |
| Foreign | | | 310,125 | | | 3.06 | | | 327,625 | | | 3.65 | |
| | |
| | | |
| | | |
| Total | | $ | 3,845,209 | | | 4.73 | | $ | 3,977,908 | | | 5.07 | |
| | |
| | | |
| | | |
| Managed loans: | | | | | | | | | | | | | |
| Managed loans outstanding | | $ | 110,509,194 | | | | | $ | 107,257,842 | | | | |
| Managed loans delinquent: | | | | | | | | | | | | | |
| 30 to 59 days | | $ | 1,583,806 | | | 1.43 | % | $ | 1,814,690 | | | 1.69 | % |
| 60 to 89 days | | | 1,007,670 | | | .91 | | | 1,117,914 | | | 1.04 | |
| 90 or more days (c) | | | 2,338,946 | | | 2.12 | | | 2,296,907 | | | 2.15 | |
| | |
| |
| |
| |
| |
| Total | | $ | 4,930,422 | | | 4.46 | % | $ | 5,229,511 | | | 4.88 | % |
| | |
| |
| |
| |
| |
| Managed loans delinquent by geographic area: | | | | | | | | | | | | | |
| Domestic: | | | | | | | | | | | | | |
| Credit card | | $ | 3,753,053 | | | 4.65 | % | $ | 3,971,802 | | | 5.00 | % |
| Other consumer | | | 700,555 | | | 5.82 | | | 793,037 | | | 6.61 | |
| | |
| | | |
| | | |
| Total domestic | | | 4,453,608 | | | 4.80 | | | 4,764,839 | | | 5.21 | |
| Foreign | | | 476,814 | | | 2.69 | | | 464,672 | | | 2.94 | |
| | |
| | | |
| | | |
| Total | | $ | 4,930,422 | | | 4.46 | | $ | 5,229,511 | | | 4.88 | |
| | |
| | | |
| | | |
(a) Amounts exclude nonaccrual loans, which are presented inTable 9. | | | | | | |
(b)The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible interest and fees. |
(c) SeeTable 8 for further detail on accruing loans past due 90 days or more. | | | | | | |
Accruing Loans Past Due 90 days Or More
Table 8 presents a reconciliation of the Corporation's accruing loan receivables past due 90 days or more to the managed loans accruing past due 90 days or more.
| | | |
| (dollars in thousands) (unaudited) | | | |
| | | June 30, | December 31, |
| | | 2003 | 2002 |
| | |
| |
| |
| Loan receivables: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 276,439 | | $ | 310,413 | |
| Other consumer | | | 154,380 | | | 179,378 | |
| | |
| |
| |
| Total domestic | | | 430,819 | | | 489,791 | |
| Foreign | | | 59,405 | | | 48,798 | |
| | |
| |
| |
| Total | | $ | 490,224 | | $ | 538,589 | |
| | |
| |
| |
| Securitized loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 1,542,673 | | $ | 1,429,522 | |
| Other consumer | | | 168,873 | | | 186,256 | |
| | |
| |
| |
| Total domestic | | | 1,711,546 | | | 1,615,778 | |
| Foreign | | | 137,176 | | | 142,540 | |
| | |
| |
| |
| Total | | $ | 1,848,722 | | $ | 1,758,318 | |
| | |
| |
| |
| Managed loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 1,819,112 | | $ | 1,739,935 | |
| Other consumer | | | 323,253 | | | 365,634 | |
| | |
| |
| |
| Total domestic | | | 2,142,365 | | | 2,105,569 | |
| Foreign | | | 196,581 | | | 191,338 | |
| | |
| |
| |
| Total | | $ | 2,338,946 | | $ | 2,296,907 | |
| | |
| |
| |
(a) Amounts exclude nonaccrual loans, which are presented inTable 9. | | | | | | | |
(b) This Table provides further detail on 90 days or more delinquent loans presented inTable 7. |
(c)The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible interest and fees. |
Renegotiated Loan Programs
The Corporation may modify the terms of its credit card and other consumer loan agreements with borrowers who have experienced financial difficulties by offering them renegotiated loan programs, which include either placing them on nonaccrual status or reducing their interest rate. The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and estimate of uncollectible interest and fees.
Nonaccrual Loans
On a case by case basis, management determines if an account should be placed on nonaccrual status. When loans are classified as nonaccrual, the accrual of interest ceases. In future periods, when payment is received it is recorded as a reduction of principal.
Nonaccrual loan receivables as a percentage of the Corporation’s loan receivables were .20% at June 30, 2003 and December 31, 2002. Nonaccrual managed loans as a percentage of managed loans were .22% at June 30, 2003, as compared to .27% at December 31, 2002. The decreases in domestic nonaccrual loans are primarily the result of a reduction in the number of renegotiated loan programs offered to domestic Customers. The increases in foreign nonaccrual loans are primarily the result of an increase in the use of nonaccrual arrangements by MBNA Europe.
Table 9 presents a reconciliation of the Corporation's nonaccrual loan receivables to the nonaccrual managed loans.
| | | |
| (dollars in thousands) (unaudited) | | | |
| | | June 30, | December 31, |
| | | 2003 | 2002 |
| | |
| |
| |
| Loan receivables: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 26,740 | | $ | 48,318 | |
| Other consumer | | | 1,733 | | | 2,481 | |
| | |
| |
| |
| Total domestic | | | 28,473 | | | 50,799 | |
| Foreign | | | 30,763 | | | 6,733 | |
| | |
| |
| |
| Total | | $ | 59,236 | | $ | 57,532 | |
| | |
| |
| |
Nonaccrual loan receivables as a percentage of ending loan receivables | | | .20 | % | | .20 | % |
| | | | | | | | |
| Securitized loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 126,474 | | $ | 215,605 | |
| Other consumer | | | 1,612 | | | 2,348 | |
| | |
| |
| |
| Total domestic | | | 128,086 | | | 217,953 | |
| Foreign | | | 53,300 | | | 11,798 | |
| | |
| |
| |
| Total | | $ | 181,386 | | $ | 229,751 | |
| | |
| |
| |
Nonaccrual securitized loans as a percentage of ending securitized loans | | | .22 | % | | .29 | % |
| | | | | | | | |
| Managed loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 153,214 | | $ | 263,923 | |
| Other consumer | | | 3,345 | | | 4,829 | |
| | |
| |
| |
| | | | | | | | |
| Total domestic | | | 156,559 | | | 268,752 | |
| Foreign | | | 84,063 | | | 18,531 | |
| | |
| |
| |
| Total | | $ | 240,622 | | $ | 287,283 | |
| | |
| |
| |
Nonaccrual managed loans as a percentage of ending managed loans | | | .22 | % | | .27 | % |
| |
(a) Although nonaccrual loans are charged off consistent with Corporation’s charge-off policy as described in “Loan Quality – Net Credit Losses,” nonaccrual loans are not included in the delinquent loans presented inTables 7 and8 and reduced-rate loans which are presented inTable 10. |
(b)The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible interest and fees. |
Reduced-Rate Loans
Reduced-rate loans are those loans for which the interest rate was reduced because of the inability of the borrower to service the obligation under the original terms of the agreement. Income is accrued at the reduced rate as long as the borrower is current under the revised terms and conditions of the agreement.
Reduced-rate loan receivables as a percentage of the Corporation’s loan receivables were 1.96% at June 30, 2003, as compared to 2.29% at December 31, 2002. Reduced-rate managed loans as a percentage of managed loans were 2.29% at June 30, 2003, as compared to 2.63% at December 31, 2002. The decreases are primarily the result of a reduction in the number of renegotiated loan programs offered to domestic Customers.
Table 10 presents a reconciliation of the Corporation's reduced-rate loan receivables to the reduced-rate managed loans.
| | | |
| (dollars in thousands) (unaudited) | | | |
| | | June 30, | December 31, |
| | | 2003 | 2002 |
| | |
| |
| |
| Loan receivables: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 368,399 | | $ | 429,122 | |
| Other consumer | | | 142,766 | | | 163,521 | |
| | |
| |
| |
| Total domestic | | | 511,165 | | | 592,643 | |
| Foreign | | | 63,637 | | | 64,951 | |
| | |
| |
| |
| Total | | $ | 574,802 | | $ | 657,594 | |
| | |
| |
| |
Reduced-rate loan receivables as a percentage of ending loan receivables | | | 1.96 | % | | 2.29 | % |
| | | | | | | | |
| Securitized loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 1,744,471 | | $ | 1,928,406 | |
| Other consumer | | | 139,049 | | | 158,254 | |
| | |
| |
| |
| Total domestic | | | 1,883,520 | | | 2,086,660 | |
| Foreign | | | 74,286 | | | 80,172 | |
| | |
| |
| |
| Total | | $ | 1,957,806 | | $ | 2,166,832 | |
| | |
| |
| |
Reduced-rate securitized loans as a percentage of ending securitized loans | | | 2.41 | % | | 2.76 | % |
| | | | | | | | |
| Managed loans: | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 2,112,870 | | $ | 2,357,528 | |
| Other consumer | | | 281,815 | | | 321,775 | |
| | |
| |
| |
| Total domestic | | | 2,394,685 | | | 2,679,303 | |
| Foreign | | | 137,923 | | | 145,123 | |
| | |
| |
| |
| Total | | $ | 2,532,608 | | $ | 2,824,426 | |
| | |
| |
| |
Reduced-rate managed loans as a percentage of ending managed loans | | | 2.29 | % | | 2.63 | % |
| |
(a) Reduced-rate loans presented in this Table exclude accruing loans past due 90 days or more and nonaccruing loans, which are presented inTables 8 and9, respectively. |
(b)The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible interest and fees. |
Re-aged Loans
A Customer’s account may be re-aged to remove existing delinquency. The intent of a re-age is to assist Customers who have recently overcome temporary financial difficulties, and have clearly demonstrated both the ability and willingness to resume regular payments, but are unable to pay the entire past due amount. Generally, to qualify for re-aging, the account must have been opened for at least one year and cannot have been re-aged during the preceding 365 days. An account may not be re-aged more than two times in a five year period. To qualify for re-aging, the Customer must also have made payments equal to a total of three minimum payments in the last 90 days, including one full minimum payment during the last 30 days. All re-age strategies are approved by senior management and the Loan Revie w Department. Re-ages can have the effect of delaying charge-offs. There were $176.3 million and $384.1 million of loan receivables re-aged during the three and six months ended June 30, 2003, compared to $331.5 million and $701.1 million for the same periods in 2002, respectively. Managed loans re-aged during the three and six months ended June 30, 2003 were $710.9 million and $1.5 billion, as compared to $1.4 billion and $2.9 billion for the same periods in 2002, respectively. Of those accounts that were re-aged during the three months ended June 30, 2002, approximately 21.2% returned to delinquency status and approximately 24.9% charged off by June 30, 2003.
Table 11 presents a reconciliation of the Corporation’s loan receivables re-aged amounts to the managed re-aged amounts.
Table 11: Re-aged Amounts (a)
(dollars in thousands) (unaudited)
| | | For the Three Months | For the Six Months |
| | | Ended June 30, | Ended June 30, |
| | |
|
|
| | | 2003 | 2002 | 2003 | 2002 |
| | |
| |
| |
| |
| |
| Loan receivable re-aged amounts | | $ | 176,266 | | $ | 331,482 | | $ | 384,121 | | $ | 701,090 | |
| Securitized loan re-aged amounts | | | 534,625 | | | 1,071,657 | | | 1,160,149 | | | 2,227,532 | |
| Managed loan re-aged amounts | | | 710,891 | | | 1,403,139 | | | 1,544,270 | | | 2,928,622 | |
| | | | | | | | | | | | | | |
(a) Re-aged loans that returned to delinquency status are included in the delinquency amounts presented inTables 7 and8. |
The decreases in loan receivable, securitized loan, and managed loan re-aged amounts were the result of changes in re-age practices implemented by the Corporation during 2002 and the first quarter of 2003, which reduced the number of accounts that qualified for re-age.
The Corporation’s net credit losses include the principal amount of losses charged off less current period recoveries and exclude uncollectible accrued interest and fees and fraud losses. Uncollectible accrued interest and fees are recognized by the Corporation through a reduction of the amount of interest income and fee income recognized in the current period that the Corporation does not expect to collect in subsequent periods. The respective income captions, loan receivables, and accrued income receivable are reduced for uncollectible interest and fees. Fraud losses are recognized through a charge to other expense. The Corporation records current period recoveries on loans previously charged off in the reserve for possible credit losses. The Corporation sells charged-off loans and records the proceeds received from these sales as recoveries.
The Corporation's policy is to charge off open-end delinquent retail loans by the end of the month in which the account becomes 180 days contractually past due, closed-end delinquent retail loans by the end of the month in which they become 120 days contractually past due, and bankrupt accounts within 60 days of receiving notification from the bankruptcy courts. The Corporation charges off deceased accounts when the loss is determined but not to exceed 180 days contractually past due.
Loan receivables net credit losses increased $66.4 million or 24.1% to $341.3 million and $131.6 million or 23.5% to $691.5 million for the three and six months ended June 30, 2003, as compared to $274.9 million and $559.9 million for the same periods in 2002, respectively. The increase in net credit losses for the three and six months ended June 30, 2003, reflects a weaker economy, the continuing seasoning of the Corporation's accounts, an increase in average loan receivables, and an increase in bankruptcies.
Net credit losses as a percentage of average loan receivables were 4.91% and 5.02% for the three and six months ended June 30, 2003, as compared to 4.53% and 4.64% for the same periods in 2002, respectively. The Corporation's managed net credit losses as a percentage of average managed loans for the three and six months ended June 30, 2003, were 5.35% and 5.41%, compared to 5.09% and 5.04% for the same periods in 2002, respectively. Domestic credit card net credit losses as a percentage of average domestic credit card loan receivables were 4.74% and 4.77% for the three and six months ended June 30, 2003, as compared to 4.07% and 4.43% for the same periods in 2002, respectively. Domestic other consumer net credit losses as a percentage of average domestic other consumer loan receivables were 7.53% and 7.82% for the three and six months ended June 30, 2003, as compared to 6.88% and 6.52% for the same periods in 2002, respectively. In addition to the weakening of general economic conditions, domestic other consumer net credit losses reflect the higher credit risk associated with these products. Foreign net credit losses as a percentage of average foreign loan receivables were 2.86% and 2.91% for the three and six months ended June 30, 2003, as compared to 2.78% and 2.75% for the same periods in 2002, respectively. The lower level of net credit losses on the Corporation's foreign loan receivables as compared to domestic loan receivables reflects the growth in the Corporation's foreign loan receivables and the seasoning of those accounts. A higher percentage of newer, less seasoned accounts results in a lower charge-off ratio compared to a more seasoned portfolio.
Managed domestic credit card net credit losses as a percentage of average managed domestic credit card loans were 5.35% and 5.39% for the three and six months ended June 30, 2003, as compared to 4.93% for the same periods in 2002, respectively. Managed domestic other consumer net credit losses as a percentage of average managed domestic other consumer loans were 8.21% and 8.44% for the three and six months ended June 30, 2003, as compared to 7.75% and 7.42% for the same periods in 2002, respectively. Managed foreign net credit losses as a percentage of average managed foreign loans were 3.27% and 3.26% for the three and six months ended June 30, 2003, as compared to 3.33% and 3.27% for the same periods in 2002, respectively. The net credit loss ratio is calculated by dividing annualized net credit lo sses, which exclude uncollectible accrued interest and fees and fraud losses, for the period by average loan receivables, which include the billed interest and fees for the corresponding period.
Table 12 presents a reconciliation of the Corporation’s loan receivables net credit loss ratio to the managed net credit losses ratio.
| Table 12: Net Credit Loss Ratio |
| (dollars in thousands) (unaudited) | | | | | | | |
| | | For the Three Months Ended June 30, 2003 | For the Three Months Ended June 30, 2002 |
| | |
|
|
| | | Net Credit Losses | Average Loans Outstanding | Net Credit Loss Ratio | Net Credit Losses | Average Loans Outstanding | Net Credit Loss Ratio |
| | |
|
| Loans receivables: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 171,875 | | $ | 14,516,108 | | | 4.74 | % | $ | 134,912 | | $ | 13,254,427 | | | 4.07 | % |
| Domestic other consumer | | | 120,162 | | | 6,384,480 | | | 7.53 | | | 106,148 | | | 6,174,024 | | | 6.88 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic loan receivables | | | 292,037 | | | 20,900,588 | | | 5.59 | | | 241,060 | | | 19,428,451 | | | 4.96 | |
| Foreign | | | 49,270 | | | 6,884,062 | | | 2.86 | | | 33,872 | | | 4,866,722 | | | 2.78 | |
| | |
| |
| | | | |
| |
| | | | |
| Total loan receivables | | $ | 341,307 | | $ | 27,784,650 | | | 4.91 | | $ | 274,932 | | $ | 24,295,173 | | | 4.53 | |
| | |
| |
| | | | |
| |
| | | | |
| Securitized loans: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 896,356 | | $ | 65,320,725 | | | 5.49 | % | $ | 786,229 | | $ | 61,443,219 | | | 5.12 | % |
| Domestic other consumer | | | 127,399 | | | 5,683,788 | | | 8.97 | | | 123,969 | | | 5,709,930 | | | 8.68 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic securitized loans | | | 1,023,755 | | | 71,004,513 | | | 5.77 | | | 910,198 | | | 67,153,149 | | | 5.42 | |
| Foreign | | | 87,350 | | | 9,814,705 | | | 3.56 | | | 61,814 | | | 6,625,031 | | | 3.73 | |
| | |
| |
| | | | |
| |
| | | | |
| Total securitized loans | | $ | 1,111,105 | | $ | 80,819,218 | | | 5.50 | | $ | 972,012 | | $ | 73,778,180 | | | 5.27 | |
| | |
| |
| | | | |
| |
| | | | |
| Managed loans: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 1,068,231 | | $ | 79,836,833 | | | 5.35 | % | $ | 921,141 | | $ | 74,697,646 | | | 4.93 | % |
| Domestic other consumer | | | 247,561 | | | 12,068,268 | | | 8.21 | | | 230,117 | | | 11,883,954 | | | 7.75 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic managed loans | | | 1,315,792 | | | 91,905,101 | | | 5.73 | | | 1,151,258 | | | 86,581,600 | | | 5.32 | |
| Foreign | | | 136,620 | | | 16,698,767 | | | 3.27 | | | 95,686 | | | 11,491,753 | | | 3.33 | |
| | |
| |
| | | | |
| |
| | | | |
| Total managed loans | | $ | 1,452,412 | | $ | 108,603,868 | | | 5.35 | | $ | 1,246,944 | | $ | 98,073,353 | | | 5.09 | |
| | |
| |
| | | | |
| |
| | | | |
| | | For the Six Months Ended June 30, 2003 | For the Six Months Ended June 30, 2002 |
| | |
|
|
| | | Net Credit Losses | Average Loans Outstanding | Net Credit Loss Ratio | Net Credit Losses | Average Loans Outstanding | Net Credit Loss Ratio |
| | |
|
| Loans receivables: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 343,956 | | $ | 14,410,941 | | | 4.77 | % | $ | 292,393 | | $ | 13,187,298 | | | 4.43 | % |
| Domestic other consumer | | | 248,538 | | | 6,359,856 | | | 7.82 | | | 202,661 | | | 6,219,205 | | | 6.52 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic loan receivables | | | 592,494 | | | 20,770,797 | | | 5.71 | | | 495,054 | | | 19,406,503 | | | 5.10 | |
| Foreign | | | 99,016 | | | 6,804,216 | | | 2.91 | | | 64,812 | | | 4,708,984 | | | 2.75 | |
| | |
| |
| | | | |
| |
| | | | |
| Total loan receivables | | $ | 691,510 | | $ | 27,575,013 | | | 5.02 | | $ | 559,866 | | $ | 24,115,487 | | | 4.64 | |
| | |
| |
| | | | |
| |
| | | | |
| Securitized loans: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 1,785,851 | | $ | 64,625,121 | | | 5.53 | % | $ | 1,533,872 | | $ | 60,913,235 | | | 5.04 | % |
| Domestic other consumer | | | 259,469 | | | 5,685,194 | | | 9.13 | | | 240,113 | | | 5,709,878 | | | 8.41 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic securitized loans | | | 2,045,320 | | | 70,310,315 | | | 5.82 | | | 1,773,985 | | | 66,623,113 | | | 5.33 | |
| Foreign | | | 166,080 | | | 9,440,100 | | | 3.52 | | | 117,542 | | | 6,450,791 | | | 3.64 | |
| | |
| |
| | | | |
| |
| | | | |
| Total securitized loans | | $ | 2,211,400 | | $ | 79,750,415 | | | 5.55 | | $ | 1,891,527 | | $ | 73,073,904 | | | 5.18 | |
| | |
| |
| | | | |
| |
| | | | |
| Managed loans: | | | | | | | | | | | | | | | | | | | |
| Domestic credit card | | $ | 2,129,807 | | $ | 79,036,062 | | | 5.39 | % | $ | 1,826,265 | | $ | 74,100,533 | | | 4.93 | % |
| Domestic other consumer | | | 508,007 | | | 12,045,050 | | | 8.44 | | | 442,774 | | | 11,929,083 | | | 7.42 | |
| | |
| |
| | | | |
| |
| | | | |
| Total domestic managed loans | | | 2,637,814 | | | 91,081,112 | | | 5.79 | | | 2,269,039 | | | 86,029,616 | | | 5.28 | |
| Foreign | | | 265,096 | | | 16,244,316 | | | 3.26 | | | 182,354 | | | 11,159,775 | | | 3.27 | |
| | |
| |
| | | | |
| |
| | | | |
| Total managed loans | | $ | 2,902,910 | | $ | 107,325,428 | | | 5.41 | | $ | 2,451,393 | | $ | 97,189,391 | | | 5.04 | |
| | |
| |
| | | | |
| |
| | | | |
Reserve And Provision For Possible Credit Losses
The Corporation’s reserve for possible credit losses increased $64.0 million or 5.8% to $1.2 billion at June 30, 2003, as compared to $1.1 billion at December 31, 2002. The provision for possible credit losses increased $70.7 million or 25.7% to $345.6 million and $90.2 million or 14.2% to $724.5 million for the three and six months ended June 30, 2003, as compared to $274.9 million and $634.3 million for the same periods in 2002, respectively. The increase in the reserve for possible credit losses and the related provision for possible credit losses primarily reflects a weaker economy as demonstrated by the increase in the Corporation’s net credit losses, and an increase in loan receivables.
The Corporation’s projections of probable net credit losses are inherently uncertain, and as a result the Corporation cannot predict with certainty the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the Corporation’s loan receivables, bankruptcy laws or regulatory policies, and other factors could impact the Corporation’s actual and projected net credit losses and the related reserve for possible credit losses.
The Corporation recorded acquired reserves for possible credit losses for loan portfolio acquisitions of $13.1 million and $26.0 million for the three and six months ended June 30, 2003, respectively, as compared to $46.7 million and $47.7 million for the same periods in 2002, respectively.
Table 13 presents an analysis of the Corporation's reserve for possible credit losses. The reserve for possible credit losses is a general allowance applicable to the Corporation's loan receivables and does not include an allocation for credit risk related to securitized loans. Net credit losses on securitized loans are absorbed directly by the related trusts under their respective contractual agreements and do not affect the reserve for possible credit losses.
| Table 13: Reserve for Possible Credit Losses |
| (dollars in thousands) (unaudited) | | | | | |
| | | For the Three Months | For the Six Months |
| | | Ended June 30, | Ended June 30, |
| | |
|
|
| | | 2003 | 2002 | 2003 | 2002 |
| | |
|
|
|
|
| Reserve for possible credit losses, beginning of period | | $ | 1,151,394 | | $ | 908,186 | | $ | 1,111,299 | | $ | 833,423 | |
| Reserves acquired | | | 13,061 | | | 46,738 | | | 26,012 | | | 47,675 | |
| Provision for possible credit losses: | | | | | | | | | | | | | |
| Domestic | | | 297,910 | | | 252,113 | | | 621,593 | | | 550,553 | |
| Foreign | | | 47,693 | | | 22,819 | | | 102,887 | | | 83,772 | |
| | |
| |
| |
| |
| |
| Total provision for possible credit losses | | | 345,603 | | | 274,932 | | | 724,480 | | | 634,325 | |
| Foreign currency translation | | | 6,505 | | | 5,189 | | | 4,975 | | | 4,556 | |
| Credit losses: | | | | | | | | | | | | | |
| Domestic: | | | | | | | | | | | | | |
| Credit card | | | (185,633 | ) | | (143,687 | ) | | (368,990 | ) | | (311,080 | ) |
| Other consumer | | | (129,867 | ) | | (112,229 | ) | | (265,788 | ) | | (213,229 | ) |
| | |
| |
| |
| |
| |
| Total domestic credit losses | | | (315,500 | ) | | (255,916 | ) | | (634,778 | ) | | (524,309 | ) |
| Foreign | | | (58,385 | ) | | (40,696 | ) | | (115,060 | ) | | (75,679 | ) |
| | |
| |
| |
| |
| |
| Total credit losses | | | (373,885 | ) | | (296,612 | ) | | (749,838 | ) | | (599,988 | ) |
| Recoveries: | | | | | | | | | | | | | |
| Domestic: | | | | | | | | | | | | | |
| Credit card | | | 13,758 | | | 8,775 | | | 25,034 | | | 18,687 | |
| Other consumer | | | 9,705 | | | 6,081 | | | 17,250 | | | 10,568 | |
| | |
| |
| |
| |
| |
| Total domestic recoveries | | | 23,463 | | | 14,856 | | | 42,284 | | | 29,255 | |
| Foreign | | | 9,115 | | | 6,824 | | | 16,044 | | | 10,867 | |
| | |
| |
| |
| |
| |
| Total recoveries | | | 32,578 | | | 21,680 | | | 58,328 | | | 40,122 | |
| | |
| |
| |
| |
| |
| Net credit losses | | | (341,307 | ) | | (274,932 | ) | | (691,510 | ) | | (559,866 | ) |
| | |
| |
| |
| |
| |
| Reserve for possible credit losses, end of period | | $ | 1,175,256 | | $ | 960,113 | | $ | 1,175,256 | | $ | 960,113 | |
| | |
| |
| |
| |
| |
Uncollectible Accrued Interest And Fees
The Corporation adjusts the amount of interest and fee income recognized in the current period for its estimate of interest and fee income that it does not expect to collect in subsequent periods through adjustments to the respective income statement captions, loan receivables, and accrued income receivable. The estimate of uncollectible interest and fees is based on a migration analysis of delinquent and current loan receivables that will progress through the various delinquency stages and will ultimately charge off. The Corporation also adjusts the estimated value of accrued interest and fees on securitized loans for the amount of uncollectible interest and fees that are not expected to be collected through an adjustment to accounts receivable from securitization and securitization income. This est imate is also based on a migration analysis of delinquent and current securitized loans that will progress through the various delinquency stages and ultimately charge off.
The differences between the amounts of interest and fees the Corporation was contractually entitled to and the amounts recognized as revenue were $285.1 million and $597.3 million for the three and six months ended June 30, 2003, as compared to$246.4million and $491.7 million for the same periods in 2002, respectively.
The Corporation is subject to risk-based capital guidelines adopted by the Federal Reserve Board for bank holding companies. The Bank and MBNA Delaware are also subject to similar capital requirements adopted by the Office of the Comptroller of the Currency. Under these requirements, the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Total Capital, and Leverage ratios are maintained. Failure to meet these minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal bank regulators that, if undertaken, could have a direct material effect on the Corporation's, the Bank's, and MBNA Delaware's consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation, the Bank, and MBNA Delaware must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.
The Corporation's, the Bank's, and MBNA Delaware's capital amounts and classification are also subject to qualitative judgments by the federal bank regulators about components, risk weightings, and other factors. At June 30, 2003, and December 31, 2002, the Corporation's, the Bank's, and MBNA Delaware's capital exceeded all minimum regulatory requirements to which they are subject, and the Bank and MBNA Delaware were “well-capitalized” as defined under the federal bank regulatory guidelines. The risk-based capital ratios, shown in Table 14, have been computed in accordance with regulatory accounting practices. No conditions or events have occurred since June 30, 2003, that have changed the Corporation’s classification as “adequately capitalized” and the Bank’s or MBNA De laware’s classification as “well-capitalized.”
| Table 14: Regulatory Capital Ratios |
| | June 30, 2003 | | December 31, 2002 | | Minimum Requirements | | Well-Capitalized Requirements | |
|
(unaudited) | |
| |
| |
| |
| MBNA Corporation | | | | | | | | |
| Tier 1 | 16.85 | % | 15.73 | % | 4.00 | % | (a) | |
| Total | 20.65 | | 19.65 | | 8.00 | | (a) | |
| Leverage | 18.89 | | 18.55 | | 4.00 | | (a) | |
| | | | | | | | | |
| MBNA America Bank, N.A. | | | | | | | | |
| Tier 1 | 14.34 | | 12.58 | | 4.00 | | 6.00 | % |
| Total | 18.14 | | 16.41 | | 8.00 | | 10.00 | |
| Leverage | 16.62 | | 15.81 | | 4.00 | | 5.00 | |
| | | | | | | | | |
| MBNA America (Delaware), N.A. | | | | | | | | |
| Tier 1 | 26.42 | | 28.06 | | 4.00 | | 6.00 | |
| Total | 27.33 | | 29.36 | | 8.00 | | 10.00 | |
| Leverage | 26.21 | | 23.21 | | 4.00 | | 5.00 | |
| |
| (a) Not applicable for bank holding companies. |
The payment of dividends in the future and the amount of such dividends, if any, will be at the discretion of the Corporation’s Board of Directors. The payment of preferred and common stock dividends by the Corporation may be limited by certain factors, including regulatory capital requirements, broad enforcement powers of the federal bank regulatory agencies, and tangible net worth maintenance requirements under the Corporation’s revolving credit facilities. The payment of common stock dividends may also be limited by the terms of the Corporation’s preferred stock. If the Corporation has not paid scheduled dividends on the preferred stock, or declared the dividends and set aside funds for payment, the Corporation may not declare or pay any cash dividends on its common stock. In additi on, if the Corporation defers interest payments for consecutive periods covering 10 semiannual periods or 20 consecutive quarterly periods, depending on the series, on its guaranteed preferred beneficial interests in Corporation’s junior subordinated deferrable interest debentures, the Corporation may not be permitted to declare or pay any cash dividends on the Corporation’s Common Stock, or pay any interest on debt securities that have equal or lower priority than the junior subordinated deferrable interest debentures. During the six months ended June 30, 2003, the Corporation declared dividends on its preferred stock of $7.0 million and on its common stock of $204.5 million.
The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. The primary source of funds for payment of preferred and common stock dividends by the Corporation is dividends received from the Bank. The amount of dividends that a national bank may declare in any year is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits. Also, a national bank may not declare dividends if such declaration would leave the bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. At June 30, 2003, the amount of undivided profits available for declaration and payment of dividends from the Bank to the Corporation was $3.4 billion. The Bank’s payment of dividends to the Corporation may also be limited by a tangible net worth requirement under the Corporation’s senior syndicated revolving credit facility. This facility was not drawn upon at June 30, 2003. If this facility had been drawn upon at June 30, 2003, the amount of retained earnings available for declaration of dividends would have been limited to $2.4 billion. Also, banking regulators have indicated that national banks should generally pay dividends only out of current operating earnings. Payment of dividends by the Bank to the Corporation, however, can be further limited by federal bank regulatory agencies.
Asset securitization is the process whereby loan principal receivables are converted into securities normally referred to as asset-backed securities. The securitization of the Corporation’s loan principal receivables is accomplished through the public and private issuance of asset-backed securities and is accounted for in accordance with Statement No. 140. Asset securitization removes loan principal receivables from the consolidated statements of financial condition through the transfer of loan principal receivables to a trust. The trust then sells undivided interests to investors that entitle the investors to specified cash flows generated from the securitized loan principal receivables, while the Corporation retains the remaining undivided interest and is entitled to specific cash flows alloca ble to that retained interest. As loan principal receivables are securitized, the Corporation’s on-balance-sheet funding needs are reduced by the amount of loans securitized.
A credit card account represents a contractual relationship between the lender and the Customer. A loan receivable represents a financial asset. Unlike a mortgage or other closed-end loan account, the terms of a credit card account permit a Customer to borrow additional amounts and to repay each month an amount the Customer chooses, subject to a minimum payment requirement. The account remains open after repayment of the balance and the Customer may continue to use it to borrow additional amounts. The Corporation reserves the right to change the account terms, including interest rates and fees, in accordance with the terms of the agreement and applicable law. The credit card account is, therefore, separate and distinct from the loan receivable.
In a credit card securitization, the account relationships are not sold to the securitization trust. The Corporation retains ownership of the account relationship, including the right to change the terms of the account and the right to additional principal receivables generated by the account. During a securitization’s revolving period, the Corporation agrees to sell the additional principal receivables to the trusts until the trusts begin using principal collections to make payments to investors. When the revolving period of the securitization ends, the account relationship between the Corporation and the Customer continues.
The undivided interests in the trusts sold to investors are issued through different classes of securities with different risk levels and credit ratings. The Corporation’s securitization transactions are generally structured to include up to three classes of securities sold to investors. With the exception of the most senior class, each class of securities issued by the trusts provides credit enhancement, in the form of subordination, to the more senior, higher-rated classes. The most senior class of asset-backed securities is the largest and generally receives a AAA credit rating at the time of issuance. In order to issue senior classes of securities, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of the above described subordinated classe s.
The trusts are qualified special purpose entities as defined under Statement No. 140. To meet the criteria to be considered a qualifying special purpose entity, a trust must be demonstrably distinct from the Corporation and have activities that are significantly limited and entirely specified in the legal documents that established the trust. The Corporation cannot change the activities that the trust can perform. These activities may only be changed by a majority of the beneficial interest holders not including the Corporation. As qualifying special purpose entities under Statement No. 140, the trusts’ assets and liabilities are not consolidated in the Corporation’s statements of financial condition. The trusts are administered by an independent trustee.
During the revolving period, which normally ranges from 24 months to 120 months, the trust makes no principal payments to the investors in the securitization. Instead, during the revolving period, the trust uses principal payments received from Customers, which pay off the loan principal receivables that were sold to the trust, to purchase for the trust from the Corporation new loan principal receivables generated by these accounts, in accordance with the terms of the transaction, so that the principal dollar amount of the investors’ undivided interest remains unchanged. Once the revolving period ends, the accumulation period begins and the trust distributes principal payments to the investors according to the terms of the transaction. When the trust uses principal payments to pay the investors, the Corporation’s on-balance-sheet loan receivables increase by the amount of any new loans on the Customer accounts because the trust is no longer purchasing new loan receivables from the Corporation.
The Corporation maintains retained interests in its securitization transactions, which are included in accounts receivable from securitization in the Corporation’s consolidated statements of financial condition. The investors and providers of credit enhancement had a lien on a portion of these retained interests of $1.2 billion at June 30, 2003 and December 31, 2002. The Corporation has no further obligation to provide funding support to either the investors or the trusts if the securitized loans are not paid when due.
The Corporation allocates resources on a managed basis, and financial data provided to management reflects the Corporation’s results on a managed basis. Managed data assumes the Corporation’s securitized loan principal receivables have not been sold and presents the earnings on securitized loan principal receivables in the same fashion as the Corporation’s owned loans. Management, equity and debt analysts, rating agencies, and others evaluate the Corporation’s operations on a managed basis because the loans that are securitized are subject to underwriting standards comparable to the Corporation’s owned loans, and the Corporation services the securitized and owned loans, and the related accounts, together and in the same manner without regard to ownership of the loans. In a se curitization, the account relationships are not sold to the trust. The Corporation continues to own and service the accounts that generate the securitized loan principal receivables. The credit performance of the entire managed loan portfolio is important to understand the quality of originations and the related credit risks inherent in the owned portfolio and retained interests in securitization transactions. Managed other operating income includes the impact of the gain recognized on securitized loan principal receivables in accordance with Statement No. 140.
When adjusted for the effects of securitization, the Corporation’s managed data may be reconciled to its consolidated financial statements. This securitization adjustment reclassifies interest income, interchange income, credit card and other consumer loan fees, insurance income, recoveries on charged-off securitized loan principal receivables in excess of interest paid to investors, gross credit losses, and other trust expenses into securitization income.
Table 15 reconciles income statement data for the period to managed net interest income, managed provision for possible credit losses, and managed other operating income.
Table 15: Reconciliation of Income Statement Data for the Period to Managed Net Interest Income, Managed
Provision for Possible Credit Losses, Managed Other Operating Income
(dollars in thousands) (unaudited)
| | | For the Three Months | For the Six Months |
| | | Ended June 30, | Ended June 30, |
| | |
|
| | | 2003 | 2002 | 2003 | 2002 |
| | |
|
|
|
|
| Net Interest Income: | | | | | | | | | | | | | |
| Net interest income | | $ | 579,168 | | $ | 504,817 | | $ | 1,134,764 | | $ | 1,018,093 | |
| Securitization adjustments | | | 1,935,718 | | | 1,798,393 | | | 3,832,834 | | | 3,560,190 | |
| | |
| |
| |
| |
| |
| Managed net interest income | | $ | 2,514,886 | | $ | 2,303,210 | | $ | 4,967,598 | | $ | 4,578,283 | |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
| Provision for Possible Credit Losses: | | | | | | | | | | | | | |
| Provision for possible credit losses | | $ | 345,603 | | $ | 274,932 | | $ | 724,480 | | $ | 634,325 | |
| Securitization adjustments | | | 1,111,105 | | | 972,012 | | | 2,211,400 | | | 1,891,527 | |
| | |
| |
| |
| |
| |
| Managed provision for possible credit losses | | $ | 1,456,708 | | $ | 1,246,944 | | $ | 2,935,880 | | $ | 2,525,852 | |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | | | |
| Other Operating Income: | | | | | | | | | | | | | |
| Other operating income | | $ | 1,851,804 | | $ | 1,633,629 | | $ | 3,639,813 | | $ | 3,229,895 | |
| Securitization adjustments | | | (824,613 | ) | | (826,381 | ) | | (1,621,434 | ) | | (1,668,663 | ) |
| | |
| |
| |
| |
| |
| Managed other operating income | | $ | 1,027,191 | | $ | 807,248 | | $ | 2,018,379 | | $ | 1,561,232 | |
| | |
| |
| |
| |
| |
Managed net interest income increased $211.7 million or 9.2% to $2.5 billion and $389.3 million or 8.5% to $5.0 billion for the three and six months ended June 30, 2003, as compared to $2.3 billion and $4.6 billion for the same periods in 2002, respectively. The increase in managed net interest income for the three and six months ended June 30, 2003, was primarily a result of an increase in average managed interest-earning assets of $14.8 billion and $13.4 billion, combined with a decrease in the rate paid on average managed interest-bearing liabilities of 55 basis points and 54 basis points, partially offset by a decrease in the yield earned on average managed interest earning assets of 97 basis points and 90 basis points, respectively. The increase in average managed interest-earning assets is prim arily the result of the increase in average managed loans and investments securities and money market instruments. The decrease in the yield earned on average managed interest-earning assets was primarily the result of lower average promotional and non-promotional interest rates offered to attract and retain Customers and to grow managed loans combined with a decrease in the yield earned on average loan receivables and average investment securities and money market instruments and an increase in lower yielding average investment securities and money market instruments as a percentage of average interest-earning assets. The decrease in the rate paid on average managed interest-bearing liabilities was a result of actions by the FOMC throughout 2001 and in the fourth quarter of 2002, that impacted overall market interest rates and decreased the Corporation’s funding costs.
The Corporation’s managed net interest margin, on a fully taxable equivalent basis, was 8.36% and 8.45% for the three and six months ended June 30, 2003, as compared to 8.73% and 8.79% for the same periods in 2002, respectively. The managed net interest margin represents managed net interest income on a fully taxable equivalent basis expressed as a percentage of managed average total interest-earning assets. The 37 basis points and 34 basis point decrease in the managed net interest margin for the three and six months ended June 30, 2003, respectively, was primarily the result of the yield earned on managed average interest-earning assets decreasing more than the rate paid on managed average interest-bearing liabilities combined with the increase in lower yielding average investment securities a nd money market instruments as a percentage of total managed average interest-earning assets. The net interest margin is reconciled to the managed net interest margin in Table 16.
The managed provision for possible credit losses increased $209.8 million or 16.8% to $1.5 billion and $410.0 million or 16.2% to $2.9 billion for the three and six months ended June 30, 2003, as compared to $1.2 billion and $2.5 billion for the same periods in 2002, respectively. The increase in the managed provision for possible credit losses was primarily the result of increases in the Corporation’s managed net credit losses and managed loans.
Managed other operating income increased $219.9 million or 27.2% to $1.0 billion and $457.1 million or 29.3% to $2.0 billion for the three and six months ended June 30, 2003, as compared to $807.2 million and $1.6 billion for the same periods in 2002, respectively. The increase in managed other operating income was primarily the result of the net gains from securitization activity, which includes changes in fair value of the interest-only strip receivable and the gains from the sale of loan principal receivables, combined with an increase in credit card fees, insurance income, and interchange income.
| Table 16: Reconciliation of the Net Interest Margin Ratio to the |
Managed Net Interest Margin Ratio(dollars in thousands) (unaudited) |
| | | For the Three Months Ended | For the Three Months Ended |
| | | June 30, 2003 | June 30, 2002 |
| | |
|
|
| | | Average Earning Assets | Net Interest Income | Net Interest Margin Ratio | Average Earning Assets | Net Interest Income | Net Interest Margin Ratio |
| | |
|
|
| Net Interest Margin (a): | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | 11,926,521 | | | | | | | | $ | 7,649,378 | | | | | | | |
| Other interest-earning assets | | | 3,856,756 | | | | | | | | | 3,916,061 | | | | | | | |
| Loan receivables (b) | | | 27,784,650 | | | | | | | | | 24,295,173 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 43,567,927 | | $ | 579,401 | | | 5.33 | % | $ | 35,860,612 | | $ | 505,110 | | | 5.65 | % |
| | |
| | | | | | | |
| | | | | | | |
| Securitization Adjustments: | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | - | | | | | | | | $ | - | | | | | | | |
| Other interest-earning assets | | | (3,787,737 | ) | | | | | | | | (3,855,194 | ) | | | | | | |
| Securitized loans | | | 80,819,218 | | | | | | | | | 73,778,180 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 77,031,481 | | $ | 1,935,718 | | | 10.08 | % | $ | 69,922,986 | | $ | 1,798,393 | | | 10.32 | % |
| | |
| | | | | | | |
| | | | | | | |
| Managed Net Interest Margin (a): | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | 11,926,521 | | | | | | | | $ | 7,649,378 | | | | | | | |
| Other interest-earning assets | | | 69,019 | | | | | | | | | 60,867 | | | | | | | |
| Managed loans | | | 108,603,868 | | | | | | | | | 98,073,353 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 120,599,408 | | $ | 2,515,119 | | | 8.36 | % | $ | 105,783,598 | | $ | 2,303,503 | | | 8.73 | % |
| | |
| | | | | | | |
| | | | | | | |
| | | | |
| | | For the Six Months Ended | For the Six Months Ended |
| | | June 30, 2003 | June 30, 2002 |
| | |
|
|
| | | Average Earning Assets | Net Interest Income | Net Interest Margin Ratio | Average Earning Assets | Net Interest Income | Net Interest Margin Ratio |
| | |
|
|
| Net Interest Margin (a): | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | 11,099,005 | | | | | | | | $ | 7,833,952 | | | | | | | |
| Other interest-earning assets | | | 3,828,536 | | | | | | | | | 3,906,471 | | | | | | | |
| Loan receivables (b) | | | 27,575,013 | | | | | | | | | 24,115,487 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 42,502,554 | | $ | 1,135,214 | | | 5.39 | % | $ | 35,855,910 | | $ | 1,018,643 | | | 5.73 | % |
| | |
| | | | | | | |
| | | | | | | |
| Securitization Adjustments: | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | - | | | | | | | | $ | - | | | | | | | |
| Other interest-earning assets | | | (3,760,513 | ) | | | | | | | | (3,845,696 | ) | | | | | | |
| Securitized loans | | | 79,750,415 | | | | | | | | | 73,073,904 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 75,989,902 | | $ | 3,832,834 | | | 10.17 | % | $ | 69,228,208 | | $ | 3,560,190 | | | 10.37 | % |
| | |
| | | | | | | |
| | | | | | | |
| Managed Net Interest Margin (a): | | | | | | | | | | | | | | | | | | | |
Investment securities and money market instruments | | $ | 11,099,005 | | | | | | | | $ | 7,833,952 | | | | | | | |
| Other interest-earning assets | | | 68,023 | | | | | | | | | 60,775 | | | | | | | |
| Managed loans | | | 107,325,428 | | | | | | | | | 97,189,391 | | | | | | | |
| | |
| | | | | | | |
| | | | | | | |
| Total | | $ | 118,492,456 | | $ | 4,968,048 | | | 8.45 | % | $ | 105,084,118 | | $ | 4,578,833 | | | 8.79 | % |
| | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(a) Net interest margin ratios are presented on a fully taxable equivalent basis. The fully taxable equivalent adjustment for the three monthsended June 30, 2003, and 2002 was $233 and $293, respectively. The fully taxable equivalent adjustment for the six months endedJune 30, 2003, and 2002 was $450 and $550, respectively. |
| (b) Loan receivables include loans held for securitization and the loan portfolio. |
During the six months ended June 30, 2003, the Corporation securitized credit card loan principal receivables totaling $6.3 billion, including the securitization of £500.0 million (approximately $790.0 million) by MBNA Europe and CAD$350.0 million (approximately $256.2 million) by MBNA Canada. The total amount of securitized loans was $81.2 billion or 73.5% of managed loans at June 30, 2003, compared to $78.5 billion or 73.2% at December 31, 2002. The total amount of securitized domestic credit card loans was 81.0% of managed domestic credit card loans at June 30, 2003, as compared to 80.4% at December 31, 2002. Securitized domestic other consumer loans were 47.2% of managed domestic other consumer loans at June 30, 2003, as compared to 47.3% at December 31, 2002. Securitized foreign loans were 57.1% of managed foreign loans at June 30, 2003, as compared to 56.8% at December 31, 2002.
During the three and six months ended June 30, 2003, there was an increase of $1.5 billion and $4.1 billion, respectively, in the Corporation's loan receivables that occurred when certain securitizations matured as scheduled and the trusts used principal payments to pay the investors rather than purchasing new loan principal receivables from the Corporation. The Corporation's loan portfolio is expected to increase an additional $4.5 billion during 2003 as a result of future scheduled maturities of existing securitization transactions when the trusts use principal payments to pay the investors rather than purchasing new loan principal receivables from the Corporation. This amount is based upon the estimated maturity of outstanding securitization transactions and does not anticipate future securitizati on activity.
Table 17 presents the Corporation’s securitized loans distribution.
Table 17: Securitized Loans Distribution
(dollars in thousands) (unaudited)
| | | June 30, | December 31, |
| | | 2003 | 2002 |
| | |
| |
| |
| Securitized Loans | | | | | | | |
| Domestic: | | | | | | | |
| Credit card | | $ | 65,422,788 | | $ | 63,886,876 | |
| Other consumer | | | 5,674,332 | | | 5,677,908 | |
| | |
| |
| |
| Total domestic securitized loans | | | 71,097,120 | | | 69,564,784 | |
| Foreign: | | | | | | | |
| Credit card | | | 10,123,695 | | | 8,966,550 | |
| | |
| |
| |
| Total securitized loans | | $ | 81,220,815 | | $ | 78,531,334 | |
| | |
| |
| |
Distribution of principal to investors may begin sooner if the average annualized yield (generally including interest income, interchange income, charged-off loan recoveries, and other fees) for three consecutive months drops below a minimum yield (generally equal to the sum of the interest rate payable to investors, contractual servicing fees, and principal credit losses during the period) or certain other events occur.
Table 18 presents summarized yields for each trust for the three month period ended June 30, 2003. The yield in excess of minimum yield for each of the trusts is presented on a cash basis and includes various credit card or other fees as specified in the securitization agreements. If the yield in excess of minimum falls below 0%, for a contractually specified period, generally a three-month average, the securitizations will begin to amortize earlier than their scheduled contractual maturity date.
Table 18: Securitization Trust Yields in Excess of Minimum Yield Data (a)
(dollars in thousands) (unaudited)
| | | | For the Three Months Ended June 30, 2003 |
| | |
|
| | | | | | | | Yield in Excess of Minimum Yield (a)
|
| | | | | | | | | | Series Range |
| | Investor Principal | Number of Series in Trust | Average Annualized Yield | | Average Minimum Yield | | Weighted Average | |
High Low |
|
| |
| MBNA Master Credit Card Trust II | $34,309,757 | 47 | 17.30 | % | 9.78 | % | 7.52 | % | 7.88 | % | 4.20 | % |
| UK Receivables Trust | 3,788,596 | 8 | 19.46 | | 11.31 | | 8.16 | | 9.00 | | 5.71 | |
| Gloucester Credit Card Trust | 2,447,874 | 9 | 19.66 | | 10.56 | | 9.10 | | 9.74 | | 7.92 | |
| MBNA Master Consumer | | | | | | | | | | | | |
| Loan Trust | 5,560,278 | 3 | (b) | | (b) | | (b) | | (b) | | (b) | |
| MBNA Triple A Master Trust | 2,000,000 | 2 | 17.70 | | 9.77 | | 7.93 | | 7.94 | | 7.93 | |
| MBNA Credit Card Master | | | | | | | | | | | | |
| Note Trust (c) | 27,344,785 | 50 | 17.35 | | 9.69 | | 7.66 | | 7.66 | | 7.66 | |
| UK Receivables Trust II | 3,707,120 | 5 | 17.92 | | 10.82 | | 7.11 | | 7.20 | | 6.84 | |
| Multiple Asset Note Trust | 500,000 | 1 | 17.77 | | 9.44 | | 8.33 | | 8.33 | | 8.33 | |
| | | | | | | | | | | | | |
| (a) The Yield in Excess of Minimum Yield represents the trust’s average annualized yield less its average minimum yield. |
(b) The MBNA Master Consumer Loan Trust yield in excess of minimum yield does not impact the distribution of principalto investors. Distribution to investors for transactions in this trust may begin earlier than the scheduled time if thecreditenhancement amount falls below a predetermined contractual level. As a result, its yields are excluded fromTable 18. |
(c) MBNA Credit Card Master Note Trust issues a series of notes called the MBNAseries. Through the MBNAseries, MBNACredit Card Master Note Trust issues specific classes of notes which contribute on a prorated basis to the calculationof the average yield in excess of minimum yield. This average yield in excess of minimum yield impacts thedistribution of principal to investors of all classes within the MBNAseries. |
The Corporation seeks to maintain prudent levels of liquidity, interest rate, and foreign currency exchange rate risk.
Liquidity management is the process by which the Corporation manages the use and availability of various funding sources to meet its current and future operating needs. These needs change as loans grow, securitizations mature, debt and deposits mature, and payments on other obligations are made. Because the characteristics of the Corporation’s assets and liabilities change, liquidity management is a dynamic process, affected by the pricing and maturity of investment securities, loans, deposits, securitizations, and other assets and liabilities. Table 19 provides a summary of the Corporation’s estimated liquidity requirements at June 30, 2003.
Table 19: Summary of Estimated Liquidity Requirements
(dollars in thousands) (unaudited)
| | | | | | |
| | | Estimated Liquidity Requirements |
| | | at June 30, 2003 |
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|
| | | Within 1 Year | 1-3 Years | 3-5 Years | Over 5 Years | Total |
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| Deposits | | $ | 20,026,565 | | $ | 9,203,950 | | $ | 3,913,987 | | $ | 8,037 | | $ | 33,152,539 | |
| Short-term borrowings | | | 1,237,378 | | | - | | | - | | | - | | | 1,237,378 | |
| Long-term debt and bank notes (par value) | | | 1,438,372 | | | 2,513,464 | | | 2,560,067 | | | 3,394,122 | | | 9,906,025 | |
| Securitized loans (investor principal) | | | 9,006,723 | | | 24,303,193 | | | 30,368,789 | | | 15,979,705 | | | 79,658,410 | |
Minimum rental payments under noncancelable operating leases | | | 24,707 | | | 27,407 | | | 3,062 | | | 80 | | | 55,256 | |
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| Total estimated liquidity requirements | | $ | 31,733,745 | | $ | 36,048,014 | | $ | 36,845,905 | | $ | 19,381,944 | | $ | 124,009,608 | |
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The Corporation estimates that it will have $31.7 billion in liquidity requirements within the next year. These requirements include $20.0 billion in deposits that will mature and $9.0 billion related to certain securitization transactions that will enter their scheduled maturity period. Based on past activity, the Corporation expects to retain a majority of its deposit balances as they mature. Therefore, the Corporation anticipates the net cash outflow related to deposits within the next year will be significantly less than reported above.
At June 30, 2003, the Corporation funded 73.5% of its managed loans through securitization transactions. To maintain an appropriate funding level, the Corporation expects to securitize additional loan principal receivables during the remainder of 2003. The consumer asset-backed securitization market in the United States exceeded $1.5 trillion at June 30, 2003, with approximately $213 billion of asset-backed securities issued during the six months ended June 30, 2003. An additional $99 billion of consumer asset-backed securities were issued in European markets during the six months ended June 30, 2003. The Corporation is a leading issuer in these markets, which have remained stable through adverse conditions. Despite the size and relative stability of these markets and the Corporation’s position as a leading issuer, if these markets experience difficulties, the Corporation may be unable to securitize its loan principal receivables or to do so at favorable pricing levels. Factors affecting the Corporation's ability to securitize its loan principal receivables or to do so at favorable pricing levels include the overall credit quality of the Corporation’s loans, the stability of the market for securitization transactions, and the legal, regulatory, accounting, and tax environments impacting securitization transactions. The Corporation does not believe adverse outcomes from these events are likely to occur. If the Corporation were unable to continue to securitize its loan receivables at current levels, the Corporation would use its investment securities and money market instruments in addition to alternative funding sources to fund increases in loan receivables and meet its other liquidity needs. The resulting change in the Corporation’s current liquidity sources could potentially subject the Corporation to certain risks. These risks would include an increase in the Corporation’s cost of funds, increases in the reserve for possible credit losses and the provision for possible credit losses as more loans would remain on the Corporation’s consolidated statements of financial condition, and restrictions on loan growth if the Corporation were unable to find alternative and cost-effective funding sources.
In addition, if the Corporation could not continue to remove the loan principal receivables from the Corporation’s statements of financial condition, the Corporation would likely need to raise additional capital to support loan and asset growth, and meet the regulatory capital requirements.
To the extent stock options are exercised or restricted shares are awarded from time to time under the Corporation's Long Term Incentive Plans, the Board of Directors has approved the purchase, on the open market or in privately negotiated transactions, of the number of common shares issued.
During the six months ended June 30, 2003, the Corporation issued 18.3 million common shares upon the exercise of stock options and issuance of restricted stock, and purchased 18.3 million common shares for $356.3 million. The Corporation received $139.4 million in proceeds from the exercise of stock options for the six months ended June 30, 2003. During the three months ended June 30, 2003, the Corporation experienced a high volume of stock option exercises. This increase in volume was primarily related to the increase in the Corporation’s stock price.
To facilitate liquidity management, the Corporation uses a variety of funding sources to establish a maturity pattern that provides a prudent mixture of short-term and long-term funds. The Corporation obtains funds through deposits and debt issuances, and uses securitization of the Corporation's loan principal receivables as a major funding alternative. In addition, further liquidity is provided to the Corporation through committed credit facilities.
Total deposits increased $2.5 billion or 8.3% to $33.2 billion at June 30, 2003, as compared to $30.6 billion at December 31, 2002. The Corporation utilizes deposits to fund loan and other asset growth and to diversify funding sources. Total deposits increased as a result of increased consumer demand for deposit products and attractive pricing relative to other investment opportunities.
Table 20 provides the maturities of the Corporation's deposits at June 30, 2003.
Table 20: Maturities of Deposits at June 30, 2003
(dollars in thousands) (unaudited)
| | | Direct Deposits | Other Deposits | Total Deposits |
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| One year or less | | $ | 16,693,128 | | $ | 3,333,437 | | $ | 20,026,565 | |
| Over one year through two years | | | 3,767,165 | | | 1,987,169 | | | 5,754,334 | |
| Over two years through three years | | | 1,897,919 | | | 1,551,697 | | | 3,449,616 | |
| Over three years through four years | | | 1,075,525 | | | 969,424 | | | 2,044,949 | |
| Over four years through five years | | | 1,270,169 | | | 598,869 | | | 1,869,038 | |
| Over five years | | | 8,037 | | | - | | | 8,037 | |
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| Total deposits | | $ | 24,711,943 | | $ | 8,440,596 | | $ | 33,152,539 | |
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Direct deposits are deposits marketed to and received from individual Customers without the use of a third-party intermediary. Included in the Corporation’s direct deposits at June 30, 2003, and December 31, 2002, were noninterest-bearing deposits of $2.3 billion and $915.7 million, representing 6.9% and 3.0% of total deposits, respectively. The increase in noninterest-bearing deposits was a result of the change in the timing of the remittance of principal collections on securitized loans to the trust. Since the second quarter of 2003, the Corporation is no longer obligated to transfer principal collections on the Corporation’s primary domestic credit card trust on a daily basis. These funds are now retained on behalf of the trust with the Corporation until remittan ce on a montly basis.
Other deposits are deposits generally obtained through the use of a third-party intermediary. Included in the Corporation’s other deposits at June 30, 2003, and December 31, 2002, were brokered deposits of $7.9 billion and $8.3 billion, representing 23.9% and 27.1% of total deposits, respectively. If these brokered deposits were not renewed at maturity, the Corporation would use its investment securities and money market instruments in addition to alternative funding sources to fund increases in its loan receivables and meet its other liquidity needs. The Federal Deposit Insurance Corporation Improvement Act of 1991 limits the use of brokered deposits to “well-capitalized” insured depository institutions and, with a waiver from the Federal Deposit Insurance Corporation, to “adequa tely capitalized” institutions. At June 30, 2003, the Bank and MBNA Delaware were “well-capitalized” as defined under the federal bank regulatory guidelines. Based on the Corporation’s historical access to the brokered deposit market, it expects to replace maturing brokered deposits with new brokered deposits or with the Corporation’s direct deposits.
The Corporation held $3.8 billion in investment securities and $8.0 billion of money market instruments at June 30, 2003, compared to $4.1 billion in investment securities and $5.3 billion in money market instruments at December 31, 2002. The investment securities primarily consist of high-quality, AAA-rated securities, most of which can be used as collateral under repurchase agreements. Of the investment securities at June 30, 2003, $1.7 billion are anticipated to mature within 12 months. The Corporation's investment securities available-for-sale portfolio, which consists primarily of U.S. Treasury obligations or short-term and variable-rate securities, was $3.4 billion at June 30, 2003, and $3.7 billion at December 31, 2002. These investment securities, along with the money market instruments, prov ide increased liquidity and flexibility to support the Corporation's funding requirements. Money market instruments increased at June 30, 2003, from December 31, 2002, to provide liquidity to support portfolio acquisition activity and anticipated loan growth. Also, during the six months ended June 30, 2003, the Corporation increased its liquidity position in anticipation of possible market disruptions due to uncertainty created by world events and capital market conditions. Estimated maturities of the Corporation’s investment securities are presented in Table 21.
Table 21: Summary of Investment Securities at June 30, 2003(dollars in thousands) (unaudited)
| | | Estimated Maturity
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| | | | Within 1 Year | | | 1-5 Years | | | 6-10 Years | | | Over 10 Years | | | Total | | | Amortized Cost | | | Market Value |
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| Available-for-Sale | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies obligations | | $ | 1,026,652 | | $ | 692,475 | | $ | - | | $ | - | | $ | 1,719,127 | | $ | 1,703,306 | | $ | 1,719,127 |
| State and political subdivisions of the United States | | | 103,785 | | | - | | | - | | | - | | | 103,785 | | | 103,785 | | | 103,785 |
| Asset-backed and other Securities | | | 610,806 | | | 957,145 | | | 26,919 | | | 1,118 | | | 1,595,988 | | | 1,588,267 | | | 1595,988 |
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| Total investment securities available-for-sale | | $ | 1,741,243 | | $ | 1,649,620 | | $ | 26,919 | | $ | 1,118 | | $ | 3,418,900 | | $ | 3,395,358 | | $ | 3,418,900 |
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| Held-to-Maturity | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies obligations | | $ | - | | $ | - | | $ | - | | $ | 367,869 | | $ | 367,869 | | $ | 367,869 | | $ | 380,412 |
| State and political subdivisions of the United States | | | - | | | 150 | | | 649 | | | 6,185 | | | 6,984 | | | 6,984 | | | 7,177 |
| Asset-backed and other Securities | | | 1,000 | | | 1,000 | | | - | | | 9,247 | | | 11,247 | | | 11,247 | | | 11,389 |
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| Total investment securities available-for-sale | | $ | 1,000 | | $ | 1,150 | | $ | 649 | | $ | 383,301 | | $ | 386,100 | | $ | 386,100 | | $ | 398,978 |
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Interest rate sensitivity refers to the change in earnings resulting from fluctuations in interest rates, variability in the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, and the differences in repricing intervals between assets and liabilities. Interest rate changes also impact the estimated value of the interest-only strip receivable and other-interest earning assets, and securitization income. The management of interest rate sensitivity attempts to maximize earnings by minimizing any negative impacts of changing market rates, asset and liability mix, and prepayment trends. Interest rate sensitive assets/liabilities have yields/rates that can change within a designated time period as a result of their maturity, a change in an underlying index rate, or th e contractual ability of the Corporation to change the yield/rate.
Interest rate risk refers to potential changes in current and future net interest income resulting from changes in interest rates and differences in the repricing characteristics between interest rate sensitive assets and liabilities. The Corporation analyzes its level of interest rate risk using several analytical techniques. In addition to on-balance-sheet activities, interest rate risk includes the interest rate sensitivity of securitization income from securitized loans and the impact of interest rate swap agreements and foreign exchange swap agreements. The Corporation uses interest rate swap agreements and foreign exchange swap agreements to change a portion of fixed-rate funding sources to floating-rate funding sources to better match the rate sensitivity of the Corporation's assets. For this reason, the Corporation analyzes its level of interest rate risk on a managed basis to quantify and capture the full impact of interest rate risk on the Corporation's earnings.
An analytical technique that the Corporation uses to measure interest rate risk is simulation analysis. Assumptions in the Corporation's simulation analysis include cash flows and maturities of interest rate sensitive instruments, changes in market conditions, loan volumes and pricing, consumer preferences, fixed-rate credit card repricings as part of the Corporation's normal planned business strategy, and management's capital plans. The analysis also assumes that there is no impact on an annual basis in the value of the interest-only strip receivable. Also included in the analysis are various actions which the Corporation would likely undertake to minimize the impact of adverse movements in interest rates. Based on the simulation analysis at June 30, 2003, the Corporation could experience a decrease in projected net income during the next 12 months of approximately $58 million, if interest rates at the time the simulation analysis was performed increased 100 basis points over the next 12 months evenly distributed on the first day of each of the next four quarters. For each incremental 100 basis points introduced into the simulation analysis, the Corporation could experience an additional decrease of approximately $58 million in projected net income during the next 12 months.
These assumptions are inherently uncertain and, as a result, the analysis cannot precisely predict the impact of higher interest rates on net income. Actual results would differ from simulated results as a result of timing, magnitude, and frequency of interest rate changes, changes in market conditions, and management strategies to offset the Corporation's potential exposure, among other factors. The Corporation has the contractual right to reprice fixed-rate credit card loans at any time by giving notice to the Customer. Accordingly, a key assumption in the simulation analysis is the repricing of fixed-rate credit card loans in response to an upward movement in interest rates, with a lag of approximately 45 days between interest rate movements and fixed-rate credit card loan repricings. The Corporat ion has repriced its fixed-rate credit card loans on numerous occasions in the past; its ability to do so in the future will depend on changes in interest rates, market conditions, and other factors.
Foreign currency exchange rate risk refers to the potential changes in current and future earnings or capital arising from movements in foreign exchange rates and occurs as a result of cross-currency investment and funding activities. The Corporation's foreign currency exchange rate risk is limited to the Corporation's net investment in its foreign subsidiaries which is unhedged. The Corporation uses forward exchange contracts and foreign exchange swap agreements to reduce its exposure to foreign currency exchange rate risk. Management reviews the foreign currency exchange rate risk of the Corporation on a routine basis. During this review, management considers the net impact to stockholders' equity under various foreign exchange rate scenarios. At June 30, 2003, the Corporation could experience a de crease in stockholders' equity, net of tax, of approximately $163 million, as a result of a 10% depreciation of the Corporation's unhedged capital exposure in foreign subsidiaries to the U.S. dollar position.
Interchange Income
Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network as compensation for risk, grace period, and other operating costs. The U.K. Office of Fair Trading issued its preliminary conclusions arising out of the Notice under Rule 14 of the Competition Act 1998, against MasterCard U.K. Members Forum; the conclusions find that the interchange fee paid by merchant acquirers to card issuers in the U.K. is anti-competitive, and that the agreement between MasterCard’s U.K. members for interchange leads to an unjustifiably high fee being paid to card issuing banks. The Corporation cannot predict when, and if, the legislation will be passed and does not expect the impact to be material in 2003. Any potential impact could also vary based on business strat egies or other actions the Corporation will take to attempt to limit the impact.
Basel Committee
In April 2003, the Basel Committee on Banking Supervision (the “Committee”) issued a consultative document for public comment, “The New Basel Capital Accord,” which proposes significant revisions to the current Basel Capital Accord. The proposed new accord would establish a three-part framework for capital adequacy that would include: (1) minimum capital requirements; (2) supervisory review of an institution’s capital adequacy and internal assessment process; and (3) market discipline through effective disclosures regarding capital adequacy.
The first part of the proposal would create options for a bank to use when determining its capital charge. The option selected by each bank would depend on the complexity of the bank’s business and the quality of its risk management. The proposed standardized approach would refine the current measurement framework and introduce the use of external credit assessments to determine a bank’s capital charge. Banks with more advanced risk management capabilities could make use of an internal risk-rating based approach (the “IRB Approach”). Under the IRB Approach, a bank could use its internal estimates to determine certain elements of credit risk, such as the loss that a borrower’s default would cause and the probability of a borrower’s default. The Committee is also proposing an explicit capital charge for operational risk to provide for risks created by processes, systems, or people, such as internal systems failure or fraud.
The second part of the proposal would establish new supervisory review requirements for capital adequacy and would seek to ensure that a bank’s capital position is consistent with its overall risk profile and strategy. The proposed supervisory review process would also encourage early supervisory intervention when a bank’s capital position deteriorates.
The third aspect of the proposal, market discipline, would require detailed disclosure of a bank’s capital adequacy to enhance the role of market participants in encouraging banks to hold adequate capital. Each bank would also be required to disclose how it evaluates its own capital adequacy.
In August 2003, an advance notice of proposed rulemaking was published by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (collectively “the Agencies”). The advance notice of proposed rulemaking was titled “Risk-Based Capital Guidelines; Implementation of New Basel Capital Accord; Internal Ratings-Based Systems for Corporate Credit and Operational Risk Advanced Measurement Approaches for Regulatory Capital; Proposed Rule and Notice” (“Proposed Regulatory Guidance”). The Proposed Regulatory Guidance sets forth for industry comment the Agencies views on a proposed framework for implementing the New Basel Capital Accord in the United States. In particular, this Proposed Regulatory Guidance describes significant elements of the Advanced Internal Ratings-Based app roach for credit risk and the Advanced Measurement Approaches for operation risk. The Agencies believe that the advance risk and capital measurement methodologies of the New Accord are the most appropriate approaches for large, internationally active banking organizations. Institutions subject to the advanced approaches on a mandatory basis would be those with total banking assets of $250 billion or more or total on-balance-sheet foreign exposure of $10 billion or more. Under the proposed rule, the Corporation would fall under the advance risk and capital measurement methodologies.
It is not clear as of this date whether and in what manner the proposed new accord will be adopted by U.S. bank regulators with respect to banking organizations that they supervise and regulate. Adoption of the proposed new accord could require U.S. banking organizations to increase their capital, due in part to the new capital requirement for operational risk.
Future changes in laws and regulations and in policies applied by banking or other regulators also could affect the Corporation’s financial condition and results of operations in future periods.
From time to time the Corporation may make forward-looking oral or written statements concerning the Corporation’s future performance. Such statements are subject to risks and uncertainties that may cause the Corporation’s actual performance to differ materially from that set forth in such forward-looking statements. Words such as “believe”, “expect”, “anticipate”, “intend” or similar expressions are intended to identify forward-looking statements. Such statements speak only as of the date on which they are made. The Corporation undertakes no obligation to update publicly or revise any such statements. Factors which could cause the Corporation’s actual financial and other results to differ materially from those projected by the Corporation in forward-looking statements include, but are not limited to, the following:
Legal And Regulatory
The banking and consumer credit industry is subject to extensive regulation and examination. Changes in federal and state laws and regulations affecting banking, consumer credit, bankruptcy, privacy, consumer protection or other matters could materially impact the Corporation’s performance. In recent years, changes in policies and regulatory guidance issued by banking regulators, and affecting credit card and consumer lending in particular, have had a significant impact on the Corporation and are likely to continue to do so in the future. The Corporation cannot predict the impact of these changes. The impact of changes in bank regulatory guidance is particularly difficult to assess as the guidance in recent years has provided, and is likely to continue to provide, considerable discretion to bank regulators in interpreting how the guidance should be applied generally or to particular lenders. In addition, the Corp oration could incur unanticipated litigation or compliance costs. See “Regulatory Matters” and “Legal Proceedings” for further discussion.
Competition
The Corporation’s business is highly competitive. Competition from other lenders could affect the Corporation’s loans outstanding, Customer retention, and the rates and fees charged on the Corporation’s loans.
Economic Conditions
The Corporation’s business is affected by general economic conditions beyond the Corporation’s control, including employment levels, consumer confidence and interest rates. A recession or slowdown in the economy of the U.S. or in other markets in which the Corporation does business may cause an increase in delinquencies and credit losses and reduce new account and loan growth and charge volume.
Delinquencies And Credit Losses
An increase in delinquencies and credit losses could affect the Corporation’s financial performance. Delinquencies and credit losses are influenced by a number of factors, including the credit quality of the Corporation’s credit card and other consumer loans, the composition of the Corporation’s loans between credit card and other consumer loans, general economic conditions, the success of the Corporation’s collection efforts and the seasoning of the Corporation’s accounts. See “Loan Quality” for a discussion of the Corporation’s delinquencies and credit losses.
Interest Rate Increases
An increase in interest rates could increase the Corporation’s cost of funds and reduce its net interest margin. The Corporation’s ability to manage the risk of interest rate increases in the U.S. and other markets is dependent on its overall product and funding mix and its ability to successfully reprice outstanding loans. See “Interest Rate Sensitivity” for a discussion of the Corporation’s efforts to manage interest rate risk.
Availability Of Funding And Securitization
Changes in the amount, type, and cost of funding available to the Corporation could affect the Corporation’s performance. A major funding alternative for the Corporation is the securitization of credit card and other consumer loans. Difficulties or delays in securitizing loans or changes in the current legal, regulatory, accounting, and tax environment governing securitizations could adversely affect the Corporation. See “Liquidity Risk” for a discussion of the Corporation’s liquidity.
Customer Behavior
The acceptance and use of credit card and other consumer loan products for consumer spending has increased significantly in recent years. The Corporation’s performance could be affected by changes in such acceptance and use, and overall consumer spending, as well as different acceptance and use in international markets.
New Products And Markets
The Corporation’s performance could be affected by difficulties or delays in the development of new products or services, including products or services other than credit card and other consumer loans, and in the expansion into new international markets. These may include the failure of Customers to accept products or services when planned, losses associated with the testing of new products, services or markets, or financial, legal or other difficulties that may arise in the course of such implementation. In addition, the Corporation could face competition with new products or services or in new markets, which may affect the success of such efforts.
Growth
The growth of the Corporation’s existing business and the development of new products and services will be dependent upon the ability of the Corporation to continue to develop the necessary operations, systems, and technology, hire qualified people, obtain funding for significant capital investments and selectively pursue loan portfolio acquisitions.
The Corporation's management (including the Chief Executive Officer and the Chief Financial Officer) conducted an evaluation of the Corporation's disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the last day of the period covered by this report as required by Rule 13a-15(b) under the Exchange Act. Based on such evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded as of the last day of the period covered by this report that the Corporation's disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in the Corporation's reports filed or submitted under the Exchange Act, particularly during the period in which this quarterly report was being prepared.
There was no change in the Corporation's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
PART II – OTHER INFORMATION
Broder v. MBNA America Bank, N.A.
In October 1998, Gerald D. Broder filed a lawsuit against the Corporation and the Bank in the Supreme Court of New York, County of New York. This suit is a purported class action. The plaintiff alleges that the Bank's advertising of its cash promotional annual percentage rate program was fraudulent and deceptive. The plaintiff seeks unspecified damages including actual, treble and punitive damages and attorneys' fees for an alleged breach of contract, common law fraud and violation of New York consumer protection statutes. In April 2000, summary judgment was granted to the Corporation and the Bank on the common law fraud claim and a class was certified by the Court. In November 2001, the court gave pre liminary approval to the settlement of this suit for an estimated $18.0 million, including fees and costs. In July 2003 the court entered a final order approving the settlement. The Corporation expects that one or more objectors will appeal the order. The Corporation has reserved $19.5 million for the settlement amount and the costs of implementing the settlement. The reserve is included in accrued expenses and other liabilities in the Corporation’s Consolidated Statement of Financial Condition at June 30, 2003.
Foreign Currency Conversion Fees Litigation.
MasterCard and Visa charge credit and debit cardholders a 1% fee on transactions in foreign currencies for conversion of the foreign currency into US dollars. They require the Corporation’s banking subsidiaries and other member banks to disclose the fee in their cardholder agreements and to bill and collect the fee from cardholders. InSchwartz v. Visa and MasterCard, filed in February 2000 in the California Superior Court, the plaintiff claims that the 1% fee is not adequately disclosed under federal and California law. The trial court issued a decision holding that the federal disclosure requirement is not applicable but that the failure to disclose the fee on each statement that includ es a fee is unfair under California law. The court intends to hold a hearing on restitution of the fees to cardholders. Visa and MasterCard have announced their intention to appeal the final decision. The Corporation is not a party to theSchwartzcase and should have no direct potential liability in that matter. However, a large monetary judgment against MasterCard or Visa could indirectly affect the Corporation and other issuers. The plaintiffs or MasterCard and Visa or their creditors may seek to assess or otherwise assert claims against members of MasterCard and Visa, including the Corporation's banking subsidiaries, to satisfy the judgment. Even if no claim is asserted against member banks, the impact of a judgment against MasterCard and Visa could adversely affect the business of the Corporatio n's banking subsidiaries. The Corporation cannot determine at this time the outcome of this matter, the amount of any possible judgments against MasterCard and Visa, or the likelihood, amount or validity of any claims against the member banks resulting from these suits.
Unlike most other issuers, in the United States the Corporation’s banking subsidiaries do not charge a foreign currency conversion fee in addition to the fee charged by MasterCard and Visa. A number of other class actions are pending against other issuers claiming that these additional foreign currency conversion fees are not properly disclosed by those issuers as finance charges on the cardholder statement under Regulation Z. The Corporation is not a party to these suits.
The Corporation is one of many card issuers who are defendants inIn Re Currency Conversion Fee Antitrust Litigationfiled in January 2002 in the US District Court for the Southern District of New York. The plaintiffs, none of whom are the Corporation’s Customers, claim that the defendants conspired in violation of the antitrust laws to charge foreign currency conversion fees and to conceal the fees by not disclosing them on cardholder statements, in violation of the Truth-in-Lending Act. The plaintiffs claim that the bank defendants and MasterCard and Visa conspired to charge the 1% foreign currency conversion fee assessed by MasterCard and Visa. The court recently granted a motion to dis miss certain Truth-in-Lending Act claims against the Corporation and other defendants, but denied a motion to dismiss the antitrust claims against the defendants. The Corporation intends to file a motion for summary judgment after discovery. The Corporation intends to defend this matter vigorously and believes that it should prevail.
The Corporation, the Bank and their affiliates are commonly subject to various pending or threatened legal proceedings, including certain class actions, arising out of the normal course of business. In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual outcome of these matters will be. However, the Corporation believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the Corporation's consolidated financial condition or results of operations.
Change of Control Severance Agreements
Change of control severance agreements are in effect between the Corporation and 20 senior executives of the Corporation. A “change of control” is defined to include an acquisition of 40% or more of the Corporation’s common stock, certain changes in a majority of the Board of Directors, certain reorganizations or mergers, and other events, all as further defined in the agreements.
Under the terms of these agreements, if an executive’s employment is terminated within the three-year period following a change of control, or within 12 months prior to a change of control and in connection with a change of control, and such termination is by the Corporation other than for “cause” or by the executive for “good reason” (each as defined in the related agreements), or, for the Corporation's Corporate Policy Committee (top 6 executives) the executive terminates his employment for any reason in the 30 day period beginning one year after a change of control, the executive will be entitled to receive a pro rata portion of the executive’s bonus, a lump sum cash payment equal to three, two or one and one-half times (depending on the executive's level with the Corporation) the sum of salary and bonus, and certain other benefits, all as further defined and detailed in the related ag reements. The agreements also provide for a full tax “gross up” to cover any “excess parachute payment” taxes imposed on the executive as a result of a change of control.
In addition, if such senior executive's employment is terminated at any time following a change of control, or within 12 months prior to a change of control and in connection with a change of control, for the reasons described above, then the executive will receive an annual retirement benefit under the Corporation's Supplemental Executive Retirement Plan (“SERP”) ranging from 40% to 80% of salary, depending on the executive's age and level, all as further detailed in the SERP (absent a change of control, the SERP generally only provides a retirement benefit for retirement at or after age 60, or as late as age 65 if the executive does not have 10 years of service with the Corporation).
The change of control severance agreements and the revised SERP are filed as exhibits to this Form 10-Q.
a. Exhibits
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| b. Reports on Form 8-K |
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1. Report dated April 10, 2003, reporting the securitization of $750.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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| 2. Report dated April 23, 2003, reporting MBNA Corporation’s earnings release for the first quarter of 2003. |
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3. Report dated April 30, 2003, reporting the net credit losses and loan delinquency ratios for MBNA Corporation, for its loan receivables and managed loans for April 2003. |
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4. Report dated May 7, 2003, reporting the securitization of CAD$350.0 million of credit card loan receivables by MBNA Canada Bank. |
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5. Report dated May 8, 2003, reporting the securitization of $175.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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6. Report dated May 21, 2003, reporting the securitization of EUR500.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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7. Report dated May 31, 2003, reporting the net credit losses and loan delinquency ratios for MBNA Corporation, for its loan receivables and managed loans for May 2003. |
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8. Report dated June 4, 2003, reporting the securitization of $500.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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9. Report dated June 12, 2003, reporting the securitization of $200.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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10. Report dated June 30, 2003, reporting the net credit losses and loan delinquency ratios for MBNA Corporation, for its loan receivables and managed loans for June 2003. |
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11. Report dated July 2, 2003, reporting the securitization of $100.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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12. Report dated July 23, 2003, reporting the securitization of 250.0 million pounds sterling of credit card loan receivables MBNA Europe Bank Limited. |
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| 13. Report dated July 24, 2003, reporting MBNA Corporation’s earnings release for the second quarter of 2003. |
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14. Report dated July 30, 2003, reporting the securitization of $250.0 million of credit card loan receivables by MBNA America Bank, N.A. |
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15. Report dated August 5, 2003, reporting the securitization of $650.0 million of credit card loan receivables by MBNA America Bank, N.A. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | MBNA Corporation |
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| Date: August 13, 2003 | /s/ | Vernon H.C. Wright |
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Vernon H.C. Wright |
| | Chief Financial Officer |
