MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited)
This discussion is intended to further the reader’s understanding of the consolidated financial statements, financial condition, and results of operations of MBNA Corporation. It should be read in conjunction with the consolidated financial statements, notes, and tables included in this report. For purposes of comparability, certain prior period amounts have been reclassified.
| | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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MBNA Corporation (“the Corporation”), a bank holding company located in Wilmington, Delaware, is the parent company of MBNA America Bank, N.A. (“the Bank”), a national bank and the Corporation’s principal subsidiary. The Bank has two wholly owned foreign bank subsidiaries, MBNA Europe Bank Limited (“MBNA Europe”) located in the United Kingdom (U.K.) and MBNA Canada Bank (“MBNA Canada”) located in Canada. The Corporation’s primary business is providing its Customers the ability to have what they need today and pay for it out of future income by lending money through credit card and other consumer loans. Through the Bank, the Corporation is the largest independent credit card lender in the world and is the leading issuer of credit cards through endorsed marketing. In addition to its credit card lending, the Corporation also makes other consumer loans, which in clude installment and revolving unsecured loan products, and offers insurance and deposit products. The Corporation is also the parent of MBNA America (Delaware), N.A. (“MBNA Delaware”), a national bank, which offers business card products, mortgage loans, aircraft loans, other commercial loans, and other specialty lending products. Mortgage loans, aircraft loans, other commercial loans, and other specialty lending products are included in other consumer loan receivables, and business card products are included in credit card loan receivables in the Corporation’s consolidated statements of financial condition.
The Corporation seeks to achieve its net income and other objectives primarily by attempting to grow loans to generate related interest and other operating income, while controlling loan losses and expense growth. It grows loans through adding new accounts and stimulating usage of existing accounts as well as portfolio and other business acquisitions. The Corporation generates income through finance charges assessed on outstanding loan receivables, securitization income, interchange income, credit card and other consumer loan fees, insurance income, interest earned on investment securities and money market instruments and other interest-earning assets. The Corporation’s primary costs are the costs of funding and growing its loan receivables, investment securities, and other assets, which include interest paid on deposits, short-term borrowings and long-term debt and bank notes, credit losses, busi ness development and operating expenses, royalties to endorsing organizations, and income taxes.
The Corporation obtains funds to make loans to its Customers primarily through the process of asset securitization, raising deposits, and the issuance of short-term and long-term debt and bank notes. Asset securitization removes loan principal receivables from the consolidated statements of financial condition through the sale of loan principal receivables to a trust. The trust sells securities backed by those loan principal receivables to investors. The trusts are independent of the Corporation, and the Corporation has no control over the trusts. The trusts are not subsidiaries of the Corporation and are excluded from the Corporation’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
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 securitization, the loan principal receivables are sold to the trust, but the account relationships are not sold . 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. Asset securitization has a significant effect on the Corporation’s consolidated financial statements. The impact is discussed under “Off-Balance Sheet Arrangements—Impact of Off-Balance Sheet Securitization Transactions on the Corporation’s Results.” Securitization income is the most significant revenue item and is discussed under “Total Other Operating Income.” Whenever managed data is included in this report, a reconciliation of the managed data to the most directly comparable financial measure presented in accordance with GAAP is provided.
Recent Developments:
• The Corporation grew loan receivables by $2.7 billion to $30.1 billion, and grew managed loans by $11.5 billion to $117.6 billion, through marketing programs and portfolio and business acquisitions as compared to the first quarter of 2003. MBNA Europe acquired $1.6 billion of commercial and consumer loan receivables through the acquisition of Premium Credit Limited (“PCL”). MBNA Delaware acquired $893.0 million of (commercial) loan receivables through the acquisition of Sky Financial Solutions, Inc. (“SFS”). The PCL and SFS acquisitions were not significant to the Corporation’s results of operations for the three months ended March 31, 2004.
• The Corporation added 2.5 million new loan, deposit, and insurance accounts, and 50 new endorsements from organizations, and renewed more than 250 group contracts. The Corporation is endorsed by more than 5,000 affinity groups and financial institutions.
• The Corporation maintained its net interest margin by balancing the interest rates it charges on its loan accounts against the Corporation’s funding costs. The net interest margin was 5.71% and 5.44% for the three months ended March 31, 2004 and 2003, respectively. The managed net interest margin was 8.25% and 8.55% for the three months ended March 31, 2004 and 2003, respectively.
• The Corporation reduced net credit losses to 4.45% and net credit losses on managed loans to 4.99%. Loan quality was affected by general economic conditions, such as levels of unemployment, bankruptcy filings, and the continued seasoning of the Corporation’s loan receivables and managed loans.
• The Corporation increased interest income, interchange income, credit card fee income, and other consumer loan fee income.
• The Corporation continued to securitize loan principal receivables as a source of funding, increasing securitization income.
These items, as well as other factors, contributed to the increase in net income for the three months ended March 31, 2004 to $519.7 million, or $.40 per common share—assuming dilution and are discussed in further detail throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
• In January, the Corporation entered into an agreement with American Express to offer its credit cards under the American Express brand network. The Corporation expects to begin offering the American Express branded cards in late 2004, upon satisfaction of certain conditions contained in the agreement.
• In the second quarter of 2004, the Corporation expects to complete a multi-phase project, which began in 2001, extending the use of the Corporation’s U.S. core Customer information systems to MBNA Europe’s business in the U.K. and Ireland, which are currently dependent on third-party vendors for such information systems. MBNA Canada already uses this system. The project will provide standardization of systems, appropriate infrastructure for “internationalized” technical platforms, and systems enhancements for the MBNA Europe processing environment. The completion of the project includes a significant system conversion for MBNA Europe's loans. Management believes that the conversion will proceed as scheduled and will be completed successfully. The Corporation has implemented control processes, and performed extensive testing on this project. However, as with any significant system conversion, there are inherent risks and uncertainties that could negatively impact the Corporation.
Management’s focus for the remainder of 2004 is discussed in the “Introduction and Overview” section of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.
Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles in the preparation of the Corporation’s consolidated financial statements. The estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. Management has identified the policies related to the accounting for asset securitization, the reserve for possible credit losses, intangible assets and goodwill, and revenue recognition as critical accounting policies which require management to make significant judgments, estimates and assumptions.
Management believes the current assumptions and other considerations used to estimate amounts reflected in the Corporation’s consolidated financial statements are appropriate. However, should actual experience differ from the assumptions and other considerations used in estimating amounts reflected in the Corporation’s consolidated financial statements, the resulting changes could have a material adverse effect on the Corporation’s consolidated results of operations, and in certain situations, could have a material adverse effect on the Corporation’s financial condition.
The development and selection of the critical accounting policies and the related disclosures have been reviewed with the Audit Committee of the Corporation’s Board of Directors.
Asset Securitization
The Corporation uses securitization of its loan principal receivables as one source to meet its funding needs. The Corporation accounts for its securitization transactions in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a Replacement of FASB Statement No. 125” (“Statement No. 140”), issued by the Financial Accounting Standards Board (“FASB”). When the Corporation securitizes loan principal receivables, the Corporation recognizes a gain on sale and retained beneficial interests, including an interest-only strip receivable. The interest-only strip receivable represents the contractual right to receive interest and other revenue less certain costs from the trust over the estimated life of the securitized loan principal receivables. The Corporation’s secu ritization trusts are qualified special-purpose entities as defined by Statement No. 140 that are specifically exempted from the requirements of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation No. 46”).
The Corporation estimates the fair value of the interest-only strip receivable based on the present value of expected future net revenue flows. Since quoted market prices for the interest-only strip receivable are not available, management uses certain assumptions and estimates in determining the fair value of the interest-only strip receivable. These assumptions and estimates include projections concerning interest income, certain fees, recoveries on charged-off securitized loans, gross credit losses on securitized loans, contractual servicing fees, and the interest rate paid to investors in a securitization transaction (“excess spread”). These projections are used to estimate the excess spread to be earned by the Corporation over the estimated life of the securitized loan principal receivables. The other assumptions and estimates used by the Corporation in estimating the fair value of the intere st-only strip receivable include projected loan payment rates, which are used to determine the estimated life of the securitized loan principal receivables, and an appropriate discount rate.
The assumptions and estimates used to estimate the fair value of the interest-only strip receivable at March 31, 2004, reflect management’s judgment as to the expected excess spread to be earned and projected loan payment rates to be experienced on the securitized loans. These estimates are likely to change in the future, as the individual components of the excess spread and projected loan payment rates are sensitive to market and economic conditions. For example, the rates paid to investors in the Corporation’s securitization transactions are primarily variable rates subject to change based on changes in market interest rates. Changes in market interest rates and competitive pressures can also affect the projected interest income on securitized loans, as the Corporation could reprice the managed loan portfolio. Credit loss projections could change in the future based on changes in the credit qual ity of the securitized loans, the Corporation’s account management and collection practices, and general economic conditions. Projected loan payment rates could fluctuate based on general economic conditions and competition. Actual and expected changes in these assumptions may result in future estimates of the excess spread and projected loan payment rates being materially different from the estimates used in the periods covered by this report.
On a quarterly basis, the Corporation reviews prior assumptions and estimates compared to actual trust performance and other factors based on the prior period that approximates the average life of the securitized loan receivables. The actual trust performance results and other factors are compared to the estimates and assumptions used in the determination of the fair value of the interest-only strip receivable. Based on this review and the Corporation’s current assumptions and estimates for future periods, the Corporation adjusts, as appropriate, the assumptions and estimates used in determining the fair value of the interest-only strip receivable. If the assumptions change, or actual results differ from projected results, the interest-only strip receivable and securitization income would be affected. If management had made different assumptions for the periods covered by this report that raised or low ered the excess spread or projected loan payment rates, the Corporation’s financial condition and results of operations could have differed materially. For example, a 20% change in the excess spread assumption for all securitized loan principal receivables could have resulted in a change of approximately $266 million in the value of the total interest-only strip receivable at March 31, 2004, and a related change in securitization income.
Based on quarterly 2003 and 2004 reviews of the interest-only strip receivable, the actual performance of the securitized receivables did not materially differ from the assumptions and estimates used to value the interest-only strip receivable.
“Note F: Asset Securitization” to the consolidated financial statements provides further detail regarding the Corporation’s assumptions and estimates used in determining the fair value of the interest-only strip receivable and their sensitivities to adverse changes.
The Corporation maintains the reserve for possible credit losses at an amount sufficient to absorb losses inherent in the Corporation’s loan principal receivables at the reporting date based on a projection of probable net credit losses. To project probable net credit losses, the Corporation regularly performs a migration analysis of delinquent and current accounts. A migration analysis is a technique used to estimate the likelihood that a loan receivable will progress through the various delinquency stages and ultimately charge off. On a quarterly basis, the Corporation reviews and adjusts, as appropriate, these estimates. The Corporation’s projection of probable net credit losses considers the impact of economic conditions on the borrowers’ ability to repay, past collection experience, the risk characteristics and composition of the portfolio, and other factors. The Corporation then reserve s for the projected probable net credit losses based on its projection of these amounts. The Corporation establishes appropriate levels of the reserve for possible credit losses for its loan products based on their risk characteristics. A provision is charged against earnings to maintain the reserve for possible credit losses at an appropriate level. The Corporation records acquired reserves for current period loan acquisitions.
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 portfolio, 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. If management had made different assumptions about probable net credit losses, the Corporation’s financial condition and results of operations could have differed materially. For example, a 10% change in management’s projection of probable net credit losses could have resulted in a change of approximately $127 million in the reserve for possible credit losses and a related change in the provision for possible credit losses at March 31, 2004.
Based on the 2003 and 2004 reviews of the reserve for possible credit losses, the actual net credit losses did not materially differ from the projections of net credit losses used to establish the reserve for possible credit losses.
“Loan Quality” provides further detail regarding the Corporation’s reserve for possible credit losses.
The Corporation’s intangible assets are primarily comprised of purchased credit card relationships (“PCCRs”). In addition to PCCRs, the Corporation has goodwill and other intangibles, such as purchased other consumer loan relationships. PCCRs are carried at net book value. The Corporation records these intangible assets as part of the acquisition of credit card loans and the corresponding Customer relationships. These intangible assets are amortized over the period the assets are expected to contribute to the cash flows of the Corporation, which reflect the expected pattern of benefit. PCCRs are amortized using an accelerated method based upon the projected cash flows the Corporation will receive from the Customer relationships during the estimated useful lives of the PCCRs.
The Corporation’s PCCRs are subject to impairment tests in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“Statement No. 144”). The Corporation reviews the carrying value of its PCCRs for impairment on a quarterly basis, or sooner, whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable, by comparing their carrying value to the sum of the undiscounted expected future cash flows from the loans and corresponding credit card relationships. In accordance with Statement No. 144, an impairment exists if the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset. An impairment would result in a write-down of the PCCRs to estimated fair value based on the discounted future cash flows expected from the PCCRs. Th e Corporation performs the impairment test on a specific portfolio basis, since it represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets and liabilities.
The Corporation makes certain estimates and assumptions that affect the determination of the expected future cash flows from the loans and corresponding credit card relationships. These estimates and assumptions include levels of account usage and activation, active account attrition, funding costs, credit loss experience, servicing costs, growth in average account balances, interest and fees assessed on loans, and other factors. Significant changes in these estimates and assumptions could result in an impairment of the PCCRs. The estimated undiscounted cash flows of acquired Customer credit card relationships exceeds the $3.0 billion net book value of the Corporation’s PCCRs at March 31, 2004 by approximately $3.9 billion. If the active account attrition rates for all acquired portfolios in the twelve month period following March 31, 2004, were to be 10 percentage points higher than the rates assumed by management when it valued the PCCRs (for example, the assumed attrition rates were 10% but the actual rates were 20%) and all other estimates and assumptions were held constant, the estimated undiscounted cash flows of acquired Customer accounts in the aggregate would still exceed the net book value of acquired Customer accounts by approximately $3.2 billion, and no impairment would result on any individual PCCR.
Goodwill is recorded as part of the Corporation’s acquisitions of businesses where the purchase price exceeds the fair market value of the net tangible and identifiable intangible assets. The Corporation’s goodwill is not amortized, but rather is subject to an annual impairment test in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
There were no impairment write-downs of intangible assets during the three months ended March 31, 2004.
Interest income is recognized based upon the amount of loans outstanding and their contractual annual percentage rates. Interest income is included in loan receivables when billed to the Customer. The Corporation accrues unbilled interest income on a monthly basis from the Customer’s statement billing cycle date to the end of the month. The Corporation uses certain estimates and assumptions (for example, estimated yield) in the determination of the accrued unbilled portion of interest income that is included in accrued income receivable in the Corporation’s consolidated statements of financial condition. The Corporation also uses certain assumptions and estimates in the valuation of the accrued interest on securitized loans which is included in accounts receivable from securitization in the Corporation’s consolidated statements of financial condition. If management had made different assumpti ons about the determination of the accrued unbilled portion of interest income and the valuation of accrued interest on securitized loans, the Corporation’s financial condition and results of operations could have differed materially. For example, a 10% change in management’s projection of the estimated yield on its loan receivables and the valuation of the accrued interest receivable on securitized loans could have resulted in a change totaling approximately $66 million in interest income and other operating income at March 31, 2004.
For the first quarter of 2004, the Corporation’s estimated yield on its loan receivables and the valuation of the accrued interest receivable on securitized loans did not materially differ from the actual yield.
The Corporation also recognizes fees (except annual fees) on loans in earnings as the fees are assessed according to agreements with the Corporation’s Customers. Credit card and other consumer loan fees include annual, late, overlimit, returned check, cash advance, express payment, and other miscellaneous fees. These fees are included in the Corporation’s loan receivables when billed. Annual fees on loan receivables and incremental direct loan origination costs are deferred and amortized on a straight-line basis over the one-year period to which they pertain.
The Corporation adjusts the amount of interest and fee income on loan receivables 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 estimate is also based on a migration analysis of delinquent and current securitized loans t hat will progress through the various delinquency stages and ultimately charge off. On a quarterly basis, the Corporation reviews and adjusts, as appropriate, these estimates.
Based on the 2003 and 2004 reviews of the estimate of uncollectible interest and fees, the actual amount of uncollectible interest and fees did not materially differ from the estimate of uncollectible interest and fees.
If management had made different assumptions about uncollectible interest and fees on its loan receivables and its securitized loans, the Corporation’s financial condition and results of operations could have differed materially. For example, a 10% change in management’s estimate of uncollectible interest and fees could have resulted in a change totaling approximately $37 million in interest income and other operating income at March 31, 2004.
Net income for the three months ended March 31, 2004 increased $87.2 million or 20.2% to $519.7 million or $.40 per common share as compared to $432.5 million or $.33 per common share for the same period in 2003. All earnings per common share amounts are presented assuming dilution.
The overall growth in earnings for the three months ended March 31, 2004 was primarily attributable to the growth in the Corporation’s loan receivables, higher levels of securitized loans, increases in other operating income and interest income combined with decreases in interest expense and the provision for possible credit losses. These items were partially offset by an increase in other operating expense.
Table 1 summarizes the Corporation’s consolidated statements of income, which has been derived from the consolidated financial statements, for the three months ended March 31, 2004 and 2003.
(dollars in thousands, except per share amounts) (unaudited) |
| | | For the Three Months |
| | | Ended March 31,
|
| | | 2004
| 2003
|
| Total interest income | | $ | 1,033,105 | | $ | 944,027 | |
| Total interest expense | | | 365,300 | | | 388,431 | |
| | |
| |
| |
| Net interest income | | | 667,805 | | | 555,596 | |
| Provision for possible credit losses | | | 365,161 | | | 378,877 | |
| | |
| |
| |
| Net interest income after provision for possible credit losses | | | 302,644 | | | 176,719 | |
| | | | | | | | |
| Total other operating income | | | 1,942,532 | | | 1,788,009 | |
| Total other operating expense | | | 1,441,918 | | | 1,287,875 | |
| | |
| |
| |
| Income before income taxes | | | 803,258 | | | 676,853 | |
| Applicable income taxes | | | 283,550 | | | 244,344 | |
| | |
| |
| |
| Net income | | $ | 519,708 | | $ | 432,509 | |
| | |
| |
| |
| Earnings per common share | | $ | .40 | | $ | .34 | |
| Earnings per common share—assuming dilution | | | .40 | | | .33 | |
| Dividends per common share | | | .12 | | | .08 | |
Ending loan receivables increased $2.7 billion or 9.7% to $30.1 billion at March 31, 2004, as compared to $27.4 billion at March 31, 2003. Total managed loans increased $11.5 billion or 10.8% to $117.6 billion at March 31, 2004, as compared to $106.1 billion at March 31, 2003. Average loan receivables increased $5.0 billion or 18.1% to $32.3 billion for the three months ended March 31, 2004, as compared to $27.4 billion for the same period in 2003. Total average managed loans increased $11.8 billion or 11.1% to $117.8 billion for the three months ended March 31, 2004, as compared to $106.0 billion for the same period in 2003.
Table 2 reconciles the Corporation’s loan receivables to its managed loans and average loan receivables to its average managed loans.
(dollars in thousands) (unaudited)
| | | March 31,
|
| | | 2004
| 2003
|
| At Period End: | | | | | | | |
| Loans held for securitization | | $ | 8,943,482 | | $ | 9,523,377 | |
| Loan portfolio | | | 21,152,344 | | | 17,901,894 | |
| | |
| |
| |
| Loan receivables | | | 30,095,826 | | | 27,425,271 | |
| Securitized loans | | | 87,490,976 | | | 78,698,578 | |
| | |
| |
| |
| Total managed loans | | $ | 117,586,802 | | $ | 106,123,849 | |
| | |
| |
| |
| | | For the Three Months |
| | | Ended March 31,
|
| | | 2004
| 2003
|
| Average for the Period: | | | | | | | |
| Loans held for securitization | | $ | 11,318,578 | | $ | 9,807,427 | |
| Loan portfolio | | | 21,001,450 | | | 17,555,619 | |
| | |
| |
| |
| Loan receivables | | | 32,320,028 | | | 27,363,046 | |
| Securitized loans | | | 85,475,544 | | | 78,669,738 | |
| | |
| |
| |
| Total managed loans | | $ | 117,795,572 | | $ | 106,032,784 | |
| | |
| |
| |
Other operating income increased $154.5 million or 8.6% to $1.9 billion for the three months ended March 31, 2004, as compared to $1.8 billion for the same period in 2003. Interest income increased $89.1 million or 9.4% to $1.0 billion for the three months ended March 31, 2004, as compared to $944.0 million for the same period in 2003. Interest expense decreased $23.1 million or 6.0% to $365.3 million for the three months ended March 31, 2004, as compared to $388.4 million for the same period in 2003.
The net credit loss ratio on loan receivables and managed loans for the three months ended March 31, 2004 was 4.45% and 4.99%, respectively. Delinquency on loan receivables and managed loans at March 31, 2004 was 3.39% and 4.27%, respectively. See “Loan Quality—Net Credit Losses” for further detail regarding net credit losses. Refer toTable 15 for a reconciliation of the loan receivables net credit loss ratio to the managed net credit loss ratio for the three months ended March 31, 2004. See “Loan Quality—Delinquencies” for further detail regarding delinquencies. Refer toTable 10 for a reconciliation of the loan receivables delinquency ratio to the managed delinquency ratio at March 31, 2004.
Other operating expense increased $154.0 million or 12.0% to $1.4 billion for the three months ended March 31, 2004, as compared to $1.3 billion for the same period in 2003.
The Corporation’s return on average total assets for the three months ended March 31, 2004, was 3.46%, as compared to 3.28% for the same period in 2003. The increase in the return on average total assets was primarily the result of net income growing at a faster rate than average total assets, mainly as a result of the Corporation’s off-balance sheet securitization activity.
The Corporation’s return on average stockholders’ equity was 17.39% for the three months ended March 31, 2004, as compared to 18.95% for the same period in 2003. The decrease in the return on average stockholders’ equity was primarily the result of the Corporation reinvesting a significant portion of its net income back into the business. Also, the strengthening of foreign currencies against the U.S. dollar increased stockholders’ equity, partially offset by an increase in the Corporation’s dividend rate per common share and other factors.
The Corporation acquired 50 new endorsements from organizations and added 2.5 million new accounts during the three months ended March 31, 2004.
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 $112.2 million or 20.2% to $668.0 million for the three months ended March 31, 2004, as compared to $555.8 million for the same period in 2003. Average interest-earning assets increased $5.6 billion or 13.6% to $47.1 billion for the three months ended March 31, 2004, as compared to $41.4 billion for the same period in 2003. The increase in average interest-earning assets was primarily the result of an increase in average loan receivables of $5.0 billion and an increase in average investment securities and money market instruments of $418.1 million. The yield on average interest-earning assets decreased 41 basis points to 8.83% for the three months ended March 31, 2004, as compared to 9.24% for the same period in 2003. 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 investment securities and money market instruments.
Average interest-bearing liabilities increased $2.1 billion or 5.0% to $43.0 billion for the three months ended March 31, 2004, as compared to $40.9 billion for the same period in 2003. The increase in average interest-bearing liabilities was a result of an increase of $2.9 billion in average borrowed funds, partially offset by a decrease of $897.4 million in average interest-bearing deposits. The decrease in the rate paid on average interest-bearing liabilities of 43 basis points to 3.42% for the three months ended March 31, 2004, from 3.85% for the same period in 2003, reflects actions by the Federal Open Market Committee (“FOMC”) throughout 2001, in the fourth quarter of 2002, and in the second quarter of 2003 that impacted overall market interest rates and lowered the Corpor ation’s cost of funds.
The Corporation’s net interest margin, on a fully taxable equivalent basis, was 5.71% for the three months ended March 31, 2004, as compared to 5.44% for the same period in 2003. 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 27 basis point increase in the net interest margin for the three months ended March 31, 2004, was primarily the result of the Corporation’s average interest-earning assets growing at a faster rate than its average interest-bearing liabilities.
Tables 3 and4 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 months ended March 31, 2004 and 2003.
