UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file number 1-10683
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MBNA Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1713008
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wilmington, DE 19884-0141
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---------- ----------
Common Stock, $.01 Par Value - 851,781,250 Shares
Outstanding as of March 31, 2001
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
March 31, 2001 (unaudited) and December 31, 2000
Consolidated Statements of Income - 3
For the Three Months Ended March 31, 2001 and 2000
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Three Months Ended March 31, 2001 and 2000
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Three Months Ended March 31, 2001 and 2000
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 17
and Results of Operations (unaudited)
Supplemental Financial Information (unaudited) 39
Part II - Other Information
Item 1. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
Signature 46
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 759,826 $ 971,469
Interest-earning time deposits in other banks..... 1,591,151 1,505,331
Federal funds sold and securities purchased
under resale agreements.......................... 920,000 700,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $2,742,180 and $2,661,962 at
March 31, 2001 and December 31, 2000,
respectively).................................. 2,759,014 2,666,196
Held-to-maturity (market value of $386,960
and $368,547 at March 31, 2001 and
December 31, 2000, respectively)............... 398,322 384,088
Loans held for securitization..................... 6,666,017 8,271,933
Loans:
Credit card..................................... 8,063,346 7,798,772
Other consumer.................................. 4,341,582 3,884,132
------------ ------------
Total loans................................... 12,404,928 11,682,904
Reserve for possible credit losses.............. (414,276) (386,568)
------------ ------------
Net loans..................................... 11,990,652 11,296,336
Premises and equipment, net....................... 1,868,757 1,781,011
Accrued income receivable......................... 229,829 305,437
Accounts receivable from securitizations.......... 8,024,690 6,940,567
Intangible assets, net............................ 2,750,823 2,749,435
Prepaid expenses and deferred charges............. 334,503 322,201
Other assets...................................... 969,697 784,092
------------ ------------
Total assets.................................. $ 39,263,281 $ 38,678,096
============ ============
March 31, December 31,
2001 2000
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 18,065,297 $ 18,468,144
Money market deposit accounts................... 5,205,634 4,922,027
Noninterest-bearing demand deposits............. 858,560 892,980
Interest-bearing transaction accounts........... 45,690 50,475
Savings accounts................................ 10,690 9,969
------------ ------------
Total deposits................................ 24,185,871 24,343,595
Short-term borrowings............................. 241,319 159,512
Long-term debt and bank notes..................... 6,089,772 5,735,635
Accrued interest payable.......................... 250,000 237,610
Accrued expenses and other liabilities............ 1,735,338 1,574,466
------------ ------------
Total liabilities............................. 32,502,300 32,050,818
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at March 31, 2001 and
December 31, 2000)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 851,781,250 shares and
851,803,793 shares issued and outstanding
at March 31, 2001 and December 31, 2000,
respectively).................................... 8,518 8,518
Additional paid-in capital........................ 2,655,906 2,725,950
Retained earnings................................. 4,162,077 3,931,248
Accumulated other comprehensive income............ (65,606) (38,524)
------------ ------------
Total stockholders' equity.................... 6,760,981 6,627,278
------------ ------------
Total liabilities and stockholders' equity.... $ 39,263,281 $ 38,678,096
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
INTEREST INCOME
Loans............................................. $ 410,509 $ 268,116
Investment securities:
Taxable......................................... 42,160 41,420
Tax-exempt...................................... 917 968
Time deposits in other banks...................... 21,876 19,161
Federal funds sold and securities purchased
under resale agreements.......................... 20,918 7,826
Loans held for securitization..................... 247,858 329,195
------------ ------------
Total interest income......................... 744,238 666,686
INTEREST EXPENSE
Deposits.......................................... 377,244 275,110
Short-term borrowings............................. 2,649 12,069
Long-term debt and bank notes..................... 99,128 96,436
------------ ------------
Total interest expense........................ 479,021 383,615
------------ ------------
NET INTEREST INCOME............................... 265,217 283,071
Provision for possible credit losses.............. 151,993 99,846
------------ ------------
Net interest income after provision for
possible credit losses........................... 113,224 183,225
OTHER OPERATING INCOME
Interchange....................................... 69,846 67,750
Credit card fees.................................. 61,342 72,491
Securitization income............................. 1,273,859 928,788
Insurance......................................... 29,166 17,043
Other............................................. 42,200 24,964
------------ ------------
Total other operating income.................. $ 1,476,413 $ 1,111,036
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.................... $ 438,982 $ 364,805
Occupancy expense of premises..................... 36,465 34,049
Furniture and equipment expense................... 52,568 49,310
Other............................................. 563,136 467,146
------------ ------------
Total other operating expense.................. 1,091,151 915,310
------------ ------------
Income before income taxes........................ 498,486 378,951
Applicable income taxes........................... 187,431 144,380
------------ ------------
NET INCOME........................................ $ 311,055 $ 234,571
============ ============
EARNINGS PER COMMON SHARE......................... $ .36 $ .29
EARNINGS PER COMMON SHARE-ASSUMING DILUTION....... .35 .28
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
(unaudited)
Outstanding Shares
-----------------------
Preferred Common Preferred Common
(000) (000) Stock Stock
----------- ---------- --------- ----------
BALANCE, DECEMBER 31, 2000.. 8,574 851,804 $ 86 $ 8,518
Comprehensive income:
Net income................ - - - -
Other comprehensive
income, net of tax....... - - - -
Comprehensive income.........
Cash dividends:
Common-$.09 per share..... - - - -
Preferred................. - - - -
Exercise of stock options
and other awards........... - 2,909 - 29
Stock option tax benefit.... - - - -
Amortization of deferred
compensation expense....... - - - -
Acquisition and retirement
of common stock............. - (2,932) - (29)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2001..... 8,574 851,781 $ 86 $ 8,518
=========== ========== ========= ==========
BALANCE, DECEMBER 31, 1999.. 8,574 801,781 $ 86 $ 8,018
Comprehensive income:
Net income................ - - - -
Other comprehensive
income, net of tax....... - - - -
Comprehensive income.........
Cash dividends:
Common-$.08 per share..... - - - -
Preferred................. - - - -
Exercise of stock options
and other awards........... - 3,356 - 34
Stock option tax benefit.... - - - -
Amortization of deferred
compensation expense....... - - - -
Acquisition and retirement
of common stock............ - (3,356) - (34)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2000..... 8,574 801,781 $ 86 $ 8,018
=========== ========== ========= ==========
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 2000 $2,725,950 $3,931,248 $ (38,524) $ 6,627,278
Comprehensive income:
Net income.............. - 311,055 - 311,055
Other comprehensive
income, net of tax..... - - (27,082) (27,082)
------------
Comprehensive income...... 283,973
------------
Cash dividends:
Common-$.09 per share... - (76,663) - (76,663)
Preferred............... - (3,563) - (3,563)
Exercise of stock options
and other awards......... 17,453 - - 17,482
Stock option tax benefit.. 10,236 - - 10,236
Amortization of deferred
compensation expense..... 8,739 - - 8,739
Acquisition and retirement
of common stock.......... (106,472) - - (106,501)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2001... $2,655,906 $4,162,077 $ (65,606) $ 6,760,981
========== ========== ============= ============
BALANCE, DECEMBER 31, 1999 $1,305,935 $2,897,964 $ (12,560) $ 4,199,443
Comprehensive income:
Net income.............. - 234,571 - 234,571
Other comprehensive
income, net of tax..... - - (6,434) (6,434)
------------
Comprehensive income...... 228,137
------------
Cash dividends:
Common-$.08 per share... - (64,142) - (64,142)
Preferred............... - (3,726) - (3,726)
Exercise of stock options
and other awards......... 7,203 - - 7,237
Stock option tax benefit.. 5,174 - - 5,174
Amortization of deferred
compensation expense..... 7,525 - - 7,525
Acquisition and retirement
of common stock.......... (88,448) - - (88,482)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2000... $1,237,389 $3,064,667 $ (18,994) $ 4,291,166
========== ========== ============= ============
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income....................................... $ 311,055 $ 234,571
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses........... 151,993 99,846
Depreciation, amortization, and accretion...... 174,591 124,606
(Benefit) provision for deferred income taxes.. (25,903) 9,038
Decrease in accrued income receivable.......... 75,608 27,236
Increase in accounts receivable from
securitizations............................... (1,084,123) (217,246)
Increase in accrued interest payable........... 12,390 6,301
Decrease in other operating activities......... (38,314) 108,800
------------ ------------
Net cash (used in) provided by operating
activities...................................... (422,703) 393,152
INVESTING ACTIVITIES
Net increase in money market instruments......... (305,820) (295,458)
Proceeds from maturities of investment securities
available-for-sale.............................. 319,935 129,741
Proceeds from sale of investment securities
available-for-sale.............................. 505 -
Purchases of investment securities
available-for-sale.............................. (410,189) (165,329)
Proceeds from maturities of investment securities
held-to-maturity ............................... 3,905 2,595
Purchases of investment securities
held-to-maturity................................ (18,532) (13,666)
Proceeds from securitization of loans............ 1,994,236 1,496,242
Proceeds from sale of loans...................... 126,562 14,164
Loan portfolio acquisitions...................... (581,567) (887,625)
Amortization of securitized loans................ (1,798,561) (653,092)
Net loan repayments (originations)............... 918,691 (53,932)
Net purchases of premises and equipment.......... (148,445) (51,030)
------------ ------------
Net cash provided by (used in)
investing activities............................ $ 100,720 $ (477,390)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net (decrease) increase in time deposits.......... $ (402,847) $ 339,713
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts............................. 245,123 192,324
Net increase (decrease) in short-term borrowings.. 81,807 (413,431)
Proceeds from issuance of long-term debt
and bank notes................................... 467,370 207,963
Maturity of long-term debt and bank notes......... (120,328) (75,557)
Proceeds from exercise of stock options
and other awards................................. 17,482 7,237
Acquisition and retirement of common stock........ (106,501) (88,482)
Dividends paid.................................... (71,766) (59,772)
------------ ------------
Net cash provided by financing activities..... 110,340 109,995
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.. (211,643) 25,757
Cash and cash equivalents at beginning of period.. 971,469 488,386
------------ ------------
Cash and cash equivalents at end of period........ $ 759,826 $ 514,143
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 470,145 $ 377,936
============ ============
Income taxes paid................................. $ 33,230 $ 70,011
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MBNA
Corporation ("the Corporation") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. The notes to the consolidated
financial statements contained in the Annual Report on Form 10-K for the year
ended December 31, 2000 should be read in conjunction with these consolidated
financial statements.
NOTE B: PREFERRED STOCK
The Corporation's Board of Directors declared the following quarterly dividends
for the Corporation's Series A and Series B Preferred Stock:
Series A Series B
--------------------- ---------------------
Dividend Per Dividend Per
Dividend Preferred Dividend Preferred
Declaration Date Payment Date Rate Share Rate Share
- --------------- ---------------- -------- ------------ -------- ------------
January 10, 2001 April 16, 2001 7.50% $ .46875 5.64% $ .35270
April 10, 2001 July 16, 2001 7.50 .46875 5.50 .34380
NOTE C: COMMON STOCK
During the three months ended March 31, 2001, 1.3 million shares of restricted
common stock were issued under the Corporation's 1997 Long Term Incentive Plan
to the Corporation's senior officers. The restricted common shares issued had
an approximate aggregate market value of $46.8 million. At March 31, 2001, the
unamortized compensation expense related to all of the Corporation's
outstanding restricted stock awards was $185.0 million.
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.
On April 10, 2001 the Corporation's Board of Directors declared a quarterly
cash dividend of $.09 per common share, payable July 1, 2001 to stockholders
of record as of June 15, 2001.
NOTE D: EARNINGS PER COMMON SHARE
Earnings per common share is computed using net income applicable to common
stock and weighted average common shares outstanding during the period.
Earnings per common share-assuming dilution is computed using net income
applicable to common stock and weighted average common shares outstanding
during the period after consideration of the potential dilutive effect of
common stock equivalents, based on the treasury stock method using an average
market price for the period. The Corporation's common stock equivalents are
solely related to employee stock options. The Corporation does not have any
other common stock equivalents.
COMPUTATION OF EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
EARNINGS PER COMMON SHARE
Net income........................................ $ 311,055 $ 234,571
Less: preferred stock dividend requirements....... 3,563 3,726
------------ ------------
Net income applicable to common stock............. $ 307,492 $ 230,845
============ ============
Weighted average common shares outstanding (000).. 851,840 801,849
============ ============
Earnings per common share......................... $ .36 $ .29
============ ============
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Net income........................................ $ 311,055 $ 234,571
Less: preferred stock dividend requirements....... 3,563 3,726
------------ ------------
Net income applicable to common stock............. $ 307,492 $ 230,845
============ ============
Weighted average common shares outstanding (000).. 851,840 801,849
Net effect of dilutive stock options (000)........ 26,562 22,596
------------ ------------
Weighted average common shares outstanding and
common stock equivalents (000)................... 878,402 824,445
============ ============
Earnings per common share-assuming dilution....... $ .35 $ .28
============ ============
There were 30,000 stock options with an exercise price of $35.9375 per share
outstanding at March 31, 2001, which were not included in the computation of
earnings per common share-assuming dilution as a result of the stock options'
exercise price being greater than the average market price of the common
shares. These stock options expire in 2011.
NOTE E: INVESTMENT SECURITIES
For the three months ended March 31, 2001, the Corporation sold investment
securities resulting in a realized a loss of $36,000, having a net after-tax
effect of $23,000.
NOTE F: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
Net income....................................... $ 311,055 $ 234,571
Other comprehensive income:
Foreign currency translation................... (35,237) (5,713)
Net unrealized gains (losses) on investment
securities available-for-sale and other
financial instruments......................... 8,155 (721)
------------ ------------
Other comprehensive income....................... (27,082) (6,434)
------------ ------------
Comprehensive income............................. $ 283,973 $ 228,137
============ ============
The components of accumulated other comprehensive income, net of tax, are as
follows:
March 31, December 31,
2001 2000
------------ ------------
Foreign currency translation..................... $ (82,193) $ (46,956)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments..................................... 16,587 8,432
------------ ------------
Accumulated other comprehensive income........... $ (65,606) $ (38,524)
============ ============
NOTE G: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original
maturity of one year or more. During the three months ended March 31, 2001,
the Corporation issued long-term debt and bank notes consisting of the
following:
Par Value
----------------------
(dollars in thousands)
Fixed-Rate Euro Medium-Term Notes, with an interest
rate of 5.75%, payable annually, maturing in 2004
(EUR500.0 million).................................... 462,350
Floating-Rate Euro Medium-Term Notes, priced at
80 basis points over the three-month Sterling London
Interbank Offered Rate with interest payable
quarterly, maturing in 2004 (6.0 million pounds
sterling)............................................. 8,687
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 to better match the interest rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to reduce its foreign currency exchange risk on a
portion of long-term debt and bank notes issued by MBNA Europe Bank Limited
("MBNA Europe").
NOTE H: DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" ("Statement No. 137") and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-an Amendment of FASB Statement No.
133" ("Statement No. 138") on January 1, 2001. The standards required that all
derivative instruments be recorded on the Corporation's consolidated statement
of financial condition at fair value and established criteria for designation
and effectiveness of hedging relationships. The Corporation recognized a $2.5
million (pretax) loss upon implementation of Statement No. 133, as amended by
Statement No. 137 and Statement No. 138, on January 1, 2001.
The Corporation utilizes certain derivative financial instruments to enhance
its ability to manage risk, including interest rate and foreign currency
exchange rate, which exist as part of its ongoing business operations.
Derivative financial instruments are entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
these exposures. The Corporation does not enter into derivative financial
instruments for trading purposes, nor is it a party to any leveraged
derivative financial instruments. The Corporation can designate derivative
financial instruments as either fair value hedges, cash flow hedges or hedges
of net investments. The Corporation also has derivative financial instruments
that are not designated as an accounting hedge, which reduce its exposure to
foreign currency exchange rate risk. The Corporation accounts for changes in
the fair value of fair value hedges and the corresponding hedged item as a
component of other operating income. The Corporation does not have cash flow
hedges or hedges of net investments. For derivative financial instruments
that are not designated as an accounting hedge, the change in fair value is
reported in other operating income. The gross unrealized gains and gross
unrealized losses on the Corporation's derivative financial instruments are
included as a component of other assets or accrued expenses and other
liabilities, respectively, on the Corporation's consolidated statement of
financial condition.
INTEREST RATE SWAP AGREEMENTS
The Corporation finances a portion of its operations through long-term debt
and bank notes. The Corporation uses interest rate swap agreements to change
fixed-rate funding sources to floating-rate funding sources to better match
the rate sensitivity of the Corporation's assets. The Corporation's interest
rate swap agreements qualify as fair value hedges under Statement No. 133.
The fair value of the Corporation's interest rate swap agreements was a gross
unrealized gain of $81.9 million at March 31, 2001. There were no unrealized
losses on the Corporation's interest rate swap agreements at March 31, 2001.
For the three months ended March 31, 2001, the Corporation's hedging
ineffectiveness was immaterial to the Corporation's consolidated statement of
income.
FOREIGN EXCHANGE SWAP AGREEMENTS
The Corporation is exposed to foreign currency exchange rate risk as a result
of transactions in currencies other than the functional currency of its
foreign bank subsidiaries. The Corporation enters into foreign exchange swap
agreements to reduce its exposure to foreign currency exchange rate risk and
to change a portion of fixed-rate long-term debt and bank notes to floating-
rate long-term debt and bank notes to better match the interest rate
sensitivity of the Corporation's assets. The Corporation's qualifying
foreign exchange swap agreements are accounted for as fair value hedges. The
fair value of the Corporation's qualifying foreign exchange swap agreements
was a gross unrealized loss of $1.4 million at March 31, 2001. The
Corporation also enters into foreign exchange swap agreements that are not
designated as accounting hedges. The fair value of the Corporation's foreign
exchange swap agreements not designated or effective as accounting hedges was
a gross unrealized loss of $28.7 million and a gross unrealized gain of $3.4
million at March 31, 2001. For the three months ended March 31, 2001, the
Corporation recognized a net loss of $22.0 million on its foreign exchange
swap agreements and an offsetting net gain of $12.6 million on the related
underlying long-term debt and bank notes, in the consolidated statement of
income. For the three months ended March 31, 2001, the Corporation's hedging
ineffectiveness was immaterial to the Corporation's consolidated statement of
income.
FORWARD EXCHANGE CONTRACTS
The Corporation is exposed to foreign currency exchange rate risk as a result
of transactions in currencies other than the designated functional currency
of the Corporation or its foreign bank subsidiaries. The Corporation enters
into forward exchange contracts to reduce its exposure to foreign currency
exchange rate risk primarily related to activity associated with its foreign
bank subsidiaries. The Corporation's forward exchange contracts are not
designated as accounting hedges. The fair value of the forward exchange
contracts was a gross unrealized gain of $25.3 million at March 31, 2001.
For the three months ended March 31, 2001, the Corporation recognized a net
gain of $60.4 million on its forward exchange contracts and an offsetting net
loss of $55.3 million on the related assets and liabilities, in the
consolidated statement of income.
NOTE I: SEGMENT REPORTING
The Corporation derives its income primarily from credit card loans, other
consumer loans, and insurance products. The credit card and other consumer
loan products have similar economic characteristics and, therefore, have been
aggregated into one operating segment. The Corporation's insurance products
have also been aggregated into the one operating segment due to
immateriality.
The Corporation allocates resources on a managed basis, and financial
information provided to management reflects the Corporation's results on a
managed basis. Therefore, an adjustment is required to reconcile the managed
financial information to the Corporation's reported financial information in
its consolidated financial statements. This adjustment reclassifies interest
income, interchange income, credit card and other fees, insurance income,
interest paid to investors, credit losses, and other trust expenses into
securitization income.
SEGMENT REPORTING
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
MANAGED INCOME STATEMENTS
Interest income................................ $ 3,247,851 $ 2,549,277
Interest expense............................... 1,460,074 1,192,942
------------ ------------
Net interest income............................ 1,787,777 1,356,335
Provision for possible credit losses........... 976,144 731,803
------------ ------------
Net interest income after provision for
possible credit losses........................ 811,633 624,532
Other operating income......................... 778,004 669,729
Other operating expense........................ 1,091,151 915,310
------------ ------------
Income before income taxes..................... 498,486 378,951
Applicable income taxes........................ 187,431 144,380
------------ ------------
Net income..................................... $ 311,055 $ 234,571
============ ============
Managed loans at period end.................... $ 87,915,009 $ 72,999,767
Average managed loans for the period........... 87,985,326 72,004,076
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
SECURITIZATION ADJUSTMENT
Interest income................................ $ (2,503,613) $ (1,882,591)
Interest expense............................... (981,053) (809,327)
------------ ------------
Net interest income............................ (1,522,560) (1,073,264)
Provision for possible credit losses........... (824,151) (631,957)
------------ ------------
Net interest income after provision for
possible credit losses........................ (698,409) (441,307)
Other operating income......................... 698,409 441,307
Other operating expense........................ - -
------------ ------------
Income before income taxes..................... - -
Applicable income taxes........................ - -
------------ ------------
Net income..................................... $ - $ -
============ ============
Securitized loans at period end................ $(68,844,064) $(55,488,220)
Average securitized loans for the period....... (69,237,079) (54,584,913)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
CONSOLIDATED STATEMENTS OF INCOME
Interest income................................ $ 744,238 $ 666,686
Interest expense............................... 479,021 383,615
------------ ------------
Net interest income............................ 265,217 283,071
Provision for possible credit losses........... 151,993 99,846
------------ ------------
Net interest income after provision for
possible credit losses........................ 113,224 183,225
Other operating income......................... 1,476,413 1,111,036
Other operating expense........................ 1,091,151 915,310
------------ ------------
Income before income taxes..................... 498,486 378,951
Applicable income taxes........................ 187,431 144,380
------------ ------------
Net income..................................... $ 311,055 $ 234,571
============ ============
Loan receivables at period end................. $ 19,070,945 $ 17,511,547
Average loan receivables for the period........ 18,748,247 17,419,163
NOTE J: ACCOUNTING PRONOUNCEMENTS
In September 2000, 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"), was issued. Statement No. 140 replaces Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement
No. 125"), and revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement No. 125's provisions
without reconsideration. The Corporation adopted Statement No. 140's revised
accounting standards for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
implementation of Statement No. 140 did not impact the Corporation's
consolidated financial statements.
As noted in the Financial Accounting Standards Board's ("the Board")
"Statement 140, a replacement of Statement 125 - Project Summary" updated on
April 19, 2001, the Board at its April 18, 2001 meeting stated that certain
one-step securitization structures utilized in the marketplace, including
one-step securitization structures that the Corporation uses, would not meet
certain isolation criterion that are required in Statement No. 140 to account
for asset securitizations as sales. In this update, the Board also stated
that it is drafting a Technical Bulletin to delay the effective date of
Statement No. 140 as it applies to these one-step securitization structures
and that two-step securitization structures would be required for
transactions occurring after December 31, 2001, with an extended transition
period for conversion of one-step master trust securitization structures
(five years from the publication of the Board's Technical Bulletin) to allow
issuers, such as the Corporation, to obtain sufficient approvals from the
beneficial interest holders. The Corporation believes that the required
changes in its securitization structures are not significant, and the
implementation of the two-step securitization structure will not have a
material impact on the Corporation's consolidated net income.
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 elsewhere in
this report.
INTRODUCTION
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 and MBNA Canada Bank ("MBNA
Canada") located in Canada. Through the Bank, the Corporation is the
largest independent credit card lender in the world and is the leading
issuer of affinity credit cards, marketed primarily to members of
associations and Customers of financial institutions. In addition to its
credit card lending, the Corporation also makes other consumer loans and
offers insurance and deposit products. The Corporation is also the parent
of MBNA America (Delaware), N.A. ("MBNA Delaware"), which offers corporate
loan products and travel related services.
The Corporation generates interest and other income through finance charges
assessed on outstanding loan receivables, interchange income, credit card
and other fees, securitization income, insurance income, and interest earned
on investment securities and money market instruments. The Corporation's
primary costs are the costs of funding its loan receivables and investment
securities and money market instruments, which include interest paid on
deposits, short-term borrowings, and long-term debt and bank notes; credit
losses; royalties paid to affinity groups and financial institutions;
business development and operating expenses; and income taxes.
EARNINGS SUMMARY
Net income for the three months ended March 31, 2001 increased 32.6% to
$311.1 million or $.35 per common share, from $234.6 million or $.28 per
common share for the same period in 2000. Earnings per common share amounts
are presented assuming dilution.
The overall growth in earnings was primarily attributable to the growth in
the Corporation's managed loans outstanding. The Corporation's average
managed loans increased 22.2% to $88.0 billion for the three months ended
March 31, 2001, as compared to $72.0 billion for the same period in 2000.
Total managed loans at March 31, 2001 were $87.9 billion, a $14.9 billion
increase from
March 31, 2000. The managed net interest margin increased to 7.71% for the
three months ended March 31, 2001, as compared to 7.10% for the same period
in 2000. During the three months ended March 31, 2001, the Corporation
acquired 121 new endorsements from organizations and added 2.5 million new
accounts. The growth in managed loans for the three months ended March 31,
2001, as compared to the same period in 2000, was a result of the
Corporation's continued marketing efforts and loan portfolio acquisitions.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization is the sale of loans to
investors, generally through a trust, that converts interest income,
interchange income, credit card and other fees, and insurance income in
excess of interest paid to investors, credit losses, and other trust
expenses into securitization income, while reducing the Corporation's on-
balance-sheet assets. During the three months ended March 31, 2001, the
Corporation securitized $2.0 billion of credit card loan receivables,
bringing total securitized loans to $68.8 billion at March 31, 2001. The
Corporation's average securitized loans increased 26.8% to $69.2 billion for
the three months ended March 31, 2001, as compared to $54.6 billion for the
same period in 2000.
The Corporation's return on average total assets for the three months ended
March 31, 2001 increased to 3.26% from 3.02% for the same period during
2000. The increase in return on average total assets is a result of the
Corporation's net income growing faster than its average total assets as a
result of asset securitization. The Corporation's return on average
stockholders' equity was 19.12% for the three months ended March 31, 2001,
as compared to 22.46% for the same period in 2000. The decrease in the
Corporation's return on average stockholders' equity is primarily a result
of an increase in average stockholders' equity from the issuance of 50
million shares of common stock in August 2000 for $1.6 billion, net of
issuance costs.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, decreased $17.9
million to $265.7 million for the three months ended March 31,2001 from the
same period in 2000. Average interest-earning assets increased $2.6 billion
for the three months ended March 31, 2001 from the same period in 2000. The
yield on average interest-earning assets increased 10 basis points for the
three months ended March 31, 2001 from the same period in 2000. The
increase in the yield earned by the Corporation on average interest-earning
assets was primarily the result of higher yielding loan receivables.
Average interest-bearing liabilities increased $4.4 billion for the three
months ended March 31, 2001 from the same period in 2000. The rate paid on
average interest-bearing liabilities increased 44 basis points for the three
months ended March 31, 2001 from the same period in 2000. The increase in
the rate paid on average interest-bearing liabilities reflects actions by
the Federal Reserve Board in 2000, which increased overall market interest
rates. The increase in average interest-bearing liabilities for the three
months ended March 31, 2001, was primarily a result of an increase of $5.0
billion in average domestic interest-bearing deposits for the three months
ended March 31, 2001, as compared to the same period in 2000, which were
used to fund the increase in average interest-earning assets, accounts
receivable from securitization, and the value of acquired Customer accounts.
The value of acquired Customer accounts represents the premiums paid by the
Corporation in excess of acquired loan receivables. Both accounts
receivable from securitization and the value of acquired Customer accounts
are included in other assets in Table 2.
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 Corporation's net interest margin, on a fully taxable equivalent
basis, was 4.33% for the three months ended March 31, 2001, as compared to
5.12% for the same period in 2000.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income on investment securities for the three months ended March
31, 2001, on a fully taxable equivalent basis, increased to $43.6 million,
as compared to $42.9 million for the same period in 2000. Average
investment securities increased $36.3 million to $3.1 billion for the three
months ended March 31, 2001, as compared to the same period in 2000. The
yield earned on average investment securities for the three months ended
March 31, 2001, increased 7 basis points to 5.77%, as compared to the same
period in 2000.
Interest income on money market instruments increased $15.8 million to $42.8
million for the three months ended March 31, 2001, from the same period in
2000. The increase in interest income on money market instruments for the
three months ended March 31, 2001 was primarily a result of an increase of
$1.2 billion in average money market instruments, offset by a decrease of 19
basis points in the yield earned on average money market instruments from
the same period in 2000.
The Corporation tries to maintain its investment securities and money market
instruments position at a level appropriate for the Corporation's
anticipated liquidity needs. The Corporation's average investment
securities and average money market instruments are affected by the timing
of receipt of funds from asset securitizations, deposits, loan payments,
long-term debt and bank notes, and maturities of investment securities.
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 was 24.6% for the three months ended
March 31, 2001, as compared to 21.9% for the same period in 2000.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$61.1 million to $658.4 million for the three months ended March 31, 2001,
from the same period in 2000. The increase for the three months ended
March 31, 2001 was primarily the result of an increase in average loan
receivables of $1.3 billion from the same period in 2000. The yield earned
by the Corporation for the three months ended March 31, 2001 on these loan
receivables increased 45 basis points to 14.24% as compared to 13.79% for
the same period in 2000.
Table 1 presents the Corporation's period end loan receivables distribution
by loan type, excluding securitized loans. Loan receivables decreased 4.4%
to $19.1 billion at March 31, 2001, as compared to $20.0 billion at
December 31, 2000.
Domestic credit card loan receivables were $11.5 billion at March 31, 2001,
as compared to $13.0 billion at December 31, 2000. The decrease in domestic
credit card loan receivables at March 31, 2001 was primarily a result of
Customer payments exceeding new sales and cash volume activity. The
Corporation acquired $139.9 million of domestic credit card loan receivables
during the three months ended March 31, 2001. Also during the three months
ended March 31, 2001, the Corporation securitized $2.0 billion of domestic
credit card loan receivables, while $1.8 billion of previously securitized
domestic credit card loan receivables amortized back into the Corporation's
loan portfolio.
Domestic other consumer loan receivables increased to $4.3 billion for the
three months ended March 31, 2001 compared to $3.8 billion at December 31,
2000. The increase in domestic other consumer loan receivables during the
three months ended March 31, 2001 was a result of loan growth in the
Corporation's lines of credit accessed through checks, and sales finance
accounts.
Foreign loan receivables increased $157.8 million to $3.3 billion at March
31, 2001, as compared to $3.1 billion at December 31, 2000. The growth in
foreign loan receivables was a result of MBNA Europe's acquisition of $352.8
million of loan receivables during the three months ended March 31, 2001.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
March 31, December 31,
2001 2000
------------- -------------
(unaudited)
Loans held for securitization:
Domestic:
Credit card.............................. $ 4,866,140 $ 6,396,652
Other consumer........................... 1,029,872 1,022,756
------------- -------------
Total domestic loans held for
securitization........................ 5,896,012 7,419,408
Foreign.................................... 770,005 852,525
------------- -------------
Total loans held for securitization.... 6,666,017 8,271,933
Loan portfolio:
Domestic:
Credit card.............................. 6,603,864 6,612,913
Other consumer........................... 3,290,012 2,799,289
------------- -------------
Total domestic loan portfolio.......... 9,893,876 9,412,202
Foreign.................................... 2,511,052 2,270,702
------------- -------------
Total loan portfolio................... 12,404,928 11,682,904
------------- -------------
Total loan receivables................. $ 19,070,945 $ 19,954,837
============= =============
DEPOSITS
Total interest expense on deposits was $377.2 million for the three months
ended March 31, 2001, as compared to $275.1 million for the same period in
2000. The increase in interest expense on deposits of $102.1 million for the
three months ended March 31, 2001 was primarily the result of a $4.9 billion
increase in average interest-bearing deposits for the three months ended
March 31, 2001, as compared to the same period in 2000, in addition to a 56
basis point increase in the rate paid on average interest-bearing deposits.
The increase in average interest-bearing deposits for the three months ended
March 31, 2001 was a result of the Corporation's continued emphasis on
marketing domestic certificates of deposit and money market deposit accounts
to members of certain affinity groups, as well as obtaining other domestic
deposits through the use of third-party intermediaries to fund loan and other
asset growth and to diversify funding sources.
BORROWED FUNDS
Interest expense on short-term borrowings decreased to $2.6 million for the
three months ended March 31, 2001, as compared to $12.1 million for the same
period in 2000. The decrease in interest expense on short-term borrowings
for the three months ended March 31, 2001 was primarily a result of a
decrease of $614.4 million in average short-term borrowings, as short-term
domestic funding was not needed during the three months ended March 31, 2001.
Interest expense on long-term debt and bank notes increased to $99.1 million
for the three months ended March 31, 2001, as compared to $96.4 million for
the same period in 2000. The increase in interest expense on long-term debt
and bank notes during the three months ended March 31, 2001, was primarily a
result of an $8.2 million increase in interest expense on foreign long-term
debt and bank notes as MBNA Europe issued additional long-term debt and bank
notes. Interest expense on domestic long-term debt and bank notes decreased
$5.5 million during the three months ended March 31, 2001, as a result of a
decrease of $332.8 million in average domestic long-term debt and bank notes,
as compared to the same period in 2000.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three months ended
March 31, 2001 and 2000, respectively.
TABLE 2: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic................................ $ 1,252 4.53% $ 14
Foreign................................. 1,549,727 5.72 21,862
------------ ----------
Total interest-earning time deposits
in other banks..................... 1,550,979 5.72 21,876
Federal funds sold and securities
purchased under resale agreements....... 1,506,367 5.63 20,918
----------- ----------
Total money market instruments...... 3,057,346 5.68 42,794
Investment securities(a):
Taxable................................. 2,963,988 5.77 42,160
Tax-exempt(b)........................... 99,625 5.74 1,410
------------ ----------
Total investment securities......... 3,063,613 5.77 43,570
Loans held for securitization:
Domestic................................ 6,003,662 14.84 219,700
Foreign................................. 833,563 13.70 28,158
------------ ----------
Total loans held for securitization. 6,837,225 14.70 247,858
Loans:
Domestic:
Credit card........................... 6,561,493 14.04 227,195
Other consumer........................ 3,076,093 15.19 115,215
------------ ----------
Total domestic loans................ 9,637,586 14.41 342,410
Foreign................................. 2,273,436 12.15 68,099
------------ ----------
Total loans......................... 11,911,022 13.98 410,509
------------ ----------
Total loan receivables.............. 18,748,247 14.24 658,367
------------ ----------
Total interest-earning assets....... 24,869,206 12.14 $ 744,731
Cash and due from banks..................... 725,823
Premises and equipment, net................. 1,823,851
Other assets................................ 11,618,338
Reserve for possible credit losses.......... (389,823)
------------
Total assets........................ $ 38,647,395
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would not be a material impact on the net interest margin.
For the Three Months Ended
March 31, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits......................... $ 17,736,437 6.72% $ 294,071
Money market deposit accounts......... 5,045,234 5.87 72,977
Interest-bearing transaction accounts. 43,932 5.03 545
Savings accounts...................... 10,186 4.98 125
------------ ----------
Total domestic interest-bearing
deposits........................... 22,835,789 6.53 367,718
Foreign:
Time deposits......................... 660,242 5.85 9,526
------------ ----------
Total interest-bearing deposits..... 23,496,031 6.51 377,244
Borrowed funds:
Short-term borrowings:
Domestic.............................. 33,975 5.59 468
Foreign............................... 158,479 5.58 2,181
------------ ----------
Total short-term borrowings......... 192,454 5.58 2,649
Long-term debt and bank notes (c):
Domestic.............................. 4,504,996 6.80 75,583
Foreign............................... 1,442,298 6.62 23,545
------------ ----------
Total long-term debt and bank notes. 5,947,294 6.76 99,128
------------ ----------
Total borrowed funds................ 6,139,748 6.72 101,777
------------ ----------
Total interest-bearing liabilities.. 29,635,779 6.56 479,021
Demand deposits............................. 873,721
Other liabilities........................... 1,540,563
------------
Total liabilities................... 32,050,063
Stockholders' equity........................ 6,597,332
------------
Total liabilities and stockholders'
equity............................. $ 38,647,395
============ ----------
Net interest income................. $ 265,710
==========
Net interest margin................. 4.33
Interest rate spread................ 5.58
(b) The fully taxable equivalent adjustment for the three months ended
March 31, 2001 was $493.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
For the Three Months Ended
March 31, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic................................ $ 3,271 4.43% $ 36
Foreign................................. 1,303,904 5.90 19,125
------------ ----------
Total interest-earning time deposits
in other banks..................... 1,307,175 5.90 19,161
Federal funds sold and securities
purchased under resale agreements....... 540,462 5.82 7,826
------------ ---------
Total money market instruments...... 1,847,637 5.87 26,987
Investment securities(a):
Taxable................................. 2,924,265 5.70 41,420
Tax-exempt(b)........................... 103,070 5.81 1,490
------------ ---------
Total investment securities......... 3,027,335 5.70 42,910
Loans held for securitization:
Domestic................................ 8,525,325 14.01 296,907
Foreign................................. 950,167 13.67 32,288
------------ ----------
Total loans held for securitization. 9,475,492 13.97 329,195
Loans:
Domestic:
Credit card........................... 4,847,728 13.57 163,551
Other consumer........................ 1,554,133 14.61 56,473
------------ ----------
Total domestic loans................ 6,401,861 13.82 220,024
Foreign................................. 1,541,810 12.55 48,092
------------ ----------
Total loans......................... 7,943,671 13.58 268,116
------------ ----------
Total loan receivables.............. 17,419,163 13.79 597,311
------------ ----------
Total interest-earning assets....... 22,294,135 12.04 $ 667,208
Cash and due from banks..................... 636,077
Premises and equipment, net................. 1,667,180
Other assets................................ 6,954,844
Reserve for possible credit losses.......... (356,000)
------------
Total assets........................ $ 31,196,236
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would not be a material impact on the net interest margin.
For the Three Months Ended
March 31, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits......................... $ 13,337,551 6.05% $ 200,669
Money market deposit accounts......... 4,425,605 5.72 62,898
Interest-bearing transaction accounts. 37,374 4.91 456
Savings accounts...................... 9,370 4.85 113
------------ ----------
Total domestic interest-bearing
deposits........................... 17,809,900 5.96 264,136
Foreign:
Time deposits......................... 788,294 5.60 10,974
------------ ----------
Total interest-bearing deposits..... 18,598,194 5.95 275,110
Borrowed funds:
Short-term borrowings:
Domestic.............................. 637,010 6.16 9,758
Foreign............................... 169,807 5.47 2,311
------------ ----------
Total short-term borrowings......... 806,817 6.02 12,069
Long-term debt and bank notes (c):
Domestic.............................. 4,837,762 6.74 81,123
Foreign............................... 960,114 6.41 15,313
------------ ----------
Total long-term debt and bank notes. 5,797,876 6.69 96,436
------------ ----------
Total borrowed funds................ 6,604,693 6.61 108,505
------------ ----------
Total interest-bearing liabilities.. 25,202,887 6.12 383,615
Demand deposits............................. 625,008
Other liabilities........................... 1,167,193
------------
Total liabilities................... 26,995,088
Stockholders' equity........................ 4,201,148
------------
Total liabilities and stockholders'
equity............................. $ 31,196,236
============ ----------
Net interest income................. $ 283,593
==========
Net interest margin................. 5.12
Interest rate spread................ 5.92
(b) The fully taxable equivalent adjustment for the three months ended
March 31, 2000 was $522.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
OTHER OPERATING INCOME
Total other operating income increased 32.9% or $365.4 million to $1.5
billion for the three months ended March 31, 2001, from the same period in
2000. The increase in other operating income was primarily attributable to
a $345.1 million or 37.2% increase in securitization income to $1.3 billion
for the three months ended March 31, 2001. The increase in securitization
income for the three months ended March 31, 2001 was the result of a $14.6
billion or 26.8% increase in average securitized loans from the same period
in 2000. Also, the securitized net interest margin increased to 8.92% for
the three months ended March 31, 2001, as compared to 7.91% for the same
period in 2000, as the yield earned on the Corporation's securitized loans
increased and the rate paid to investors in the Corporation's securitized
loan transactions decreased. The rate paid to investors in the
Corporation's securitized loan transactions decreased as a result of the
actions by the Federal Reserve Board in 2001 to lower overall market
interest rates. The rate paid to investors generally reprices on a monthly
basis. Therefore, lower market interest rates in 2001 decreased the rate
paid to investors during the three months ended March 31, 2001. In
addition, credit card fees decreased 15.4% to $61.3 million for the
three months ended March 31, 2001, from the same period in 2000. The
decrease in credit card fees for the three months ended March 31, 2001 was a
result of a decrease in late fees.
Insurance income increased $12.1 million to $29.2 million for the three months
ended March 31, 2001, as compared to the same period in 2000. The increase in
insurance income was primarily a result of growth in credit life insurance
commissions, in addition to the introduction of a credit protection insurance
product in the first quarter of 2001. Other income increased to $42.2 million
for the three months ended March 31, 2001, as compared to $25.0 million for the
same period in 2000, respectively. The increase in other income for the three
months ended March 31, 2001 was primarily a result of the Corporation receiving
incentive payments from MasterCard International Inc. and Visa U.S.A., Inc. for
meeting certain incentive targets.
OTHER OPERATING EXPENSE
Total other operating expense increased 19.2% to $1.1 billion for the three
months ended March 31, 2001, as compared to $915.3 million for the same
period in 2000. The growth in other operating expense reflects the
Corporation's continued investment in attracting, servicing, and retaining
credit card and other consumer loan Customers. The Corporation added 2.5
million new accounts (3.0 million new customers) for the three months ended
March 31. The Corporation also added 121 new endorsements from organizations
during the three months ended March 31, 2001. The Corporation also has
continued to invest in its other consumer loan, foreign, and insurance agency
businesses.
Included in the growth in total other operating expense for the three months
ended March 31, 2001 is an increase in salaries and employee benefits of
$74.2 million to $439.0 million from the same period in 2000. The increase
in salaries and employee benefits reflects an increase in the number of
people to service the Corporation's higher number of Customers. At March 31,
2001, the Corporation had approximately 24,100 full-time equivalent
employees, as compared to 20,500 full-time equivalent employees for the same
period in 2000.
The growth in other operating expense for the three months ended March 31,
2001 also includes amortization of intangible assets which increased $45.3
million to $98.0 million, as compared to the same period in 2000. The
increase in the amortization of intangible assets was the result of a higher
level of intangible assets resulting from the Corporation's loan portfolio
acquisitions. Table 3 provides further detail regarding the Corporation's
other operating expenses.
TABLE 3: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
Purchased services............................... $ 125,998 $ 90,176
Advertising...................................... 57,770 68,350
Collection....................................... 10,244 10,524
Stationery and supplies.......................... 10,653 9,179
Service bureau................................... 14,434 12,835
Postage and delivery............................. 83,051 98,198
Telephone usage.................................. 20,273 17,645
Loan receivable fraud losses..................... 42,422 33,699
Amortization of intangible assets................ 97,978 52,707
Computer software................................ 19,279 17,600
Other............................................ 81,034 56,233
------------ ------------
Total other operating expense.................. $ 563,136 $ 467,146
============ ============
LOAN QUALITY
The Corporation's loan quality at any time reflects, among other factors, the
quality of the Corporation's credit card and other consumer loans, the
general economic conditions, the success of the Corporation's collection
efforts, and the seasoning of the Corporation's loans. As new loans season,
the delinquency rate on these loans generally rises and then stabilizes.
DELINQUENCIES
An account is contractually delinquent if the minimum payment is not received
by the specified date on the Customer's statement. However, the Corporation
generally continues to accrue interest until the loan is either paid or
charged off. Delinquency as a percentage of the Corporation's loan portfolio
was 3.58% at March 31, 2001, compared with 3.89% at December 31, 2000. The
Corporation's delinquency as a percentage of managed loans was 4.60% at
March 31, 2001, compared to 4.49% at December 31, 2000.
Table 4 presents the stages of delinquency of the Corporation's loan
portfolio, excluding loans held for securitization.
TABLE 4: DELINQUENT LOANS
(dollars in thousands)
March 31, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Loan portfolio......................... $12,404,928 $11,682,904
Loans delinquent:
30 to 59 days........................ $ 168,918 1.36% $ 176,128 1.51%
60 to 89 days........................ 97,979 .79 95,859 .82
90 or more days...................... 177,647 1.43 182,955 1.56
----------- ----- ----------- -----
Total.............................. $ 444,544 3.58% $ 454,942 3.89%
=========== ===== =========== =====
Loans delinquent by geographic area:
Domestic............................. $ 381,508 3.86% $ 404,390 4.30%
Foreign.............................. 63,036 2.51 50,552 2.23
The Corporation may modify the terms of its credit card and other consumer
loan agreements with borrowers who have experienced financial difficulties,
by either reducing their interest rate or placing them on nonaccrual status.
These other nonperforming loans, excluding loans held for securitization, are
presented in Table 5.
TABLE 5: OTHER NONPERFORMING LOANS
(dollars in thousands)
March 31, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Nonaccrual loans..................... $ 22,401 $ 22,574
Reduced-rate loans................... 276,518 238,747
------------------ -----------------
Total other nonperforming loans.... $ 298,919 $ 261,321
================== =================
Other nonperforming loans as a % of
ending loan portfolio............... 2.41% 2.24%
The Corporation's total managed other nonperforming loans as a percentage of
ending managed loans was 2.46% at March 31, 2001, as compared to 2.41% at
December 31, 2000.
NET CREDIT LOSSES
The Corporation's policy is to charge off open-end delinquent accounts by the
end of the month in which the account becomes 180 days contractually past
due, closed-end 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. The Corporation sells
charged-off receivables and records the proceeds received from these sales as
recoveries, thereby reducing net credit losses.
Net credit losses for the three months ended March 31, 2001 were $133.8
million, compared to $99.8 million for the same period in 2000. Net credit
losses do not include credit losses from securitized loans, which are charged
to the related trusts in accordance with their respective contractual
agreements. The net credit losses for the three months ended March 31, 2001
reflect increases in the Corporation's outstanding loan receivables, general
economic conditions, and the seasoning of the Corporation's accounts, offset
by recoveries from the sale of charged-off receivables.
Net credit losses as a percentage of average loan receivables were 2.85% for
the three months ended March 31, 2001, compared to 2.29% for the same period
in 2000. The Corporation's managed credit losses as a percentage of average
managed loans for the three months ended March 31, 2001 were 4.35%, compared
to 4.06% for the same period in 2000, respectively.
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
The loan portfolio is regularly reviewed to determine an appropriate reserve
for possible credit losses based upon the impact of economic conditions on
the borrowers' ability to repay, past collection experience, the risk
characteristics of the portfolio, and other factors. A provision is charged
against earnings to maintain the reserve at an appropriate level. The
provision for possible credit losses for the three months ended March 31,
2001 was $152.0 million, compared to $99.8 million for the three months ended
March 31, 2000. The increase in the provision for possible credit losses
primarily reflects an increase in the Corporation's net credit losses.
The Corporation records acquired reserves for current period loan portfolio
acquisitions. During the three months ended March 31, 2001, the Corporation
recorded $10.3 million of reserves acquired for current period loan portfolio
acquisitions.
Table 6 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 portfolio and does not include an
allocation for credit risk related to securitized loans. 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 6: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
Reserve for possible credit losses, beginning of
period........................................... $ 386,568 $ 355,959
Reserves acquired............................... 10,322 12,232
Provision for possible credit losses
Domestic...................................... 131,845 92,524
Foreign....................................... 20,148 7,322
------------ ------------
Total provision for possible credit
losses.................................. 151,993 99,846
Foreign currency translation.................... (846) (161)
Credit losses:
Domestic:
Credit card................................. (136,696) (115,652)
Other consumer.............................. (45,116) (27,836)
------------ ------------
Total domestic credit losses.............. (181,812) (143,488)
Foreign....................................... (24,476) (12,197)
------------ ------------
Total credit losses....................... (206,288) (155,685)
Recoveries:
Domestic:
Credit card................................. 54,529 44,196
Other consumer.............................. 7,587 6,401
------------ ------------
Total domestic recoveries................. 62,116 50,597
Foreign....................................... 10,411 5,320
------------ ------------
Total recoveries.......................... 72,527 55,917
------------ ------------
Net credit losses............................... (133,761) (99,768)
------------ ------------
Reserve for possible credit losses, end of period. $ 414,276 $ 368,108
============ ============
CAPITAL ADEQUACY
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 March 31,
2001 and December 31, 2000, 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 7, have been computed in accordance with regulatory
accounting practices.
TABLE 7: REGULATORY CAPITAL RATIOS
March 31, December 31, Minimum Well-Capitalized
2001 2000 Requirements Requirements
----------- ------------ ------------ ----------------
(unaudited)
MBNA Corporation
Tier 1................. 15.22% 14.98% 4.00% (a)
Total.................. 16.90 16.61 8.00 (a)
Leverage............... 16.89 17.30 4.00 (a)
MBNA America Bank, N.A.
Tier 1................. 11.34 10.78 4.00 6.00%
Total.................. 13.07 12.44 8.00 10.00
Leverage............... 12.78 12.79 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1................. 20.48 20.88 4.00 6.00
Total.................. 21.44 21.84 8.00 10.00
Leverage............... 19.95 62.74 4.00 5.00
(a) Not applicable for bank holding companies.
DIVIDEND LIMITATIONS
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 outstanding 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 the common stock. In addition, 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 capital stock or
interest on debt securities that have equal or lower priority than the junior
subordinated deferrable interest debentures. During the three months ended
March 31, 2001, the Corporation declared dividends on its preferred stock of
$3.6 million and on its common stock of $76.7 million. On April 10, 2001,
the Corporation's Board of Directors declared a quarterly dividend of $.09
per common share, payable July 1, 2001 to shareholders of record as of
June 15, 2001. Also, on April 10, 2001, the Corporation's Board of Directors
declared a quarterly dividend of $.46875 per share on the 7 1/2% Cumulative
Preferred Stock, Series A, and a quarterly dividend of $.34380 per share on
the Adjustable Rate Cumulative Preferred Stock, Series B. The preferred
stock dividends are payable July 16, 2001 to stockholders of record as of
June 30, 2001.
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 profit.
Under
current regulatory practice, national banks may pay dividends only out of
current operating earnings. Also, a 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 March 31, 2001, the amount of retained earnings
available for declaration and payment of dividends from the Bank to the
Corporation was $2.0 billion. Payment of dividends by the Bank to the
Corporation, however, can be further limited by federal bank regulatory
agencies.
The Bank's payment of dividends to the Corporation may also be limited by a
tangible net worth requirement under the senior syndicated revolving credit
facility. This facility was not drawn upon at March 31, 2001. If this
facility had been drawn upon at March 31, 2001, the amount of retained
earnings available for declaration of dividends would have been further
limited to $755.6 million.
LIQUIDITY AND RATE SENSITIVITY
The Corporation seeks to maintain prudent levels of liquidity, interest rate
risk, and foreign currency exchange rate risk.
LIQUIDITY MANAGEMENT
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, deposits mature, and
payments on 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 loans, deposits, and
other assets and liabilities. This process is also affected by changes in
the relationship between short-term and long-term interest rates.
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 issuance, and uses securitization of the Corporation's loan
receivables as a major funding alternative. In addition, liquidity is
provided to the Corporation through committed credit facilities.
Total deposits at March 31, 2001 and December 31, 2000 were $24.2 billion and
$24.3 billion, respectively. The decrease in deposits from December 31, 2000
was primarily a result of a decrease in foreign time deposits. Table 8
provides the maturities of the Corporation's deposits at March 31, 2001.
TABLE 8: MATURITIES OF DEPOSITS AT MARCH 31, 2001
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
(unaudited)
Three months or less(a)............. $ 7,734,022 $ 939,319 $ 8,673,341
Over three months through twelve
months............................. 4,533,078 1,509,713 6,042,791
Over one year through five years.... 4,750,367 4,713,605 9,463,972
Over five years..................... 5,767 - 5,767
------------ ------------ ------------
Total deposits.................... $ 17,023,234 $ 7,162,637 $ 24,185,871
============ ============ ============
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts
totaling $6.1 billion.
The Corporation also held $3.2 billion in investment securities and $2.5
billion of money market instruments at March 31, 2001, compared to $3.1
billion in investment securities and $2.2 billion in money market instruments
at December 31, 2000. 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 March 31, 2001, $1.7
billion is anticipated to mature within twelve 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
$2.8 billion at March 31, 2001 and $2.7 billion at December 31, 2000. These
investment securities, along with the money market instruments, provide
increased liquidity and flexibility to support the Corporation's funding
requirements.
Estimated maturities, including the impact of estimated prepayments of the
Corporation's investment securities portfolio, are presented in Table 9.
TABLE 9: SUMMARY OF INVESTMENT SECURITIES AT MARCH 31, 2001
(dollars in thousands) (unaudited)
Estimated Maturity
------------------------------------------
Within 1 1-5 6-10 Over
Year Years Years 10 Years
---------- ---------- --------- --------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations. $1,287,516 $ 485,949 $ - $ -
State and political subdivisions
of the United States............ 90,291 2,075 - -
Asset-backed and other securities 302,896 558,516 23,270 8,501
---------- ---------- --------- --------
Total investment securities
available-for-sale............ $1,680,703 $1,046,540 $ 23,270 $ 8,501
========== ========== ========= ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations. $ - $ - $ - $320,069
State and political subdivisions
of the United States............ 10 186 - 5,745
Asset-backed and other securities - 11,630 - 60,682
---------- ---------- --------- --------
Total investment securities
held-to-maturity.............. $ 10 $ 11,816 $ - $386,496
========== ========== ========= ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,773,465 $1,773,465
State and political subdivisions
of the United States............. 92,366 92,366
Asset-backed and other securities. 893,183 893,183
---------- ----------
Total investment securities
available-for-sale............. $2,759,014 $2,759,014
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 320,069 $ 307,713
State and political subdivisions
of the United States............. 5,941 6,920
Asset-backed and other securities. 72,312 72,327
---------- ----------
Total investment securities
held-to-maturity............... $ 398,322 $ 386,960
========== ==========
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the change in earnings resulting from
fluctuations in interest rates, variability in spread relationships, and the
differences in repricing intervals between assets and liabilities. 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.
The Corporation analyzes its level of interest rate risk using several
analytical techniques, which include the impact of on-balance-sheet financial
instruments. 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. Key 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. Also
included in the analysis are various actions which the Corporation would
undertake to minimize the impact of adverse movements in interest rates. 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 movements in interest rates, with a lag of approximately 45
days between interest rate movements and fixed-rate credit card loan
repricings. The Corporation has repriced its fixed-rate credit card loans on
numerous occasions in the past, and expects to continue to do so in response
to changes in interest rates, market conditions, or other factors.
Based on the simulation analysis at March 31, 2001, the Corporation could
experience a decrease in projected net income during the next twelve months
of approximately $46 million, if interest rates at the time the simulation
analysis was performed increased 100 basis points over the 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 due to 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.
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
Foreign currency exchange rate risk refers to the potential changes in
current and future earnings or capital arising from movements in foreign
exchange rates. The Corporation's foreign currency exchange rate risk is
limited to the unhedged portion of the Corporation's net investment in its
foreign subsidiaries. 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 March 31, 2001, the Corporation could experience
a decrease in stockholders' equity, net of tax, of approximately $44 million,
as a result of a 10% depreciation of the Corporation's unhedged capital
exposure in foreign subsidiaries to the U.S. dollar position.
The Corporation does not have any other off-balance-sheet derivative
financial instruments.
The Corporation adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" ("Statement No. 137") and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-an Amendment of FASB Statement No.
133" ("Statement No. 138") on January 1, 2001. The standards required that
all derivative instruments be recorded on the Corporation's consolidated
statement of financial condition at fair value and established criteria for
designation and effectiveness of hedging relationships. The Corporation
recognized a $2.5 million (pretax) loss upon implementation of Statement No.
133, as amended by Statement No. 137 and Statement No. 138, on January 1,
2001.
ASSET SECURITIZATION
Asset securitization of loan receivables is accomplished primarily through
the public and private issuance of asset-backed securities. As loan
receivables are securitized, the Corporation's on-balance-sheet funding needs
are reduced by the amount of loans securitized.
Asset securitization involves the sale, generally to a trust, of a pool of
loan receivables. The Corporation continues to own the accounts that
generate the loan receivables. In addition, the Corporation also sells the
rights to new loan receivables, including most fees generated by the accounts
and payments received from the accounts. The trust sells undivided interests
in the trust to investors, while the Corporation retains the remaining
undivided interest. The senior classes of the asset-backed securities receive
a AAA credit rating at the time of issuance. This AAA credit rating is
generally achieved through the sale of lower rated subordinated classes of
asset-backed securities. The Corporation continues to service the accounts
and receives a contractual servicing fee for doing so.
During the revolving period, which generally ranges from 24 months to 108
months, the trust makes no principal payments to the investors. Instead, the
trust uses principal payments received on the accounts to purchase new loan
receivables generated by these accounts, in accordance with the terms of the
transaction, so that the principal dollar amount of the investor's undivided
interest remains unchanged. Once the revolving period ends, the amortization
period begins and the trust distributes principal payments to the investors
according to the terms of the transaction. When the trust allocates
principal payments to the investors, the Corporation's on-balance-sheet loan
receivables increase by the amount of any new purchases or cash advance
activity on the accounts.
Distribution of principal to investors may begin sooner if the average
annualized yield (generally including interest income, interchange, and other
fees) for three consecutive months drops below a minimum yield (generally
equal to the sum of the coupon rate payable to investors, contractual
servicing fees, and principal credit losses during the period) or certain other
events occur.
During the three months ended March 31, 2001, the Corporation securitized
credit card loan receivables totaling $2.0 billion, while $1.8 billion of
previously securitized credit card and other consumer loan receivables
amortized or matured. The total amount of outstanding securitized loans was
$68.8 billion or 78.3% of managed loans at March 31, 2001, compared to $68.8
billion or 77.5% at December 31, 2000. An additional $7.5 billion of
previously securitized loans is scheduled to amortize or mature during the
remainder of 2001. The amortization amount is based upon estimated
amortization periods, which are subject to change.
Table 10 shows the Corporation's securitized loan distribution.
TABLE 10: SECURITIZED LOANS DISTRIBUTION
(dollars in thousands)
March 31, December 31,
2001 2000
------------ ------------
(unaudited)
Securitized Loans
Domestic:
Credit card.................................. $ 57,694,343 $ 57,425,582
Other consumer............................... 5,696,527 5,691,769
------------ ------------
Total domestic securitized loans........... 63,390,870 63,117,351
Foreign:
Credit card.................................. 5,403,061 5,650,485
Other consumer............................... 50,133 68,048
------------ ------------
Total foreign securitized loans............ 5,453,194 5,718,533
------------ ------------
Total securitized loans.................... $ 68,844,064 $ 68,835,884
============ ============
Table 11 shows summarized yields in excess of minimum yield data for each
securitization trust for the three-month period ended March 31, 2001. The
yields in excess of minimum yield for each of the securitization trusts are
presented on a cash basis and include various credit card or other fees as
specified in the securitization agreements.
TABLE 11: SECURITIZATION TRUST YIELDS IN EXCESS OF MINIMUM YIELD DATA (a)
Yield in Excess of Minimum
Number --------------------------------
of Series Range
Series Weighted --------------------
in Trust Average High Low
-------- ---------- --------- ---------
(unaudited)
MBNA Master Credit Card
Trust II (b)....................... 66 7.38% 7.87% 5.47%
UK Receivables Trust................ 11 6.33 7.05 5.72
Gloucester Credit Card Trust........ 5 7.42 8.14 6.51
MBNA Triple A Master Trust.......... 2 6.44 6.45 6.43
First Union Master Credit Card
Trust (c).......................... 1 10.85 10.85 10.85
First Union Direct Bank Master
Credit Card Trust (c).............. 3 10.13 10.51 9.10
(a) MBNA Master Consumer Loan Trust and UK Consumer Loan Receivables Trust are
excluded from Table 11, as the yield in excess of minimum yield does not
impact the distribution of principal to investors. Distribution to
investors for transactions in these securitization trusts may begin
earlier than the scheduled time if the credit enhancement amount falls
below a predetermined contractual level.
(b) MBNA Master Credit Card Trust II Series 2001-A issued on February 20, 2001
and Series 2001-B issued on March 8, 2001 are excluded from Table 11
presented above as a result of their recency. MBNA Master Credit Card
Trust II Series 1996-C has entered its scheduled controlled amortization
period and is also excluded from Table 11.
(c) These securitization trusts were assumed by the Corporation in 2000 as
part of the acquisition of the consumer and commercial revolving credit
loan portfolio from First Union Corporation.
In September 2000, 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"), was issued. Statement No. 140 replaces Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement
No. 125"), and revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement No. 125's provisions
without reconsideration. The Corporation adopted Statement No. 140's revised
accounting standards for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
implementation of Statement No. 140 did not impact the Corporation's
consolidated financial statements.
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(unaudited)
The following supplemental financial information presents selected managed
income statement and asset data. This information can be used to help evaluate
the Corporation's financial condition and results of operations.
MANAGED FINANCIAL INFORMATION
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
MANAGED INCOME STATEMENTS
Interest income................................ $ 3,247,851 $ 2,549,277
Interest expense............................... 1,460,074 1,192,942
------------ ------------
Net interest income............................ 1,787,777 1,356,335
Provision for possible credit losses........... 976,144 731,803
------------ ------------
Net interest income after provision for
possible credit losses........................ 811,633 624,532
Other operating income......................... 778,004 669,729
Other operating expense........................ 1,091,151 915,310
------------ ------------
Income before income taxes..................... 498,486 378,951
Applicable income taxes........................ 187,431 144,380
------------ ------------
Net income..................................... $ 311,055 $ 234,571
============ ============
MANAGED LOANS
At period end.................................. $ 87,915,009 $ 72,999,767
Average for the period......................... 87,985,326 72,004,076
MANAGED RATIOS
Delinquency.................................... 4.60% 4.35%
Net credit losses.............................. 4.35 4.06
Net interest margin............................ 7.71 7.10
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1996, Andrew B. Spark filed a lawsuit against the Corporation, the
Bank and certain of its officers and its subsidiary MBNA Marketing Systems,
Inc. The case is pending in the United States District Court for the District
of Delaware. 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, violation of the Delaware Deceptive Trade
Practices Act and violation of the federal Racketeer Influenced and Corrupt
Organizations Act. In February 1998, a class was certified by the District
Court. In September 2000, the Court gave preliminary approval to a settlement
of this suit for approximately $8.7 million. A hearing on final approval will
be held in May 2001. 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 May 2000, the Corporation and the Bank filed an
appeal from the order certifying a class. In March 2001, the order was
affirmed by the appellate court. In October 2000, plaintiff filed a motion
for partial summary judgement. That motion is pending. The Corporation and
the Bank believe that their advertising practices were and are proper under
applicable federal and state law and intend to defend this action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of the Stockholders of MBNA Corporation was held on
April 30, 2001.
The stockholders elected the following nominees to the Corporation's Board of
Directors to serve for the coming year and until their successors are elected
and qualify. The following shows the separate tabulation of votes for each
nominee:
Number of Votes
-----------------------------
For Withheld
------------- --------------
Alfred Lerner................................. 642,877,263 8,263,216
Charles M. Cawley............................. 642,335,158 8,805,321
James H. Berick, Esq.......................... 608,318,522 42,821,957
Benjamin R. Civiletti, Esq.................... 608,759,378 42,381,101
Bernadine P. Healy, M.D....................... 643,034,390 8,106,089
William L. Jews............................... 642,765,788 8,374,691
Randolph D. Lerner, Esq....................... 642,954,877 8,185,602
Stuart L. Markowitz, M.D...................... 642,948,668 8,191,811
Michael Rosenthal, Ph.D....................... 642,212,843 8,927,636
The stockholders did not approve a stockholder proposal that the Board of
Directors prepare a report, at reasonable cost and excluding confidential
information, to be made available to shareholders four months after the annual
shareholder meeting, on the Corporation's progress concerning the Glass Ceiling
Commission's business recommendations. The Board of Directors opposed the
proposal. There were 69,618,929 affirmative votes, 436,383,025 negative votes,
and 29,717,789 abstentions.
The stockholders approved the Corporation's new Senior Executive Performance
Plan. There were 610,823,382 affirmative votes, 36,823,126 negative votes, and
3,474,242 abstentions.
The Corporation had 851,781,250 shares entitled to vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- -----------------------------------------------------
10 Senior Executive Performance Plan
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
EXHIBIT 10: SENIOR EXECUTIVE PERFORMANCE PLAN
Purpose
The purpose of the Senior Executive Performance Plan (the "Plan") is to set
forth the terms on which annual bonuses will be paid to participating senior
executives of MBNA Corporation and MBNA America Bank, N.A. and their
subsidiaries (collectively the "Corporation"). The Plan is intended to permit
the Corporation to deduct fully annual bonuses paid to senior executives in
determining its federal income taxes in accordance with Section 162(m) of the
Internal Revenue Code of l986, as amended.
Administration
The Plan has been approved by and shall be administered by the Compensation
Committee of the Board of Directors of the Corporation or a subcommittee of the
Compensation Committee composed of two or more "outside directors" as defined
in Section 162(m) and the regulations thereunder (the "Committee"). The
Committee shall interpret the Plan and shall have the authority and duties set
forth in the Plan.
Covered Officers
The Plan applies each year to those officers of the Corporation whose
compensation would be subject to the limitations of Section 162(m) or the
regulations thereunder for that year.
Bonuses
Each covered officer who is employed by the Corporation during a calendar year
while this Plan is in effect will be eligible to receive a bonus, if the
Corporation achieves the net income target for that year established or to be
established by the Committee, in an amount equal to 200% of the covered
officer's 2001 base salary. No bonus will be paid for any year pursuant to the
Plan unless the net income objective for that year has been attained. The
Committee may reduce or eliminate bonuses for any reason in its sole discretion
notwithstanding attainment of the net income objective for that year.
The Committee will determine the net income objective for each year's bonuses
not later than 90 days after the commencement of each year, provided that the
net income objective for such year is substantially uncertain. Net income for
purposes of the Plan means consolidated net income of the Corporation before
extraordinary items and the cumulative net effect of accounting changes
occurring or adopted following approval of the net income objective by the
Committee. The Committee shall make appropriate adjustments in net income
objectives to reflect any changes in federal or applicable state income tax
rates.
No bonus shall be paid pursuant to this Plan for any year until the Committee
has certified that the net income target for that year has been attained.
Bonuses shall be paid promptly following the Committee's certification that the
net income objective for that year has been attained. Annual bonuses payable
pursuant to the Plan may be paid in cash, restricted or unrestricted shares of
Common Stock, or both, as determined by the Committee.
Miscellaneous
No covered officer may assign the right to receive any benefit under the Plan.
The Committee may approve payment of any amount which a disabled or deceased
covered officer would have earned under the Plan to the covered officer's
spouse or estate.
The Plan shall be submitted to the Corporation's stockholders for approval in
accordance with Section 162(m).
The Committee may amend or change the Plan at any time and in any manner.
After the Plan has been approved by the Corporation's stockholders, the Plan
may not be amended or changed without stockholder approval if the amendment or
change would limit the deductibility of bonuses paid pursuant to the Plan under
Section 162(m).
The Plan will be effective beginning with bonuses for 2001. The Plan will
continue in effect without further stockholder approval until terminated by
the Committee. The Committee may terminate the Plan at any time.
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 498,486 $ 378,951
Fixed charges.................................... 481,761 386,999
Interest capitalized during period, net of
amortization of previously capitalized interest. (644) (929)
------------ ------------
Earnings, for computation purposes............... $ 979,603 $ 765,021
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 479,807 $ 384,673
Portion of rents representative of the interest
factor.......................................... 1,954 2,326
------------ ------------
Fixed charges.................................... 481,761 386,999
Preferred stock dividend requirements............ 5,710 6,019
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 487,471 $ 393,018
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.01 1.95
For the Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 498,486 $ 378,951
Fixed charges.................................... 104,517 111,889
Interest capitalized during period, net of
amortization of previously capitalized interest. (649) (934)
------------ ------------
Earnings, for computation purposes............... $ 602,354 $ 489,906
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 102,563 $ 109,563
Portion of rents representative of the interest
factor.......................................... 1,954 2,326
------------ ------------
Fixed charges.................................... 104,517 111,889
Preferred stock dividend requirements............ 5,710 6,019
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 110,227 $ 117,908
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 5.46 4.15
The ratio of earnings to combined fixed charges and preferred stock dividend
requirements is computed by dividing (i) income before income taxes and fixed
charges less interest capitalized during such period, net of amortization of
previously capitalized interest, by (ii) fixed charges and preferred stock
dividend requirements. Fixed charges consist of interest, expensed or
capitalized, on borrowings (including or excluding deposits, as applicable),
and the portion of rental expense which is deemed representative of interest.
The preferred stock dividend requirements represent the pretax earnings which
would have been required to cover such dividend requirements on the
Corporation's Preferred Stock outstanding.
REPORTS ON FORM 8-K
1. Report dated January 10, 2001, reporting MBNA Corporation's earnings
release for the fourth quarter of 2000.
2. Report dated January 31, 2001, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for January 2001.
3. Report dated February 20, 2001, reporting the securitization of
$1.25 billion of credit card loan receivables by MBNA America Bank,
N.A.
4. Report dated February 28, 2001, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for February 2001.
5. Report dated March 8, 2001, reporting the securitization of
$750.0 million of credit card loan receivables by MBNA America Bank,
N.A.
6. Report dated March 31, 2001, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for March 2001.
7. Report dated April 11, 2001, reporting MBNA Corporation's earnings
release for the first quarter of 2001.
8. Report dated April 18, 2001, reporting the securitization of
CAD$350.0 million of credit card loan receivables by MBNA Canada Bank.
9. Report dated April 30, 2001, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for April 2001.
SIGNATURE
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 hereunto duly authorized.
MBNA CORPORATION
Date: May 15, 2001 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer