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 June 30, 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
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Commission file number 1-10683
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MBNA Corporation
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(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, Delaware 19884-0141
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(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
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(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 June 30, 2001
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
June 30, 2001 (unaudited) and December 31, 2000
Consolidated Statements of Income - 3
For the Three and Six Months Ended June 30, 2001 and 2000
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Six Months Ended June 30, 2001 and 2000
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Six Months Ended June 30, 2001 and 2000
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations (unaudited)
Supplemental Financial Information (unaudited) 48
Part II - Other Information
Item 1. Legal Proceedings 49
Item 6. Exhibits and Reports on Form 8-K 49
Signature 53
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 754,141 $ 971,469
Interest-earning time deposits in other banks..... 1,682,910 1,505,331
Federal funds sold and securities purchased
under resale agreements.......................... 1,190,000 700,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $2,956,231 and $2,661,962 at
June 30, 2001 and December 31, 2000,
respectively).................................. 2,972,167 2,666,196
Held-to-maturity (market value of $395,762
and $368,547 at June 30, 2001 and
December 31, 2000, respectively)............... 415,332 384,088
Loans held for securitization..................... 7,108,967 8,271,933
Loans:
Credit card..................................... 7,391,078 7,798,772
Other consumer.................................. 6,043,050 3,884,132
------------ ------------
Total loans................................... 13,434,128 11,682,904
Reserve for possible credit losses.............. (528,158) (386,568)
------------ ------------
Net loans..................................... 12,905,970 11,296,336
Premises and equipment, net....................... 1,959,231 1,781,011
Accrued income receivable......................... 296,674 305,437
Accounts receivable from securitizations.......... 7,108,971 6,940,567
Intangible assets, net............................ 2,675,393 2,749,435
Prepaid expenses and deferred charges............. 317,539 322,201
Other assets...................................... 1,028,254 784,092
------------ ------------
Total assets.................................. $ 40,415,549 $ 38,678,096
============ ============
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 18,446,603 $ 18,468,144
Money market deposit accounts................... 5,432,744 4,922,027
Noninterest-bearing demand deposits............. 838,251 892,980
Interest-bearing transaction accounts........... 40,958 50,475
Savings accounts................................ 10,401 9,969
------------ ------------
Total deposits................................ 24,768,957 24,343,595
Short-term borrowings............................. 200,559 159,512
Long-term debt and bank notes..................... 6,465,491 5,735,635
Accrued interest payable.......................... 226,297 237,610
Accrued expenses and other liabilities............ 1,764,530 1,574,466
------------ ------------
Total liabilities............................. 33,425,834 32,050,818
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at June 30, 2001 and
December 31, 2000)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 851,781,250 shares and
851,803,793 shares issued and outstanding
at June 30, 2001 and December 31, 2000,
respectively).................................... 8,518 8,518
Additional paid-in capital........................ 2,590,859 2,725,950
Retained earnings................................. 4,462,008 3,931,248
Accumulated other comprehensive income............ (71,756) (38,524)
------------ ------------
Total stockholders' equity.................... 6,989,715 6,627,278
------------ ------------
Total liabilities and stockholders' equity.... $ 40,415,549 $ 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 For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Loans......................... $ 466,008 $ 326,851 $ 876,517 $ 594,967
Loans held for securitization. 223,723 273,473 471,581 602,668
Investment securities:
Taxable..................... 43,660 43,268 85,820 84,688
Tax-exempt.................. 978 1,169 1,895 2,137
Time deposits in other banks.. 18,483 18,673 40,359 37,834
Federal funds sold and
securities purchased under
resale agreements............ 12,979 4,471 33,897 12,297
Other interest income......... 22,840 17,669 44,200 34,874
---------- ---------- ---------- ----------
Total interest income...... 788,671 685,574 1,554,269 1,369,465
INTEREST EXPENSE
Deposits...................... 365,501 292,963 742,745 568,073
Short-term borrowings......... 1,656 11,507 4,305 23,576
Long-term debt and bank notes. 86,434 95,122 185,562 191,558
---------- ---------- ---------- ----------
Total interest expense..... 453,591 399,592 932,612 783,207
---------- ---------- ---------- ----------
NET INTEREST INCOME........... 335,080 285,982 621,657 586,258
Provision for possible credit
losses....................... 260,157 89,301 412,150 189,147
---------- ---------- ---------- ----------
Net interest income after
provision for possible
credit losses................ 74,923 196,681 209,507 397,111
OTHER OPERATING INCOME
Interchange................... 76,103 66,598 145,949 134,348
Credit card fees.............. 67,909 66,049 129,251 138,540
Securitization income......... 1,364,793 984,459 2,617,292 1,896,042
Insurance..................... 30,063 19,450 59,229 36,493
Other......................... 43,831 39,146 86,031 64,110
---------- ---------- ---------- ----------
Total other operating
income.................... $1,582,699 $1,175,702 $3,037,752 $2,269,533
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee
benefits..................... $ 439,534 $ 382,209 $ 878,516 $ 747,014
Occupancy expense of premises. 37,780 33,210 74,245 67,259
Furniture and equipment
expense...................... 54,760 47,441 107,328 96,751
Other......................... 516,369 448,479 1,079,505 915,625
---------- ---------- ---------- ----------
Total other operating
expense................... 1,048,443 911,339 2,139,594 1,826,649
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.... 609,179 461,044 1,107,665 839,995
Applicable income taxes....... 229,051 175,658 416,482 320,038
---------- ---------- ---------- ----------
NET INCOME.................... $ 380,128 $ 285,386 $ 691,183 $ 519,957
========== ========== ========== ==========
EARNINGS PER COMMON SHARE..... $ .44 $ .35 $ .80 $ .64
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION............ .43 .34 .78 .62
=============================================================================
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-$.18 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 7,150 - 72
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (7,173) - (72)
----------- ---------- --------- ----------
BALANCE, JUNE 30, 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-$.16 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 5,371 - 54
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (5,371) - (54)
----------- ---------- --------- ----------
BALANCE, JUNE 30, 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............... - 691,183 - 691,183
Other comprehensive
income, net of tax...... - - (33,232) (33,232)
------------
Comprehensive income....... 657,951
------------
Cash dividends:
Common-$.18 per share.... - (153,339) - (153,339)
Preferred................ - (7,084) - (7,084)
Exercise of stock options
and other awards.......... 65,426 - - 65,498
Stock option tax benefit... 45,366 - - 45,366
Amortization of deferred
compensation expense...... 15,117 - - 15,117
Acquisition and retirement
of common stock........... (261,000) - - (261,072)
---------- ---------- ------------- ------------
BALANCE, JUNE 30, 2001..... $2,590,859 $4,462,008 $ (71,756) $ 6,989,715
========== ========== ============= ============
BALANCE, DECEMBER 31, 1999. $1,305,935 $2,897,964 $ (12,560) $ 4,199,443
Comprehensive income:
Net income............... - 519,957 - 519,957
Other comprehensive
income, net of tax...... - - (31,048) (31,048)
------------
Comprehensive income....... 488,909
------------
Cash dividends:
Common-$.16 per share.... - (128,288) - (128,288)
Preferred................ - (7,398) - (7,398)
Exercise of stock options
and other awards.......... 19,341 - - 19,395
Stock option tax benefit... 18,249 - - 18,249
Amortization of deferred
compensation expense...... 12,745 - - 12,745
Acquisition and retirement
of common stock........... (143,229) - - (143,283)
---------- ---------- ------------- ------------
BALANCE, JUNE 30, 2000..... $1,213,041 $3,282,235 $ (43,608) $ 4,459,772
========== ========== ============= ============
==============================================================================
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 Six Months Ended
June 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 691,183 $ 519,957
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses............ 412,150 189,147
Depreciation, amortization, and accretion....... 348,639 251,537
(Benefit) provision for deferred income taxes... (57,558) 12,308
Decrease in accrued income receivable........... 8,763 32,995
Increase in accounts receivable from
securitizations................................ (168,404) (1,328,858)
(Decrease) increase in accrued interest payable. (11,313) 4,087
(Increase) decrease in other operating
activities..................................... (37,060) 118
------------ ------------
Net cash provided by (used in) operating
activities....................................... 1,186,400 (318,709)
INVESTING ACTIVITIES
Net increase in money market instruments.......... (667,579) (232,497)
Proceeds from maturities of investment securities
available-for-sale............................... 765,978 253,395
Proceeds from sale of investment securities
available-for-sale............................... 505 -
Purchases of investment securities
available-for-sale............................... (1,079,077) (298,343)
Proceeds from maturities of investment securities
held-to-maturity ................................ 9,807 5,651
Purchases of investment securities
held-to-maturity................................. (41,538) (26,323)
Proceeds from securitization of loans............. 4,483,619 6,677,685
Proceeds from sale of loans....................... 289,932 67,407
Loan portfolio acquisitions....................... (767,155) (1,397,080)
Amortization of securitized loans................. (3,310,111) (2,031,196)
Net loan originations............................. (1,701,069) (3,171,885)
Net purchases of premises and equipment........... (292,989) (118,627)
------------ ------------
Net cash used in investing activities............. $ (2,309,677) $ (271,813)
For the Six Months Ended
June 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net (decrease) increase in time deposits.......... $ (21,541) $ 1,546,186
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts............................. 446,903 178,907
Net increase (decrease) in short-term borrowings.. 41,047 (696,172)
Proceeds from issuance of long-term debt
and bank notes................................... 1,115,405 413,814
Maturity of long-term debt and bank notes......... (328,309) (597,711)
Proceeds from exercise of stock options
and other awards................................. 65,498 19,395
Acquisition and retirement of common stock........ (261,072) (143,283)
Dividends paid.................................... (151,982) (127,655)
------------ ------------
Net cash provided by financing activities..... 905,949 593,481
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.. (217,328) 2,959
Cash and cash equivalents at beginning of period.. 971,469 488,386
------------ ------------
Cash and cash equivalents at end of period........ $ 754,141 $ 491,345
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 958,561 $ 778,727
============ ============
Income taxes paid................................. $ 368,440 $ 396,115
============ ============
==============================================================================
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. 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. For purposes of comparability,
certain prior period amounts have been reclassified. Operating results for the
three and six months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
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
July 11, 2001 October 15, 2001 7.50 .46875 5.60 .35020
NOTE C: COMMON STOCK
During the six months ended June 30, 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 June 30, 2001, the
unamortized compensation expense related to all of the Corporation's
outstanding restricted stock awards was $178.8 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 July 11, 2001 the Corporation's Board of Directors declared a quarterly cash
dividend of $.09 per common share, payable October 1, 2001 to stockholders of
record as of September 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 For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE
Net income........................ $ 380,128 $ 285,386 $ 691,183 $ 519,957
Less: preferred stock dividend
requirements..................... 3,521 3,672 7,084 7,398
--------- --------- --------- ---------
Net income applicable to common
stock............................ $ 376,607 $ 281,714 $ 684,099 $ 512,559
========= ========= ========= =========
Weighted average common shares
outstanding (000)................ 851,853 801,821 851,847 801,835
========= ========= ========= =========
Earnings per common share......... $ .44 $ .35 $ .80 $ .64
========= ========= ========= =========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
Net income........................ $ 380,128 $ 285,386 $ 691,183 $ 519,957
Less: preferred stock dividend
requirements..................... 3,521 3,672 7,084 7,398
--------- --------- --------- ---------
Net income applicable to common
stock............................ $ 376,607 $ 281,714 $ 684,099 $ 512,559
========= ========= ========= =========
Weighted average common shares
outstanding (000)................ 851,853 801,821 851,847 801,835
Net effect of dilutive stock
options (000).................... 25,896 24,487 26,226 23,541
--------- --------- --------- ---------
Weighted average common shares
outstanding and common stock
equivalents (000)................ 877,749 826,308 878,073 825,376
========= ========= ========= =========
Earnings per common share-
assuming dilution................ $ .43 $ .34 $ .78 $ .62
========= ========= ========= =========
There were 65,000 stock options with an average exercise price of $36.18 per
share outstanding at June 30, 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
During the six months ended June 30, 2001, the Corporation sold investment
securities resulting in a realized 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 For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income........................ $ 380,128 $ 285,386 $ 691,183 $ 519,957
Other comprehensive income:
Foreign currency translation.... (6,623) (28,349) (41,860) (34,062)
Net unrealized gains
on investment securities
available-for-sale and other
financial instruments.......... 473 3,735 8,628 3,014
--------- --------- --------- ---------
Other comprehensive income........ (6,150) (24,614) (33,232) (31,048)
--------- --------- --------- ---------
Comprehensive income.............. $ 373,978 $ 260,772 $ 657,951 $ 488,909
========= ========= ========= =========
The components of accumulated other comprehensive income, net of tax, are as
follows:
June 30, December 31,
2001 2000
------------ ------------
Foreign currency translation...................... $ (88,816) $ (46,956)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments...................................... 17,060 8,432
------------ ------------
Accumulated other comprehensive income............ $ (71,756) $ (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 six months ended June 30, 2001, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
Fixed-Rate Bank Note, with an interest rate of 6.50%,
payable semiannually, maturing in 2006................ $600,000
Floating-Rate Senior Medium-Term Notes, priced
at 100 basis points over the three-month
London Interbank Offered Rate, payable quarterly,
maturing in 2003...................................... 50,000
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 rate risk on a
portion of long-term debt and bank notes issued by MBNA Europe Bank Limited
("MBNA Europe").
During the three months ended June 30, 2001, MBNA America Bank, N.A. ("the
Bank"), entered into two interest rate swap agreements, each with an underlying
notional amount of $300.0 million, related to the issuance of the $600.0
million fixed-rate bank note.
In addition, during the six months ended June 30, 2001, MBNA Europe entered
into foreign exchange swap agreements to reduce the foreign currency exchange
rate risk and interest rate sensitivity related to the EUR500.0 million
fixed-rate Euro medium-term notes issuance.
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
the 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 on the Corporation's consolidated statement of 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 on the
Corporation's consolidated statement of 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 $53.9 million and a gross unrealized loss of $8.2 million at June 30,
2001. For the three and six months ended June 30, 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 $424,000 at June 30, 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
$42.6 million and a gross unrealized gain of $4.1 million at June 30, 2001.
For the three months ended June 30, 2001, the Corporation recognized a net loss
of $12.3 million on its foreign exchange swap agreements and an offsetting net
gain of $22.6 million on the related underlying long-term debt and bank notes,
in the consolidated statement of income. For the six months ended June 30,
2001, the Corporation recognized a net loss of $34.3 million on its foreign
exchange swap agreements and an offsetting net gain of $35.2 million on the
related underlying long-term debt and bank notes, in the consolidated statement
of income. For the three and six months ended June 30, 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 $21.7 million and a gross unrealized loss of $1.7
million at June 30, 2001. For the three months ended June 30, 2001, the
Corporation recognized a net loss of $5.2 million on its forward exchange
contracts and a net loss of $5.5 million on the related assets and liabilities,
in the consolidated statement of income. For the six months ended June 30,
2001, the Corporation recognized a net gain of $55.1 million on its forward
exchange contracts and an offsetting net loss of $60.8 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.
MANAGED INCOME STATEMENTS
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ 3,254,691 $ 2,663,805 $ 6,502,542 $ 5,213,082
Interest expense....... 1,273,057 1,273,297 2,733,131 2,466,239
------------ ------------ ------------ ------------
Net interest income.... 1,981,634 1,390,508 3,769,411 2,746,843
Provision for possible
credit losses......... 1,187,697 731,508 2,163,841 1,463,311
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 793,937 659,000 1,605,570 1,283,532
Other operating income. 863,685 713,383 1,641,689 1,383,112
Other operating
expense............... 1,048,443 911,339 2,139,594 1,826,649
------------ ------------ ------------ ------------
Income before income
taxes................. 609,179 461,044 1,107,665 839,995
Applicable income
taxes................. 229,051 175,658 416,482 320,038
------------ ------------ ------------ ------------
Net income............. $ 380,128 $ 285,386 $ 691,183 $ 519,957
============ ============ ============ ============
Managed loans at
period end............ $ 90,417,016 $ 76,332,656
Average managed loans
for the period........ 89,266,188 74,061,588 $ 88,629,295 $ 73,032,832
SECURITIZATION ADJUSTMENT
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ (2,466,020) $ (1,978,231) $ (4,948,273) $ (3,843,617)
Interest expense....... (819,466) (873,705) (1,800,519) (1,683,032)
------------ ------------ ------------ ------------
Net interest income.... (1,646,554) (1,104,526) (3,147,754) (2,160,585)
Provision for possible
credit losses......... (927,540) (642,207) (1,751,691) (1,274,164)
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ (719,014) (462,319) (1,396,063) (886,421)
Other operating income. 719,014 462,319 1,396,063 886,421
Other operating
expense............... - - - -
------------ ------------ ------------ ------------
Income before income
taxes................. - - - -
Applicable income
taxes................. - - - -
------------ ------------ ------------ ------------
Net income............. $ - $ - $ - $ -
============ ============ ============ ============
Securitized loans at
period end............ $(69,873,921) $(59,211,174)
Average securitized
loans for the period.. (69,271,510) (56,832,969) $(69,254,389) $(55,708,941)
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ 788,671 $ 685,574 $ 1,554,269 $ 1,369,465
Interest expense....... 453,591 399,592 932,612 783,207
------------ ------------ ------------ ------------
Net interest income.... 335,080 285,982 621,657 586,258
Provision for possible
credit losses......... 260,157 89,301 412,150 189,147
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 74,923 196,681 209,507 397,111
Other operating income. 1,582,699 1,175,702 3,037,752 2,269,533
Other operating
expense............... 1,048,443 911,339 2,139,594 1,826,649
------------ ------------ ------------ ------------
Income before income
taxes................. 609,179 461,044 1,107,665 839,995
Applicable income
taxes................. 229,051 175,658 416,482 320,038
------------ ------------ ------------ ------------
Net income............. $ 380,128 $ 285,386 $ 691,183 $ 519,957
============ ============ ============ ============
Loan receivables at
period end............ $ 20,543,095 $ 17,121,482
Average loan
receivables for the
period................ 19,994,678 17,228,619 $ 19,374,906 $ 17,323,891
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.
In July 2001, Financial Accounting Standards Board Technical Bulletin No. 01-1,
"Effective Date for Certain Financial Institutions of Certain Provisions of
Statement 140 Related to the Isolation of Transferred Financial Assets"
("Technical Bulletin No. 01-1"), was issued. Technical Bulletin No. 01-1
applies to securitization structures utilized in the marketplace and clarifies
certain isolation criterion that are required by Statement No. 140 to account
for asset securitizations as sales. Technical Bulletin No. 01-1 delays the
effective date of Statement No. 140 as it applies to single-step securitization
structures for transactions occurring after December 31, 2001. Technical
Bulletin No. 01-1 also provides an extended transition period until June 30,
2006, for conversion of existing single-step master trust securitization
structures to allow issuers, if necessary, additional time to obtain sufficient
approvals from the beneficial interest holders to meet the isolation criterion
required by Statement No. 140 to achieve sales treatment. The Corporation
believes that any required changes in its securitization structures will not be
significant, and that the implementation of any changes will not have a
material impact on the Corporation's consolidated net income.
The Corporation adopted Emerging Issues Task Force Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets" ("EITF 99-20") on April 1, 2001. As a result,
the Corporation now records certain income related to beneficial interests
retained in a securitization transaction accounted for as a sale as interest
income in the Corporation's consolidated statement of income. This income was
previously recorded as securitization income in the Corporation's consolidated
statement of income. The Corporation includes these retained beneficial
interests in accounts receivable from securitizations on the consolidated
statement of financial condition. The implementation of EITF 99-20 did not
impact the Corporation's consolidated net income.
In June 2001, Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("Statement No. 142"), was issued. In accordance
with Statement No. 142, goodwill and intangible assets determined to have
indefinite lives will no longer be amortized, but will instead be subject to an
annual impairment test. Other separately identifiable intangible assets,
including the value of acquired Customer accounts, will continue to be
amortized over their estimated useful lives. The effective date for Statement
No. 142 is for fiscal years beginning after December 15, 2001. The
implementation of Statement No. 142 will not have a material impact on the
Corporation's consolidated financial statements.
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. For purposes of comparability, certain prior period amounts have been
reclassified.
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 home equity loans and
corporate loan products.
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, money market instruments, and other interest-earning
assets. The Corporation's primary costs are the costs of funding its loan
receivables, investment securities, and other assets, which include interest
paid on deposits, short-term borrowings, and long-term debt and bank notes;
credit losses; 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 June 30, 2001 increased 33.2% to $380.1
million or $.43 per common share, from $285.4 million or $.34 per common
share for the same period in 2000. Net income for the six months ended
June 30, 2001 increased 32.9% to $691.2 million or $.78 per common share, from
$520.0 million or $.62 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 20.5% to $89.3 billion and 21.4% to $88.6 billion for the three
and six months ended June 30, 2001, as compared to $74.1 billion and $73.0
billion for the same periods in 2000, respectively. Total managed loans at
June 30, 2001 were $90.4 billion, a $14.1 billion increase from June 30, 2000,
and a $1.6 billion increase since December 31, 2000. In addition, the managed
net interest margin increased to 8.33% and 8.02% for the three and six months
ended June 30, 2001, as compared to 7.12% and 7.11% for the same periods in
2000, respectively.
During the six months ended June 30, 2001, the Corporation acquired 227 new
endorsements from a variety of organizations in the United States, United
Kingdom, and Canada and added 4.7 million new accounts. The growth in managed
loans for the three and six months ended June 30, 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 and other interest income, while reducing the
Corporation's on-balance-sheet assets. During the three and six months ended
June 30, 2001, the Corporation securitized $2.5 billion and $4.5 billion of
credit card loan receivables, respectively, bringing total securitized loans
to $69.9 billion at June 30, 2001. The Corporation's average securitized
loans increased 21.9% and 24.3% to $69.3 billion for both the three and six
months ended June 30, 2001, as compared to $56.8 billion and $55.7 billion for
the same periods in 2000, respectively.
The Corporation's return on average total assets for the three and six months
ended June 30, 2001 increased to 3.88% and 3.58% from 3.63% and 3.33% for the
same periods during 2000, respectively. 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 22.33% and 20.76% for
the three and six months ended June 30, 2001, as compared to 26.36% and 24.44%
for the same periods in 2000, respectively. 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, increased $49.0
million to $335.6 million for the three months ended June 30, 2001 from the
same period in 2000. Average interest-earning assets increased $4.5 billion
for the three months ended June 30, 2001, as compared to the same period in
2000. The increase in average interest-earning assets for the three months
ended June 30, 2001 was a result of an increase in average loan receivables of
$2.8 billion, as compared to the same period in 2000. Average interest-bearing
liabilities increased $4.6 billion for the three months ended June 30, 2001, as
compared to the same period in 2000. The increase in average interest-bearing
liabilities for the three months ended June 30, 2001 was primarily a result of
an increase of $4.7 billion in average interest-bearing deposits, as compared
to the same period in 2000, which was used to fund the increase in average
interest-earning assets.
Net interest income, on a fully taxable equivalent basis, increased $35.3
million to $622.7 million for the six months ended June 30, 2001 from the same
period in 2000. Average interest-earning assets increased $3.6 billion for the
six months ended June 30, 2001, as compared to the same period in 2000. The
increase in average interest-earning assets for the six months ended June 30,
2001 was a result of an increase in average loan receivables of $2.1 billion
and an increase in average money market instruments of $1.3 billion as compared
to the same period in 2000. Average interest-bearing liabilities increased
$4.5 billion for the six months ended June 30, 2001, as compared to the same
period in 2000. The increase in average interest-bearing liabilities for the
six months ended June 30, 2001 as compared to the same period in 2000 was
primarily a result of an increase of $4.8 billion in average interest-bearing
deposits which were used to fund the increase in average interest-earning
assets, accounts receivable from securitizations, 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 securitizations 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 5.00% and 4.78% for the three and six months ended June 30, 2001, as
compared to 5.15% and 5.22% for the same periods in 2000, respectively.
INVESTMENTS SECURITIES AND OTHER INTEREST-EARNING ASSETS
Interest income on investment securities for the three and six months ended
June 30, 2001, on a fully taxable equivalent basis, was $45.2 million and
$88.7 million, as compared to $45.1 million and $88.0 million for the same
periods in 2000, respectively. Average investment securities increased $312.7
million and $175.4 million to $3.4 billion and $3.2 billion for the three and
six months ended June 30, 2001, as compared to the same periods in 2000,
respectively. The yield earned on the Corporation's average investment
securities for the three and six months ended June 30, 2001, decreased 54 basis
points and 25 basis points to 5.33% and 5.54%, as compared to the same periods
in 2000, respectively.
Interest income on money market instruments increased $8.3 million and $24.1
million to $31.5 million and $74.3 million for the three and six months ended
June 30, 2001, from the same periods in 2000, respectively. The increase in
interest income on money market instruments for the three and six months ended
June 30, 2001 was primarily a result of an increase of $1.3 billion in average
money market instruments for both periods, offset by a decrease of 174 basis
points and 92 basis points in the yield earned on average money market
instruments from the same periods in 2000, respectively.
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.
Interest income on other interest-earning assets was $22.8 million and $44.2
million for the three and six months ended June 30, 2001, as compared to $17.7
million and $34.9 million for the same periods in 2000, respectively. The
Corporation adopted Emerging Issues Task Force Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets" ("EITF 99-20") on April 1, 2001. As a result,
the Corporation now records certain income related to beneficial interests
retained in a securitization transaction accounted for as a sale as interest
income in the Corporation's consolidated statement of income. This income was
previously recorded as securitization income in the Corporation's consolidated
statement of income. The Corporation includes these retained beneficial
interests in accounts receivable from securitizations on the consolidated
statement of financial condition. The implementation of EITF 99-20 did not
impact the Corporation's consolidated net income.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$89.4 million and $150.5 million to $689.7 million and $1.3 billion for the
three and six months ended June 30, 2001, from the same periods in 2000,
respectively. The increase for the three and six months ended June 30, 2001
was primarily the result of an increase in average loan receivables of $2.8
billion and $2.1 billion from the same periods in 2000, respectively. The
yield on loan receivables for the three and six months ended June 30, 2001 was
13.84% and 14.03%, as compared to 14.01% and 13.90% for the same periods in
2000.
Table 1 presents the Corporation's period end loan receivables distribution by
loan type, excluding securitized loans. Loan receivables increased 2.9% to
$20.5 billion at June 30, 2001, as compared to $20.0 billion at December 31,
2000.
Domestic credit card loan receivables decreased to $12.0 billion at June 30,
2001, from $13.0 billion at December 31, 2000. The decrease in domestic credit
card loan receivables was a result of the Corporation's securitization of $4.3
billion of domestic credit card loan receivables, while $3.3 billion of
previously securitized domestic credit card loan receivables amortized back
into the Corporation's loan portfolio during the six months ended June 30,
2001. The Corporation also acquired $266.2 million of domestic credit card
loan receivables during the six months ended June 30, 2001.
Domestic other consumer loan receivables increased to $5.0 billion at June 30,
2001 from $3.8 billion at December 31, 2000. The increase in domestic other
consumer loan receivables was a result of loan growth in the Corporation's
lines of credit accessed through checks and sales finance accounts.
Foreign loan receivables increased $429.3 million to $3.6 billion at June 30,
2001 from $3.1 billion at December 31, 2000. The growth in foreign loan
receivables was primarily a result of MBNA Europe's acquisition of $394.0
million of credit card loan receivables during the six months ended June 30,
2001. The growth in foreign loan receivables was partially offset by the
securitization of CAD$350.0 million (approximately $227.5 million) of foreign
credit card loan receivables by MBNA Canada during the six months ended
June 30, 2001.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
June 30, December 31,
2001 2000
------------- -------------
(unaudited)
Loans held for securitization:
Domestic:
Credit card.................................. $ 6,149,935 $ 6,396,652
Other consumer............................... 33,950 1,022,756
------------- -------------
Total domestic loans held for
securitization............................ 6,183,885 7,419,408
Foreign........................................ 925,082 852,525
------------- -------------
Total loans held for securitization........ 7,108,967 8,271,933
Loan portfolio:
Domestic:
Credit card.................................. 5,851,626 6,612,913
Other consumer............................... 4,955,054 2,799,289
------------- -------------
Total domestic loan portfolio.............. 10,806,680 9,412,202
Foreign........................................ 2,627,448 2,270,702
------------- -------------
Total loan portfolio....................... 13,434,128 11,682,904
------------- -------------
Total loan receivables..................... $ 20,543,095 $ 19,954,837
============= =============
DEPOSITS
Total interest expense on deposits was $365.5 million and $742.7 million for
the three and six months ended June 30, 2001, as compared to $293.0 million and
$568.1 million for the same periods in 2000, respectively. The increase in
interest expense on deposits for the three and six months ended June 30, 2001
was primarily the result of a $4.7 billion and a $4.8 billion increase in
average interest-bearing deposits for the three and six months ended
June 30, 2001, as compared to the same periods in 2000, respectively.
The increase in average interest-bearing deposits for the three and six months
ended June 30, 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 time
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 $1.7 million and $4.3
million for the three and six months ended June 30, 2001, as compared to $11.5
million and $23.6 million for the same periods in 2000, respectively. The
decrease in interest expense on short-term borrowings for the three and six
months ended June 30, 2001 was a result of a decrease of $608.5 million and
$611.6 million in average short-term borrowings, respectively, as the
Corporation's short-term domestic funding needs declined during the three and
six months ended June 30, 2001. In addition, rates paid on average short-term
borrowings decreased 130 basis points and 81 basis points for the three and six
months ended June 30, 2001 from the same periods in 2000, respectively.
Interest expense on long-term debt and bank notes decreased to $86.4 million
and $185.6 million for the three and six months ended June 30, 2001, as
compared to $95.1 million and $191.6 million for the same periods in 2000,
respectively. The decrease in interest expense on long-term debt and bank
notes was a result of a decrease in rates paid on average domestic long-term
debt and bank notes of 133 basis points and 64 basis points for the three and
six months ended June 30, 2001, as compared to the same periods in 2000,
respectively. Interest expense on foreign long-term debt and bank notes
increased $7.3 million and $15.5 million for the three and six months ended
June 30, 2001, as compared to the same periods in 2000, as a result of an
increase in average foreign long-term debt and bank notes of $540.7 million and
$511.8 million for the three and six months ended June 30, 2001, as compared to
the same periods in 2000, as MBNA Europe issued additional long-term debt and
bank notes.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three and six months ended
June 30, 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
June 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,302 3.39% $ 11
Foreign................................ 1,562,365 4.74 18,472
------------ ----------
Total interest-earning time
deposits in other banks............. 1,563,667 4.74 18,483
Federal funds sold and securities
purchased under resale agreements....... 1,212,275 4.29 12,979
----------- ----------
Total money market instruments....... 2,775,942 4.55 31,462
Investment securities(a):
Taxable.................................. 3,291,136 5.32 43,660
Tax-exempt(b)............................ 107,135 5.63 1,505
------------ ----------
Total investment securities.......... 3,398,271 5.33 45,165
Other interest-earning assets(a)........... 763,416 12.00 22,840
Loans held for securitization:
Domestic................................. 5,658,839 14.15 199,645
Foreign.................................. 706,276 13.67 24,078
------------ ----------
Total loans held for securitization.. 6,365,115 14.10 223,723
Loans:
Domestic:
Credit card............................ 6,701,403 13.25 221,405
Other consumer......................... 4,349,191 15.10 163,762
------------ ----------
Total domestic loans................. 11,050,594 13.98 385,167
Foreign.................................. 2,578,969 12.57 80,841
------------ ----------
Total loans.......................... 13,629,563 13.71 466,008
------------ ----------
Total loan receivables............... 19,994,678 13.84 689,731
------------ ----------
Total interest-earning assets........ 26,932,307 11.75 $ 789,198
Cash and due from banks...................... 695,043
Premises and equipment, net.................. 1,921,765
Other assets................................. 10,150,856
Reserve for possible credit losses........... (453,336)
------------
Total assets......................... $ 39,246,635
============
For the Three Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,848,281 6.60% $ 293,747
Money market deposit accounts.......... 5,308,395 4.82 63,836
Interest-bearing transaction accounts.. 43,463 3.90 423
Savings accounts....................... 10,398 3.93 102
------------ ----------
Total domestic interest-bearing
deposits............................ 23,210,537 6.19 358,108
Foreign:
Time deposits.......................... 582,155 5.09 7,393
------------ ----------
Total interest-bearing deposits...... 23,792,692 6.16 365,501
Borrowed funds:
Short-term borrowings:
Domestic............................... 33,419 4.32 360
Foreign................................ 101,385 5.13 1,296
------------ ----------
Total short-term borrowings.......... 134,804 4.93 1,656
Long-term debt and bank notes:
Domestic............................... 4,483,592 5.54 61,905
Foreign................................ 1,576,140 6.24 24,529
------------ ----------
Total long-term debt and bank notes.. 6,059,732 5.72 86,434
------------ ----------
Total borrowed funds................. 6,194,536 5.70 88,090
------------ ----------
Total interest-bearing liabilities... 29,987,228 6.07 453,591
Demand deposits.............................. 783,827
Other liabilities............................ 1,646,519
------------
Total liabilities.................... 32,417,574
Stockholders' equity......................... 6,829,061
------------
Total liabilities and stockholders'
equity.............................. $ 39,246,635
============ ----------
Net interest income.................. $ 335,607
==========
Net interest margin.................. 5.00
Interest rate spread................. 5.68
(a) Average amounts for investment securities available-for-sale and other
interest-earning assets are based on market values; if these items were
carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
June 30, 2001 was $527.
For the Three Months Ended
June 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,332 2.72% $ 9
Foreign................................ 1,196,294 6.27 18,664
------------ ----------
Total interest-earning time
deposits in other banks............. 1,197,626 6.27 18,673
Federal funds sold and securities
purchased under resale agreements....... 281,253 6.39 4,471
------------ ---------
Total money market instruments....... 1,478,879 6.29 23,144
Investment securities(a):
Taxable.................................. 2,982,729 5.83 43,268
Tax-exempt(b)............................ 102,854 7.03 1,797
------------ ---------
Total investment securities.......... 3,085,583 5.87 45,065
Other interest-earning assets(a)........... 592,212 12.00 17,669
Loans held for securitization:
Domestic................................. 6,807,891 14.58 246,768
Foreign.................................. 823,469 13.04 26,705
------------ ----------
Total loans held for securitization.. 7,631,360 14.41 273,473
Loans:
Domestic:
Credit card............................ 5,793,721 13.61 196,009
Other consumer......................... 2,011,071 14.81 74,072
------------ ----------
Total domestic loans................. 7,804,792 13.92 270,081
Foreign.................................. 1,792,467 12.74 56,770
------------ ----------
Total loans.......................... 9,597,259 13.70 326,851
------------ ----------
Total loan receivables............... 17,228,619 14.01 600,324
------------ ----------
Total interest-earning assets........ 22,385,293 12.33 $ 686,202
Cash and due from banks...................... 644,953
Premises and equipment, net.................. 1,664,922
Other assets................................. 7,308,965
Reserve for possible credit losses........... (369,405)
------------
Total assets......................... $ 31,634,728
============
For the Three Months Ended
June 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 13,728,392 6.25% $ 213,435
Money market deposit accounts.......... 4,526,929 6.01 67,591
Interest-bearing transaction accounts.. 36,253 5.19 468
Savings accounts....................... 9,412 5.13 120
------------ ----------
Total domestic interest-bearing
deposits............................ 18,300,986 6.19 281,614
Foreign:
Time deposits.......................... 792,128 5.76 11,349
------------ ----------
Total interest-bearing deposits...... 19,093,114 6.17 292,963
Borrowed funds:
Short-term borrowings:
Domestic............................... 522,230 6.46 8,393
Foreign................................ 221,081 5.67 3,114
------------ ----------
Total short-term borrowings.......... 743,311 6.23 11,507
Long-term debt and bank notes:
Domestic............................... 4,558,577 6.87 77,884
Foreign................................ 1,035,460 6.70 17,238
------------ ----------
Total long-term debt and bank notes.. 5,594,037 6.84 95,122
------------ ----------
Total borrowed funds................. 6,337,348 6.77 106,629
------------ ----------
Total interest-bearing liabilities... 25,430,462 6.32 399,592
Demand deposits.............................. 643,729
Other liabilities............................ 1,206,080
------------
Total liabilities.................... 27,280,271
Stockholders' equity......................... 4,354,457
------------
Total liabilities and stockholders'
equity.............................. $ 31,634,728
============ ----------
Net interest income.................. $ 286,610
==========
Net interest margin.................. 5.15
Interest rate spread................. 6.01
(a) Average amounts for investment securities available-for-sale and other
interest-earning assets are based on market values; if these items were
carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
June 30, 2000 was $628.
For the Six Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,277 3.95% $ 25
Foreign................................ 1,556,081 5.23 40,334
------------ ----------
Total interest-earning time
deposits in other banks............. 1,557,358 5.23 40,359
Federal funds sold and securities
purchased under resale agreements....... 1,358,508 5.03 33,897
----------- ----------
Total money market instruments....... 2,915,866 5.14 74,256
Investment securities(a):
Taxable.................................. 3,128,466 5.53 85,820
Tax-exempt(b)............................ 103,401 5.68 2,915
------------ ----------
Total investment securities.......... 3,231,867 5.54 88,735
Other interest-earning assets(a)........... 742,763 12.00 44,200
Loans held for securitization:
Domestic................................. 5,830,298 14.50 419,345
Foreign.................................. 769,568 13.69 52,236
------------ ----------
Total loans held for securitization.. 6,599,866 14.41 471,581
Loans:
Domestic:
Credit card............................ 6,631,834 13.64 448,600
Other consumer......................... 3,716,159 15.14 278,977
------------ ----------
Total domestic loans................. 10,347,993 14.18 727,577
Foreign.................................. 2,427,047 12.38 148,940
------------ ----------
Total loans.......................... 12,775,040 13.84 876,517
------------ ----------
Total loan receivables............... 19,374,906 14.03 1,348,098
------------ ----------
Total interest-earning assets........ 26,265,402 11.94 $1,555,289
Cash and due from banks...................... 710,348
Premises and equipment, net.................. 1,873,078
Other assets................................. 10,521,597
Reserve for possible credit losses........... (421,755)
------------
Total assets......................... $ 38,948,670
============
For the Six Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,792,668 6.66% $ 587,818
Money market deposit accounts.......... 5,177,542 5.33 136,813
Interest-bearing transaction accounts.. 43,696 4.47 968
Savings accounts....................... 10,292 4.45 227
------------ ----------
Total domestic interest-bearing
deposits............................ 23,024,198 6.36 725,826
Foreign:
Time deposits.......................... 620,983 5.49 16,919
------------ ----------
Total interest-bearing deposits...... 23,645,181 6.33 742,745
Borrowed funds:
Short-term borrowings:
Domestic............................... 33,696 4.96 828
Foreign................................ 129,774 5.40 3,477
------------ ----------
Total short-term borrowings.......... 163,470 5.31 4,305
Long-term debt and bank notes:
Domestic............................... 4,494,234 6.17 137,488
Foreign................................ 1,509,589 6.42 48,074
------------ ----------
Total long-term debt and bank notes.. 6,003,823 6.23 185,562
------------ ----------
Total borrowed funds................. 6,167,293 6.21 189,867
------------ ----------
Total interest-bearing liabilities... 29,812,474 6.31 932,612
Demand deposits.............................. 828,526
Other liabilities............................ 1,593,833
------------
Total liabilities.................... 32,234,833
Stockholders' equity......................... 6,713,837
------------
Total liabilities and stockholders'
equity.............................. $ 38,948,670
============ ----------
Net interest income.................. $ 622,677
==========
Net interest margin.................. 4.78
Interest rate spread................. 5.63
(a) Average amounts for investment securities available-for-sale and other
interest-earning assets are based on market values; if these items were
carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the six months ended
June 30, 2001 was $1,020.
For the Six Months Ended
June 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 2,302 3.93% $ 45
Foreign................................ 1,250,099 6.08 37,789
------------ ----------
Total interest-earning time
deposits in other banks............. 1,252,401 6.08 37,834
Federal funds sold and securities
purchased under resale agreements....... 410,857 6.02 12,297
------------ ---------
Total money market instruments....... 1,663,258 6.06 50,131
Investment securities(a):
Taxable.................................. 2,953,497 5.77 84,688
Tax-exempt(b)............................ 102,962 6.42 3,287
------------ ---------
Total investment securities.......... 3,056,459 5.79 87,975
Other interest-earning assets(a)........... 584,435 12.00 34,874
Loans held for securitization:
Domestic................................. 7,666,608 14.26 543,675
Foreign.................................. 886,818 13.38 58,993
------------ ----------
Total loans held for securitization.. 8,553,426 14.17 602,668
Loans:
Domestic:
Credit card............................ 5,320,724 13.59 359,560
Other consumer......................... 1,782,602 14.73 130,545
------------ ----------
Total domestic loans................. 7,103,326 13.88 490,105
Foreign.................................. 1,667,139 12.65 104,862
------------ ----------
Total loans.......................... 8,770,465 13.64 594,967
------------ ----------
Total loan receivables............... 17,323,891 13.90 1,197,635
------------ ----------
Total interest-earning assets........ 22,628,043 12.18 $1,370,615
Cash and due from banks...................... 640,515
Premises and equipment, net.................. 1,666,051
Other assets................................. 6,843,575
Reserve for possible credit losses........... (362,702)
------------
Total assets......................... $ 31,415,482
============
For the Six Months Ended
June 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 13,532,971 6.15% $ 414,104
Money market deposit accounts.......... 4,476,267 5.86 130,489
Interest-bearing transaction accounts.. 36,814 5.05 924
Savings accounts....................... 9,391 4.99 233
------------ ----------
Total domestic interest-bearing
deposits............................ 18,055,443 6.08 545,750
Foreign:
Time deposits.......................... 790,211 5.68 22,323
------------ ----------
Total interest-bearing deposits...... 18,845,654 6.06 568,073
Borrowed funds:
Short-term borrowings:
Domestic............................... 579,620 6.30 18,151
Foreign................................ 195,444 5.58 5,425
------------ ----------
Total short-term borrowings.......... 775,064 6.12 23,576
Long-term debt and bank notes:
Domestic............................... 4,698,169 6.81 159,007
Foreign................................ 997,787 6.56 32,551
------------ ----------
Total long-term debt and bank notes.. 5,695,956 6.76 191,558
------------ ----------
Total borrowed funds................. 6,471,020 6.69 215,134
------------ ----------
Total interest-bearing liabilities... 25,316,674 6.22 783,207
Demand deposits.............................. 634,368
Other liabilities............................ 1,186,637
------------
Total liabilities.................... 27,137,679
Stockholders' equity......................... 4,277,803
------------
Total liabilities and stockholders'
equity.............................. $ 31,415,482
============ ----------
Net interest income.................. $ 587,408
==========
Net interest margin.................. 5.22
Interest rate spread................. 5.96
(a) Average amounts for investment securities available-for-sale and other
interest-earning assets are based on market values; if these items were
carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the six months ended
June 30, 2000 was $1,150.
OTHER OPERATING INCOME
Total other operating income increased 34.6% or $407.0 million and 33.8% or
$768.2 million to $1.6 billion and $3.0 billion for the three and six months
ended June 30, 2001, from the same periods in 2000, respectively. The increase
in other operating income was primarily attributable to a $380.3 million or
38.6% and $721.3 million or 38.0% increase in securitization income to $1.4
billion and $2.6 billion for the three and six months ended June 30, 2001, as
compared to the same periods in 2000, respectively. The increase in
securitization income for the three and six months ended June 30, 2001 was the
result of a $12.4 billion and $13.5 billion or 21.9% and 24.3% increase in
average securitized loans from the same periods in 2000, respectively. Also,
the securitized net interest margin increased to 9.64% and 9.27% for the three
and six months ended June 30, 2001, as compared to 7.90% and 7.88% for the same
periods in 2000, respectively, 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 and six months ended June 30, 2001. The increase in
the Corporation's securitized net interest margin was offset by an increase in
the net credit loss rates on the Corporation's securitized loans to 5.36% and
5.06% for the three and six months ended June 30, 2001, from 4.52% and 4.57%
for the same periods in 2000.
Insurance income increased $10.6 million and $22.7 million to $30.1 million and
$59.2 million for the three and six months ended June 30, 2001, as compared to
the same periods in 2000, respectively. 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 $86.0 million for the six months
ended June 30, 2001, as compared to $64.1 million for the same period in 2000.
The increase in other income for the six months ended June 30, 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 15.0% to $1.0 billion and 17.1% to $2.1
billion for the three and six months ended June 30, 2001, as compared to $911.3
million and $1.8 billion for the same periods in 2000, respectively. 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 4.7 million new accounts (5.6
million new customers) during the six months ended June 30, 2001. The
Corporation also added 227 new endorsements from organizations during the six
months ended June 30, 2001. The Corporation has also 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 and six
months ended June 30, 2001 was an increase in salaries and employee benefits of
$57.3 million and $131.5 million to $439.5 million and $878.5 million from the
same periods in 2000, respectively. 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 June 30, 2001, the Corporation
had approximately 24,000 full-time equivalent employees, as compared to 20,600
full-time equivalent employees at June 30, 2000.
The growth in other operating expense for the three and six months ended
June 30, 2001 also includes amortization of intangible assets which increased
$34.5 million and $79.8 million to $92.1 million and $190.1 million, as
compared to the same periods in 2000, respectively. 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 For the Six Months
Ended June 30, Ended June 30,
-------------------- ----------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
(unaudited)
Purchased services.............. $ 117,172 $ 91,368 $ 243,170 $ 181,544
Advertising..................... 67,623 70,279 125,393 138,629
Collection...................... 10,700 11,648 20,944 22,172
Stationery and supplies......... 10,923 8,920 21,576 18,099
Service bureau.................. 15,850 11,677 30,284 24,512
Postage and delivery............ 76,961 89,418 160,012 187,616
Telephone usage................. 21,125 18,610 41,398 36,255
Loan receivable fraud losses.... 41,127 34,371 83,549 68,070
Amortization of intangible
assets......................... 92,128 57,580 190,106 110,287
Computer software............... 20,394 17,092 39,673 34,692
Other........................... 42,366 37,516 123,400 93,749
--------- --------- ---------- ----------
Total other operating expense. $ 516,369 $ 448,479 $1,079,505 $ 915,625
========= ========= ========== ==========
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 3.89%
at June 30, 2001 and December 31, 2000. The Corporation's delinquency as a
percentage of managed loans was 4.57% at June 30, 2001, as 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)
June 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Loan portfolio......................... $13,434,128 $11,682,904
Loans delinquent:
30 to 59 days........................ $ 201,480 1.50% $ 176,128 1.51%
60 to 89 days........................ 114,432 .85 95,859 .82
90 or more days...................... 207,123 1.54 182,955 1.56
----------- ----- ----------- -----
Total.............................. $ 523,035 3.89% $ 454,942 3.89%
=========== ===== =========== =====
Loans delinquent by geographic area:
Domestic............................. $ 455,912 4.22% $ 404,390 4.30%
Foreign.............................. 67,123 2.55 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)
June 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Nonaccrual loans...................... $ 21,615 $ 22,574
Reduced-rate loans.................... 258,547 238,747
------------------ -----------------
Total other nonperforming loans..... $ 280,162 $ 261,321
================== =================
Other nonperforming loans as a % of
ending loan portfolio................ 2.09% 2.24%
The Corporation's total managed other nonperforming loans as a percentage of
ending managed loans was 2.55% at June 30, 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 and six months ended June 30, 2001 were $148.4
million and $282.2 million, as compared to $89.3 million and $189.1 million for
the same periods 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
and six months ended June 30, 2001 reflect increases in the Corporation's
outstanding loan receivables, general economic conditions, the seasoning of the
Corporation's accounts, and an increase in bankruptcy filings, offset by
recoveries from the sale of charged-off receivables.
Net credit losses as a percentage of average loan receivables were 2.97% and
2.91% for the three and six months ended June 30, 2001, as compared to 2.07%
and 2.18% for the same periods in 2000, respectively. The Corporation's managed
credit losses as a percentage of average managed loans for the three and six
months ended June 30, 2001 were 4.82% and 4.59%, as compared to 3.95% and 4.01%
for the same periods 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 and six months ended
June 30, 2001 was $260.2 million and $412.2 million, as compared to $89.3
million and $189.1 million for the three and six months ended June 30, 2000.
The increase in the provision for possible credit losses primarily reflects an
increase in anticipated future net credit losses, as the Corporation has
experienced an increased number of bankruptcy filings and an increase in the
on-balance sheet loan portfolio.
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 For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited)
Reserve for possible credit
losses, beginning of period...... $ 414,276 $ 368,108 $ 386,568 $ 355,959
Reserves acquired............... 2,295 7,894 12,617 20,126
Provision for possible credit
losses:
Domestic..................... 245,785 82,122 377,630 174,646
Foreign...................... 14,372 7,179 34,520 14,501
--------- --------- --------- ---------
Total provision for
possible credit losses.. 260,157 89,301 412,150 189,147
Foreign currency translation.... (168) (709) (1,014) (870)
Credit losses:
Domestic:
Credit card................. (145,935) (95,413) (282,631) (211,065)
Other consumer.............. (59,257) (33,667) (104,373) (61,503)
--------- --------- --------- ---------
Total domestic credit
losses................... (205,192) (129,080) (387,004) (272,568)
Foreign....................... (25,897) (13,435) (50,373) (25,632)
--------- --------- --------- ---------
Total credit losses....... (231,089) (142,515) (437,377) (298,200)
Recoveries:
Domestic:
Credit card................. 64,255 40,918 118,784 85,114
Other consumer.............. 6,556 5,682 14,143 12,083
--------- --------- --------- ---------
Total domestic recoveries. 70,811 46,600 132,927 97,197
Foreign....................... 11,876 6,621 22,287 11,941
--------- --------- --------- ---------
Total recoveries.......... 82,687 53,221 155,214 109,138
--------- --------- --------- ---------
Net credit losses............... (148,402) (89,294) (282,163) (189,062)
--------- --------- --------- ---------
Reserve for possible credit
losses, end of period............ $ 528,158 $ 375,300 $ 528,158 $ 375,300
========= ========= ========= =========
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 June 30,
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
June 30, December 31, Minimum Well-Capitalized
2001 2000 Requirements Requirements
----------- ------------ ------------ ----------------
(unaudited)
MBNA Corporation
Tier 1................. 15.76% 14.98% 4.00% (a)
Total.................. 17.67 16.61 8.00 (a)
Leverage............... 17.51 17.30 4.00 (a)
MBNA America Bank, N.A.
Tier 1................. 12.23 10.78 4.00 6.00%
Total.................. 14.22 12.44 8.00 10.00
Leverage............... 13.72 12.79 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1................. 20.30 20.88 4.00 6.00
Total.................. 21.21 21.84 8.00 10.00
Leverage............... 19.85 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 six months ended June 30, 2001, the
Corporation declared dividends on its preferred stock of $7.1 million and on
its common stock of $153.3 million. On July 11, 2001, the Corporation's Board
of Directors declared a quarterly dividend of $.09 per common share, payable
October 1, 2001 to shareholders of record as of September 15, 2001. Also, on
July 11, 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 $.3502 per share on the Adjustable Rate
Cumulative Preferred Stock, Series B. The preferred stock dividends are
payable October 15, 2001 to stockholders of record as of September 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 June 30, 2001, the amount of retained earnings
available for declaration and payment of dividends from the Bank to the
Corporation was $2.4 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 June 30, 2001. If this facility
had been drawn upon at June 30, 2001, the amount of retained earnings available
for declaration of dividends would have been further limited to $963.2 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 June 30, 2001 and December 31, 2000 were $24.8 billion and
$24.3 billion, respectively. Included in total deposits at June 30, 2001 are
$522.3 million of foreign time deposits, which generally mature within one
year. Table 8 provides the maturities of the Corporation's deposits at June 30,
2001.
TABLE 8: MATURITIES OF DEPOSITS AT JUNE 30, 2001
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
(unaudited)
Three months or less(a)............. $ 8,007,928 $ 978,853 $ 8,986,781
Over three months through twelve
months............................. 4,941,740 1,602,172 6,543,912
Over one year through five years.... 4,717,997 4,513,241 9,231,238
Over five years..................... 7,026 - 7,026
------------ ------------ ------------
Total deposits.................... $ 17,674,691 $ 7,094,266 $ 24,768,957
============ ============ ============
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts
totaling $6.3 billion.
MBNA Canada renegotiated its multi-currency syndicated revolving credit
facility in July 2001 for CAD$350.0 million (approximately $229.8 million)
extending its maturity through July 2004. MBNA Canada may take advances under
the facility subject to covenants and conditions customary in a transaction of
this kind and was not drawn upon as of June 30, 2001.
The Corporation also held $3.4 billion in investment securities and $2.9
billion of money market instruments at June 30, 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 June 30, 2001, $1.6
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 $3.0
billion at June 30, 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 JUNE 30, 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.. $1,188,621 $ 789,031 $ - $ -
State and political subdivisions
of the United States............. 98,805 3,230 - -
Asset-backed and other securities. 333,591 540,934 16,106 1,849
---------- ---------- --------- --------
Total investment securities
available-for-sale............. $1,621,017 $1,333,195 $ 16,106 $ 1,849
========== ========== ========= ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ - $ - $ - $337,207
State and political subdivisions
of the United States............. 10 186 - 5,763
Asset-backed and other securities. - 11,484 - 60,682
---------- ---------- --------- --------
Total investment securities
held-to-maturity............... $ 10 $ 11,670 $ - $403,652
========== ========== ========= ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,977,652 $1,977,652
State and political subdivisions
of the United States............. 102,035 102,035
Asset-backed and other securities. 892,480 892,480
---------- ----------
Total investment securities
available-for-sale............. $2,972,167 $2,972,167
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 337,207 $ 316,516
State and political subdivisions
of the United States............. 5,959 7,070
Asset-backed and other securities. 72,166 72,176
---------- ----------
Total investment securities
held-to-maturity............... $ 415,332 $ 395,762
========== ==========
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 June 30, 2001, the Corporation could
experience a decrease in projected net income during the next twelve months of
approximately $48 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 June 30, 2001, the Corporation could experience a decrease in
stockholders' equity, net of tax, of approximately $52 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
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.
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, to the trust. 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 and six months ended June 30, 2001, the Corporation
securitized credit card loan receivables totaling $2.5 billion and $4.5
billion, while $1.5 billion and $3.3 billion of previously securitized credit
card and other consumer loan receivables amortized or matured. Included in the
securitization activity during the three months ended June 30, 2001 is
CAD$350.0 million (approximately $227.5 million) of credit card loan
receivables issued by MBNA Canada. The total amount of outstanding securitized
loans was $69.9 billion or 77.3% of managed loans at June 30, 2001, compared to
$68.8 billion or 77.5% at December 31, 2000. An additional $4.2 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)
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
Securitized Loans
Domestic:
Credit card.................................. $ 58,525,666 $ 57,425,582
Other consumer............................... 5,697,425 5,691,769
------------ ------------
Total domestic securitized loans........... 64,223,091 63,117,351
Foreign:
Credit card.................................. 5,612,902 5,650,485
Other consumer............................... 37,928 68,048
------------ ------------
Total foreign securitized loans............ 5,650,830 5,718,533
------------ ------------
Total securitized loans.................... $ 69,873,921 $ 68,835,884
============ ============
Table 11 shows summarized yields in excess of minimum yield data for each
securitization trust for the three-month period ended June 30, 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)....................... 68 7.27% 7.53% 6.48%
UK Receivables Trust................ 11 6.90 9.91 5.63
Gloucester Credit Card Trust(c)..... 6 8.04 8.50 7.80
MBNA Triple A Master Trust.......... 2 6.71 6.73 6.69
First Union Master Credit Card
Trust (d).......................... 1 12.40 12.40 12.40
First Union Direct Bank Master
Credit Card Trust (d).............. 3 11.08 11.12 11.01
MBNA Credit Card Master Note Trust.. 3 (e) (e) (e)
(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-C issued April 25, 2001 is
excluded from Table 11 presented above as a result of its recency.
(c) Gloucester Credit Card Trust Series 2001-1 issued on April 18, 2001 is
excluded from Table 11 presented above as a result of its recency.
(d) 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.
(e) MBNA Credit Card Master Note Trust issued MBNAseries Class B (2001-1)
and Class C (2001-1) on May 24, 2001 and Class A (2001-1) on May 31, 2001.
As a result of their recency, yield in excess of minimum for MBNA Credit
Card Master Note Trust is excluded from Table 11.
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 For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
MANAGED INCOME STATEMENTS
Interest income........... $ 3,254,691 $ 2,663,805 $ 6,502,542 $ 5,213,082
Interest expense.......... 1,273,057 1,273,297 2,733,131 2,466,239
----------- ----------- ----------- -----------
Net interest income....... 1,981,634 1,390,508 3,769,411 2,746,843
Provision for possible
credit losses............ 1,187,697 731,508 2,163,841 1,463,311
----------- ----------- ----------- -----------
Net interest income after
provision for possible
credit losses............ 793,937 659,000 1,605,570 1,283,532
Other operating income.... 863,685 713,383 1,641,689 1,383,112
Other operating expense... 1,048,443 911,339 2,139,594 1,826,649
----------- ----------- ----------- -----------
Income before income
taxes.................... 609,179 461,044 1,107,665 839,995
Applicable income taxes... 229,051 175,658 416,482 320,038
----------- ----------- ----------- -----------
Net income................ $ 380,128 $ 285,386 $ 691,183 $ 519,957
=========== =========== =========== ===========
MANAGED LOANS
At period end............. $90,417,016 $76,332,656
Average for the period.... 89,266,188 74,061,588 $88,629,295 $73,032,832
MANAGED RATIOS
Delinquency............... 4.57% 4.44%
Net credit losses......... 4.82 3.95 4.59% 4.01%
Net interest margin....... 8.33 7.12 8.02 7.11
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 was held on May 24,
2001. On August 1, 2001, the court entered an order approving a settlement
payout, including fees and costs, of approximately $5.1 million. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- -----------------------------------------------------
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
For the Six Months Ended
June 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,107,665 $ 839,995
Fixed charges.................................... 938,565 789,736
Interest capitalized during period, net of
amortization of previously capitalized interest. (2,222) (1,867)
------------ ------------
Earnings, for computation purposes............... $ 2,044,008 $ 1,627,864
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 935,139 $ 785,333
Portion of rents representative of the interest
factor.......................................... 3,426 4,403
------------ ------------
Fixed charges.................................... 938,565 789,736
Preferred stock dividend requirements............ 11,353 11,952
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 949,918 $ 801,688
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.15 2.03
For the Six Months Ended
June 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,107,665 $ 839,995
Fixed charges.................................... 195,820 221,663
Interest capitalized during period, net of
amortization of previously capitalized interest. (2,232) (1,877)
------------ ------------
Earnings, for computation purposes............... $ 1,301,253 $ 1,059,781
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 192,394 $ 217,260
Portion of rents representative of the interest
factor.......................................... 3,426 4,403
------------ ------------
Fixed charges.................................... 195,820 221,663
Preferred stock dividend requirements............ 11,353 11,952
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 207,173 $ 233,615
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 6.28 4.54
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 April 11, 2001, reporting MBNA Corporation's earnings
release for the first quarter of 2001.
2. Report dated April 18, 2001, reporting the securitization of CAD$350.0
million of credit card loan receivables by MBNA Canada Bank.
3. 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.
4. Report dated May 24, 2001, reporting the securitization of $500.0 million
of credit card loan receivables by MBNA America Bank, N.A.
5. Report dated May 31, 2001, reporting the securitization of $1.0 billion
of credit card loan receivables by MBNA America Bank, N.A.
6. Report dated May 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 May 2001.
7. Report dated June 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 June 2001.
8. Report dated July 12, 2001, reporting MBNA Corporation's earnings
release for the second quarter of 2001.
9. Report dated July 25, 2001, reporting the securitization of $400.0 million
of credit card loan receivables by MBNA America Bank, N.A.
10. Report dated July 26, 2001, reporting the securitization of $500.0 million
of credit card loan receivables by MBNA America Bank, N.A.
11. Report dated July 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 July 2001.
12. Report dated August 8, 2001, reporting the securitization of $1.0 billion
of credit card loan receivables by MBNA America Bank, N.A.
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: August 14, 2001 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer
3