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 September 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
- -------------------------------------------------------------------------------
(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 September 30, 2001
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
September 30, 2001 (unaudited) and December 31, 2000
Consolidated Statements of Income - 3
For the Three and Nine Months Ended September 30, 2001
and 2000 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Nine Months Ended September 30, 2001 and 2000
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Nine Months Ended September 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)
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
ASSETS
Cash and due from banks......................... $ 1,140,728 $ 971,469
Interest-earning time deposits in other banks... 1,602,935 1,505,331
Federal funds sold and securities purchased
under resale agreements........................ 2,585,000 700,000
Investment securities:
Available-for-sale (at market value,
amortized cost of $2,887,169 and $2,661,962
at September 30, 2001 and December 31, 2000,
respectively)................................ 2,922,849 2,666,196
Held-to-maturity (market value of $424,138
and $368,547 at September 30, 2001 and
December 31, 2000, respectively)............. 433,881 384,088
Loans held for securitization................... 5,742,127 8,271,933
Loans:
Credit card................................... 7,567,748 7,798,772
Other consumer................................ 5,740,904 3,884,132
------------- -------------
Total loans................................. 13,308,652 11,682,904
Reserve for possible credit losses............ (623,425) (386,568)
------------- -------------
Net loans................................... 12,685,227 11,296,336
Premises and equipment, net..................... 2,073,703 1,781,011
Accrued income receivable....................... 307,099 305,437
Accounts receivable from securitizations........ 9,445,501 6,940,567
Intangible assets, net.......................... 2,650,741 2,749,435
Prepaid expenses and deferred charges........... 350,353 322,201
Other assets.................................... 1,149,430 784,092
------------- -------------
Total assets................................ $ 43,089,574 $ 38,678,096
============= =============
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................. $ 18,863,389 $ 18,468,144
Money market deposit accounts................. 5,817,379 4,922,027
Noninterest-bearing demand deposits........... 886,278 892,980
Interest-bearing transaction accounts......... 42,770 50,475
Savings accounts.............................. 24,710 9,969
------------- -------------
Total deposits.............................. 25,634,526 24,343,595
Short-term borrowings........................... 1,242,680 159,512
Long-term debt and bank notes................... 6,415,703 5,735,635
Accrued interest payable........................ 257,062 237,610
Accrued expenses and other liabilities.......... 2,133,612 1,574,466
------------- -------------
Total liabilities........................... 35,683,583 32,050,818
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at September 30, 2001 and
December 31, 2000)............................. 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 851,781,250 shares and
851,803,793 shares issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively).................................. 8,518 8,518
Additional paid-in capital...................... 2,564,479 2,725,950
Retained earnings............................... 4,860,146 3,931,248
Accumulated other comprehensive income.......... (27,238) (38,524)
------------- -------------
Total stockholders' equity.................. 7,405,991 6,627,278
------------- -------------
Total liabilities and stockholders' equity.. $ 43,089,574 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Loans......................... $ 461,162 $ 331,308 $1,337,679 $ 926,275
Loans held for securitization. 238,029 292,620 709,610 895,288
Investment securities:
Taxable..................... 40,963 45,054 126,783 129,742
Tax-exempt.................. 675 1,116 2,570 3,253
Time deposits in other banks.. 16,152 23,566 56,511 61,400
Federal funds sold and
securities purchased under
resale agreements............ 12,019 15,315 45,916 27,612
Other interest income......... 25,562 19,052 69,762 53,926
---------- ---------- ---------- ----------
Total interest income..... 794,562 728,031 2,348,831 2,097,496
INTEREST EXPENSE
Deposits...................... 359,816 328,114 1,102,561 896,187
Short-term borrowings......... 8,313 7,359 12,618 30,935
Long-term debt and bank notes. 83,204 98,472 268,766 290,030
---------- ---------- ---------- ----------
Total interest expense.... 451,333 433,945 1,383,945 1,217,152
---------- ---------- ---------- ----------
NET INTEREST INCOME........... 343,229 294,086 964,886 880,344
Provision for possible credit
losses....................... 242,222 113,283 654,372 302,430
---------- ---------- ---------- ----------
Net interest income after
provision for possible
credit losses................ 101,007 180,803 310,514 577,914
OTHER OPERATING INCOME
Securitization income......... 1,547,857 1,104,628 4,165,149 3,000,670
Interchange................... 71,944 70,881 217,893 205,229
Credit card fees.............. 83,580 78,116 212,831 216,656
Insurance..................... 38,309 23,879 97,538 60,372
Other......................... 64,298 29,594 150,329 93,704
---------- ---------- ---------- ----------
Total other operating
income................... $1,805,988 $1,307,098 $4,843,740 $3,576,631
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee
benefits..................... $ 477,571 $ 401,612 $1,356,087 $1,148,626
Occupancy expense of premises. 39,493 36,358 113,738 103,617
Furniture and equipment
expense...................... 54,424 49,230 161,752 145,981
Other......................... 568,933 404,983 1,648,438 1,320,608
---------- ---------- ---------- ----------
Total other operating
expense.................. 1,140,421 892,183 3,280,015 2,718,832
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.... 766,574 595,718 1,874,239 1,435,713
Applicable income taxes....... 288,232 226,969 704,714 547,007
---------- ---------- ---------- ----------
NET INCOME.................... $ 478,342 $ 368,749 $1,169,525 $ 888,706
========== ========== ========== ==========
EARNINGS PER COMMON SHARE..... $ .56 $ .44 $ 1.36 $ 1.08
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION............ .54 .43 1.32 1.05
=============================================================================
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-$.27 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 8,926 - 89
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (8,949) - (89)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 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-$.24 per share...... - - - -
Preferred.................. - - - -
Issuance of common stock,
net of issuance costs....... - 50,000 - 500
Exercise of stock options
and other awards............ - 8,634 - 86
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (8,634) - (86)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 2000.. 8,574 851,781 $ 86 $ 8,518
=========== ========== ========= ==========
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................ - 1,169,525 - 1,169,525
Other comprehensive
income, net of tax....... - - 11,286 11,286
------------
Comprehensive income....... 1,180,811
------------
Cash dividends:
Common-$.27 per share..... - (230,005) - (230,005)
Preferred................. - (10,622) - (10,622)
Exercise of stock options
and other awards........... 77,120 - - 77,209
Stock option tax benefit.... 61,605 - - 61,605
Amortization of deferred
compensation expense....... 23,627 - - 23,627
Acquisition and retirement
of common stock............ (323,823) - - (323,912)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2001. $2,564,479 $4,860,146 $ (27,238) $ 7,405,991
========== ========== ============= ============
BALANCE, DECEMBER 31, 1999.. $1,305,935 $2,897,964 $ (12,560) $ 4,199,443
Comprehensive income:
Net income................ - 888,706 - 888,706
Other comprehensive
income, net of tax....... - - (43,156) (43,156)
------------
Comprehensive income........ 845,550
------------
Cash dividends:
Common-$.24 per share..... - (196,429) - (196,429)
Preferred................. - (11,048) - (11,048)
Issuance of common stock,
net of issuance costs...... 1,598,555 - - 1,599,055
Exercise of stock options
and other awards........... 42,660 - - 42,746
Stock option tax benefit.... 43,983 - - 43,983
Amortization of deferred
compensation expense....... 17,969 - - 17,969
Acquisition and retirement
of common stock............ (251,943) - - (252,029)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2000. $2,757,159 $3,579,193 $ (55,716) $ 6,289,240
========== ========== ============= ============
==============================================================================
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 Nine Months
Ended September 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 1,169,525 $ 888,706
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible credit losses............ 654,372 302,430
Depreciation, amortization, and accretion....... 528,373 396,180
(Benefit) provision for deferred income taxes... (97,391) 26,675
Increase in accrued income receivable........... (1,662) (7,396)
Increase in accounts receivable from
securitizations................................ (2,504,934) (2,323,281)
Increase in accrued interest payable............ 19,452 22,898
Decrease in other operating activities.......... 312,990 240,498
------------ ------------
Net cash provided by (used in) operating
activities....................................... 80,725 (453,290)
INVESTING ACTIVITIES
Net increase in money market instruments.......... (1,982,604) (962,119)
Proceeds from maturities of investment securities
available-for-sale............................... 1,243,103 381,004
Proceeds from sale of investment securities
available-for-sale............................... 505 -
Purchases of investment securities
available-for-sale............................... (1,487,416) (424,713)
Proceeds from maturities of investment securities
held-to-maturity ................................ 16,167 9,740
Purchases of investment securities
held-to-maturity................................. (65,666) (48,761)
Proceeds from securitization of loans............. 9,417,923 11,403,654
Proceeds from sale of loans....................... 486,219 153,169
Loan portfolio acquisitions....................... (1,038,187) (4,564,770)
Amortization of securitized loans................. (4,877,508) (3,354,837)
Net loan originations............................. (3,649,341) (5,625,617)
Net purchases of premises and equipment........... (452,351) (234,241)
------------ ------------
Net cash used in investing activities............. $ (2,389,156) $ (3,267,491)
For the Nine Months
Ended September 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in time deposits..................... $ 395,245 $ 2,381,822
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts............................. 895,686 498,271
Net increase (decrease) in short-term borrowings.. 1,083,168 (241,486)
Proceeds from issuance of long-term debt
and bank notes................................... 1,375,952 1,074,386
Maturity of long-term debt and bank notes......... (793,486) (828,088)
Proceeds from exercise of stock options
and other awards................................. 77,209 42,746
Acquisition and retirement of common stock........ (323,912) (252,029)
Proceeds from issuance of common stock............ - 1,599,055
Dividends paid.................................... (232,172) (195,459)
------------ ------------
Net cash provided by financing activities......... 2,477,690 4,079,218
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS............. 169,259 358,437
Cash and cash equivalents at beginning of period.. 971,469 488,386
------------ ------------
Cash and cash equivalents at end of period........ $ 1,140,728 $ 846,823
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 1,389,898 $ 1,194,044
============ ============
Income taxes paid................................. $ 394,581 $ 549,361
============ ============
==============================================================================
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 nine months ended September 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
October 11, 2001 January 15, 2002 7.50 .46875 5.50 .34380
NOTE C: COMMON STOCK
During the nine months ended September 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 $48.3 million. At
September 30, 2001, the unamortized compensation expense related to all of the
Corporation's outstanding restricted stock awards was $190.6 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 October 11, 2001 the Corporation's Board of Directors declared a quarterly
cash dividend of $.09 per common share, payable January 1, 2002 to stockholders
of record as of December 14, 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 Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
EARNINGS PER COMMON SHARE
Net income....................... $ 478,342 $ 368,749 $1,169,525 $ 888,706
Less: preferred stock dividend
requirements.................... 3,538 3,650 10,622 11,048
--------- --------- ---------- ----------
Net income applicable to common
stock........................... $ 474,804 $ 365,099 $1,158,903 $ 877,658
========= ========= ========== ==========
Weighted average common shares
outstanding (000)............... 851,812 826,310 851,835 810,053
========= ========= ========== ==========
Earnings per common share........ $ .56 $ .44 $ 1.36 $ 1.08
========= ========= ========== ==========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
Net income....................... $ 478,342 $ 368,749 $1,169,525 $ 888,706
Less: preferred stock dividend
requirements.................... 3,538 3,650 10,622 11,048
--------- --------- ---------- ----------
Net income applicable to common
stock........................... $ 474,804 $ 365,099 $1,158,903 $ 877,658
========= ========= ========== ==========
Weighted average common shares
outstanding (000)............... 851,812 826,310 851,835 810,053
Net effect of dilutive stock
options (000)................... 23,327 28,362 25,249 25,160
--------- --------- ---------- ----------
Weighted average common shares
outstanding and common stock
equivalents (000)............... 875,139 854,672 877,084 835,213
========= ========= ========== ==========
Earnings per common share-
assuming dilution............... $ .54 $ .43 $ 1.32 $ 1.05
========= ========= ========== ==========
There were 85,000 common stock options with an average exercise price of $35.57
per share outstanding at September 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 Corporation's common shares. These stock options expire in 2011.
NOTE E: INVESTMENT SECURITIES
During the nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Net income...................... $ 478,342 $ 368,749 $1,169,525 $ 888,706
Other comprehensive income:
Foreign currency translation.. 30,024 (17,722) (11,836) (51,784)
Net unrealized gains
on investment securities
available-for-sale and other
financial instruments........ 14,494 5,614 23,122 8,628
--------- --------- ---------- ----------
Other comprehensive income...... 44,518 (12,108) 11,286 (43,156)
--------- --------- ---------- ----------
Comprehensive income............ $ 522,860 $ 356,641 $1,180,811 $ 845,550
========= ========= ========== ==========
The components of accumulated other comprehensive income, net of tax, are as
follows:
September 30, December 31,
2001 2000
------------- -------------
Foreign currency translation................... $ (58,792) $ (46,956)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments................................... 31,554 8,432
------------- -------------
Accumulated other comprehensive income......... $ (27,238) $ (38,524)
============= =============
NOTE G: SHORT-TERM BORROWINGS
During the three months ended September 30, 2001, the Bank completed two
on-balance-sheet structured financings totaling $953.8 million, which were
recorded as short-term borrowings on the Corporation's consolidated statement
of financial condition at September 30, 2001. These structured financings are
secured by $1.0 billion of other consumer loan receivables. The Corporation
has an option to liquidate these structured financings on a monthly basis.
NOTE H: 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 nine months ended September 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 between
95 basis points and 110 basis points over the
three-month London Interbank Offered Rate ("LIBOR"),
payable quarterly, maturing in varying amounts in
2003 and 2004......................................... 130,000
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 LIBOR
with interest payable quarterly, maturing in 2004
(6.0 million pounds sterling)......................... 8,687
Floating-Rate Euro Medium-Term Notes, priced at
70 basis points and 74 basis points over the
three-month Japanese LIBOR, with interest payable
quarterly, maturing in 2003 (JPY6.2 billion).......... 51,462
Fixed-Rate Medium-Term Deposit Notes, with a weighted
average interest rate of 6.13%, payable semiannually,
maturing in varying amounts from 2004 to 2008
(CAD$115.0 million)................................... 74,088
Floating-Rate Medium-Term Deposit Notes, priced at
78 basis points over the ninety-day Bankers
Acceptance Rate, payable quarterly, maturing in 2004
(CAD$50.0 million).................................... 32,321
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 nine months ended September 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. MBNA Canada Bank ("MBNA Canada") also entered
into interest rate swap agreements, with a total notional value of CAD$115.0
million (approximately $72.9 million), related to the issuance of the Canadian
dollar denominated fixed-rate Medium-Term Deposit Notes.
In addition, during the nine months ended September 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 Note issuance, and to reduce the exposure
to foreign currency exchange rate risk related to the issuance of floating-rate
Euro Medium-Term Notes denominated in Japanese yen.
NOTE I: 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 $139.8 million at September 30, 2001. For the three and nine months
ended September 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 foreign exchange swap
agreements designated as fair value hedges were not effective as accounting
hedges during the three months ended September 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 gain of $8.0 million and a gross unrealized loss of $36.1 million at
September 30, 2001. For the three months ended September 30, 2001, the
Corporation recognized a net gain of $10.9 million on its foreign exchange swap
agreements and a net gain of $5.6 million on the related underlying long-term
debt and bank notes, in the consolidated statement of income. For the nine
months ended September 30, 2001, the Corporation recognized a net loss of $23.4
million on its foreign exchange swap agreements and an offsetting net gain of
$40.8 million on the related underlying long-term debt and bank notes, in the
consolidated statement of income. For the three and nine months ended
September 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 $631,000 and a gross unrealized loss of $42.5 million
at September 30, 2001. For the three months ended September 30, 2001, the
Corporation recognized a net loss of $61.9 million on its forward exchange
contracts and an offsetting net gain of $60.8 million on the related assets and
liabilities, in the consolidated statement of income. For the nine months ended
September 30, 2001, the Corporation recognized a net loss of $6.8 million on
its forward exchange contracts and an offsetting net gain of $45,000 on
the related assets and liabilities, in the consolidated statement of income.
NOTE J: 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 Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ 3,282,620 $ 2,893,266 $ 9,785,162 $ 8,106,348
Interest expense....... 1,162,554 1,408,534 3,895,685 3,874,773
------------ ------------ ------------ ------------
Net interest income.... 2,120,066 1,484,732 5,889,477 4,231,575
Provision for possible
credit losses......... 1,213,529 770,936 3,377,370 2,234,247
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 906,537 713,796 2,512,107 1,997,328
Other operating income. 1,000,458 774,105 2,642,147 2,157,217
Other operating
expense............... 1,140,421 892,183 3,280,015 2,718,832
------------ ------------ ------------ ------------
Income before income
taxes................. 766,574 595,718 1,874,239 1,435,713
Applicable income
taxes................. 288,232 226,969 704,714 547,007
------------ ------------ ------------ ------------
Net income............. $ 478,342 $ 368,749 $ 1,169,525 $ 888,706
============ ============ ============ ============
MANAGED LOANS
At period end.......... $ 92,585,150 $ 84,671,443
Average for the period. 91,852,750 77,788,683 $ 89,715,588 $ 74,629,687
SECURITIZATION ADJUSTMENT
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ (2,488,058) $ (2,165,235) $ (7,436,331) $ (6,008,852)
Interest expense....... (711,221) (974,589) (2,511,740) (2,657,621)
------------ ------------ ------------ ------------
Net interest income.... (1,776,837) (1,190,646) (4,924,591) (3,351,231)
Provision for possible
credit losses......... (971,307) (657,653) (2,722,998) (1,931,817)
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ (805,530) (532,993) (2,201,593) (1,419,414)
Other operating income. 805,530 532,993 2,201,593 1,419,414
Other operating
expense............... - - - -
------------ ------------ ------------ ------------
Income before income
taxes................. - - - -
Applicable income
taxes................. - - - -
------------ ------------ ------------ ------------
Net income............. $ - $ - $ - $ -
============ ============ ============ ============
SECURITIZED LOANS
At period end.......... $(73,534,371) $(66,626,693)
Average for the period. (71,395,990) (60,120,484) $(69,976,101) $(57,190,189)
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income........ $ 794,562 $ 728,031 $ 2,348,831 $ 2,097,496
Interest expense....... 451,333 433,945 1,383,945 1,217,152
------------ ------------ ------------ ------------
Net interest income.... 343,229 294,086 964,886 880,344
Provision for possible
credit losses......... 242,222 113,283 654,372 302,430
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 101,007 180,803 310,514 577,914
Other operating income. 1,805,988 1,307,098 4,843,740 3,576,631
Other operating
expense............... 1,140,421 892,183 3,280,015 2,718,832
------------ ------------ ------------ ------------
Income before income
taxes................. 766,574 595,718 1,874,239 1,435,713
Applicable income
taxes................. 288,232 226,969 704,714 547,007
------------ ------------ ------------ ------------
Net income............. $ 478,342 $ 368,749 $ 1,169,525 $ 888,706
============ ============ ============ ============
LOAN RECEIVABLES
At period end.......... $ 19,050,779 $ 18,044,750
Average for the period. 20,456,760 17,668,199 $ 19,739,487 $ 17,439,498
NOTE K: 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 No. 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 by the Corporation 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, securitization income, interchange
income, credit card and other fees, 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 September 30, 2001 increased 29.7% to
$478.3 million or $.54 per common share, from $368.7 million or $.43 per
common share for the same period in 2000. Net income for the nine months
ended September 30, 2001 increased 31.6% to $1.2 billion or $1.32 per common
share, from $888.7 million or $1.05 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 18.1% to $91.9 billion and 20.2% to $89.7 billion for the three
and nine months ended September 30, 2001, as compared to $77.8 billion and
$74.6 billion for the same periods in 2000, respectively. Total managed loans
at September 30, 2001 were $92.6 billion, a $7.9 billion increase from
September 30, 2000, and a $3.8 billion increase since December 31, 2000. In
addition, the managed net interest margin increased to 8.57% and 8.21% for the
three and nine months ended September 30, 2001, as compared to 7.10% for the
same periods in 2000, respectively.
During the nine months ended September 30, 2001, the Corporation acquired 329
new endorsements from a variety of organizations in the United States, United
Kingdom, and Canada, and added 7.1 million new accounts. The growth in managed
loans for the three and nine months ended September 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 nine months ended
September 30, 2001, the Corporation securitized $5.0 billion and $9.5 billion
of credit card loan receivables, respectively, bringing total securitized
loans to $73.5 billion at September 30, 2001. The Corporation's average
securitized loans increased 18.8% and 22.4% to $71.4 billion and $70.0 billion
for the three and nine months ended September 30, 2001, respectively, as
compared to $60.1 billion and $57.2 billion for the same periods in 2000.
The Corporation's return on average total assets for the three and nine months
ended September 30, 2001 increased to 4.58% and 3.93% from 4.38% and 3.70% 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 securitizations. The
Corporation's return on average stockholders' equity was 26.49% and 22.77% for
the three and nine months ended September 30, 2001, as compared to 27.56% and
25.65% 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 $48.9
million to $343.6 million for the three months ended September 30, 2001 from
the same period in 2000. Average interest-earning assets increased
$3.8 billion for the three months ended September 30, 2001, as compared to the
same period in 2000. The increase in average interest-earning assets for the
three months ended September 30, 2001 was primarily 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 $5.4 billion for the three
months ended September 30, 2001, as compared to the same period in 2000. The
increase in average interest-bearing liabilities for the three months ended
September 30, 2001 was primarily a result of an increase of $4.3 billion in
average interest-bearing deposits and an increase of $923.6 million in average
long-term debt and bank notes, as compared to the same period in 2000, the
proceeds of 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.
Net interest income, on a fully taxable equivalent basis, increased $84.2
million to $966.3 million for the nine months ended September 30, 2001 from the
same period in 2000. Average interest-earning assets increased $3.7 billion
for the nine months ended September 30, 2001, as compared to the same period in
2000. The increase in average interest-earning assets for the nine months ended
September 30, 2001 was a result of an increase in average loan receivables of
$2.3 billion and an increase in average money market instruments of
$1.0 billion as compared to the same period in 2000. Average interest-bearing
liabilities increased $4.8 billion for the nine months ended September 30,
2001, as compared to the same period in 2000. The increase in average
interest-bearing liabilities for the nine months ended September 30, 2001, as
compared to the same period in 2000 was primarily a result of an increase of
$4.6 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 net interest margin represents net interest income on a fully taxable
equivalent basis expressed as a percentage of average total interest-earning
assets. The Corporation's net interest margin, on a fully taxable equivalent
basis, was 4.94% and 4.84% for the three and nine months ended September 30,
2001, as compared to 4.93% and 5.12% for the same periods in 2000,
respectively.
INVESTMENTS SECURITIES, MONEY MARKET INSTRUMENTS, AND OTHER INTEREST-EARNING
ASSETS
Interest income on investment securities for the three and nine months ended
September 30, 2001, on a fully taxable equivalent basis, was $42.0 million and
$130.7 million, as compared to $46.8 million and $134.7 million for the same
periods in 2000, respectively. Average investment securities increased $238.4
million and $196.7 million to $3.4 billion and $3.3 billion for the three and
nine months ended September 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 nine months ended September 30, 2001, decreased
100 basis points and 51 basis points to 4.97% and 5.34%, as compared to the
same periods in 2000, respectively.
Interest income on money market instruments decreased $10.7 million to $28.2
million for the three months ended September 30, 2001, and increased $13.4
million to $102.4 million for the nine months ended September 30, 2001, as
compared to the same periods in 2000, respectively. The decrease in interest
income on money market instruments for the three months ended
September 30, 2001 was primarily a result of a decrease of 275 basis points in
the yield earned on average money market instruments from the same period in
2000. The increase in interest income on money market instruments for the nine
months ended September 30, 2001 was primarily a result of an increase of $1.0
billion in average money market instruments, offset by a decrease of 158 basis
points in the yield earned on average money market instruments from the same
period in 2000.
The Corporation tries to maintain its investment securities and money market
instruments position at a level appropriate for the Corporation's anticipated
liquidity needs. The Corporation's average investment securities and average
money market instruments are affected by the timing of receipt of funds from
asset securitizations, deposits, loan payments, long-term debt and bank notes,
and maturities of investment securities. Funds received from these sources are
generally invested in short-term, liquid money market instruments and
investment securities available-for-sale until the funds are needed for loan
growth and other liquidity needs.
Interest income on other interest-earning assets was $25.6 million and $69.8
million for the three and nine months ended September 30, 2001, as compared to
$19.1 million and $53.9 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
$75.3 million and $225.7 million to $699.2 million and $2.0 billion for the
three and nine months ended September 30, 2001, as compared to the same periods
in 2000, respectively. The increase for the three and nine months ended
September 30, 2001 was primarily the result of an increase in average loan
receivables of $2.8 billion and $2.3 billion as compared to the same periods in
2000, respectively. The yield on loan receivables for the three and nine
months ended September 30, 2001 was 13.56% and 13.87%, as compared to 14.05%
and 13.95% for the same periods in 2000.
Table 1 presents the Corporation's period end loan receivables distribution by
loan type, excluding securitized loans.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
Loan receivables:
Loans held for securitization:
Domestic:
Credit card.............................. $ 2,926,596 $ 6,396,652
Other consumer........................... 1,033,632 1,022,756
------------- -------------
Total domestic loans held for
securitization........................ 3,960,228 7,419,408
Foreign.................................... 1,781,899 852,525
------------- -------------
Total loans held for securitization.... 5,742,127 8,271,933
Loan portfolio:
Domestic:
Credit card.............................. 5,724,865 6,612,913
Other consumer........................... 4,504,721 2,799,289
------------- -------------
Total domestic loan portfolio.......... 10,229,586 9,412,202
Foreign.................................... 3,079,066 2,270,702
------------- -------------
Total loan portfolio................... 13,308,652 11,682,904
------------- -------------
Total loan receivables................. $ 19,050,779 $ 19,954,837
============= =============
Domestic credit card loan receivables decreased $4.3 billion to $8.7 billion at
September 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 $9.2 billion of domestic credit card loan receivables, while
$4.5 billion of previously securitized domestic credit card loan receivables
amortized back into the Corporation's loan portfolio during the nine months
ended September 30, 2001. The Corporation also acquired $546.9 million of
domestic credit card loan receivables during the nine months ended
September 30, 2001.
Domestic other consumer loan receivables increased $1.7 billion to $5.5 billion
at September 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 $1.8 billion to $4.9 billion at
September 30, 2001 from $3.1 billion at December 31, 2000. The growth in
foreign loan receivables was primarily a result of marketing programs at the
Corporation's two foreign bank subsidiaries, MBNA Europe and MBNA Canada, in
addition to the acquisition of $394.0 million of credit card loan receivables
by MBNA Europe during the nine months ended September 30, 2001. In addition,
MBNA Canada securitized CAD$350.0 million (approximately $227.5 million) of
foreign credit card loan receivables during the nine months ended
September 30, 2001.
DEPOSITS
Total interest expense on deposits was $359.8 million and $1.1 billion for
the three and nine months ended September 30, 2001, as compared to
$328.1 million and $896.2 million for the same periods in 2000, respectively.
The increase in interest expense on deposits for the three and nine months
ended September 30, 2001 was primarily the result of a $4.3 billion and a
$4.6 billion increase in average interest-bearing deposits for the three and
nine months ended September 30, 2001, as compared to the same periods in 2000,
respectively.
The increase in average interest-bearing deposits for the three and nine months
ended September 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 increased to $8.3 million for the
three months ended September 30, 2001, as compared to $7.4 million for the same
period in 2000. The increase in interest expense on short-term borrowings for
the three months ended September 30, 2001 was primarily a result of an increase
of $216.7 million in average short-term borrowings for the three months ended
September 30, 2001 as compared to the same period in 2000. Interest expense
on short-term borrowings decreased to $12.6 million for the nine months ended
September 30, 2001, as compared to $30.9 million for the same period in 2000.
The decrease in interest expense on short-term borrowings for the nine months
ended September 30, 2001 was primarily a result of a decrease of $332.9 million
in average short-term borrowings for the nine months ended September 30, 2001
as compared to the same period in 2000. In addition, rates paid on average
short-term borrowings decreased 155 basis points and 114 basis points for the
three and nine months ended September 30, 2001 from the same periods in 2000,
respectively.
Interest expense on long-term debt and bank notes decreased to $83.2 million
and $268.8 million for the three and nine months ended September 30, 2001, as
compared to $98.5 million and $290.0 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 long-term debt and
bank notes of 199 basis points and 104 basis points for the three and nine
months ended September 30, 2001, as compared to the same periods in 2000,
respectively. Interest expense on foreign long-term debt and bank notes
increased $5.9 million and $21.4 million for the three and nine months ended
September 30, 2001, as compared to the same periods in 2000. This was a result
of an increase in average foreign long-term debt and bank notes of $509.3
million and $511.1 million for the three and nine months ended
September 30, 2001, from the same periods in 2000, as MBNA Europe and MBNA
Canada 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 nine months ended
September 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
September 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............................... $ 1,179 3.03% $ 9
Foreign................................ 1,546,745 4.14 16,143
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,547,924 4.14 16,152
Federal funds sold and securities
purchased under resale agreements....... 1,397,437 3.41 12,019
----------- ----------
Total money market instruments....... 2,945,361 3.79 28,171
Investment securities(a):
Taxable.................................. 3,255,589 4.99 40,963
Tax-exempt(b)............................ 100,130 4.12 1,039
------------ ----------
Total investment securities.......... 3,355,719 4.97 42,002
Other interest-earning assets(a)........... 845,151 12.00 25,562
Loan receivables:
Loans held for securitization:
Domestic............................... 5,464,097 14.00 192,829
Foreign................................ 1,377,303 13.02 45,200
------------ ----------
Total loans held for
securitization.................... 6,841,400 13.80 238,029
Loans:
Domestic:
Credit card.......................... 5,381,858 12.79 173,468
Other consumer....................... 5,287,749 14.91 198,682
------------ ----------
Total domestic loans............... 10,669,607 13.84 372,150
Foreign................................ 2,945,753 11.99 89,012
------------ ----------
Total loans.......................... 13,615,360 13.44 461,162
------------ ----------
Total loan receivables............... 20,456,760 13.56 699,191
------------ ----------
Total interest-earning assets........ 27,602,991 11.43 $ 794,926
Cash and due from banks...................... 774,133
Premises and equipment, net.................. 2,043,433
Other assets................................. 11,535,587
Reserve for possible credit losses........... (543,751)
------------
Total assets......................... $ 41,412,393
============
For the Three Months Ended
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,004,394 6.37% $ 289,102
Money market deposit accounts.......... 5,692,703 4.26 61,195
Interest-bearing transaction accounts.. 40,569 3.00 307
Savings accounts....................... 14,055 2.99 106
------------ ----------
Total domestic interest-bearing
deposits............................ 23,751,721 5.86 350,710
Foreign:
Time deposits.......................... 714,938 5.05 9,106
------------ ----------
Total interest-bearing deposits...... 24,466,659 5.83 359,816
Borrowed funds:
Short-term borrowings:
Domestic............................... 450,596 5.20 5,903
Foreign................................ 217,962 4.39 2,410
------------ ----------
Total short-term borrowings.......... 668,558 4.93 8,313
Long-term debt and bank notes:
Domestic............................... 4,771,587 4.81 57,871
Foreign................................ 1,638,538 6.13 25,333
------------ ----------
Total long-term debt and bank notes.. 6,410,125 5.15 83,204
------------ ----------
Total borrowed funds................. 7,078,683 5.13 91,517
------------ ----------
Total interest-bearing liabilities... 31,545,342 5.68 451,333
Demand deposits.............................. 915,056
Other liabilities............................ 1,786,717
------------
Total liabilities.................... 34,247,115
Stockholders' equity......................... 7,165,278
------------
Total liabilities and stockholders'
equity.............................. $ 41,412,393
============ ----------
Net interest income.................. $ 343,593
==========
Net interest margin.................. 4.94
Interest rate spread................. 5.75
(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
September 30, 2001 was $364.
For the Three Months Ended
September 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............................... $ 32,056 6.03% $ 486
Foreign................................ 1,413,859 6.49 23,080
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,445,915 6.48 23,566
Federal funds sold and securities
purchased under resale agreements....... 920,951 6.62 15,315
------------ ---------
Total money market instruments....... 2,366,866 6.54 38,881
Investment securities(a):
Taxable.................................. 3,016,255 5.94 45,054
Tax-exempt(b)............................ 101,027 6.76 1,717
------------ ---------
Total investment securities.......... 3,117,282 5.97 46,771
Other interest-earning assets(a)........... 631,610 12.00 19,052
Loan receivables:
Loans held for securitization:
Domestic............................... 6,722,112 14.98 253,151
Foreign................................ 1,178,805 13.32 39,469
------------ ----------
Total loans held for
securitization.................... 7,900,917 14.73 292,620
Loans:
Domestic:
Credit card.......................... 5,717,289 13.56 194,897
Other consumer....................... 1,865,189 14.85 69,616
------------ ----------
Total domestic loans............... 7,582,478 13.88 264,513
Foreign................................ 2,184,804 12.16 66,795
------------ ----------
Total loans.......................... 9,767,282 13.49 331,308
------------ ----------
Total loan receivables............... 17,668,199 14.05 623,928
------------ ----------
Total interest-earning assets........ 23,783,957 12.19 $ 728,632
Cash and due from banks...................... 688,112
Premises and equipment, net.................. 1,699,109
Other assets................................. 7,661,620
Reserve for possible credit losses........... (375,600)
------------
Total assets......................... $ 33,457,198
============
For the Three Months Ended
September 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 14,758,984 6.52% $ 241,904
Money market deposit accounts.......... 4,631,719 6.40 74,533
Interest-bearing transaction accounts.. 38,632 5.22 507
Savings accounts....................... 9,127 5.19 119
------------ ----------
Total domestic interest-bearing
deposits............................ 19,438,462 6.49 317,063
Foreign:
Time deposits.......................... 754,197 5.83 11,051
------------ ----------
Total interest-bearing deposits...... 20,192,659 6.46 328,114
Borrowed funds:
Short-term borrowings:
Domestic............................... 291,553 6.81 4,991
Foreign................................ 160,326 5.88 2,368
------------ ----------
Total short-term borrowings.......... 451,879 6.48 7,359
Long-term debt and bank notes:
Domestic............................... 4,357,307 7.22 79,033
Foreign................................ 1,129,206 6.85 19,439
------------ ----------
Total long-term debt and bank notes.. 5,486,513 7.14 98,472
------------ ----------
Total borrowed funds................. 5,938,392 7.09 105,831
------------ ----------
Total interest-bearing liabilities... 26,131,051 6.61 433,945
Demand deposits.............................. 688,335
Other liabilities............................ 1,315,568
------------
Total liabilities.................... 28,134,954
Stockholders' equity......................... 5,322,244
------------
Total liabilities and stockholders'
equity.............................. $ 33,457,198
============ ----------
Net interest income.................. $ 294,687
==========
Net interest margin.................. 4.93
Interest rate spread................. 5.58
(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
September 30, 2000 was $601.
For the Nine Months Ended
September 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............................... $ 1,244 3.65% $ 34
Foreign................................ 1,552,934 4.86 56,477
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,554,178 4.86 56,511
Federal funds sold and securities
purchased under resale agreements....... 1,371,627 4.48 45,916
----------- ----------
Total money market instruments....... 2,925,805 4.68 102,427
Investment securities(a):
Taxable.................................. 3,171,306 5.35 126,783
Tax-exempt(b)............................ 102,299 5.17 3,954
------------ ----------
Total investment securities.......... 3,273,605 5.34 130,737
Other interest-earning assets(a)........... 777,267 12.00 69,762
Loan receivables:
Loans held for securitization:
Domestic............................... 5,706,889 14.34 612,174
Foreign................................ 974,373 13.37 97,436
------------ ----------
Total loans held for
securitization.................... 6,681,262 14.20 709,610
Loans:
Domestic:
Credit card.......................... 6,210,597 13.39 622,068
Other consumer....................... 4,245,779 15.04 477,659
------------ ----------
Total domestic loans............... 10,456,376 14.06 1,099,727
Foreign................................ 2,601,849 12.23 237,952
------------ ----------
Total loans.......................... 13,058,225 13.70 1,337,679
------------ ----------
Total loan receivables............... 19,739,487 13.87 2,047,289
------------ ----------
Total interest-earning assets........ 26,716,164 11.76 $2,350,215
Cash and due from banks...................... 731,843
Premises and equipment, net.................. 1,930,488
Other assets................................. 10,863,308
Reserve for possible credit losses........... (462,867)
------------
Total assets......................... $ 39,778,936
============
For the Nine Months Ended
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,864,019 6.56% $ 876,920
Money market deposit accounts.......... 5,351,149 4.95 198,008
Interest-bearing transaction accounts.. 42,642 4.00 1,275
Savings accounts....................... 11,560 3.85 333
------------ ----------
Total domestic interest-bearing
deposits............................ 23,269,370 6.19 1,076,536
Foreign:
Time deposits.......................... 652,646 5.33 26,025
------------ ----------
Total interest-bearing deposits...... 23,922,016 6.16 1,102,561
Borrowed funds:
Short-term borrowings:
Domestic............................... 174,189 5.17 6,731
Foreign................................ 159,493 4.93 5,887
------------ ----------
Total short-term borrowings.......... 333,682 5.06 12,618
Long-term debt and bank notes:
Domestic............................... 4,587,702 5.69 195,359
Foreign................................ 1,553,044 6.32 73,407
------------ ----------
Total long-term debt and bank notes.. 6,140,746 5.85 268,766
------------ ----------
Total borrowed funds................. 6,474,428 5.81 281,384
------------ ----------
Total interest-bearing liabilities... 30,396,444 6.09 1,383,945
Demand deposits.............................. 857,686
Other liabilities............................ 1,658,835
------------
Total liabilities.................... 32,912,965
Stockholders' equity......................... 6,865,971
------------
Total liabilities and stockholders'
equity.............................. $ 39,778,936
============ ----------
Net interest income.................. $ 966,270
==========
Net interest margin.................. 4.84
Interest rate spread................. 5.67
(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 nine months ended
September 30, 2001 was $1,384.
For the Nine Months Ended
September 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............................... $ 12,292 5.77% $ 531
Foreign................................ 1,305,084 6.23 60,869
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,317,376 6.23 61,400
Federal funds sold and securities
purchased under resale agreements....... 582,130 6.34 27,612
------------ ---------
Total money market instruments....... 1,899,506 6.26 89,012
Investment securities(a):
Taxable.................................. 2,974,569 5.83 129,742
Tax-exempt(b)............................ 102,312 6.53 5,004
------------ ---------
Total investment securities.......... 3,076,881 5.85 134,746
Other interest-earning assets(a)........... 600,275 12.00 53,926
Loan receivables:
Loans held for securitization:
Domestic............................... 7,349,478 14.48 796,826
Foreign................................ 984,858 13.35 98,462
------------ ----------
Total loans held for
securitization.................... 8,334,336 14.35 895,288
Loans:
Domestic:
Credit card.......................... 5,453,878 13.58 554,457
Other consumer....................... 1,810,331 14.77 200,161
------------ ----------
Total domestic loans............... 7,264,209 13.88 754,618
Foreign................................ 1,840,953 12.46 171,657
------------ ----------
Total loans.......................... 9,105,162 13.59 926,275
------------ ----------
Total loan receivables............... 17,439,498 13.95 1,821,563
------------ ----------
Total interest-earning assets........ 23,016,160 12.18 $2,099,247
Cash and due from banks...................... 656,496
Premises and equipment, net.................. 1,677,151
Other assets................................. 7,118,248
Reserve for possible credit losses........... (367,033)
------------
Total assets......................... $ 32,101,022
============
For the Nine Months Ended
September 30, 2000
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 13,944,625 6.28% $ 656,008
Money market deposit accounts.......... 4,528,463 6.05 205,022
Interest-bearing transaction accounts.. 37,424 5.11 1,431
Savings accounts....................... 9,302 5.05 352
------------ ----------
Total domestic interest-bearing
deposits............................ 18,519,814 6.22 862,813
Foreign:
Time deposits.......................... 778,119 5.73 33,374
------------ ----------
Total interest-bearing deposits...... 19,297,933 6.20 896,187
Borrowed funds:
Short-term borrowings:
Domestic............................... 482,896 6.40 23,142
Foreign................................ 183,653 5.67 7,793
------------ ----------
Total short-term borrowings.......... 666,549 6.20 30,935
Long-term debt and bank notes:
Domestic............................... 4,583,720 6.94 238,040
Foreign................................ 1,041,913 6.67 51,990
------------ ----------
Total long-term debt and bank notes.. 5,625,633 6.89 290,030
------------ ----------
Total borrowed funds................. 6,292,182 6.81 320,965
------------ ----------
Total interest-bearing liabilities... 25,590,115 6.35 1,217,152
Demand deposits.............................. 652,488
Other liabilities............................ 1,229,928
------------
Total liabilities.................... 27,472,531
Stockholders' equity......................... 4,628,491
------------
Total liabilities and stockholders'
equity.............................. $ 32,101,022
============ ----------
Net interest income.................. $ 882,095
==========
Net interest margin.................. 5.12
Interest rate spread................. 5.83
(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 nine months ended
September 30, 2000 was $1,751.
OTHER OPERATING INCOME
Total other operating income increased 38.2% or $498.9 million and 35.4% or
$1.3 billion to $1.8 billion and $4.8 billion for the three and nine months
ended September 30, 2001, from the same periods in 2000, respectively. The
increase in other operating income was primarily attributable to a $443.2
million or 40.1% and $1.2 billion or 38.8% increase in securitization income
to $1.5 billion and $4.2 billion for the three and nine months ended
September 30, 2001, as compared to the same periods in 2000, respectively.
The increase in securitization income for the three and nine months ended
September 30, 2001 was the result of a $11.3 billion and $12.8 billion or 18.8%
and 22.4% increase in average securitized loans from the same periods in 2000,
respectively. Also, the securitized net interest margin increased to 9.99% and
9.51% for the three and nine months ended September 30, 2001, as compared to
7.96% and 7.91% for the same periods in 2000, respectively, primarily resulting
from a decrease in the rate paid to investors in the Corporation's securitized
loan transactions. 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 nine months ended September 30, 2001. The increase in the Corporation's
securitized net interest margin was partially offset by an increase in the net
credit loss rates on the Corporation's securitized loans to 5.44% and 5.19% for
the three and nine months ended September 30, 2001, from 4.38% and 4.50% for
the same periods in 2000.
Insurance income increased $14.4 million and $37.2 million to $38.3 million and
$97.5 million for the three and nine months ended September 30, 2001, as
compared to the same periods in 2000, respectively. The increase in insurance
income was primarily a result of the introduction of a credit protection
product in the first quarter of 2001. Other income increased $34.7 million and
$56.6 million to $64.3 million and $150.3 million for the three and nine months
ended September 30, 2001, as compared to the same periods in 2000,
respectively. The increase in other income for the three and nine months ended
September 30, 2001 was primarily a result of an increase in fee income from the
Corporation's other consumer loan products and 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 27.8% to $1.1 billion and 20.6% to
$3.3 billion for the three and nine months ended September 30, 2001, as
compared to $892.2 million and $2.7 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 both domestic and
foreign credit card and other consumer loan Customers. The Corporation added
7.1 million new accounts (8.4 million new Customers) during the nine months
ended September 30, 2001.
Included in the growth in total other operating expense for the three and nine
months ended September 30, 2001 was an increase in salaries and employee
benefits of $76.0 million and $207.5 million to $477.6 million and $1.4 billion
as compared to 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 September 30, 2001,
the Corporation had approximately 24,400 full-time equivalent employees, as
compared to 21,300 full-time equivalent employees at September 30, 2000.
The growth in other operating expense for the three and nine months ended
September 30, 2001 also includes amortization of intangible assets which
increased $17.5 million and $97.3 million to $92.2 million and $282.3 million,
as compared to the same periods in 2000, respectively. The increase in the
amortization of intangible assets for the three and nine months ended
September 30, 2001 was primarily the result of the acquisition of the consumer
and commercial revolving credit loan portfolio from First Union Corporation in
2000.
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 Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
(unaudited)
Purchased services.............. $ 117,326 $ 78,469 $ 360,496 $ 260,013
Advertising..................... 71,252 44,602 196,645 183,231
Collection...................... 12,340 10,359 33,284 32,531
Stationery and supplies......... 10,949 8,745 32,525 26,844
Service bureau.................. 16,843 14,128 47,127 38,640
Postage and delivery............ 95,387 57,331 255,399 244,947
Telephone usage................. 21,052 18,904 62,450 55,159
Loan receivable fraud losses.... 42,929 41,796 126,478 109,866
Amortization of intangible
assets......................... 92,152 74,637 282,258 184,924
Computer software............... 21,156 16,969 60,829 51,661
Other........................... 67,547 39,043 190,947 132,792
--------- --------- ---------- ----------
Total other operating expense. $ 568,933 $ 404,983 $1,648,438 $1,320,608
========= ========= ========== ==========
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 3.61%
at September 30, 2001 as compared to 3.89% at December 31, 2000. The
Corporation's delinquency as a percentage of managed loans was 4.23% at
September 30, 2001, as compared to 4.49% at December 31, 2000.
During September 2001, MBNA Corporation initiated measures to assist its
Customers who were affected by the tragic events of September 11, 2001. This
included assistance for Customers who may not have received their statement in
a timely manner or may have had delivery of their payment delayed. The
Corporation's actions postponed some Customer's accounts from becoming
delinquent. As a result, the Corporation's managed and reported delinquency
ratios were lower than their anticipated levels. Without these measures, the
Corporation estimates that managed delinquency ratios would have been between
4.85% and 4.95% at September 30, 2001. The charge-off of accounts was
unaffected.
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)
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Loan portfolio......................... $13,308,652 $11,682,904
Loans delinquent:
30 to 59 days........................ $ 136,966 1.03% $ 176,128 1.51%
60 to 89 days........................ 127,151 .96 95,859 .82
90 or more days...................... 216,379 1.62 182,955 1.56
----------- ----- ----------- -----
Total.............................. $ 480,496 3.61% $ 454,942 3.89%
=========== ===== =========== =====
Loans delinquent by geographic area:
Domestic............................. $ 402,383 3.93% $ 404,390 4.30%
Foreign.............................. 78,113 2.54 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)
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Nonaccrual loans....................... $ 16,059 $ 22,574
Reduced-rate loans..................... 267,438 238,747
------------------ -----------------
Total other nonperforming loans...... $ 283,497 $ 261,321
================== =================
Other nonperforming loans as a % of
ending loan portfolio................. 2.13% 2.24%
The Corporation's total managed other nonperforming loans as a percentage of
ending managed loans was 2.67% at September 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 nine months ended September 30, 2001 were
$153.7 million and $435.8 million, as compared to $97.0 million and
$286.0 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 increase in net credit losses for the three and nine months ended
September 30, 2001 reflects increases in the Corporation's outstanding loan
receivables, general economic conditions, and the seasoning of the
Corporation's accounts, offset by recoveries from the sale of charged-off
receivables.
Net credit losses as a percentage of average loan receivables were 3.00% and
2.94% for the three and nine months ended September 30, 2001, respectively, as
compared to 2.19% for the same periods in 2000. The Corporation's managed
credit losses as a percentage of average managed loans for the three and nine
months ended September 30, 2001 were 4.90% and 4.69%, as compared to 3.88% and
3.96% 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 nine months ended
September 30, 2001 was $242.2 million and $654.4 million, as compared to
$113.3 million and $302.4 million for the three and nine months ended
September 30, 2000, respectively. 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited)
Reserve for possible credit
losses, beginning of period...... $ 528,158 $ 375,300 $ 386,568 $ 355,959
Reserves acquired............... 5,744 37,733 18,361 57,859
Provision for possible credit
losses:
Domestic...................... 217,622 99,347 595,252 273,993
Foreign....................... 24,600 13,936 59,120 28,437
--------- --------- --------- ---------
Total provision for
possible credit losses..... 242,222 113,283 654,372 302,430
Foreign currency translation.... 969 (441) (45) (1,311)
Credit losses:
Domestic:
Credit card................. (118,136) (101,324) (400,767) (312,389)
Other consumer.............. (74,036) (25,623) (178,409) (87,126)
--------- --------- --------- ---------
Total domestic credit
losses................... (192,172) (126,947) (579,176) (399,515)
Foreign....................... (34,997) (20,083) (85,370) (45,715)
--------- --------- --------- ---------
Total credit losses....... (227,169) (147,030) (664,546) (445,230)
Recoveries:
Domestic:
Credit card................. 55,297 38,648 174,081 123,762
Other consumer.............. 6,826 5,270 20,969 17,353
--------- --------- --------- ---------
Total domestic recoveries. 62,123 43,918 195,050 141,115
Foreign....................... 11,378 6,162 33,665 18,103
--------- --------- --------- ---------
Total recoveries.......... 73,501 50,080 228,715 159,218
--------- --------- --------- ---------
Net credit losses............... (153,668) (96,950) (435,831) (286,012)
--------- --------- --------- ---------
Reserve for possible credit
losses, end of period............ $ 623,425 $ 428,925 $ 623,425 $ 428,925
========= ========= ========= =========
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
September 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
Well-
September 30, December 31, Minimum Capitalized
2001 2000 Requirements Requirements
------------- ------------ ------------ ------------
(unaudited)
MBNA Corporation
Tier 1.................. 16.38% 14.98% 4.00% (a)
Total................... 18.38 16.61 8.00 (a)
Leverage................ 17.82 17.30 4.00 (a)
MBNA America Bank, N.A.
Tier 1.................. 13.11 10.78 4.00 6.00%
Total................... 15.14 12.44 8.00 10.00
Leverage................ 14.36 12.79 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1.................. 20.27 20.88 4.00 6.00
Total................... 21.25 21.84 8.00 10.00
Leverage................ 19.66 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 nine months ended September 30,
2001, the Corporation declared dividends on its preferred stock of $10.6
million and on its common stock of $230.0 million. On October 11, 2001, the
Corporation's Board of Directors declared a quarterly cash dividend of $.09
per common share, payable January 1, 2002 to stockholders of record as of
December 14, 2001. Also, on October 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 $.3438 per
share on the Adjustable Rate Cumulative Preferred Stock, Series B. The
preferred stock dividends are payable January 15, 2002 to stockholders of
record as of December 31, 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 September 30, 2001, the amount of retained
earnings available for declaration and payment of dividends from the Bank to
the Corporation was $2.8 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 September 30, 2001. If this
facility had been drawn upon at September 30, 2001, the amount of retained
earnings available for declaration of dividends would have been further limited
to $1.2 billion.
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 September 30, 2001 and December 31, 2000 were $25.6 billion
and $24.3 billion, respectively. Included in total deposits at September 30,
2001 are $760.0 million of foreign time deposits, which generally mature within
one year. Table 8 provides the maturities of the Corporation's deposits at
September 30, 2001.
TABLE 8: MATURITIES OF DEPOSITS AT SEPTEMBER 30, 2001
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
(unaudited)
Three months or less(a)............. $ 8,629,630 $ 1,211,979 $ 9,841,609
Over three months through twelve
months............................. 5,223,435 1,433,569 6,657,004
Over one year through five years.... 4,930,300 4,191,784 9,122,084
Over five years..................... 13,829 - 13,829
------------ ------------ ------------
Total deposits.................... $ 18,797,194 $ 6,837,332 $ 25,634,526
============ ============ ============
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts
totaling $6.8 billion.
MBNA Canada renegotiated its multi-currency syndicated revolving credit
facility in July 2001 for CAD$350.0 million (approximately $221.9 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. This facility was not drawn upon as of September 30, 2001.
The Corporation also held $3.4 billion in investment securities and $4.2
billion of money market instruments at September 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 September 30,
2001, $1.4 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, short-term securities and
variable-rate securities, was $2.9 billion at September 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 SEPTEMBER 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.. $1,017,582 $ 952,524 $ - $ -
State and political subdivisions
of the United States............. 93,330 - - -
Asset-backed and other securities. 281,797 564,221 12,535 860
---------- ---------- --------- --------
Total investment securities
available-for-sale............. $1,392,709 $1,516,745 $ 12,535 $ 860
========== ========== ========= ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ - $ - $ - $355,253
State and political subdivisions
of the United States............. - 181 - 5,844
Asset-backed and other securities. 1,000 10,921 - 60,682
---------- ---------- --------- --------
Total investment securities
held-to-maturity............... $ 1,000 $ 11,102 $ - $421,779
========== ========== ========= ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,970,106 $1,970,106
State and political subdivisions
of the United States............. 93,330 93,330
Asset-backed and other securities. 859,413 859,413
---------- ----------
Total investment securities
available-for-sale............. $2,922,849 $2,922,849
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 355,253 $ 344,054
State and political subdivisions
of the United States............. 6,025 7,437
Asset-backed and other securities. 72,603 72,647
---------- ----------
Total investment securities
held-to-maturity............... $ 433,881 $ 424,138
========== ==========
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. As a result, 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 September 30, 2001, the Corporation could
experience a decrease in projected net income during the next twelve months of
approximately $47 million, if interest rates at the time the simulation
analysis was performed increased 100 basis points over the 12 month period.
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 September 30, 2001, the Corporation could experience a decrease
in stockholders' equity, net of tax, of approximately $58 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 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.
In July 2001, Financial Accounting Standards Board Technical Bulletin No. 01-1,
"Effective Date for Certain Financial Institutions of Certain Provisions of
Statement No. 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 by the Corporation 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.
Asset securitization of loan receivables by the Corporation 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, net of
payments 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 nine months ended September 30, 2001, the Corporation
securitized credit card loan receivables totaling $5.0 billion and
$9.5 billion, respectively, while $1.6 billion and $4.9 billion of previously
securitized credit card and other consumer loan receivables amortized or
matured. Included in the securitization activity during the nine months ended
September 30, 2001 is CAD$350.0 million (approximately $227.5 million) of
credit card loan receivables securitized by MBNA Canada. The total amount of
outstanding securitized loans was $73.5 billion or 79.4% of managed loans at
September 30, 2001, compared to $68.8 billion or 77.5% at December 31, 2000.
An additional $3.1 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)
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
Securitized Loans:
Domestic:
Credit card................................ $ 62,404,217 $ 57,425,582
Other consumer............................. 5,701,605 5,691,769
------------- -------------
Total domestic securitized loans......... 68,105,822 63,117,351
Foreign:
Credit card................................ 5,399,084 5,650,485
Other consumer............................. 29,465 68,048
------------- -------------
Total foreign securitized loans.......... 5,428,549 5,718,533
------------- -------------
Total securitized loans.................. $ 73,534,371 $ 68,835,884
============= =============
Table 11 shows summarized yields in excess of minimum yield data for each
securitization trust for the three-month period ended September 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)
Yields in Excess of Minimum
Number --------------------------------
of Series Range
Series Weighted --------------------
in Trust Average High Low
-------- ---------- --------- ---------
(unaudited)
MBNA Master Credit Card Trust II ... 66 7.83% 8.38% 6.59%
UK Receivables Trust................ 10 6.69 7.47 5.50
Gloucester Credit Card Trust........ 6 8.33 8.94 8.04
MBNA Triple A Master Trust.......... 2 6.73 7.70 6.25
First Union Direct Bank Master
Credit Card Trust (b).............. 3 10.78 10.82 10.76
MBNA Credit Card Master Note
Trust(c)........................... 11 6.13 - -
(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) The First Union Direct Bank Master Credit Card Trust was assumed by the
Corporation in 2000 as part of the acquisition of the consumer and
commercial revolving credit loan portfolio from First Union Corporation.
The First Union Master Credit Card Trust was terminated by the Corporation
in October 2001 and is therefore excluded from Table 11.
(c) MBNA Credit Card Master Note Trust issues a series of notes called the
MBNAseries. Through the MBNAseries, MBNA Credit Card Master Note Trust
issued specific classes of notes which contribute on a prorated basis to
the calculation of the average yield in excess of minimum. This average
yield in excess of minimum impacts the distribution of principal to
investors of all classes within the MBNAseries.
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 Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
MANAGED INCOME STATEMENTS
Interest income........... $ 3,282,620 $ 2,893,266 $ 9,785,162 $ 8,106,348
Interest expense.......... 1,162,554 1,408,534 3,895,685 3,874,773
----------- ----------- ----------- -----------
Net interest income....... 2,120,066 1,484,732 5,889,477 4,231,575
Provision for possible
credit losses............ 1,213,529 770,936 3,377,370 2,234,247
----------- ----------- ----------- -----------
Net interest income after
provision for possible
credit losses............ 906,537 713,796 2,512,107 1,997,328
Other operating income.... 1,000,458 774,105 2,642,147 2,157,217
Other operating expense... 1,140,421 892,183 3,280,015 2,718,832
----------- ----------- ----------- -----------
Income before income
taxes.................... 766,574 595,718 1,874,239 1,435,713
Applicable income taxes... 288,232 226,969 704,714 547,007
----------- ----------- ----------- -----------
Net income................ $ 478,342 $ 368,749 $ 1,169,525 $ 888,706
=========== =========== =========== ===========
MANAGED LOANS
At period end............. $92,585,150 $84,671,443
Average for the period.... 91,852,750 77,788,683 $89,715,588 $74,629,687
MANAGED RATIOS
Delinquency(a)............ 4.23% 4.65%
Net credit losses......... 4.90 3.88 4.69% 3.96%
Net interest margin....... 8.57 7.10 8.21 7.10
(a) During September 2001, MBNA Corporation initiated measures to assist its
Customers who were affected by the tragic events of September 11, 2001.
This included assistance for Customers who may not have received their
statement in a timely manner or may have had delivery of their payment
delayed. The Corporation's actions postponed some Customer's accounts from
becoming delinquent. As a result, the Corporation's managed and reported
delinquency ratios were lower than their anticipated levels. Without these
measures, the Corporation estimates that managed delinquency ratios would
have been between 4.85% and 4.95% at September 30, 2001. The charge-off of
accounts was unaffected.
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. On August 24
and August 30, 2001, various members of the class who had filed objections to
the proposed settlement appealed the order approving the settlement to the
Third Circuit Court of Appeals.
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 Nine Months
Ended September 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,874,239 $ 1,435,713
Fixed charges.................................... 1,392,987 1,226,414
Interest capitalized during period, net of
amortization of previously capitalized interest. (4,458) (2,826)
------------ ------------
Earnings, for computation purposes............... $ 3,262,768 $ 2,659,301
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 1,388,829 $ 1,220,366
Portion of rents representative of the interest
factor.......................................... 4,158 6,048
------------ ------------
Fixed charges.................................... 1,392,987 1,226,414
Preferred stock dividend requirements............ 17,022 17,848
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 1,410,009 $ 1,244,262
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.31 2.14
For the Nine Months
Ended September 30,
--------------------------
2001 2000
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,874,239 $ 1,435,713
Fixed charges.................................... 290,426 330,227
Interest capitalized during period, net of
amortization of previously capitalized interest. (4,474) (2,842)
------------ ------------
Earnings, for computation purposes............... $ 2,160,191 $ 1,763,098
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 286,268 $ 324,179
Portion of rents representative of the interest
factor.......................................... 4,158 6,048
------------ ------------
Fixed charges.................................... 290,426 330,227
Preferred stock dividend requirements............ 17,022 17,848
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 307,448 $ 348,075
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 7.03 5.07
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 July 12, 2001, reporting MBNA Corporation's earnings
release for the second quarter of 2001.
2. Report dated July 25, 2001, reporting the securitization of $400.0 million
of credit card loan receivables by MBNA America Bank, N.A.
3. Report dated July 26, 2001, reporting the securitization of $500.0 million
of credit card loan receivables by MBNA America Bank, N.A.
4. 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.
5. Report dated August 8, 2001, reporting the securitization of $1.0 billion
of credit card loan receivables by MBNA America Bank, N.A.
6. Report dated August 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 August 2001.
7. Report dated September 6, 2001, reporting the securitization of $500.0
million of credit card loan receivables by MBNA America Bank, N.A.
8. Report dated September 27, 2001, reporting the securitization of $1.0
billion of credit card loan receivables by MBNA America Bank, N.A.
9. Report dated September 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 September 2001.
10. Report dated October 11, 2001, reporting MBNA Corporation's earnings
release for the third quarter of 2001.
11. Report dated October 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 October 2001.
12. Report dated October 31, 2001, reporting the securitization of 499.7
million pounds sterling of credit card receivables by MBNA Europe Bank
Limited.
13. Report dated November 8, 2001, reporting the securitization of $500.0
million 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: November 14, 2001 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer