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[MBNA CORPORATION LOGO]
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[PHOTO]
Platinum Plus Credit Cards
SUCCESS IS GETTING THE RIGHT CUSTOMERS . . .
AND KEEPING THEM.
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1996 ANNUAL REPORT
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[MBNA CORPORATION LOGO]
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MBNA Is A Company Of People Committed To:
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Providing the Customer with the finest products backed by
consistently top-quality service.
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Delivering these products and services efficiently, thus ensuring fair prices to
the Customer and a sound investment for the stockholder.
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Treating the Customer as we expect to be treated--
putting the Customer first every day--and meaning it.
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Being leaders in innovation, quality, efficiency, and Customer satisfaction.
Being known for doing the little things and the big things well.
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Expecting and accepting from ourselves nothing short of the best. Remembering
that each of us, the people of MBNA, makes the unassailable difference.
Getting the right Customers and keeping them is the foundation of our business.
It demands a single-minded commitment to Customer satisfaction. Meeting this
commitment requires tough standards, good people, and constant attention to the
importance of each individual Customer. It means having an attitude. Introduced
during the summer of 1986, the precepts above express our attitude. They are
displayed throughout the company, and each person carries a copy. These words
have been reviewed every year since they were written and have never been
changed. They are simple and straightforward, and we mean every single word.
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[PHOTO] Collage of Credit Cards
CONTENTS
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2 Financial Highlights
3 To Our Stockholders
4 Where We Are Today
6 Unique Marketing Proposition
8 MBNA's Business Development Sectors
10 Regionalization
11 How We Market
12 Credit
13 Technology
14 Putting Technology to Work
16 MBNA in the Community
18 MBNA Regional Centers
19 Financials
63 Senior Executives
64 Directors and Officers
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Earnings per Common Share Net Income
Earnings Income
(dollars) (millions)
87 0.22 87 74.7
88 0.27 88 90.1
89 0.31 89 104.1
90 0.39 90 129.1
91 0.44 91 149.2
92 0.51 92 172.7
93 0.62 93 207.8
94 0.79 94 266.6
95 1.03 95 353.1
96 1.33 96 474.5
Managed Loans (ending) Sales and Cash Advance Volume
Loans Loans
(billions) (billions)
87 3.2 87 5.3
88 4.5 88 7.3
89 5.7 89 9.1
90 7.4 90 11.5
91 8.8 91 12.9
92 9.9 92 14.5
93 12.4 93 17.9
94 18.7 94 25.1
95 26.7 95 34.3
96 38.6 96 48.7
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FINANCIAL HIGHLIGHTS
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YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
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(dollars in thousands, except per share amounts)
PER COMMON SHARE DATA FOR THE YEAR (a)
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Earnings ............................. $ 1.33 $ 1.03 $ .79 $ .62 $ .51
Dividends (b) ........................ .43 .37 .32 .28 .26
Book value ........................... 4.20 3.34 2.75 2.30 1.98
RATIOS
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Return on average assets ............. 3.26% 3.09% 3.16% 3.15% 2.96%
Return on average stockholders' equity 34.46 35.51 32.70 30.01 28.55
Stockholders' equity to total assets . 10.00 9.56 9.51 10.51 10.25
FINANCIAL STATEMENT DATA FOR THE YEAR
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Net interest income .................. $ 640,477 $ 544,226 $ 532,108 $ 474,323 $ 357,515
Other operating income ............... 1,895,923 1,424,618 1,013,580 739,968 577,505
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NET INCOME ........................... 474,495 353,099 266,593 207,796 172,732
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Deposits ............................. 10,151,686 8,608,914 6,632,489 5,241,883 4,568,791
Stockholders' equity ................. 1,704,308 1,265,058 919,578 769,131 661,290
MANAGED LOAN DATA
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Managed loans at year end ............ $38,623,533 $26,711,704 $18,743,864 $12,358,518 $ 9,860,129
Sales and cash advance volume ........ 48,666,129 34,272,909 25,078,918 17,889,747 14,523,570
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(a) Per common share data has been restated to reflect the three-for-two split
of the Corporation's Common Stock, effected in the form of a dividend,
issued on January 1, 1997, to stockholders of record as of December 16,
1996.
(b) On January 14, 1997, the Board of Directors approved an increase of 12.5%
in the quarterly dividend to $.12 per common share.
[PHOTO]
Pictured left to right:
MBNA America
Vice Chairman
Bruce L. Hammonds,
John R. Cochran III,
M. Scot Kaufman,
and Lance L. Weaver.
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TO OUR STOCKHOLDERS
This report presents MBNA's full-year results for 1996, our fifteenth year in
business. During 1996, earnings increased 34.4% to $474.5 million. Loans
outstanding grew to $38.6 billion, an $11.9 billion increase over year-end 1995.
We also added 7.5 million new accounts. Our MBNA Platinum Plus credit card,
launched in March, generated 2.8 million new Customers. The typical new MBNA
Customer during 1996 had a $60,000 average annual household income, owned a
home, was employed for 11 years, and had a 12-year history of paying bills on
time.
This year, all credit card issuers experienced rising loan losses. This is not
the first time MBNA has been through such a cycle, and it does moderately affect
us. However, our lending policies and methods remained consistent. As a result,
our losses continue to be well below the industry average. Throughout 1996, the
difference in credit quality between MBNA and others in our business became
clearer.
Over the past year, we continued to strengthen the company through investments
in new products and technologies. While much of the investment has been in our
primary business, credit card lending, significant investments were made in
several other businesses. We expanded our consumer finance business, introduced
new insurance products and formed an insurance sales subsidiary, and continued
to grow MBNA International, our bank located in the United Kingdom. MBNA
International now has more than 1 million Customers and $1.8 billion in loans.
[PHOTO]
Al Lerner and Charlie Cawley.
This year's annual report focuses on the things we did in 1996 that will
strengthen our company in the future.
Everything that happens at MBNA is the direct result of the commitment,
attitude, and hard work of each of the people who work here. We are very proud
of the people of MBNA and what they accomplished in 1996 and during the last 15
years. We're sure you are too.
We hope you enjoy this report and find it informative.
/s/ ALFRED LERNER /s/ CHARLES M. CAWLEY
Alfred Lerner Charles M. Cawley
Chairman and Chief Executive Officer President
MBNA Corporation MBNA Corporation
Chairman and Chief Executive Officer
MBNA America Bank, N.A.
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[PHOTO] Trae Ballou
MBNA is a company of people dedicated to providing top-quality products and
services. This is one way MBNA distinguishes itself in the credit card business.
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WHERE WE ARE TODAY
MBNA Corporation is a bank holding company that does business through MBNA
America Bank, N.A., and MBNA International Bank Limited. Like other national
banks, we take deposits and make loans. Our consumer finance business
(non-credit card) manages more than $3.0 billion in loans. Consumer finance
products include installment loans, home equity loans, and lines of credit
accessed by check. Our retail deposit business, which offers money market
accounts and certificates of deposit, totals $7.8 billion. We also provide
credit insurance to more than 1 million Customers and market Property and
Casualty products through our insurance agency.
But that's where the similarity to a traditional national bank ends. We don't
have a branch network. Our primary business is lending to individuals through
credit cards. Our credit card lending business has $35.3 billion in managed
loans, making MBNA the world's second-largest lender through bank credit cards.
We make loans through credit cards in the United States and the United Kingdom.
MBNA International, our subsidiary in the U.K., was started just 36 months ago
and already has extended $1.8 billion in loans to more than 1 million Customers.
Credit card lending is a good business. Credit cards free people from the need
to carry cash and let them have the things they need today while paying for them
out of future income. There is widespread demand for credit cards in the United
States and around the world. In the United States alone, there are at least 150
million people who could qualify for a credit card. And the market continually
refreshes itself as young people reach adulthood.
Credit cards are good for consumers, and they are good for the economy. Credit
cards help people pay for vacations, buy gifts, or have their cars repaired.
And, in turn, these expenditures benefit the economy by creating jobs, helping
to reduce unemployment, and stimulating economic growth.
The vast majority of people handle their credit cards perfectly--97% of people
pay their bills on time, and those who don't usually have had a disruption in
their lives such as a medical emergency or job loss. Some people have suggested
that credit card use is causing consumers to be financially irresponsible. All
too often, this discussion focuses solely on the very small percentage of people
who have had problems and not on the majority of people who use credit
responsibly.
Done right, credit card lending produces low-risk assets. MBNA's loans are
spread among millions of active borrowers. Our portfolio has no industry
concentrations, no geographic concentrations, and no individual account
concentrations.
The credit card business is very competitive, but there's plenty of room for us
to grow. Over the past six years, we've increased market share to 9% from 4% of
combined Visa and MasterCard outstanding loans.
In the credit card business, the key to success is getting the right Customers
and keeping them. If you're not good at both, nothing else matters. And we are
very good at both.
Six years ago, we became a public company. Earnings have grown to $474.5 million
in 1996 from $149.2 million in 1991, an average annual growth rate of 26%.
Successful expansion into the United Kingdom and development of non-credit card
consumer finance products here in the U.S. are broadening our Customer base.
[4] EXCELLENCE IS A POINT OF VIEW. IT ISN'T BRILLIANCE OR GETTING THE BREAKS.
IT'S CONSISTENT ATTENTION TO AND HONEST RESPECT FOR THE CUSTOMER.
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Further, the expansion of our insurance business provides a solid opportunity
to increase non-interest income.
While growing rapidly, maintaining the quality of our loan portfolio is
essential. And we have done just that. The typical MBNA Customer has been
employed for 13 years, has an average annual household income of $60,000, has a
15-year history of paying bills promptly, and 81% own their own homes. Our
losses have remained well below industry averages--one-third less than the
losses of the typical bank credit card lender. Additionally, MBNA's Customers
continue to be very loyal. Our Customers use their cards more often and carry
balances 60% higher than the industry average.
At MBNA, we've established a solid foundation enabling us to continue producing
consistent results. We created a marketing franchise with thousands of
endorsements from membership organizations and expanded our regional marketing
centers, thus bringing us closer to Customers.
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OUR CUSTOMERS:
- USE US MORE: MBNA INDUSTRY
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Average account balance $3,256 $2,032
Average transactions per account 36 35
Average transaction $ 134 $ 89
- DEFAULT LESS:
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Loan losses per $1,000 of
average outstanding $ 34 $ 50
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MBNA Customers are very loyal. They carry higher balances, spend more, and
demonstrate a greater willingness to repay than the typical customer of our
competitors.
Supported by an in-house advertising agency and the largest telemarketing
operation of any financial institution, we continue to find new ways to attract
Customers. We invested in technology and created state-of-the-art processing
systems dedicated solely to serving the needs of the company and its Customers.
And, most important, we continue to make credit decisions one Customer at a
time. As a result, MBNA's typical Customers have significantly better repayment
habits than the industry's typical customer.
[PHOTO] Two people completing credit card transaction.
MBNA Customers used their MBNA credit cards more than 350 million times in 1996
and spent $47 billion.
EVERYTHING STARTS WITH THE CUSTOMER. [5]
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MBNA CONSUMER FINANCE
MBNA markets consumer finance products the same way we market credit
cards--through the mail and over the phone to members of endorsing
organizations. Consumer finance products include lines of credit accessed by
check, installment loans, and home equity loans. During 1996, consumer finance
loans increased to $3.3 billion from $1.5 billion at the end of 1995. MBNA
Consumer Finance serves more than 800,000 Customers.
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UNIQUE MARKETING PROPOSITION
GETTING THE RIGHT CUSTOMERS
In 1982, we began selling our credit card products to people with a strong
common interest by marketing to members of endorsing groups. This concept is
known as affinity marketing. The first organization that endorsed MBNA's credit
card was the Georgetown University Alumni Association. Fifteen years later,
along with Georgetown's endorsement, we have the endorsement of more than 4,400
other membership organizations and financial institutions. The total membership
of these organizations and financial institutions is more than 150 million
people--a membership base that provides a marketing opportunity that is
unmatched in the credit card industry or any other industry. And these groups
endorse a variety of MBNA products, including credit cards, consumer loans,
money market accounts, certificates of deposit, and insurance. Our success in
affinity marketing has helped create an unassailable marketing franchise and
operation that generated more than 7.5 million new accounts in 1996--the most
ever added in one year by any issuer in this business.
Each day we work to strengthen the franchise. For example, we organize our sales
and market-ing efforts into 10 specific Business Development sectors. Each
sector is led by managers who have developed expertise in reaching a particular
audience, such as teachers or NFL fans. These managers work closely with their
organizations to implement marketing programs. This specialization has produced
consistent, profitable results in each of the 10 sectors.
[PHOTO]
Michelle Shepherd, Geralyn Volk, Frank Andrews, and Alan Scott
MBNA people work closely with each of the 4,400 membership organizations and
financial institutions that endorse MBNA products. Together, they develop
innovative marketing programs that target the interests of potential Customers.
[6] COMPLACENCY IS DEVASTATING.
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[PHOTO] Collage of Credit Cards
In 1996, MBNA received the endorsement of 544 new membership organizations and
financial institutions, including 127 located in the United Kingdom.
One of the largest of these is the Professional sector. We have the endorsement
of more than 1,000 professional groups, including 35 state bar associations and
31 state medical societies. This sector generated more than 1 million accounts
in 1996. Our concentration on professionals has resulted in MBNA's credit card
being carried by 53% of all physicians, 24% of all nurses, 35% of all lawyers,
27% of all teachers, 26% of all engineers, 27% of all architects, and 60% of all
dentists in the United States.
In our Sports sector, we have almost 300 endorsements. Our focus on sports
endorsements has resulted in MBNA's credit card being the official card of the
National Football League, the National Hockey League, NASCAR, and the
Association of Tennis Professionals (ATP Tour).
MBNA is also the official card of 481 colleges and universities in the United
States. In 1996, 75 new colleges and universities, including the alumni
associations of Stanford University, the University of North Carolina at Chapel
Hill, the United States Military Academy, and Purdue University, chose to
endorse MBNA products.
The 800 endorsements in our Financial Institutions sector give us access to more
than 4,500 branches throughout the country where we market directly to
Customers.
Our International sector offers credit cards and loan products in the United
Kingdom, where we market our products the same way we do in the United States.
More than 400 organizations endorse MBNA International products. In 1996 alone,
we signed agreements with 127 new organizations. After only 36 months of
operation, we have $1.8 billion in outstanding loans.
We continue to strengthen our marketing franchise by acquiring new organizations
and financial institutions to endorse our products. In 1996, we obtained
endorsements from 544 new organizations. Accounts generated through the programs
we created in 1996 will drive our growth for years to come.
[PHOTO] Deposit Marketing Materials
MBNA also markets deposit products, such as money market accounts and
certificates of deposit, through the mail and over the telephone to members of
endorsing organizations.
ULTIMATELY, THE ONLY THING THAT REALLY COUNTS IS THE CUSTOMER. [7]
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MBNA'S BUSINESS DEVELOPMENT SECTORS
[PHOTO] College and University Credit Cards
COLLEGES AND UNIVERSITIES More than 480 educational institutions endorse MBNA
products. Alumni and students from most of the nation's top schools, including
eight of the Big 10 and six of the PAC-10, carry MBNA credit cards. In 1996,
MBNA received the endorsement of 75 colleges and universities, including the
alumni associations of Stanford University and the University of North Carolina
at Chapel Hill.
[PHOTO] Special Interest Credit Cards
SPECIAL INTEREST MBNA markets its products to the members of 400 cause-related
and special-interest groups and has 2.4 million Customers in this sector.
Endorsements include, for example, The Nature Conservancy, the National Wildlife
Federation, and The Cleveland Clinic Foundation.
[PHOTO] International Credit Cards
INTERNATIONAL In just three years of marketing credit cards internationally,
MBNA has $1.8 billion in outstanding loans, more than 1 million Customers, and
endorsements from more than 400 organizations. New groups signed in 1996 include
Oxford Limited and The Royal College of Surgeons of England.
[PHOTO] Motorsports Credit Cards
MOTORSPORTS More than 300 motorsports groups, including NASCAR, Indianapolis
Motor Speedway, and the National Hot Rod Association, endorse MBNA. Nearly 1.5
million Customers demonstrate their loyalty by using the card of their favorite
motorsport or hobby. MBNA's sponsorship of a NASCAR team helped generate 300,000
new accounts in this sector in 1996.
[PHOTO] Professional Credit Cards
PROFESSIONAL More than 1,000 professional organizations endorse MBNA credit
cards carried by 53% of all physicians, 24% of all nurses, 35% of all lawyers,
26% of all engineers, 27% of all architects, and 60% of all dentists in the
United States. This is MBNA's largest sector with 4.5 million Customers and
almost $9.0 billion in outstanding loans.
[8] EXCELLENCE DOES NOT COME BY CHANCE . . .
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[PHOTO] Sports Credit Cards
SPORTS Sports continues to be one of MBNA's fastest growing and most exciting
marketing sectors. We now market to the loyal fans of almost 300 sports teams,
and we are the official credit card issuer of the National Football League, the
National Hockey League, and the Association of Tennis Professionals (ATP Tour).
[PHOTO] Military and Law Enforcement Credit Cards
MILITARY AND LAW ENFORCEMENT MBNA markets to individuals associated with
military institutions and law enforcement organizations--for example, the U.S.
Naval Academy Alumni Association, the National Association of Chiefs of Police,
and the California State Firefighters Association.
[PHOTO] Financial Institution Credit Cards
FINANCIAL INSTITUTIONS MBNA offers credit cards to 17 million Customers of 800
financial institutions throughout the country. With MBNA's efficiencies and
marketing expertise, Customers of these banks have opened 1.4 million MBNA
credit card accounts.
[PHOTO] Alliance Credit Cards
ALLIANCE In 1996, MBNA formed 34 new relationships with prominent businesses,
including L.L.Bean, Gateway 2000, and Ringling Bros. and Barnum & Bailey, that
offer enhancements based on Customer loyalty. MBNA has also developed alliances
in the travel industry with American Historic Inns, The Bermuda Club, and the
Myrtle Beach credit card programs.
[PHOTO] Education Credit Cards
EDUCATORS Nearly 1.2 million or 27% of all teachers in the United States use an
MBNA credit card. More than 60 educator groups, including the National Education
Association, the National Association for the Education of Young Children, and
the National Association of Elementary School Principals, endorse MBNA products.
. . . IT COMES BY CHOICE. [9]
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[PHOTO] MBNA International Facility
MBNA INTERNATIONAL
Our European center, opened in November of 1993, is located in Chester,
England. In its first 36 months of operation, MBNA International has generated
more than 1 million Customers and $1.8 billion in outstanding loans in the
United Kingdom. MBNA products are currently endorsed by more than 400 U.K.
organizations. In late 1996, MBNA announced plans to open another international
office in Dublin, Ireland. MBNA also announced plans to open a bank in Canada
during 1997.
REGIONALIZATION
GETTING CLOSER TO OUR CUSTOMERS
In 1992, MBNA strengthened its commitment to getting the right Customers and
keeping them when we began regionalizing the company. This strategy enables us
to identify potential Customers by enhancing our familiarity with local
markets, to better understand the needs and motivations of MBNA Customers and
affinity groups, and to keep in close touch with what local competitors are
doing.
MBNA now has Northern, Southern, Southwestern, Central, and Mid-Atlantic
regional centers and sales offices in New York City, Chicago, Washington, D.C.,
and San Francisco. Because of the enthusiastic efforts of the people in those
offices, MBNA received the endorsement of many prominent groups in 1996--for
example, L.L.Bean in our Northern region, Rock and Roll Hall of Fame + Museum in
our Central region, and The General Alumni Association of the University of
North Carolina at Chapel Hill in our Southern region. During 1997, we will
expand further by adding a Western regional center in Scottsdale, Arizona.
Regional centers also enable us to identify local opportunities to develop new
Customer relationships. One such example is our "Don't mess with Texas" credit
card. The idea for the program was developed by a marketing manager in our
Southwestern regional center in Dallas. Today this program has more than 244,000
accounts. Similar success was achieved by our Southern regional center, which
began marketing an Olympic Games card in 1994 and helped us acquire 184,000
accounts--more than any other Visa issuer. Examples of other successful regional
NORTHERN
[PHOTO] Camden, Maine Facility
CAMDEN, MAINE. The Northern regional center, opened in 1993, includes a
regional marketing office located in Camden, Maine,
and an operations center located in Belfast, Maine.
SOUTHWESTERN
[PHOTO] Dallas, Texas Facility
DALLAS, TEXAS. The Southwestern regional center, located in Dallas, Texas,
includes regional marketing and MBNA Hallmark Information Services, Inc.
CENTRAL
[PHOTO] Beachwood, Ohio Facility
BEACHWOOD, OHIO. The Central regional center, opened in 1993,
is located in Beachwood, Ohio.
SOUTHERN
[PHOTO] Boca Raton, Florida Facility
BOCA RATON, FLORIDA. The Southern regional center is located in our new
facility in Boca Raton, Florida.
MID-ATLANTIC
[PHOTO] Hunt Valley, Maryland Facility
HUNT VALLEY, MARYLAND. The Mid-Atlantic regional center will be located in our
new facility in Hunt Valley, Maryland.
[10] WHAT GETS ATTENDED TO GETS DONE.
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HOW WE MARKET
[PHOTO]
Tom McGinley and Nick Primola
MBNA's person-to-person sales efforts generated more than 400,000 new accounts
in 1996.
programs include the Great Lakes Boating and Sailing cards, the Preserve New
England card, and the Chesapeake Bay Foundation card.
All of these programs were developed through a very precise and intense focus
on Customers based on where they live. Regionalization of our marketing and
sales efforts has both strengthened our relationships with membership
organizations and provided another means to develop marketing programs targeted
at a person's interests.
AN INTEGRATED MARKETING APPROACH
Our work doesn't stop after we've signed the right group or developed a concept
to market a product based on a person's interests. It takes marketing to get the
right Customer. In 1996, we acquired more than 7.5 million new accounts. We
approach Customers in a variety of ways, including through the mail, over the
phone, through television or other media, and in person at events.
Direct mail remains one of the most effective ways of marketing. But unlike many
of our competitors who rely on a few large mailings each year, MBNA customizes
each mailing for the 4,400 groups and hundreds of common-interest and regional
programs. Because of the complexity of our needs, outside advertising agencies
find it difficult to meet MBNA's standards. So we rely on a full-service,
in-house advertising agency. MBNA Advertising developed more than 6,000 separate
mailings and more than 1,000 separate media campaigns in 1996. Internal design
and production of these programs enable the company's marketing managers to work
closely with the advertising agency. The results are creative, targeted, and
cost-effective mailings that produce very consistent results. For example, in
early 1996 we successfully launched the MBNA Platinum Plus Visa and MasterCard
program. To support this new product, MBNA Advertising produced a mail campaign
that, along with telemarketing follow-up, generated 2.8 million MBNA Platinum
Plus Customers in just nine months of marketing. The outstanding characteristics
of these Customers--$89,000 average annual household income and a 14-year
history of paying bills promptly--enhanced the already exceptional
characteristics of MBNA's existing portfolio.
We have also established the largest telephone sales operation of any financial
institution--MBNA Marketing Systems, Inc. Telephone sales units in Delaware,
Pennsylvania, Florida, Maine, Ohio, Maryland, Texas, and Georgia produced
millions of accounts in 1996. Each telephone call was customized based on the
Customer's group affiliation or interests. Additionally, we attended 4,000
events in 1996 and through person-to-person marketing efforts generated hundreds
of thousands of accounts. Success with programs like the National Football
League helped us get the endorsement of the National Hockey League.
Our success with affinity marketing goes well beyond credit cards. During 1996,
we increased marketing of consumer finance products. The combination of MBNA's
affinity franchise and diversified acquisition methods helped us increase this
portfolio to $3.3 billion in loans
MBNA INSURANCE SERVICES
MBNA Insurance Services, formed in 1996 to market new insurance products to MBNA
Customers and members of endorsing organizations, is located in Greenville,
Delaware. MBNA Insurance Services has more than 1 million insured Customers and
in 1996 generated $100 million in premiums primarily through credit insurance.
In October of 1996, Insurance Services began marketing MBNA's first Property and
Casualty product, automobile insurance, which is underwritten by TIG Insurance
with MBNA acting as an agent. We will be marketing additional insurance products
during 1997.
[PHOTO] Platinum Plus Marketing Materials
The typical MBNA Platinum Plus credit card Customer has an $89,000 average
annual household income and a 14-year history of paying bills on time.
THINK OF YOURSELF AS A CUSTOMER. [11]
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[PHOTO]
Jack Hewes
Each of the 7.5 million new loans approved in 1996 was individually evaluated by
an experienced credit analyst.
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CREDIT
LOAN LOSS COMPARISON
[CHART] Five year Loan Loss Comparison to VISA Peer and Total VISA
As a result of MBNA's ability to get the right Customers, our credit losses
remain well below industry averages.
at year-end 1996. We also began marketing new insurance products with the launch
of our first Property and Casualty product, automobile insurance. We now have
more than 1 million Customers insured through MBNA Insurance Services.
Additionally, we continue to offer money market accounts and certificates of
deposit through the mail and over the phone, with $7.8 billion in retail
deposits at year-end.
A PERSONALIZED APPROACH TO LENDING
MBNA's unique marketing proposition gets us the right applicants. The next step
in ensuring that MBNA gets the right Customers is effective lending.
Most credit card issuers use computerized scoring and evaluation processes, with
no consideration of a Customer's personal situation, when making credit
decisions. MBNA issues credit the old-fashioned way--with people. At MBNA,
credit decisions are made by combining sophisticated technology and highly
predictive models with the insight of a credit professional. This approach is a
cornerstone of our success and will continue to be in the future.
Each credit professional looks at all the factors included in an application and
makes an individual decision. Like a computer, the analyst may decide yes or no.
But unlike a computer, an analyst can decide maybe. Maybe happens about 25% of
the time. When a credit analyst says maybe, he or she calls the applicant to
develop the additional information necessary to change the answer to yes or no.
A computer would make a decision without getting this additional
information--information that is fundamental to making the right credit
decision.
This process ensures that people who should get an MBNA credit card get one--and
those who shouldn't, don't. Fewer than half of all applicants qualify for an
MBNA card. Those who do, receive the right credit lines--lines that properly fit
their specific circumstances. This personal approach to credit evaluation gets
our relationship with a new Customer off to the right start and has resulted in
lending losses that are consistently below industry-wide averages.
[12] MBNA AMERICA--15,000 PEOPLE WITH AN ATTITUDE . . .
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TECHNOLOGY
TECHNOLOGY THAT MEETS OUR BUSINESS NEEDS
At MBNA, we develop our own systems and technology. In 1996, these systems
supported the processing of 5 billion online transactions, the generation of
125 million statements and letters, the issuance of 15 million credit cards,
and responses to 200 million telephone calls. To deal effectively with this
volume, a sophisticated technological environment is required. MBNA systems
consist of mainframe computers, more than 200 distributed computers, and 13,000
networked personal computers. These systems are backed by more than 1,000
programmers dedicated exclusively to the development and support of MBNA
systems.
We develop technology internally to ensure the reliability, quality, and
responsiveness of the computer and telecommunication systems we use to satisfy
our Customers. With MBNA's unique approach to the credit card business,
controlling which new systems or enhancements are developed and when and how
they are implemented is critical to meeting our objectives. In 1996, we made
more than 100,000 improvements to MBNA systems and invested more than $90
million in new technology.
Many of the changes we make to our systems are the result of specific programs
developed for the 4,400 organizations that endorse our products. A program
designed for Sierra Club has different marketing and service requirements than
a program for the National Hockey League. A successful affinity credit card
program requires a system flexible enough to support many customized marketing
and service strategies. For example, after signing L.L.Bean in early 1996, we
rapidly modified our internal systems to support the Customer benefits that are
part of that program.
We also further enhanced the technology we use when we make lending decisions.
We implemented an imaging system that enables credit analysts to view Customers'
applications online. This improvement, along with other enhancements to our
lending systems, helps ensure that we continue to select the right Customers.
Technology supports every aspect of MBNA's business, and we have a long-term
commitment to investing in state-of-the-art systems that enable us to satisfy
our Customers.
DIVERSIFIED FUNDING
MBNA continues to broaden and diversify its funding sources in the U.S. market
and internationally. To fund our growth, we issue bank notes, senior debt,
adjustable-rate preferred stock, trust preferred securities, and we continue to
expand our deposit base.
During 1996, asset-backed securitizations continued to be an important source
of funding. We issued more than $11.3 billion of asset-backed securities,
bringing outstanding securitizations to $28.5 billion at year-end. MBNA issued
the first 10-year floating-rate credit card asset-backed securitization and our
first deutsche mark-denominated securitization. Both of these transactions were
extremely successful, attracting many new foreign investors. MBNA sold these
securities at rates below those of our competitors as a result of the quality
of MBNA's loan portfolio and our reputation in the market.
Funding sources in the United Kingdom were also expanded to support the
continued growth of MBNA International. MBNA International completed two
sterling-denominated credit card securitizations backed by sterling
receivables.
[PHOTO] Selective Statement Insertion Machine
MBNA's selective statement insertion technology gives us the ability to
customize individual Customer statements.
. . . SATISFY THE CUSTOMER. [13]
16
- - --------------------------------------------------------------------------------
PUTTING TECHNOLOGY TO WORK
[PHOTO] Electronic Imaging System
ELECTRONIC IMAGING MBNA images credit applications, monthly statements, and
Customer correspondence, making them instantly available on our computer systems
and enabling us to reduce significantly the time it takes to process a credit
application, research a billing dispute with a merchant, or verify a
transaction. MBNA uses this technology in Customer-contact areas to streamline
procedures and enable operating areas to communicate more effectively with the
Customer and each other.
[PHOTO] Technology Centers
TECHNOLOGY CENTERS MBNA develops and maintains its technology in-house,
ensuring the highest levels of responsiveness, quality, and control. MBNA's
mainframe computer complex is centered in our Dallas, Texas, technology
facility, and our distributed computer complexes are centered in Newark,
Delaware.
[PHOTO] Computer Equipment
DATABASE MARKETING MBNA's state-of-the-art marketing database gives us the
capability to design specific marketing programs for the 4,400 organizations
that endorse our products.
[PHOTO] Customized Cards
CUSTOMIZED CARDS MBNA produced more than 15 million highly individualized cards
from our stock of 12,000 card types and our Customer-selected picture card
technology. This type of mass customization is essential when marketing to our
affinity groups.
[PHOTO] Neural Network
NEURAL NETWORKS MBNA's neural network instantly analyzes thousands of credit
card transactions every day to help identify and prevent fraud. Our systems
track billions of transactions providing Customer Satisfaction representatives
with crucial real-time data.
[14] IT IS ALWAYS THE THOUSANDS OF LITTLE THINGS DONE RIGHT THAT ADD UP TO THE
UNASSAILABLE ADVANTAGE.
17
- - --------------------------------------------------------------------------------
[PHOTO] MBNA's Web Site
INTERNET MBNA's Web site address is www.mbnainternational.com. We market our
products through our 4,400 affinity relationships and take applications directly
online from interested applicants. And we supply our toll-free telesales number
for Customers to call for additional information.
[PHOTO] Telecommunication Wires
TELECOMMUNICATIONS MBNA's advanced telecommunications network uses
state-of-the-art voice and data technology, a key component in being able to
provide the ultimate levels of service to our Customers. In 1996, this network
handled 200 million telephone calls in the support of our Customer service and
telesales areas.
[PHOTO] Systems Management Facility
SYSTEMS MANAGEMENT MBNA's highly sophisticated twin command centers in Texas
and Delaware continually monitor system performance--24 hours a day, 7 days a
week, 365 days a year. We have more than 1,000 in-house programmers all
dedicated to the development and support of MBNA systems.
[PHOTO] Customer Satisfaction Workstation
CUSTOMER SATISFACTION WORKSTATION MBNA's Customer Satisfaction Super Station
lets telephone representatives see a caller's account without having to ask for
the complete account number and consolidates a wide variety of Customer
information from multiple systems. For example, the Super Station automatically
alerts representatives if the caller qualifies for an instant credit line
increase or is a candidate for access checks.
[PHOTO] Customized Statement
CUSTOMIZED STATEMENT In 1996, MBNA produced 125 million individualized
statements and letters using our selective statement insertion system.
Customized statement inserts provide endorsing groups another way of communi-
cating with their members.
ABOVE ALL, WE WANT A REPUTATION FOR DOING THE LITTLE THINGS WELL . . . [15]
AND THE BIG THINGS WILL FOLLOW.
18
- - --------------------------------------------------------------------------------
MBNA IN THE COMMUNITY
A COMPANY OF PEOPLE WHO LIKE PEOPLE
MBNA is a company of people who like people. So, it follows logically that MBNA
people get enthusiastically involved in the communities where they live and
work. Participation in community activities on company time is actively
encouraged. Volunteering is the right thing to do, and we know the benefit to
the company far exceeds the cost of the volunteers' time away from work.
How do we choose the organizations we support? Our decisions are inspired by a
question posed by a remarkable man named Brother Ronald Giannone, O.F.M.
Capuchin. Brother Ronald simply asks, "Who needs help the most?" Asking that
question led him to found The Ministry of Caring Inc., which today encompasses
11 specific ministries in Delaware that provide immediate solutions for such
problems as hunger and homelessness. MBNA people contribute their time to each
of these ministries and to countless other community groups. In all, MBNA
people spent more than 150,000 hours in 1996 assisting people in need,
including children, the homeless, and the elderly.
[PHOTO]
Michael Scanlan, Paul Parris, Brian Lofink
Education is an important part of MBNA's commitment to the community and its
people. Pictured above is Michael Scanlan, Director of Community Relations,
meeting with recent recipients of MBNA college scholarships. Both students are
currently attending the University of Delaware.
Much of our community involvement is focused on supporting educational
initiatives. The MBNA Scholars Foundation provides college scholarships and
educational grants to economically disadvantaged students in Delaware. In
collaboration with the University of Delaware, MBNA participates in the Fortune
2000 program that offers scholarships, MBNA internships, and mentoring to
minority students studying business.
MBNA also supports St. Benedict's Preparatory School in Newark, New Jersey.
Students there are given an opportunity, at the completion of their junior year,
to participate in educational, summer workstudy, and graduate workshop programs.
Many receive summer internships throughout college and begin their careers at
MBNA following graduation. In Chicago, MBNA people mentor Daniel Murphy
Scholarship Foundation recipients--economically disadvantaged eighth-grade
students who demonstrate high academic potential. More than two dozen MBNA
people tutor fifth- and sixth-grade students in Cleveland's Randallwood
Elementary School. MBNA people in Camden, Maine, act as Big Brothers and Big
Sisters to students at Camden-Rockport High School, helping them with career
goals, applying to colleges, and scholarship opportunities. MBNA people in
Belfast, Maine, assisted parents in renovating the Peirce School playground. And
at the Howard High School of Technology in Wilmington, MBNA people participated
in several programs in support of education for students and teachers.
Wherever you find MBNA people, you'll find them lending a helping hand. MBNA
people in Cleveland volunteered at the Special Needs Festival, an Olympic-style
competition for specially challenged athletes. Camden and Belfast, Maine,
volunteers set up dining rooms serving hot meals and developed friendships with
the homebound elderly.
[16] IF EVERY COMPANY IS A PORTRAIT OF ITS PEOPLE . . .
19
- - --------------------------------------------------------------------------------
[PHOTO]
Fred Wittig, a Francis X. Norton Community Service Award recipient, reads with
children through the Child, Inc., program. The award was named in honor of the
MBNA person who has dedicated his life to serving people.
In Baltimore, the Ark Daycare Center received assistance from MBNA people who
read during story time to the children in local shelters. At The Ministry of
Caring Child Care Center in Wilmington, MBNA scholarships allow students to
participate in early-childhood programs while their parents pursue educational
and employment opportunities.
People from our Orono, Maine, telesales office organized a telemarketing effort
for the Children's Miracle Network Telethon and a ski-a-thon for the Greater
Bangor Area Homeless Shelter. MBNA International people work with the Blacon
Project, a self-help program in Chester, England. In Dover, Delaware, MBNA
people serve as mentors for clients of Mom's House, a licensed day care center
that offers free child care to infants and toddlers so their parents can return
to school.
Bryan's House in Dallas provides child care and family services to those who are
affected by HIV/AIDS. MBNA volunteers participate in Bryan's Little Socks of
Love campaign and prepare lunch for the children twice a month.
And through the Meals on Wheels program, MBNA people served more than 10,000 hot
meals to the homebound elderly in Delaware, Texas, Maine, and Ohio in 1996.
These are a few examples of the many ways the people of MBNA support their
communities with volunteer time and financial aid. Some might call this level
of commitment extraordinary. At MBNA, it's business as usual.
MBNA SCHOLARS FOUNDATION
The MBNA Scholars Foundation was created as part of our commitment to help
provide education in settings that promote achievement and success. These
programs are designed to further MBNA's continuing dedication to support
education.
The foundation, which has initial five-year financing of $30 million in
contributions from the Corporation and its individual officers, has two major
components. The MBNA Excellence In Education Grants Program provides grants to
teachers and schools for the development of results-oriented academic
initiatives. The MBNA College Scholarship Program provides college scholarships
to help ensure that students acquire higher education regardless of financial
status.
Additionally, a new college and career counseling and mentoring service offered
by MBNA complements the scholarship and grants programs to further assist
students outside the classroom.
. . . MBNA IS A MASTERPIECE. [17]
20
- - --------------------------------------------------------------------------------
MBNA
[MAP] Map indicating MBNA's Headquarter's, Regional Centers and District Sales
Offices.
HEADQUARTERS
X MBNA Headquarters
Wilmington, DE 19884
(800) 441-7048
REGIONAL CENTERS
* Northern Region
32 Washington St.
Camden, ME 04843
(800) 386-6262
* Central Region
25875 Science Park Dr.
Beachwood, OH 44122
(800) 410-6262
* Mid-Atlantic Region
11333 McCormick Rd.
Hunt Valley, MD 21030
* Southern Region
1501 Yamato Rd.
Boca Raton, FL 33431
(800) 841-6845
* Southwestern Region
16001 N. Dallas Pkwy.
Dallas, TX 75248
(800) 435-9672
* Western Region
Scottsdale, AZ
(To open in 1997)
* European Region
Stansfield House
Chester Business Park
Wrexham Rd.
Chester, Cheshire
CH49QQ
United Kingdom
(011) 44-1244-672000
DISTRICT SALES OFFICES
+ 676 North Michigan Ave.
Chicago, IL 60611
(800) 906-6262
+ 9 W. 57th St.
New York, NY 10019
(800) 746-6262
+ 800 Connecticut Ave., NW
Washington, DC 20006
(800) 789-6262
+ 44 Montgomery St.
San Francisco, CA 94104
(800) 585-4956
+ 86 Jermyn St.
London SW1Y6JD
United Kingdom
(011) 44-171-389-6200
+ Dublin, Ireland
(To open in 1997)
KEY
X Headquarters
* Regional Centers
+ Sales Offices
[18]
21
[PHOTO] Financial Market
MBNA Corporation and Subsidiaries
FINANCIAL CONTENTS
20 Ten-Year Statistical Summary
22 Glossary of Financial Terms
23 Management's Discussion and Analysis of Financial Condition and Results of
Operations
36 Supplemental Financial Information
37 Management's Report on Consolidated Financial Statements and Internal
Control
38 Consolidated Statements of Financial Condition
39 Consolidated Statements of Income
40 Consolidated Statements of Changes in Stockholders' Equity
41 Consolidated Statements of Cash Flows
42 Notes to the Consolidated Financial Statements
60 Report of Independent Auditors
61 Quarterly Data
62 Stock Price Ranges and Dividends
22
MBNA CORPORATION AND SUBSIDIARIES
TEN-YEAR STATISTICAL SUMMARY
- - --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- - ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA FOR THE YEAR
Net interest income......................... $ 640,477 $ 544,226 $ 532,108 $ 474,323
Provision for possible credit losses........ 178,224 138,176 108,477 98,795
Other operating income...................... 1,895,923 1,424,618 1,013,580 739,968
Other operating expense..................... 1,572,551 1,246,067 996,110 774,872
Net income (a).............................. 474,495 353,099 266,593 207,796
PER COMMON SHARE DATA FOR THE YEAR (b)
Earnings (c)................................ $ 1.33 $ 1.03 $ .79 $ .62
Dividends................................... .43 .37 .32 .28
Book value.................................. 4.20 3.34 2.75 2.30
RATIOS
Return on average total assets.............. 3.26% 3.09% 3.16% 3.15%
Return on average stockholders' equity...... 34.46 35.51 32.70 30.01
Average receivables to average deposits..... 92.50 91.60 93.05 85.34
Stockholders' equity to total assets........ 10.00 9.56 9.51 10.51
Loan portfolio:
Delinquency (e).......................... 3.59 3.11 2.60 3.03
Net credit losses........................ 1.98 1.91 1.96 2.43
Managed loans (f):
Delinquency.............................. 4.28 3.70 3.03 3.27
Net credit losses........................ 3.35 2.74 2.59 2.97
Net interest margin (g).................. 7.62 7.42 8.16 8.47
MANAGED LOAN DATA (f)
At year end:
Loans held for securitization............ $ 2,469,974 $ 3,168,427 $ 2,299,026 $ 741,869
Loan portfolio........................... 7,659,078 4,967,491 3,407,974 3,725,509
Securitized loans........................ 28,494,481 18,575,786 13,036,864 7,891,140
------------- ------------- ------------- -------------
Total managed loans................... $ 38,623,533 $ 26,711,704 $ 18,743,864 $ 12,358,518
============= ============= ============= =============
Average:
Loans held for securitization............ $ 2,529,484 $ 2,269,362 $ 1,330,011 $ 642,750
Loan portfolio........................... 6,174,095 4,792,536 4,000,271 3,425,935
Securitized loans........................ 22,514,014 15,440,499 9,462,401 6,596,387
------------- ------------- ------------- -------------
Total managed loans................... $ 31,217,593 $ 22,502,397 $ 14,792,683 $ 10,665,072
============= ============= ============= =============
For the year:
Sales and cash advance volume.............. $ 48,666,129 $ 34,272,909 $ 25,078,918 $ 17,889,747
BALANCE SHEET DATA AT YEAR END
Investment securities and money market
instruments ............................... $ 3,194,664 $ 2,669,402 $ 2,269,081 $ 1,440,684
Loans held for securitization............... 2,469,974 3,168,427 2,299,026 741,869
Credit card loans........................... 5,722,299 4,090,553 2,882,232 2,949,995
Other consumer loans........................ 1,936,779 876,938 525,742 775,514
------------- ------------- ------------- -------------
Total loans.............................. 7,659,078 4,967,491 3,407,974 3,725,509
Reserve for possible credit losses.......... (118,427) (104,886) (101,519) (97,580)
------------- ------------- ------------- -------------
Net loans................................ 7,540,651 4,862,605 3,306,455 3,627,929
Total assets................................ 17,035,342 13,228,889 9,671,858 7,319,756
Total deposits.............................. 10,151,686 8,608,914 6,632,489 5,241,883
Long-term debt and bank notes............... 3,950,358 2,657,600 1,687,357 779,553
Stockholders' equity........................ 1,704,308 1,265,058 919,578 769,131
AVERAGE BALANCE SHEET DATA
Investment securities and money market
instruments................................ $ 2,927,351 $ 2,451,783 $ 1,684,316 $ 1,364,350
Loans held for securitization............... 2,529,484 2,269,362 1,330,011 642,750
Credit card loans........................... 4,907,814 4,160,230 3,207,110 2,735,191
Other consumer loans........................ 1,266,281 632,306 793,161 690,744
------------- ------------- ------------- -------------
Total loans.............................. 6,174,095 4,792,536 4,000,271 3,425,935
Reserve for possible credit losses.......... (111,041) (103,568) (99,175) (97,580)
------------- ------------- ------------- -------------
Net loans................................ 6,063,054 4,688,968 3,901,096 3,328,355
Total assets................................ 14,571,288 11,425,721 8,432,511 6,596,419
Total deposits.............................. 9,408,843 7,709,840 5,728,432 4,767,669
Long-term debt and bank notes............... 3,029,250 2,212,591 1,199,520 537,609
Stockholders' equity........................ 1,377,072 994,287 815,243 692,460
Weighted average common shares outstanding and
common stock equivalents (000) (b)......... 345,988 342,429 338,895 337,830
- - ----------------------------------------------------------------------------------------------------------------------------------
The consolidated financial statements for the years ended prior to December 31,
1991, reflect the combined results of the "Credit Card and Certain Related
Banking Activities of MBNAAmerica Bank, N.A., and Certain Affiliates" prior to
the organization of MBNA Corporation ("the Corporation"). The consolidated
financial statements for the years ended December 31, 1991, and thereafter
reflect the independent Corporation.
(a) Net income for the year ended December 31, 1996, includes a $32.8 million
tax benefit related to deductions for the amortization of Customer-based
intangible assets acquired in connection with the 1991 initial public
offering of the Corporation's Common Stock, and a charge of $32.8 million
net of tax ($54.3 million pretax) related to the launch of the MBNA
Platinum Plus Visa and MasterCard program. Net income for the year ended
December 31, 1993, includes an $89.8 million tax benefit related to the
recognition of tax deductions for the amortization of Customer-based
intangible assets acquired in connection with the 1991 initial public
offering of the Corporation's Common Stock. Net income for the year ended
December 31, 1993, also includes a charge of $150.0 million ($92.9 million,
net of tax) for the termination of a marketing agreement with an
independent third-party marketing organization.
(b) Per common share data and weighted average common shares outstanding and
common stock equivalents have been restated to reflect the three-for-two
split of the Corporation's Common Stock, effected in the form of a
dividend, issued January 1, 1997, to stockholders of record as of the close
of business on December 16, 1996.
[20]
23
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
- - ----------------------------------------------------------------------------------------------------------------------------
$ 357,515 $ 239,599 $ 164,315 $ 116,754 $ 149,641 $ 172,062
97,534 86,723 57,951 43,319 63,262 65,859
577,505 540,708 451,863 343,551 254,828 168,281
565,467 459,035 354,462 258,357 203,853 145,822
172,732 149,213 128,998 104,109 90,065 74,697
$ .51 $ .44 $ .39 $ .31 $ .27 $ .22
.26 .24 (d) (d) (d) (d)
1.98 1.77 (d) (d) (d) (d)
2.96% 2.79% 3.87% 4.13% 3.55% 3.01%
28.55 28.55 (d) (d) (d) (d)
69.98 71.77 103.51 124.73 153.30 218.10
10.25 9.86 (d) (d) (d) (d)
3.78 4.39 4.15 3.52 3.33 3.64
2.87 2.65 1.79 1.77 1.99 2.10
3.99 4.40 4.52 3.66 3.59 3.00
3.33 3.05 2.21 1.97 1.85 2.04
7.22 6.36 6.55 5.77 6.56 6.40
$ 678,000 $ 600,000 $ 567,000 $ 418,800 $ - $ -
3,300,650 2,886,405 2,672,733 1,842,473 1,906,947 2,503,479
5,881,479 5,327,901 4,137,950 3,456,587 2,600,182 682,172
- - ------------- ------------- ------------- ------------- ------------- -------------
$ 9,860,129 $ 8,814,306 $ 7,377,683 $ 5,717,860 $ 4,507,129 $ 3,185,651
============= ============= ============= ============= ============= =============
$ 733,473 $ 560,447 $ 707,632 $ 215,223 $ - $ -
2,659,305 2,707,535 1,907,208 1,782,051 2,280,480 2,357,752
5,528,394 4,563,279 3,798,409 2,898,169 1,360,452 197,175
- - ------------- ------------- ------------- ------------- ------------- -------------
$ 8,921,172 $ 7,831,261 $ 6,413,249 $ 4,895,443 $ 3,640,932 $ 2,554,927
============= ============= ============= ============= ============= =============
$ 14,523,570 $ 12,915,104 $ 11,541,181 $ 9,075,967 $ 7,256,735 $ 5,335,784
$ 1,345,995 $ 1,768,048 $ 540,660 $ 151,973 $ 97,386 $ 26,262
678,000 600,000 567,000 418,800 - -
2,659,007 2,299,912 2,216,604 1,587,652 1,743,292 2,391,039
641,643 586,493 456,129 254,821 163,655 112,440
- - ------------- ------------- ------------- ------------- ------------- -------------
3,300,650 2,886,405 2,672,733 1,842,473 1,906,947 2,503,479
(97,580) (97,580) (97,580) (82,098) (74,152) (56,303)
- - ------------- ------------- ------------- ------------- ------------- -------------
3,203,070 2,788,825 2,575,153 1,760,375 1,832,795 2,447,176
6,454,511 6,009,028 4,579,514 2,858,924 2,276,114 2,674,348
4,568,791 5,094,011 4,202,159 1,743,969 1,521,907 1,232,278
470,601 - - - - -
661,290 592,230 214,098 256,904 203,980 178,013
$ 1,572,911 $ 1,401,469 $ 160,356 $ 182,254 $ 35,547 $ 17,322
733,473 560,447 707,632 215,223 - -
2,050,487 2,176,144 1,529,759 1,584,368 2,146,851 2,253,874
608,818 531,391 377,449 197,683 133,629 103,878
- - ------------- ------------- ------------- ------------- ------------- -------------
2,659,305 2,707,535 1,907,208 1,782,051 2,280,480 2,357,752
(97,580) (93,284) (76,509) (73,120) (64,110) (41,524)
- - ------------- ------------- ------------- ------------- ------------- -------------
2,561,725 2,614,251 1,830,699 1,708,931 2,216,370 2,316,228
5,829,052 5,347,990 3,330,155 2,519,192 2,538,968 2,478,064
4,847,911 4,553,186 2,526,109 1,601,225 1,487,568 1,081,057
116,301 - - - - -
605,079 522,721 258,719 274,991 230,510 147,742
337,861 336,256 334,125 334,125 334,125 334,125
- - ----------------------------------------------------------------------------------------------------------------------------
(c) Earnings per common share are computed using net income applicable to
common stock and weighted average common shares outstanding (including
common stock equivalents). For comparative purposes, earnings per common
share for the years ended prior to December 31, 1991, are presented on a
pro forma basis.
(d) During 1991, MBNA Corporation became an independent corporation traded
publicly on the New York Stock Exchange. Accordingly, dividends per common
share, book value per common share, and equity ratios have not been
presented for years ended prior to December 31, 1991.
(e) Loan portfolio delinquency does not include loans held for securitization
or securitized loans.
(f) Managed loans include the Corporation's loans held for securitization, loan
portfolio, and securitized loans.
(g) Managed net interest margin is presented on a fully taxable equivalent
basis.
[21]
24
MBNA CORPORATION AND SUBSIDIARIES
GLOSSARY OF FINANCIAL TERMS
- - --------------------------------------------------------------------------------
The following definitions may be helpful when reading Management's Discussion
and Analysis of Financial Condition and Results of Operations of MBNA
Corporation ("the Corporation").
ASSET SECURITIZATION
Asset securitization removes loan receivables from the consolidated statements
of financial condition by selling them, generally to a trust. Asset
securitization converts interest income, interchange, and other fees in excess
of interest paid to Certificateholders; credit losses; and other trust expenses
into loan servicing fees, while reducing the Corporation's on-balance-sheet
assets.
CREDIT CARD FEES
Credit card fees include annual, late, overlimit, returned check, and cash
advance transaction fees.
DIRECT DEPOSITS
Direct deposits are deposits marketed to and received from individual Customers
without the use of a third-party intermediary.
FULLY TAXABLE EQUIVALENT (FTE) BASIS
FTE basis represents the adjusted income on total interest-earning assets that
is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the
prevailing incremental federal income tax rate, and adjusted for nondeductible
carrying costs and state income taxes, where applicable. Yield calculations,
where appropriate, include these adjustments.
INTERCHANGE INCOME
Interchange income is a fee paid by a merchant bank to the card-issuing bank
through the interchange network as compensation for risk, grace period, and
other operating costs. Such fees are set annually by MasterCard International
and Visa International.
INTEREST RATE SENSITIVE ASSETS/LIABILITIES
Interest rate sensitive assets/liabilities have yields or rates that can change
within a designated time period, due either to their maturity during this
period or to the contractual ability of the Corporation to change the
yield/rate during this period.
INVESTMENT SECURITIES
Investment securities include both those available-for-sale and those
held-to-maturity.
LOAN PORTFOLIO
Loan portfolio includes credit card and other consumer loans, excluding loans
held for securitization, as reported on the consolidated statements of
financial condition.
LOAN RECEIVABLES
Loan receivables consist of the Corporation's loan portfolio and loans held for
securitization.
MANAGED LOANS
Managed loans consist of the Corporation's loan portfolio, loans held for
securitization, and securitized loans.
MONEY MARKET INSTRUMENTS
Money market instruments include interest-earning time deposits in other banks
and federal funds sold and securities purchased under resale agreements.
NET INTEREST INCOME
Net interest income represents interest income on total interest-earning
assets, on an FTE basis where appropriate, reduced by interest expense on total
interest-bearing liabilities.
NET INTEREST MARGIN
Net interest margin represents net interest income on an FTE basis expressed as
a percentage of average total interest-earning assets.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments include interest rate swap agreements,
forward exchange contracts, and foreign exchange swap agreements. The
Corporation has used 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 uses forward exchange contracts and foreign exchange swap
agreements to reduce its exposure to foreign currency exchange rate risk
primarily related to MBNA International Bank Limited ("MBNA International"), a
foreign bank subsidiary in the United Kingdom.
The Corporation does not hold or issue off-balance-sheet financial instruments
for trading purposes.
[22]
25
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
This discussion is intended to further the reader's understanding of the
consolidated financial condition and results of operations of MBNA Corporation.
It should be read in conjunction with the consolidated financial statements,
notes, tables, and glossary of financial terms included in this report.
INTRODUCTION
MBNA Corporation, a bank holding company, is the parent company of MBNA America
Bank, N.A., ("the Bank") a national bank. Through the Bank, the Corporation is
one of the world's largest bank credit card lenders 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 various deposit
products.
NET INCOME
(millions)
94 266.6
95 353.1
96 474.5
The Corporation generates interest and other income through finance charges
assessed on outstanding loan receivables, interchange income, merchant discount
fees, credit card fees, loan servicing fees, processing fees, and interest
earned on investment securities and money market instruments. The Corporation's
primary costs are the costs of funding its loan receivables and investment
securities, 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.
On October 15, 1996, the Board of Directors approved a three-for-two split of
the Corporation's Common Stock effected in the form of a dividend. In
connection with this transaction, one additional share of common stock was
issued on January 1, 1997, for every two shares of common stock held by
stockholders of record as of the close of business on December 16, 1996. All
common share and per common share data in the following discussion includes the
effect of all the Corporation's stock splits.
EARNINGS SUMMARY
Net income for 1996 increased 34.4% to $474.5 million or $1.33 per common share
from 1995's net income of $353.1 million or $1.03 per common share. The overall
growth in earnings was primarily attributable to the growth in managed loans
outstanding, which increased $11.9 billion to $38.6 billion at December 31,
1996, as the Corporation acquired 544 new endorsements from organizations and
added 7.5 million new accounts. The Corporation's average managed loans
increased 38.7% or $8.7 billion to $31.2 billion in 1996 from 1995.
Net income for 1995 increased 32.4% to $353.1 million or $1.03 per common share
from $266.6 million or $.79 per common share in 1994. Average managed loans in
1995 increased 52.1% to $22.5 billion from $14.8 billion in 1994 and was the
primary reason for the increase in net income.
RETURN ON AVERAGE TOTAL ASSETS
percent
94 3.16
95 3.09
96 3.26
RETURN ON AVERAGE
STOCKHOLDERS EQUITY
percent
94 32.79
95 35.51
96 34.46
The Corporation continues to be an active participant in the asset
securitization market. Securitization converts interest income, interchange,
and other fees in excess of interest paid to Certificateholders; credit losses;
and other trust expenses into loan servicing fees, while reducing the
Corporation's on-balance-sheet assets.
Table 1 reflects the trends of the Corporation's return on average total
assets, stockholders' equity, and other equity ratios.
The return on average total assets for 1996 increased primarily as a result of
the percentage growth in net income, which exceeded the increase in average
total assets. The return on average total assets for 1995 declined primarily as
a result of an increase in average total assets, which exceeded the percentage
growth in net income. The return on average stockholders' equity for 1996
decreased primarily as a result of an increase in average stockholders' equity
related to the Corporation's issuance of $150.0 million of 7 1/2% Cumulative
Preferred Stock, Series A, in November 1995 and $150.0 million of Adjustable
Rate Cumulative Preferred Stock, Series B, in September 1996, which offset the
percentage growth in net income. The return on average stockholders' equity
for 1995 increased primarily as a result of an increase in net income partially
offset by the growth in average stockholders' equity.
- - -----------------------------------------------------------------------------------------------
TABLE 1: RETURN ON AVERAGE TOTAL ASSETS AND STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -----------------------------------------------------------------------------------------------
Return on average total assets............... 3.26% 3.09% 3.16%
Return on average stockholders' equity....... 34.46 35.51 32.70
Average stockholders' equity to average
total assets................................ 9.45 8.70 9.67
Dividend payout ratio........................ 32.33 35.92 40.51
- - -----------------------------------------------------------------------------------------------
[23]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
TABLE 2: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
- - -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
- - -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Income Average Yield/ Income Average Yield/ Income
Amount Rate or Expense Amount Rate or Expense Amount Rate or Expense
------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits
in other banks................... $ 531,132 5.56% $ 29,528 $ 261,999 6.04% $ 15,832 $ 104,180 4.91% $ 5,115
Federal funds sold and securities
purchased under resale agreements 184,347 5.39 9,935 129,657 5.96 7,727 117,725 4.78 5,626
----------- --------- ----------- --------- ---------- ---------
Total money market instruments.. 715,479 5.52 39,463 391,656 6.02 23,559 221,905 4.84 10,741
Investment securities (a):
Taxable........................... 2,126,411 5.79 123,054 1,980,322 6.03 119,322 1,384,352 5.69 78,753
Tax-exempt (b).................... 85,461 5.99 5,116 79,805 6.41 5,116 78,059 6.04 4,717
----------- --------- ----------- --------- ---------- ---------
Total investment securities..... 2,211,872 5.79 128,170 2,060,127 6.04 124,438 1,462,411 5.71 83,470
Loans held for securitization....... 2,529,484 14.08 356,120 2,269,362 14.06 319,009 1,330,011 13.96 185,708
Loans:
Credit card....................... 4,907,814 13.94 684,015 4,160,230 14.15 588,704 3,207,110 13.85 444,179
Other consumer.................... 1,266,281 14.00 177,290 632,306 13.74 86,896 793,161 14.78 117,195
----------- --------- ----------- --------- ---------- ---------
Total loans..................... 6,174,095 13.95 861,305 4,792,536 14.10 675,600 4,000,271 14.03 561,374
----------- --------- ----------- --------- ---------- ---------
Total interest-earning assets... 11,630,930 11.91 1,385,058 9,513,681 12.01 1,142,606 7,014,598 11.99 841,293
Cash and due from banks................ 350,463 197,374 141,565
Premises and equipment, net............ 931,455 685,022 467,250
Other assets........................... 1,769,481 1,133,212 908,273
Reserve for possible credit losses..... (111,041) (103,568) (99,175)
----------- ----------- ----------
Total assets.................... $14,571,288 $11,425,721 $8,432,511
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits (c)................. $ 6,644,737 5.89 391,567 $ 5,647,517 5.78 326,509 $4,101,534 3.88 159,139
Money market deposit accounts..... 2,540,850 5.30 134,777 1,903,931 5.79 110,244 1,514,307 4.11 62,219
Interest-bearing transaction
accounts......................... 23,504 4.58 1,077 19,212 5.10 980 15,178 3.52 535
Savings accounts.................. 10,181 4.56 464 8,401 5.05 424 7,539 3.44 259
----------- --------- ----------- --------- ---------- ---------
Total interest-bearing deposits. 9,219,272 5.73 527,885 7,579,061 5.78 438,157 5,638,558 3.94 222,152
Borrowed funds:
Federal funds purchased and
securities sold under repurchase
agreements....................... 67,712 5.39 3,648 49,141 6.01 2,952 167,012 3.82 6,375
Other short-term borrowings....... 269,538 5.51 14,849 148,804 6.14 9,143 271,589 4.92 13,361
Long-term debt and bank notes (c). 3,029,250 6.48 196,408 2,212,591 6.61 146,337 1,199,520 5.47 65,646
----------- --------- ----------- --------- ---------- ---------
Total borrowed funds............ 3,366,500 6.38 214,905 2,410,536 6.57 158,432 1,638,121 5.21 85,382
----------- --------- ----------- --------- ---------- ---------
Total interest-bearing
liabilities.................... 12,585,772 5.90 742,790 9,989,597 5.97 596,589 7,276,679 4.23 307,534
Demand deposits........................ 189,571 130,779 89,874
Other liabilities...................... 418,873 311,058 250,715
----------- ----------- ----------
Total liabilities............... 13,194,216 10,431,434 7,617,268
Stockholders' equity................... 1,377,072 994,287 815,243
----------- ----------- ----------
Total liabilities and
stockholders' equity........... $14,571,288 $11,425,721 $8,432,511
=========== --------- =========== --------- ========== ---------
Net interest income............. $ 642,268 $ 546,017 $ 533,759
========= ========= =========
Net interest margin............. 5.52 5.74 7.61
Interest rate spread............ 6.01 6.04 7.76
- - -----------------------------------------------------------------------------------------------------------------------------------
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent adjustment for the years ended December 31,
1996, 1995, and 1994, was $1,791, $1,791, and $1,651, respectively.
(c) Includes the impact of interest rate swap agreements used to change
fixed-rate funding sources to floating-rate funding sources.
[24]
27
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
TABLE 3: RATE-VOLUME VARIANCE ANALYSIS (a)
- - ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995 1995 COMPARED TO 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------
INTEREST-EARNING ASSETS
Money market instruments:
Interest-earning time deposits in other banks.................. $ 15,056 $ (1,360) $ 13,696 $ 9,300 $ 1,417 $ 10,717
Federal funds sold and securities purchased under
resale agreements............................................. 3,005 (797) 2,208 611 1,490 2,101
--------- --------- --------- --------- --------- ---------
Total money market instruments............................... 18,061 (2,157) 15,904 9,911 2,907 12,818
Investment securities:
Taxable........................................................ 8,576 (4,844) 3,732 35,667 4,902 40,569
Tax-exempt (b)................................................. 350 (350) - 107 292 399
--------- --------- --------- --------- --------- ---------
Total investment securities.................................. 8,926 (5,194) 3,732 35,774 5,194 40,968
Loans held for securitization..................................... 36,621 490 37,111 132,038 1,263 133,301
Loans:
Credit card.................................................... 104,316 (9,005) 95,311 134,678 9,847 144,525
Other consumer................................................. 88,732 1,662 90,394 (22,532) (7,767) (30,299)
--------- --------- --------- --------- --------- ---------
Total loans.................................................. 193,048 (7,343) 185,705 112,146 2,080 114,226
--------- --------- --------- --------- --------- ---------
Total interest income........................................ 256,656 (14,204) 242,452 289,869 11,444 301,313
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Time deposits.................................................. 58,656 6,402 65,058 72,764 94,606 167,370
Money market deposit accounts.................................. 34,405 (9,872) 24,533 18,538 29,487 48,025
Interest-bearing transaction accounts.......................... 204 (107) 97 166 279 445
Savings accounts............................................... 84 (44) 40 32 133 165
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits.............................. 93,349 (3,621) 89,728 91,500 124,505 216,005
Borrowed funds:
Federal funds purchased and securities sold under
repurchase agreements......................................... 1,025 (329) 696 (5,923) 2,500 (3,423)
Other short-term borrowings.................................... 6,738 (1,032) 5,706 (7,010) 2,792 (4,218)
Long-term debt and bank notes.................................. 53,004 (2,933) 50,071 64,714 15,977 80,691
--------- --------- --------- --------- --------- ---------
Total borrowed funds......................................... 60,767 (4,294) 56,473 51,781 21,269 73,050
--------- --------- --------- --------- --------- ---------
Total interest expense....................................... 154,116 (7,915) 146,201 143,281 145,774 289,055
--------- --------- --------- --------- --------- ---------
Net interest income.......................................... $ 102,540 $ (6,289) $ 96,251 $ 146,588 $(134,330) $ 12,258
========= ========= ========= ========= ========= =========
- - -----------------------------------------------------------------------------------------------------------------------------------
(a) The rate-volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of the rate or volume variance to the sum of the two absolute variances.
(b) Tax-exempt investment securities are presented on a fully taxable
equivalent basis.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased 17.6% or
$96.3 million to $642.3 million in 1996 from 1995, as shown in Table 2. The
increase in net interest income in 1996 is primarily a result of a $2.1 billion
increase in average interest-earning assets from 1995, offset by a 22 basis
point decline in the net interest margin and a $2.6 billion increase in average
interest-bearing liabilities for the same period. The growth in average
interest-earning assets reflects a $1.6 billion increase in average loan
receivables combined with a $475.6 million increase in average investment
securities and money market instruments. The increase in interest-bearing
liabilities resulted primarily from funding the increase in interest-earning
assets.
Net interest income, on a fully taxable equivalent basis, increased 2.3% or
$12.3 million to $546.0 million in 1995 from 1994, as also shown in Table 2.
The increase in net interest income in 1995 was primarily a result of a $2.5
billion increase in average interest-earning assets from 1994, offset by a 187
basis point decline in the net interest margin and a $2.7 billion increase in
average interest-bearing liabilities for the same period. The growth in average
interest-earning assets reflects a $1.7 billion increase in average loan
receivables and a $767.5 million increase in average investment securities and
money market instruments.
Table 3 illustrates the impact that rate and volume fluctuations had on the
Corporation's net interest income for the years presented.
The net interest margin, on a fully taxable equivalent basis, was 5.52% for
1996, compared to 5.74% and 7.61% for 1995 and 1994, respectively. The decline
in the net interest margin for 1996 is primarily a result of an increase in
average interest-bearing liabilities that was partially used to fund the growth
of non-interest-earning assets combined with a 10 basis point decrease in rates
received on interest-earning assets. The decline in the net interest margin for
1995 is primarily a result of a 174 basis point increase in rates paid on
interest-bearing liabilities, as actions by the Federal Reserve Board impacted
overall market interest rates.
NET INTEREST INCOME
(fully taxable equivalent basis)
(millions)
94 533.8
95 546
96 642.3
[25]
28
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
TABLE 4: INVESTMENT SECURITIES
- - ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, yields on a fully taxable equivalent basis)
- - ------------------------------------------------------------------------------------------------------------------------------------
ESTIMATED MATURITIES AT DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Within 1 Year 1-5 Years 6-10 Years Over 10 Years Total
Book Yield Book Yield Book Yield Book Yield Book Yield
--------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations.................. $ 604,884 5.37% $ - -% $ - -% $ - -% $ 604,884 5.37%
State and political subdivisions of the
United States.......................... 72,748 6.46 14,853 6.55 - - - - 87,601 6.47
Asset-backed and other securities....... 87,340 5.79 863,520 5.79 73,360 5.87 3,025 5.78 1,027,245 5.79
--------- --------- -------- --------- ----------
Total investment securities
available-for-sale................. $ 764,972 5.51 $ 878,373 5.80 $ 73,360 5.87 $ 3,025 5.78 $1,719,730 5.68
========= ========= ======== ========= ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S. government
agencies obligations..................$ 262,451 5.78 $ 194,868 5.17 $ - - $ 49,027 6.10 $ 506,346 5.59
State and political subdivisions of the
United States......................... - - - - - - 454 7.54 454 7.54
Asset-backed and other securities....... 36,032 6.65 45,071 5.79 1,000 6.81 9,417 6.00 91,520 6.16
--------- --------- -------- --------- ----------
Total investment securities
held-to-maturity....................$ 298,483 5.89 $ 239,939 5.29 $ 1,000 6.81 $ 58,898 6.10 $ 598,320 5.67
========= ========= ======== ========= ==========
- - ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income on investment securities, on a fully taxable equivalent basis,
increased $3.7 million to $128.2 million in 1996 from 1995. This increase is
the result of a $151.7 million increase in average investment securities,
offset by a 25 basis point decrease in yields earned on these securities.
Interest income on money market instruments increased $15.9 million to $39.5
million in 1996 from 1995. The increase in 1996 is primarily the result of an
increase of $323.8 million in average money market instruments from 1995,
offset by a 50 basis point decrease in the yields earned on these instruments.
In 1995, interest income on investment securities, on a fully taxable
equivalent basis, increased $41.0 million to $124.4 million from 1994. The
increase in 1995 was primarily the result of a $597.7 million increase in
average investment securities, combined with a 33 basis point increase in
yields earned on these securities. Interest income on money market instruments
increased $12.8 million to $23.6 million in 1995 from 1994. The increase in
1995 was primarily the result of an increase of $169.8 million in average money
market instruments from 1994, combined with a 118 basis point increase in the
yields earned on these instruments.
The Corporation uses its holdings of investment securities and money market
instruments to provide liquidity and flexibility. The increases in average
investment securities and average money market instruments are primarily a
result of the timing of the receipt of funds from asset securitizations. As a
result of continued loan growth, the Corporation securitized $11.3 billion of
loan receivables during 1996 and $6.2 billion during 1995. Funds received from
these securitizations typically are invested in investment securities
available-for-sale and money market instruments until they are needed to fund
loan growth.
Average investment securities and money market instruments as a percentage of
average interest-earning assets remained relatively constant at 25.2% for 1996,
compared to 25.8% in 1995 and 24.0% in 1994. Table 4 reflects the estimated
maturities of the Corporation's investment securities and weighted average
yields, on a fully taxable equivalent basis, at December 31, 1996. Note B to
the audited consolidated financial statements provides further detail regarding
the Corporation's investment securities.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$222.8 million to $1.2 billion in 1996. The increase is the result of a $1.6
billion increase in average loan receivables, offset by a decrease of 9 basis
points in the average yields earned on these receivables.
INTEREST INCOME FROM
LOAN RECEIVABLES
(millions)
94 747.1
95 994.6
96 1,217.4
Interest income on loan receivables increased $247.5 million to $994.6 million
in 1995. The increase in interest income during 1995 was the result of a $1.7
billion increase in average loan receivables, combined with a 6 basis point
increase in the average yields earned on these receivables.
[26]
29
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Table 5 presents the Corporation's period-end loan receivables distribution by
loan type, excluding securitized loans, and the percentage of loan receivables
represented by type of loan. Loan receivables increased 24.5% to $10.1 billion
at December 31, 1996, compared to $8.1 billion and $5.7 billion at December 31,
1995 and 1994, respectively.
During 1996, credit card loan receivables increased to $8.2 billion at December
31, 1996, compared to $7.3 billion and $4.8 billion at December 31, 1995 and
1994, respectively. The increases in credit card loan receivables for 1996 and
1995 were a result of the Corporation's successful marketing programs, such as
the introduction of the MBNA Platinum Plus Visa and MasterCard program, as well
as competitive pricing strategies. In addition, the Corporation continues to
offer variable-rate credit card loans as well as variable-rate home equity
loans to certain new and existing Customers. These variable-rate loans made up
42.1% of total managed loans at December 31, 1996, compared to 39.9% of total
managed loans at December 31, 1995. These variable-rate loans are indexed to
the U.S. Prime Rate published in The Wall Street Journal and generally reprice
quarterly.
During 1996, other consumer loan receivables, consisting primarily of unsecured
lines of credit accessed by check and home equity loans, increased 120.9% to
$1.9 billion at December 31, 1996. The increase in other consumer loans is a
result of the Corporation's increased efforts to originate other consumer loans
combined with the acquisition of other consumer loan portfolios. Additionally,
the Bank securitized $841.6 million of other consumer loans during 1996 through
a private multi-seller commercial paper conduit.
In 1995, other consumer loan receivables decreased $48.8 million to $876.9
million from 1994. The decrease in other consumer loan receivables is a result
of the Corporation's securitizing $400.0 million of other consumer loans during
1995.
Note C to the audited consolidated financial statements provides further detail
regarding the Corporation's loan receivables.
- - ----------------------------------------------------------------------------------------------------------------------------------
TABLE 5: LOAN RECEIVABLES DISTRIBUTION
- - ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- - ----------------------------------------------------------------------------------------------------------------------------------
Loans held for securitization:
Credit card.................. $ 2,469,974 24.4% $3,168,427 38.9% $1,899,026 33.3% $ 741,869 16.6% $678,000 17.0%
Other consumer............... - - - - 400,000 7.0 - - - -
----------- ----- ---------- ----- ---------- ----- ---------- ----- ----------- -----
Total loans held for
securitization............ 2,469,974 24.4 3,168,427 38.9 2,299,026 40.3 741,869 16.6 678,000 17.0
Loan portfolio:
Credit card.................. 5,722,299 56.5 4,090,553 50.3 2,882,232 50.5 2,949,995 66.0 2,659,007 66.9
Other consumer............... 1,936,779 19.1 876,938 10.8 525,742 9.2 775,514 17.4 641,643 16.1
----------- ----- ---------- ----- ---------- ----- ---------- ----- ----------- -----
Total loan portfolio....... 7,659,078 75.6 4,967,491 61.1 3,407,974 59.7 3,725,509 83.4 3,300,650 83.0
----------- ----- ---------- ----- ---------- ----- ---------- ----- ----------- -----
Total loan receivables..... $10,129,052 100.0% $8,135,918 100.0% $5,707,000 100.0% $4,467,378 100.0% $ 3,978,650 100.0%
=========== ===== ========== ===== ========== ===== ========== ===== =========== =====
- - ----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS
Total interest expense on deposits was $527.9 million for 1996, compared to
$438.2 million and $222.2 million for 1995 and 1994, respectively. The increase
in interest expense of $89.7 million during 1996 is primarily the result of a
$1.6 billion increase in average interest-bearing deposits offset by a 5 basis
point decrease in rates paid on average interest-bearing deposits.
The increase in interest expense on deposits of $216.0 million during 1995 was
the result of a 184 basis point increase in rates paid on average
interest-bearing deposits, combined with a $1.9 billion increase in average
interest-bearing deposits from 1994.
The increases in average interest-bearing deposits for 1996 and 1995 are a
result of the Corporation's continued emphasis on marketing certificates of
deposit and money market deposit accounts to fund loan growth and diversify
funding sources.
BORROWED FUNDS
Interest expense on short-term borrowings increased $6.4 million to $18.5
million during 1996. The increase in interest expense on short-term borrowings
for 1996 is primarily the result of a $139.3 million increase in average
short-term borrowings from 1995, offset by a 63 basis point decrease in the
rates paid on these average short-term borrowings.
Interest expense on short-term borrowings decreased $7.6 million to $12.1
million during 1995. The decrease in 1995 was primarily the result of a $240.7
million decrease in average short-term borrowings from 1994, offset by a 161
basis point increase in the rates paid on these average short-term borrowings.
Note F to the audited consolidated financial statements provides further detail
regarding the Corporation's short-term borrowings.
[27]
30
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
During 1996 and 1995, the Corporation continued to increase its funding
provided by long-term debt and bank notes to add diversity to the Corporation's
funding sources, to fund loan growth, to acquire premises and equipment, and
for other general corporate purposes. As a result, interest expense related to
long-term debt and bank notes increased $50.1 million to $196.4 million in 1996
from 1995. This increase is primarily the result of an increase of $816.7
million in average long-term debt and bank notes to $3.0 billion, offset by a
decrease of 13 basis points in rates paid on these funds.
In 1995, interest expense related to long-term debt and bank notes increased
$80.7 million to $146.3 million from 1994. This increase was primarily the
result of an increase in average long-term debt and bank notes of $1.0 billion
to $2.2 billion, combined with an increase of 114 basis points in the rates
paid on these funds.
Note G to the audited consolidated financial statements provides further detail
regarding the Corporation's long-term debt and bank notes.
OTHER OPERATING INCOME
Total other operating income increased 33.1% or $471.3 million to $1.9 billion
in 1996 from 1995. The increase in other operating income during 1996 is
primarily attributable to an increase of 37.8% or $452.6 million in loan
servicing fees for the period. Loan servicing fees, generated by securitized
loans, consist of interest income, interchange, and other fees in excess of
interest paid to Certificateholders; credit losses; and other trust expenses.
The increase in loan servicing fees is a direct result of an increase in
average securitized loans of $7.1 billion during 1996. In addition, credit card
fees increased $20.3 million to $102.6 million during 1996. This increase is
primarily the result of increases in late and overlimit fees.
OTHER OPERATING INCOME
(millions)
94 1.0
95 1.4
96 1.9
Processing fees in 1996 declined $13.7 million from 1995. The decline in
processing fees is primarily a result of MBNA Hallmark Information Services,
Inc., (formerly known as MBNA Information Services, Inc.) the Corporation's
information processing subsidiary, not renewing contracts with external
Customers in order to increase their focus on providing information technology
support and services to the Bank and its affiliates.
In 1995, total other operating income increased 40.6% or $411.0 million to $1.4
billion from 1994. The increase in 1995 was primarily attributable to an
increase of 45.1% or $371.8 million in loan servicing fees for the period. The
increase in loan servicing fees was the direct result of an increase in average
securitized loans of $6.0 billion. In addition, credit card fees increased
$34.3 million to $82.3 million during 1995. This increase is primarily the
result of increases in annual fee income, late fees, and cash advance
transaction fees.
OTHER OPERATING EXPENSE
Total other operating expense increased 26.2% to $1.6 billion in 1996 from $1.2
billion in 1995, compared to an increase of 25.1% in 1995 from 1994. The growth
in other operating expense reflects the continued investment in business
development to enhance the ability of the Corporation to attract and retain
Customers. As a result of these increased business development activities, new
accounts originated during 1996 were 7.5 million, compared to 6.0 million in
1995.
Note O to the audited consolidated financial statements provides further detail
regarding the Corporation's other operating expenses.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement No. 123), was issued. This
statement, effective for fiscal years beginning after December 15, 1995,
defines a fair-value-based method of accounting for an employee stock option or
similar equity instrument. However, it allows a company to continue to measure
compensation cost for those instruments using the intrinsic-value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). Statement No.
123 requires certain additional disclosures about stock-based employee
compensation arrangements regardless of the method used to account for them. As
permitted by Statement No. 123, in 1996 the Corporation elected to retain its
present accounting for stock option grants in accordance with APB Opinion No.
25. The adoption of Statement No. 123 had no impact on the Corporation's
consolidated financial statements. Note K to the audited consolidated financial
statements provides further detail regarding the Corporation's stock option
plans.
SPECIAL MARKETING PROGRAM
During the year ended December 31, 1996, the Corporation charged $32.8 million
net of tax ($54.3 million pretax) to earnings related to the launch of the
MBNAPlatinum Plus Visa and MasterCard program. This item was recognized by the
Corporation during the three months ended March 31, 1996.
[28]
31
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
INCOME TAXES
Applicable income taxes were $289.6 million in 1996, compared to $231.5 million
in 1995 and $174.5 million in 1994. This represents an effective tax rate of
39.6% for 1996, 1995, and 1994. Applicable income taxes for 1996 exclude the
effect of the tax benefit from Customer-based intangible assets described
below. Note Q to the audited consolidated financial statements reconciles
reported applicable income taxes to the amount computed by applying the federal
statutory rate to income before income taxes.
Net income for the year ended December 31, 1996, includes a $32.8 million tax
benefit related to the recognition of tax deductions for the amortization of
Customer-based intangible assets acquired in connection with the Corporation's
1991 initial public offering. The initial public offering resulted in certain
Customer-based intangible assets being recorded for income tax purposes only,
creating future tax deductions relating to these intangible assets. The
Corporation did not initially recognize, for financial statement purposes, any
tax benefit related to those assets because there were uncertainties concerning
the tax treatment of such assets. During the second quarter of 1993, the U.S.
Supreme Court in the "Newark Morning Ledger" case affirmed that Customer-based
intangible assets may be amortized for tax purposes, and the Corporation
recognized $89.8 million of the tax benefit related to the Customer-based
intangible assets. During the three months ended March 31, 1996, the Internal
Revenue Service completed an audit of the Corporation's 1991 and 1992 tax
returns and entered into a final agreement with the Corporation regarding the
tax treatment of the intangible assets. As a result, the Corporation recognized
the remaining tax benefit relating to the intangible assets, $32.8 million,
during the three-month period ended March 31, 1996.
- - ------------------------------------------------------------------------------------------------------------------------------------
TABLE 6: DELINQUENT LOANS
- - ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------------------------------------------------
Loan portfolio............. $7,659,078 $4,967,491 $3,407,974 $3,725,509 $3,300,650
Loans delinquent:
30 to 59 days........... $ 114,382 1.49% $ 65,651 1.32% $ 38,912 1.14% $ 41,501 1.11% $ 48,724 1.48%
60 to 89 days........... 52,857 .69 30,162 .61 17,962 .53 20,984 .56 23,489 .71
90 or more days......... 107,679 1.41 58,894 1.18 31,804 .93 50,477 1.36 52,709 1.59
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- -----
Total................. $ 274,918 3.59% $ 154,707 3.11% $ 88,678 2.60% $ 112,962 3.03% $ 124,922 3.78%
========== ===== ========== ==== ========== ==== ========== ==== ========== =====
- - ------------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
The Corporation's asset quality at any time reflects, among other factors, the
quality of the credit card loans and other consumer loans, the average
seasoning of the Corporation's accounts, the success of the Corporation's
collection efforts, and the general economic conditions.
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 3.59%
at December 31, 1996, compared with 3.11% at December 31, 1995. The
Corporation's delinquency, as a percentage of managed loans, was 4.28% at
December 31, 1996, compared to 3.70% at December 31, 1995. The Corporation
believes that several factors, including general economic conditions, increased
consumer debt levels, and the seasoning of the Corporation's loans, contributed
to the increase in delinquency. As new accounts season, the delinquency rate on
these accounts generally rises and stabilizes. Table 6 presents the delinquency
of the Corporation's loan portfolio, excluding loans held for securitization.
NET CREDIT LOSSES
Net credit losses during 1996 were $172.7 million, compared to $134.7 million
for 1995 and $104.6 million for 1994. Net credit losses do not include credit
losses from securitized loans, which are charged to the related trusts, in
accordance with their respective contractual agreements. The increases in net
credit losses in 1996 and 1995 reflect increases in the Corporation's
outstanding loan receivables, the general economic conditions, and the
seasoning of the Corporation's accounts.
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. From time to time, the Corporation sells
certain previously charged-off receivables. The proceeds received by the
Corporation from these sales are recorded as recoveries and thus reduce net
credit losses.
[29]
32
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
TABLE 7: RESERVE FOR POSSIBLE CREDIT LOSSES
- - ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- - ----------------------------------------------------------------------------------------------------------------------------------
Reserve balance, beginning of year.............................$ 104,886 $ 101,519 $ 97,580 $ 97,580 $ 97,580
Reserves acquired........................................... 7,553 - - - -
Provision for possible credit losses........................ 178,224 138,176 108,477 98,795 97,534
Foreign currency translation................................ 488 (90) 21 - -
Credit losses:
Credit card............................................... (230,894) (164,340) (98,963) (88,099) (84,483)
Other consumer............................................ (23,523) (10,553) (33,331) (30,332) (27,790)
----------- ---------- ---------- ---------- ----------
Total credit losses..................................... (254,417) (174,893) (132,294) (118,431) (112,273)
Recoveries:
Credit card............................................... 77,255 37,901 26,063 18,577 14,033
Other consumer............................................ 4,438 2,273 1,672 1,059 706
----------- ---------- ---------- ---------- ----------
Total recoveries........................................ 81,693 40,174 27,735 19,636 14,739
----------- ---------- ---------- ---------- ----------
Net credit losses........................................... (172,724) (134,719) (104,559) (98,795) (97,534)
----------- ---------- ---------- ---------- ----------
Reserve balance, end of year...................................$ 118,427 $ 104,886 $ 101,519 $ 97,580 $ 97,580
=========== ========== ========== ========== ==========
Net credit losses as a % of average loan receivables........... 1.98% 1.91% 1.96% 2.43% 2.87%
Net credit losses as a % of beginning reserve.................. 164.68 132.70 107.15 101.25 99.95
Reserve balance as a % of ending loan receivables.............. 1.17 1.29 1.78 2.18 2.45
Ending loan receivables........................................$10,129,052 $8,135,918 $5,707,000 $4,467,378 $3,978,650
Average loan receivables....................................... 8,703,579 7,061,898 5,330,282 4,068,685 3,392,778
- - ----------------------------------------------------------------------------------------------------------------------------------
Annual net credit losses as a percentage of average loan receivables increased
to 1.98% during 1996, compared to 1.91% for 1995 and 1.96% for 1994. The
Corporation's annual managed credit losses as a percentage of average managed
loans for 1996 was 3.35%, compared to 2.74% and 2.59% for 1995 and 1994,
respectively. Excluding the sale of certain previously charged-off receivables,
annual managed credit losses as a percentage of average managed loans for 1996
would have been 3.43%.
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
An analysis of the Corporation's reserve for possible credit losses is
presented in Table 7. The loan portfolio is regularly reviewed to determine an
appropriate range for the 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 that deserve current recognition. A provision is charged to operating
expense to maintain the reserve level within this range. The reserve for
possible credit losses, however, does not include an allocation for credit risk
related to securitized loans, which is absorbed directly by the related trusts
under their respective contractual agreements, thus reducing loan servicing
fees rather than the reserve for possible credit losses. The provision for
possible credit losses for the year ended December 31, 1996, increased $40.0
million or 29.0% from 1995, compared to a $29.7 million or 27.4% increase in
1995 from 1994. The increases in the Corporation's provision for possible
credit losses for the years ended December 31, 1996 and 1995, primarily reflect
the increases in the Corporation's net credit losses for the same period.
While the reserve for possible credit losses is available to absorb potential
losses in the Corporation's outstanding loan receivables, its composition is
internally allocated between credit card and other consumer loans, as presented
in Table 8.
- - ------------------------------------------------------------------------------------------
TABLE 8: ALLOCATION OF RESERVE FOR POSSIBLE CREDIT LOSSES
- - ------------------------------------------------------------------------------------------
(dollars in thousands)
- - ------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------
Credit card.............. $ 99,981 $ 86,877 $ 80,828 $ 78,766 $ 81,539
Other consumer........... 18,446 18,009 20,691 18,814 16,041
-------- -------- -------- -------- --------
Total................. $118,427 $104,886 $101,519 $ 97,580 $ 97,580
======== ======== ======== ======== ========
- - ------------------------------------------------------------------------------------------
[30]
33
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY
The financial condition of the Corporation is managed with a focus on
maintaining high-quality credit standards and prudent levels of liquidity and
interest rate risk.
LIQUIDITY MANAGEMENT
Liquidity management is the process by which the Corporation manages its access
to 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
pricing and maturity of loans, deposits, and other assets and liabilities. This
process also is 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- and long-term funds. Funding sources are available to the Corporation
through programs established by the Corporation and the Bank.
During 1996, the Corporation issued $200.0 million in Senior Medium-Term Notes,
compared to $175.0 million issued in 1995. As of December 31, 1996, the
Corporation had $765.5 million in Senior Medium-Term Notes outstanding that
mature from 1997 to 2003, as compared to $590.5 million at December 31, 1995.
In addition, the Corporation had $250.0 million in Senior Notes outstanding at
December 31, 1996 and 1995, that mature in 1999 and 2005. The net proceeds were
used to fund growth in other consumer loans, to purchase premises and
equipment, and for other general corporate purposes. The Corporation expects to
pay the interest on both the Senior Notes and Senior Medium-Term Notes from
dividend, lease, and other payments received primarily from the Bank.
The Corporation has two one-year revolving credit facilities totaling $50.0
million. These credit facilities were renewed during 1996 with $25.0 million
expiring in April 1997 and $25.0 million expiring in October 1997. The
Corporation may take advances under these facilities subject to certain
conditions, including requirements for tangible net worth. These facilities may
be used for general corporate purposes and were not drawn upon as of December
31, 1996.
In April 1995, the Corporation established a $100.0 million commercial paper
program that allows the Corporation to issue commercial paper with a maturity
of 270 days or less. At December 31, 1996, there was no commercial paper
outstanding.
In December 1996, the Corporation issued $250.0 million of guaranteed preferred
beneficial interests in Corporation's junior subordinated deferrable interest
debentures. The securities qualify as regulatory capital for the Corporation,
and the proceeds were contributed as additional capital to the Bank.
In September 1996, the Corporation issued 6.0 million shares of Adjustable Rate
Cumulative Preferred Stock, Series B, with a $25 stated value per share. The
shares of the Series B Preferred Stock are redeemable, in whole or in part,
solely at the option of the Corporation on or after October 15, 2001. The
Series B Preferred Stock may also be redeemed in whole at the option of the
Corporation in the event of certain amendments to the Internal Revenue Code of
1986 with respect to the dividends-received deduction.
In November 1995, the Corporation issued 6.0 million shares of 7 1/2%
Cumulative Preferred Stock, Series A, with a $25 stated value per share. The
shares of the Series A Preferred Stock are redeemable, in whole or in part,
solely at the option of the Corporation on or after January 15, 2001.
Shares of the Series AandB Preferred Stock are not convertible into any other
securities of the Corporation. Dividends on the preferred stock are cumulative
from the date of original issue and are payable quarterly. Note L to the
audited consolidated financial statements provides further detail regarding the
Corporation's Preferred Stock.
The Corporation may also issue additional Senior or Subordinate Debt securities
and preferred stock under an existing S-3 shelf registration statement filed
with the Securities and Exchange Commission.
Funding sources available to the Corporation through programs established by
the Bank include deposits, bank notes, deposit notes, and committed credit
facilities.
Deposits generated by the Bank are a major source of funds for the Corporation.
Total deposits at December 31, 1996, were $10.2 billion, compared with $8.6
billion and $6.6 billion at December 31, 1995 and 1994, respectively. The
increase in deposits from 1995 is primarily the result of a $1.6 billion
increase in direct deposits. The increase in 1995 deposits of $2.0 billion from
1994 is the result of a $2.2 billion increase in direct deposits. These
increases in direct deposits were primarily the result of the Corporation's
emphasis on marketing certificates of deposit and offering competitive rates.
Table 9 provides the maturities of the Corporation's deposits at December 31,
1996.
- - ----------------------------------------------------------------------------------------------------------------------------------
TABLE 9: MATURITIES OF DEPOSITS
- - ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DIRECT DEPOSITS OTHER DEPOSITS TOTAL DEPOSITS
- - ----------------------------------------------------------------------------------------------------------------------------------
Three months or less................................................... $3,900,518 $ 339,006 $ 4,239,524
Over three months through twelve months................................ 1,756,728 610,397 2,367,125
Over one year through five years....................................... 2,088,879 1,448,790 3,537,669
Over five years........................................................ 4,857 2,511 7,368
---------- ----------- -----------
Total deposits...................................................... $7,750,982 $ 2,400,704 $10,151,686
========== =========== ===========
- - ----------------------------------------------------------------------------------------------------------------------------------
[31]
34
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Funding Sources
(dollars in millions)
DECEMBER 31, 1996 DECEMBER 31, 1995
Other deposits $ 2,400.7 $ 2,463.9
Direct deposits $ 7,751.0 $ 6,145.0
Borrowed funds $ 4,643.7 $ 2,947.1
Equity $ 1,704.3 $ 1,265.1
An additional source of funding for the Bank is provided by a medium-term bank
note/deposit note program. These notes may be issued in maturities ranging from
nine months to fifteen years from the date of issue. During 1996, the Bank
issued $860.0 million of bank notes, compared to $770.9 million issued in 1995.
As of December 31, 1996 and 1995, the Bank had $2.4 billion and $1.6 billion,
respectively, issued and outstanding under this program.
The Bank can also obtain funding through the issuance of short-term bank notes,
with maturities ranging from seven days to one year from the date of issue. The
Bank had $459.0 million of short-term bank notes outstanding at December 31,
1996. The Bank had no short-term bank notes outstanding at December 31, 1995.
In addition to these funding sources, the Bank has $200.0 million of 7.25%
Subordinated Notes outstanding at December 31, 1996 and 1995, which mature in
September 2002. These Subordinated Notes qualify as regulatory capital under
the Comptroller of the Currency's guidelines and enhance the Bank's regulatory
capital level, in addition to providing a long-term source of funds.
In January 1997, the Bank extended its $2.0 billion committed syndicated
revolving credit facility through February 2001. Advances are subject to
covenants and conditions customary in a transaction of this kind. These
conditions include requirements for tangible net worth of at least $760.0
million, increased by 40% of the Bank's net income earned after September 30,
1996, and managed loan receivables 90 days or more past due plus nonaccrual
receivables not to exceed 6% of managed credit card receivables. Should managed
credit card losses equal or exceed 5% for a period of four consecutive
quarters, a ratio of qualifying loan receivables to outstanding borrowings
under the facility of at least 115% is required. The facility may be used for
general corporate purposes and was not drawn upon as of December 31, 1996.
MBNA International has issued Pound Sterling 34.0 million (approximately $58.2
million at December 31, 1996) of Subordinated Guaranteed Floating-Rate Notes
priced between 100 basis points and 145 basis points over the three-month
Sterling London Interbank Offered Rate (LIBOR) for the first five years, with a
50 basis point increase for the last five years, maturing in 2005. Interest on
these notes is payable quarterly or semiannually.
MBNA International has also entered into six bilateral credit facilities,
ranging from one to five years, totaling Pound Sterling 60.0 million
(approximately $102.8 million, at December 31, 1996). MBNA International may
take advances under the facilities subject to certain conditions, including
requirements for tangible net worth. The facilities may be used for general
corporate purposes. At December 31, 1996, MBNA International had Pound Sterling
30.0 million (approximately $51.4 million at December 31, 1996) outstanding.
In addition, MBNA International also has a four-year, Pound Sterling 300.0
million (approximately $513.8 million at December 31, 1996) multi-currency
committed syndicated revolving credit facility which expires in October 2000.
This facility was increased by MBNA International during 1996 from Pound
Sterling 200.0 million to Pound Sterling 300.0 million. MBNA International may
take advances under the facility subject to certain conditions, including
requirements for tangible net worth, outstanding loan receivables, and account
delinquencies. The facility may be used for general corporate purposes and was
not drawn upon as of December 31, 1996.
The Corporation also held $2.3 billion in investment securities and $876.6
million in money market instruments at December 31, 1996, compared to $2.1
billion in investment securities and $573.6 million in money market securities
at December 31, 1995. 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 December 31, 1996,
$1.1 billion is anticipated to mature within 12 months. During 1996, the
Corporation changed its investment securities portfolio strategy from holding a
higher level of held-to-maturity securities to investing in more
available-for-sale securities. At December 31, 1996, the Corporation had $1.7
billion of investment securities available-for-sale. These investment
securities and money market instruments provide increased liquidity and
flexibility to support the Corporation's funding requirements.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
(dollars in millions)
DECEMBER 31, 1996 DECEMBER 31, 1995
Interest-earning time deposits in other banks $ 621.6 $ 448.6
Federal funds sold and securities purchased under
resale agreements $ 255.0 $ 125.0
Investment securities available-for-sale $ 1,719.7 $ 912.1
Investment securities held-to-maturity $ 598.3 $ 1,183.7
[32]
35
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the volatility in earnings resulting from
fluctuations in interest rates, variability in spread relationships, and the
mismatch of repricing intervals between assets and liabilities. Interest rate
sensitivity management attempts to maximize earnings growth by minimizing the
effects of changing market rates, asset and liability mix, and prepayment
trends. The interest rate sensitivity schedule presented in Table 10 uses the
static gap methodology to measure interest rate risk. This method reports the
difference between rate-sensitive assets and liabilities at a specific point in
time. Fixed- and variable-rate loans have been distributed among the various
periods based on management's estimate of their repricing characteristics.
Results of the gap analysis show that, within one year, the Corporation's
liabilities reprice faster than its assets. Management has the flexibility to
respond to current market conditions by lengthening or shortening this
sensitivity through credit card repricings and changing its funding mix.
Although the static gap methodology is widely accepted for its simplicity, it
ignores repricing timing differences and market spread adjustments. For these
reasons, the Corporation utilizes simulation modeling to monitor its interest
rate risk. These simulations take into consideration changes in balance sheet
composition, liability pricing spreads, and loan repricing assumptions.
Management reviews the Corporation's interest rate sensitivity position on an
ongoing basis and prepares strategies to adjust that sensitivity as
appropriate. As part of those strategies, the Corporation offers variable-rate
credit cards and home equity loans, which provide an additional vehicle for
managing interest rate sensitivity. Variable-rate loans were 42.1% of total
managed loans at December 31, 1996.
For the Corporation, interest rate risk is not limited to on-balance-sheet
activities, but includes the interest rate sensitivity of loan servicing fees
from securitized loans and the impact of off-balance-sheet financial
instruments. For this reason, the Corporation's interest rate sensitivity
analysis includes a managed adjustment to quantify and capture the full impact
of interest rate risk on the Corporation's earnings.
- - ---------------------------------------------------------------------------------------------------------------------------------
TABLE 10: INTEREST RATE SENSITIVITY SCHEDULE
- - ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 SUBJECT TO REPRICING
- - ---------------------------------------------------------------------------------------------------------------------------------
Within 1 Year 1-5 Years After 5 Years Total
- - ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks.......................... $ 621,614 $ - $ - $ 621,614
Federal funds sold and securities purchased under resale agreements.... 255,000 - - 255,000
Investment securities (a):
Available-for-sale.................................................. 1,696,501 23,229 - 1,719,730
Held-to-maturity.................................................... 300,483 238,939 58,898 598,320
Loans held for securitization.......................................... 2,469,974 - - 2,469,974
Loans:
Credit card......................................................... 5,120,098 602,201 - 5,722,299
Other consumer...................................................... 1,222,966 537,756 176,057 1,936,779
----------- ----------- ---------- -----------
Total loans....................................................... 6,343,064 1,139,957 176,057 7,659,078
----------- ----------- ---------- -----------
Total interest-earning assets..................................... 11,686,636 1,402,125 234,955 13,323,716
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Time deposits....................................................... 3,614,403 3,537,669 7,368 7,159,440
Money market deposit accounts....................................... 2,719,545 - - 2,719,545
Interest-bearing transaction accounts............................... 27,995 - - 27,995
Savings accounts.................................................... 10,821 - - 10,821
----------- ----------- ---------- -----------
Total interest-bearing deposits................................... 6,372,764 3,537,669 7,368 9,917,801
Borrowed funds:
Short-term borrowings............................................... 693,387 - - 693,387
Long-term debt and bank notes....................................... 2,006,070 1,075,240 869,048 3,950,358
----------- ----------- ---------- -----------
Total borrowed funds.............................................. 2,699,457 1,075,240 869,048 4,643,745
----------- ----------- ---------- -----------
Total interest-bearing liabilities................................ 9,072,221 4,612,909 876,416 14,561,546
----------- ----------- ---------- -----------
Gap before managed adjustments......................................... 2,614,415 (3,210,784) (641,461) (1,237,830)
Managed adjustments (b)................................................ (3,440,931) 4,316,415 171,466 1,046,950
----------- ----------- ---------- -----------
Gap after managed adjustments.......................................... $ (826,516) $ 1,105,631 $ (469,995) $ (190,880)
=========== =========== ========== ===========
Cumulative gap after managed adjustments............................... $ (826,516) $ 279,115 $ (190,880)
=========== =========== ==========
Cumulative gap after managed adjustments
as a percent of total managed assets (c).............................. (1.82)% .61% (.42)%
- - ---------------------------------------------------------------------------------------------------------------------------------
(a) Investment securities are presented using estimated maturities.
(b) Managed adjustments reflect the impact interest rates have on securitized
loans and off-balance-sheet financial instruments.
(c) Total managed assets at December 31, 1996, were $45,529,823.
[33]
36
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank is also subject to
similar capital requirements adopted by the Office of the Comptroller of the
Currency. Under these requirements, the regulatory agencies have set minimum
thresholds for Tier 1 capital, Total capital, and Leverage ratios. At December
31, 1996, both the Corporation's and the Bank's capital exceeded all minimum
regulatory requirements, and the Bank was "well-capitalized" as defined in the
regulations issued pursuant to the FDIC Improvement Act of 1991. Both the
Corporation's and the Bank's risk-based capital ratios, shown in Table 11, have
been computed in accordance with regulatory accounting policies.
- - -----------------------------------------------------------------
TABLE 11: REGULATORY CAPITAL RATIOS
MBNA MBNA AMERICA MINIMUM
DECEMBER 31, 1996 CORPORATION BANK, N.A. REQUIREMENTS
- - -----------------------------------------------------------------
Tier 1................... 10.89% 10.01% 4.00%
Total.................... 13.22 12.31 8.00
Leverage................. 11.21 9.24 3.00
- - -----------------------------------------------------------------
Note N to the audited consolidated financial statements provides further detail
regarding the Corporation's capital adequacy.
During December 1996, the Corporation issued $250.0 million of guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures. On October 21, 1996, the Federal Reserve announced that
cumulative preferred securities, having the characteristics of the guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures, could be included in Tier 1 capital for bank holding
companies. Such Tier 1 capital treatment, together with the Corporation's
ability to deduct, for income tax purposes, interest payable on the junior
subordinated deferrable interest debentures, will provide the Corporation with
lower-cost regulatory capital. The Corporation used the proceeds from the
issuance of guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures as a capital contribution to the
Bank.
Also, the $150.0 million of Adjustable Rate Cumulative Preferred Stock, Series
B, issued in September 1996, and the $150.0 million of 7 1/2% Cumulative
Preferred Stock, Series A, issued in November 1995 by the Corporation, qualify
as Tier 1 capital under the risk-based guidelines for bank holding companies.
During 1996, the Corporation declared dividends on its preferred and common
stock of $156.6 million. 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. In addition, if the Corporation defers interest
for 10 consecutive semiannual periods 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 less priority over claims as the junior subordinated deferrable interest
debentures.
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 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. 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
December 31, 1996, the amount of retained earnings available for declaration of
dividends from the Bank to the Corporation was $588.9 million. Payment of
dividends by the Bank to the Corporation may, however, 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 Bank's revolving credit facility. This
facility was not drawn upon as of December 31, 1996. If this facility were
drawn upon as of December 31, 1996, the amount of retained earnings available
for declaration of dividends would have been limited to $409.4 million.
SECURITIZATION
Securitization of the Bank's loan receivables continues to be a major funding
alternative for the Corporation. This 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.
Securitization involves the sale, generally to a trust, of a pool of loan
receivables. These loan receivables arise from accounts whose ownership is
retained by the Bank. In addition to selling the existing loan receivables,
rights to new loan receivables, including most fees generated by and payments
made from these accounts, are sold. Certificates representing undivided
interests in the trust are issued. The Investor Certificates are sold by the
trust to investors, generally through a public offering. Interest is paid to
the Investor Certificateholders during the life of the transaction. The Seller
Certificate is retained by the Bank. The Bank continues to service the accounts
and receives a servicing fee for doing so.
During the revolving period, which generally ranges from 24 months to 108
months, no principal payments are made to the Investor Certificateholders.
Payments received on the accounts are used to pay interest to the Investor
Certificateholders and to purchase new loan receivables generated by the
accounts, so that the principal dollar amount of the Investor Certificate
remains unchanged. Once the revolving period ends, principal payments are
allocated for distribution to the Investor Certificateholders according to the
terms of the transaction. As principal payments are allocated to the Investor
Certificateholders, the Bank's loan receivables increase by the amount of any
new purchases or cash advance activity on the accounts.
During 1996, the Bank securitized loan receivables totaling $11.3 billion
through both public and private markets, including two securitizations of
Pound Sterling 500.0 million involving MBNA International. Additionally, during
December 1996, the Bank securitized
[34]
37
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
$841.6 million of other consumer loans through a private multi-seller
commercial paper conduit. In 1995, the Bank securitized a total of $6.2 billion
of its loan receivables, including a securitization of Pound Sterling 207.5
million involving MBNAInternational. These securitizations bring the total
amount of outstanding securitized loans to $28.5 billion or 73.8% of managed
loans as of December 31, 1996, compared to $18.6 billion or 69.5%at December
31, 1995.
The Corporation's securitized loan distribution is shown in Table 12.
- - -----------------------------------------------------------------------------
TABLE 12: SECURITIZED LOAN DISTRIBUTION
- - -----------------------------------------------------------------------------
(dollars in thousands)
- - -----------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994
- - -----------------------------------------------------------------------------
Securitized loans:
Credit card................... $27,082,046 $17,989,333 $ 12,833,489
Other consumer................ 1,412,435 586,453 203,375
----------- ----------- ------------
Total securitized loans...... $28,494,481 $18,575,786 $ 13,036,864
=========== =========== ============
- - -----------------------------------------------------------------------------
In addition, $1.6 billion of previously securitized loans in existing trusts
amortized back into the Bank's loan portfolio during 1996, compared to $775.0
million in 1995. During the amortization period, new charges and cash advances
are for the account of the Bank, which increases the Corporation's
on-balance-sheet assets. Table 13 presents the amounts, at December 31, 1996,
of investor principal (face value)in securitized receivables scheduled to
amortize into the Bank's loan portfolio in future years.
Distribution of principal to the Investor Certificateholders may begin sooner
if the average annualized yield (generally including interest income,
interchange, and other fees) for three consecutive months drops below a minimum
yield (generally equal to the sum of the certificate rate payable to investors,
contractual servicing fees, and principal credit losses during the period) or
certain other events occur. Table 14 compares the average annualized yield for
the three-month period ended December 31, 1996, to the minimum yield for each
transaction. The yield for each of the transactions is presented on a cash
basis and includes various credit card or other fees as specified in the
securitization agreements.
- - --------------------------------------------------------------
TABLE 13: AMORTIZATIONS OF INVESTOR PRINCIPAL (FACE VALUE)
- - --------------------------------------------------------------
(dollars in thousands)
1997...............................................$ 3,071,425
1998............................................... 3,257,561
1999............................................... 5,482,747
2000............................................... 4,320,763
2001............................................... 4,099,553
Thereafter......................................... 7,809,831
------------
Total amortizations............................$ 28,041,880
============
- - --------------------------------------------------------------
Due to the relatively short average life of loans, no gain or loss is recorded
at the time of a securitization. Rather, loan servicing fees (interest income,
interchange, and other fees in excess of interest paid to Certificateholders;
credit losses; and other trust expenses) are recognized monthly over the life
of the transaction when earned.
The Corporation is required to adopt Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (Statement No. 125), effective for all
transactions occurring after December 31, 1996. Statement No. 125 requires
recognition of a gain at the time of the initial sale and each subsequent sale
of loan receivables in a securitization. Currently, the Corporation recognizes
this income over the life of the securitization. These gains, which are
expected to be material in 1997, will be invested in additional business
development efforts and, as a result, will have no impact on the Corporation's
1997 net income.
- - -----------------------------------------------------------------
TABLE 14: YIELDS ON SECURITIZED TRANSACTIONS (a)
THREE-MONTH AVERAGE
- - -----------------------------------------------------------------
Yield in
Annualized Minimum Excess of
Yield Yield Minimum
- - -----------------------------------------------------------------
MasterTrust 91-1 (b)........... 22.05% 15.03% 7.02%
MasterTrust 92-1 (b)........... 18.31 13.70 4.61
MasterTrust 92-2............... 18.31 12.65 5.66
MasterTrust 92-3............... 18.31 12.39 5.92
MasterTrust 93-1............... 18.31 12.33 5.98
MasterTrust 93-2 (b)........... 29.42 14.66 14.76
MasterTrust 93-3............... 18.31 11.85 6.46
MasterTrust 93-4............... 18.31 12.28 6.03
MasterTrust 94-1............... 18.31 12.18 6.13
MasterTrust 94-2............... 18.31 12.24 6.07
MasterTrust II 94-A............ 17.04 11.65 5.39
MasterTrust II 94-B............ 17.04 11.64 5.40
MasterTrust II 94-C............ 17.04 11.74 5.30
MasterTrust II 94-D............ 17.04 11.68 5.36
MasterTrust II 94-E............ 17.04 11.62 5.42
Gold Reserve................... 19.36 14.30 5.06
MasterTrust II 95-A............ 17.04 11.76 5.28
MasterTrust II 95-B............ 17.04 11.63 5.41
MasterTrust II 95-C............ 17.04 11.69 5.35
MasterTrust II 95-D............ 17.04 11.55 5.49
MasterTrust II 95-E............ 17.04 11.70 5.34
Cards No. 1.................... 19.88 10.28 9.60
MasterTrust II 95-F............ 17.04 12.44 4.60
MasterTrust II 95-G ........... 17.04 11.69 5.35
MasterTrust II 95-H ........... 17.04 11.54 5.50
MasterTrust II 95-I............ 17.04 11.63 5.41
MasterTrust II 95-J............ 17.04 11.71 5.33
MasterTrust II 96-A............ 17.04 11.68 5.36
MasterTrust II 96-B............ 17.04 11.75 5.29
MasterTrust II 96-C............ 17.04 11.62 5.42
MasterTrust II 96-D............ 17.04 11.62 5.42
Cards No. 2.................... 19.88 10.17 9.71
MasterTrust II 96-E............ 17.04 11.65 5.39
MasterTrust II 96-F............ 17.04 11.57 5.47
MasterTrust II 96-G............ 17.04 11.69 5.35
MasterTrust II 96-H............ 17.06 11.63 5.43
MasterTrust II 96-I............ 17.03 12.59 4.44
MasterTrust II 96-J............ 17.03 12.27 4.76
- - ----------------------------------------------------------------
(a) MasterTrust II 96-K issued on October 24, 1996, MasterTrust II 96-M issued
on November 26, 1996, MasterTrust II 96-L issued on December 3, 1996, Cards
No. 3 issued on December 5, 1996, and GoldOption issued on December 18,
1996, are excluded from the yields presented above as a result of their
recency.
(b) Represents a transaction that has entered its scheduled controlled
amortization period.
[35]
38
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
(unaudited)
The following supplemental information presents selected line items of the
Corporation's results of operations and financial condition on a managed basis.
This information is used to evaluate the generation of revenue as well as the
impact of securitizations on a managed basis.
- - -------------------------------------------------------------------------------------
MANAGED INCOME STATEMENT DATA
- - -------------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
INCOME (AS REPORTED):
Net interest income.......................... $ 640,477 $ 544,226 $ 532,108
Provision for possible credit losses......... 178,224 138,176 108,477
Other operating income....................... 1,895,923 1,424,618 1,013,580
Other operating expense...................... 1,572,551 1,246,067 996,110
----------- ------------ -----------
Income before income taxes and
special marketing program................... $ 785,625 $ 584,601 $ 441,101
=========== ============ ===========
ADJUSTMENTS FOR SECURITIZATIONS
(SUPPLEMENTAL):
Net interest income.......................... $ 1,957,960 $ 1,305,249 $ 811,109
Provision for possible credit losses......... 872,634 482,063 278,639
Other operating income....................... (1,085,326) (823,186) (532,470)
Other operating expense...................... - - -
----------- ------------ -----------
Income before income taxes and
special marketing program................... $ - $ - $ -
=========== ============ ===========
MANAGED INCOME STATEMENTS
(SUPPLEMENTAL):
Net interest income.......................... $ 2,598,437 $ 1,849,475 $ 1,343,217
Provision for possible credit losses......... 1,050,858 620,239 387,116
Other operating income....................... 810,597 601,432 481,110
Other operating expense...................... 1,572,551 1,246,067 996,110
----------- ------------ -----------
Income before income taxes and
special marketing program................... $ 785,625 $ 584,601 $ 441,101
=========== ============ ===========
- - -------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------
MANAGED ASSET DATA
- - -------------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------
AT YEAR END:
Loans held for securitization............. $ 2,469,974 $ 3,168,427 $ 2,299,026
Loan portfolio............................ 7,659,078 4,967,491 3,407,974
Securitized loans......................... 28,494,481 18,575,786 13,036,864
----------- ------------ -----------
Total managed loans.................... $38,623,533 $ 26,711,704 $18,743,864
=========== =========== ===========
Total managed interest-earning
assets............................... $41,818,197 $29,381,106 $21,012,945
----------- ----------- -----------
Total managed assets................... $45,529,823 $31,804,675 $22,708,722
=========== =========== ===========
AVERAGE:
Loans held for securitization............. $ 2,529,484 $ 2,269,362 $ 1,330,011
Loan portfolio............................ 6,174,095 4,792,536 4,000,271
Securitized loans......................... 22,514,014 15,440,499 9,462,401
----------- ----------- -----------
Total managed loans.................... $31,217,593 $22,502,397 $14,792,683
=========== =========== ===========
Total managed interest-earning
assets............................... $34,144,944 $24,954,180 $16,476,999
----------- ----------- -----------
Total managed assets................... $37,085,302 $26,866,220 $17,894,912
=========== =========== ===========
MANAGED RATIOS:
Delinquency............................... 4.28% 3.70% 3.03%
Net credit losses......................... 3.35 2.74 2.59
Net interest margin (on an FTE basis)..... 7.62 7.42 8.16
- - -------------------------------------------------------------------------------------
DELINQUENCY NET CREDIT LOSSES NET INTEREST MARGIN
(MANAGED) (MANAGED) (MANAGED)
percent percent percent
94 3.03 94 2.59 94 8.16
95 3.70 95 2.74 95 7.42
96 4.28 96 3.35 96 7.62
[36]
39
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL
- - --------------------------------------------------------------------------------
The accompanying consolidated financial statements were prepared by management,
who are responsible for the integrity and objectivity of the information
presented, including amounts that must necessarily be based on judgments and
estimates. The consolidated financial statements were prepared in conformity
with generally accepted accounting principles, and in situations where
acceptable alternative accounting principles exist, management selected the
method that was appropriate in the circumstance. Financial information appearing
throughout this Annual Report to Stockholders is consistent with the
consolidated financial statements.
Management depends upon MBNA Corporation's systems of internal control in
meeting its responsibilities for reliable consolidated financial statements. In
management's opinion, these systems provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with management's authorizations. Judgments are required to assess
and balance the relative cost and expected benefits of these controls. As an
integral part of the systems of internal control, the Corporation maintains a
professional staff of internal auditors who conduct operational and special
audits and coordinate audit coverage with the independent auditors.
The consolidated financial statements have been audited by the Corporation's
independent auditors, Ernst & Young LLP, whose independent professional opinion
appears separately.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the internal auditors, the independent
auditors, and management to review the work of each and ensure that each is
properly discharging its responsibilities. The independent auditors have free
access to the Committee to discuss the results of their audit work and their
evaluations of the adequacy of internal controls and the quality of financial
reporting.
/s/ ALFRED LERNER /s/ CHARLES M. CAWLEY
Alfred Lerner Charles M. Cawley
Chairman and President
Chief Executive Officer MBNA Corporation
MBNA Corporation Chairman and
Chief Executive Officer
MBNA America Bank, N.A.
/s/ M. SCOT KAUFMAN /s/ KENNETH F. BOEHL
M. Scot Kaufman Kenneth F. Boehl
Chief Financial Officer General Auditor
MBNA Corporation MBNA Corporation
Vice Chairman
MBNA America Bank, N.A.
37
40
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - --------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks......................................................................... $ 225,063 $ 291,856
Interest-earning time deposits in other banks................................................... 621,614 448,611
Federal funds sold and securities purchased under resale agreements............................. 255,000 125,000
Investment securities:
Available-for-sale (at market value, amortized cost of $1,718,643 and
$911,877 at December 31, 1996 and 1995, respectively)....................................... 1,719,730 912,064
Held-to-maturity (market value of $592,208 and $1,188,101 at December 31, 1996
and 1995, respectively)..................................................................... 598,320 1,183,727
Loans held for securitization................................................................... 2,469,974 3,168,427
Loans:
Credit card.................................................................................. 5,722,299 4,090,553
Other consumer............................................................................... 1,936,779 876,938
------------- -------------
Total loans................................................................................ 7,659,078 4,967,491
Reserve for possible credit losses........................................................... (118,427) (104,886)
------------- -------------
Net loans.................................................................................. 7,540,651 4,862,605
Premises and equipment, net..................................................................... 1,047,183 816,277
Accrued income receivable....................................................................... 98,160 93,636
Accounts receivable from securitizations........................................................ 1,777,323 951,568
Prepaid expenses and deferred charges........................................................... 204,139 139,901
Other assets.................................................................................... 478,185 235,217
------------- -------------
Total assets............................................................................... $ 17,035,342 $ 13,228,889
============= =============
LIABILITIES
Deposits:
Time deposits................................................................................ $ 7,159,440 $ 6,147,599
Money market deposit accounts................................................................ 2,719,545 2,257,565
Noninterest-bearing demand deposits.......................................................... 233,885 169,571
Interest-bearing transaction accounts........................................................ 27,995 24,514
Savings accounts............................................................................. 10,821 9,665
------------- -------------
Total deposits............................................................................. 10,151,686 8,608,914
Short-term borrowings........................................................................... 693,387 289,543
Long-term debt and bank notes................................................................... 3,950,358 2,657,600
Accrued interest payable........................................................................ 107,187 93,400
Accrued expenses and other liabilities.......................................................... 428,416 314,374
------------- -------------
Total liabilities.......................................................................... 15,331,034 11,963,831
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000 shares authorized, 12,000,000
shares and 6,000,000 shares issued and outstanding at December 31, 1996
and 1995, respectively)....................................................................... 120 60
Common stock ($.01 par value, 700,000,000 shares authorized, 334,125,000 shares
issued and outstanding at December 31, 1996 and 1995, respectively)............................ 3,341 3,341
Additional paid-in capital...................................................................... 603,902 490,622
Retained earnings............................................................................... 1,096,945 771,035
------------- -------------
Total stockholders' equity................................................................. 1,704,308 1,265,058
------------- -------------
Total liabilities and stockholders' equity................................................. $ 17,035,342 $ 13,228,889
============= =============
- - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
[38]
41
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans...................................................................... $ 861,305 $ 675,600 $ 561,374
Investment securities:
Taxable................................................................. 123,054 119,322 78,753
Tax-exempt.............................................................. 3,325 3,325 3,066
Time deposits in other banks............................................... 29,528 15,832 5,115
Federal funds sold and securities purchased under resale agreements........ 9,935 7,727 5,626
Loans held for securitization............................................. 356,120 319,009 185,708
-------------- -------------- --------------
Total interest income................................................. 1,383,267 1,140,815 839,642
INTEREST EXPENSE
Deposits................................................................... 527,885 438,157 222,152
Short-term borrowings...................................................... 18,497 12,095 19,736
Long-term debt and bank notes.............................................. 196,408 146,337 65,646
-------------- -------------- --------------
Total interest expense................................................ 742,790 596,589 307,534
-------------- -------------- --------------
NET INTEREST INCOME........................................................ 640,477 544,226 532,108
Provision for possible credit losses....................................... 178,224 138,176 108,477
-------------- -------------- --------------
Net interest income after provision for possible credit losses............. 462,253 406,050 423,631
OTHER OPERATING INCOME
Interchange................................................................ 88,191 88,051 84,965
Merchant discount.......................................................... 8,430 9,158 7,509
Credit card fees........................................................... 102,579 82,293 48,029
Loan servicing fees........................................................ 1,649,337 1,196,781 824,997
Processing fees............................................................ 9,898 23,558 27,195
Gain (loss) on investment securities....................................... - 39 (74)
Other...................................................................... 37,488 24,738 20,959
-------------- -------------- --------------
Total other operating income.......................................... 1,895,923 1,424,618 1,013,580
OTHER OPERATING EXPENSE
Salaries and employee benefits............................................. 732,971 552,538 451,191
Occupancy expense of premises.............................................. 66,536 44,915 33,906
Furniture and equipment expense............................................ 97,785 88,221 62,885
Other...................................................................... 675,259 560,393 448,128
-------------- -------------- --------------
Total other operating expense......................................... 1,572,551 1,246,067 996,110
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES AND SPECIAL MARKETING PROGRAM................... 785,625 584,601 441,101
Special marketing program.................................................. 54,331 - -
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES ................................................ 731,294 584,601 441,101
Applicable income taxes.................................................... 289,592 231,502 174,508
Tax benefit from Customer-based intangible assets.......................... (32,793) - -
-------------- -------------- --------------
NET INCOME................................................................. $ 474,495 $ 353,099 $ 266,593
============== ============== ==============
EARNINGS PER COMMON SHARE.................................................. $ 1.33 $ 1.03 $ .79
Weighted average common shares outstanding and common stock
equivalents (000)........................................................ 345,988 342,429 338,895
- - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
[39]
42
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- - ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING SHARES
- - ------------------------------------------------------------------------------------------------------------------------------------
Preferred Common Preferred Common
(000) (000) Stock Stock
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993.................................. - 334,125 $ - $ 3,341
Net income.................................................. - - - -
Cash dividends:
Common--$.32 per share................................... - - - -
Exercise of stock options and other awards.................. - 1,425 - 14
Acquisition and retirement of common stock.................. - (1,425) - (14)
Foreign currency translation, net of tax
(accumulated amount of $243 at December 31, 1994).......... - - - -
Net unrealized losses on investment securities
available-for-sale, net of tax............................. - - - -
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994.................................. - 334,125 - 3,341
Net income.................................................. - - - -
Cash dividends:
Common--$.37 per share................................... - - - -
Preferred................................................ - - - -
Exercise of stock options and other awards.................. - 3,274 - 33
Acquisition and retirement of common stock.................. - (3,274) - (33)
Issuance of preferred stock, net of issuance costs.......... 6,000 - 60 -
Foreign currency translation, net of tax
(accumulated amount of $391 at December 31, 1995).......... - - - -
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $189 at December 31, 1995)............................. - - - -
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995.................................. 6,000 334,125 60 3,341
Net income.................................................. - - - -
Cash dividends:
Common--$.43 per share................................... - - - -
Preferred................................................ - - - -
Exercise of stock options and other awards.................. - 3,293 - 33
Acquisition and retirement of common stock.................. - (3,293) - (33)
Issuance of preferred stock, net of issuance costs.......... 6,000 - 60 -
Foreign currency translation, net of tax
(accumulated amount of $7,910 at December 31, 1996)........ - - - -
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $723 at December 31, 1996).............................. - - - -
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.................................. 12,000 334,125 $ 120 $ 3,341
=========== =========== =========== ===========
- - ------------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------
Additional
Paid-in Retained Stockholders'
Capital Earnings Equity
-------------------------------------------------
BALANCE, DECEMBER 31, 1993 ......................... $ 382,044 $ 383,746 $ 769,131
Net income ......................................... - 266,593 266,593
Cash dividends:
Common--$.32 per share .......................... - (106,920) (106,920)
Exercise of stock options and other awards ......... 6,616 - 6,630
Acquisition and retirement of common stock ......... (15,428) - (15,442)
Foreign currency translation, net of tax
(accumulated amount of $243 at December 31, 1994) . - 418 418
Net unrealized losses on investment securities
available-for-sale, net of tax .................... - (832) (832)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 ......................... 373,232 543,005 919,578
Net income ......................................... - 353,099 353,099
Cash dividends:
Common--$.37 per share .......................... - (124,769) (124,769)
Preferred ....................................... - (1,469) (1,469)
Exercise of stock options and other awards ......... 22,176 - 22,209
Acquisition and retirement of common stock ......... (49,796) - (49,829)
Issuance of preferred stock, net of issuance costs . 145,010 - 145,070
Foreign currency translation, net of tax
(accumulated amount of $391 at December 31, 1995) . - 148 148
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $189 at December 31, 1995) .................... - 1,021 1,021
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 ......................... 490,622 771,035 1,265,058
Net income ......................................... - 474,495 474,495
Cash dividends:
Common--$.43 per share .......................... - (142,583) (142,583)
Preferred ....................................... - (14,055) (14,055)
Exercise of stock options and other awards ......... 39,013 - 39,046
Acquisition and retirement of common stock ......... (71,880) - (71,913)
Issuance of preferred stock, net of issuance costs . 146,147 - 146,207
Foreign currency translation, net of tax
(accumulated amount of $7,910 at December 31, 1996) - 7,519 7,519
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $723 at December 31, 1996) ..................... - 534 534
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 ......................... $ 603,902 $ 1,096,945 $ 1,704,308
=========== =========== ===========
- - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
[40]
43
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income................................................................. $ 474,495 $ 353,099 $ 266,593
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for possible credit losses.................................... 178,224 138,176 108,477
Depreciation, amortization, and accretion............................... 96,602 76,584 64,967
(Gain) loss on investment securities.................................... - (39) 74
(Benefit) provision for deferred income taxes........................... (32,006) 9,633 48,392
Increase in accrued income receivable................................... (4,524) (28,560) (7,766)
Increase in accounts receivable from securitizations.................... (825,755) (218,850) (119,831)
Increase in accrued interest payable.................................... 13,787 24,797 29,665
Decrease (increase) in other operating activities....................... 63,477 (14,167) 56,166
-------------- -------------- --------------
Net cash (used in) provided by operating activities................... (35,700) 340,673 446,737
INVESTING ACTIVITIES
Net increase in money market instruments................................... (303,003) (306,036) (236,221)
Proceeds from maturities of investment securities available-for-sale....... 4,450,709 2,852,934 199,765
Purchases of investment securities available-for-sale...................... (5,234,815) (3,303,589) (700,217)
Proceeds from sale of investment securities available-for-sale............. - 35,249 99,246
Proceeds from maturities of investment securities held-to-maturity......... 604,869 357,870 629,796
Purchases of investment securities held-to-maturity........................ (19,302) (18,657) (817,429)
Proceeds from securitization of loans...................................... 11,223,917 6,180,743 6,093,287
Portfolio acquisitions..................................................... (1,475,498) (77,324) (32,803)
Amortization of securitized loans.......................................... (1,608,334) (775,000) (1,041,666)
Net loan originations...................................................... (10,540,920) (7,921,653) (6,384,567)
Net purchases of premises and equipment.................................... (303,173) (344,490) (186,423)
-------------- -------------- --------------
Net cash used for investing activities................................ (3,205,550) (3,319,953) (2,377,232)
FINANCING ACTIVITIES
Net increase in money market deposit accounts, noninterest-bearing
demand deposits, interest-bearing transaction accounts, and savings accounts 530,931 746,110 110,154
Net increase in time deposits.............................................. 1,011,841 1,230,315 1,280,452
Net increase (decrease) in short-term borrowings........................... 403,844 179,043 (200,493)
Proceeds from issuance of long-term debt and bank notes.................... 1,444,985 1,092,395 981,485
Maturity of long-term debt and bank notes.................................. (165,192) (123,000) (75,000)
Proceeds from issuance of preferred stock.................................. 146,207 145,070 -
Proceeds from exercise of stock options and other awards................... 22,869 12,780 4,033
Acquisition and retirement of common stock................................. (71,913) (49,829) (15,442)
Dividends paid............................................................. (149,115) (120,312) (103,952)
-------------- -------------- --------------
Net cash provided by financing activities............................. 3,174,457 3,112,572 1,981,237
-------------- -------------- --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... (66,793) 133,292 50,742
Cash and cash equivalents at beginning of year............................. 291,856 158,564 107,822
-------------- -------------- --------------
Cash and cash equivalents at end of year................................... $ 225,063 $ 291,856 $ 158,564
============== ============== ==============
SUPPLEMENTAL DISCLOSURES:
Interest expense paid...................................................... $ 728,091 $ 572,232 $ 273,894
============== ============== ==============
Income taxes paid.......................................................... $ 248,329 $ 194,364 $ 102,584
============== ============== ==============
Noncash exchange of credit card loan receivables........................... $ - $ - $ 10,188
============== ============== ==============
- - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
[41]
44
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements.
BUSINESS
MBNA Corporation ("the Corporation") is a registered bank holding company,
incorporated under the laws of Maryland. It is the parent company of MBNA
America Bank, N.A., ("the Bank") a national bank. Through the Bank, the
Corporation is one of the world's largest lenders through bank credit cards.
The Corporation 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 makes other consumer
loans and offers deposit products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require the
Corporation's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements as well as
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include, after intercompany
elimination, the accounts of all subsidiaries of the Corporation, all of which
are wholly owned. For purposes of comparability, certain prior year amounts
have been reclassified.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
MBNA International Bank Limited ("MBNA International"), the Bank's foreign bank
subsidiary, issues credit cards and other consumer loans in the United Kingdom.
The financial statements of this foreign subsidiary have been translated into
U.S. dollars in accordance with generally accepted accounting principles.
Assets and liabilities have been translated using the exchange rate at year
end. Income and expense amounts have been translated using the average exchange
rate for the period in which the transaction took place. The translation gains
and losses resulting from the change in exchange rates have been reported as a
component of stockholders' equity, net of tax. The effect on the consolidated
statements of income of transaction gains and losses is immaterial for all
years presented.
INVESTMENT SECURITIES
The Corporation accounts for its investment securities portfolio using three
classifications, each of which receives different accounting treatment.
Investment securities available-for-sale are reported at market value with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity. Investment securities held-to-maturity are reported at
cost (adjusted for amortization of premiums and accretion of discounts).
Trading securities are reported at market value, with unrealized gains and
losses included in earnings. The Corporation does not have a trading securities
portfolio.
Realized gains and losses and other-than-temporary impairments related to debt
and equity securities are determined using the specific identification method
and are reported in other operating income as gains or losses on investment
securities.
LOANS HELD FOR SECURITIZATION
Loans held for securitization are the lesser of loans eligible for
securitization or loans that management intends to securitize within one year.
These loans are carried at the lower of aggregate cost or market value.
INTEREST INCOME ON LOANS
Interest income on loans is recognized based upon the principal amount
outstanding. Interest income is generally recognized until the loan is charged
off. The accrued interest portion of the charged-off loan balance is deducted
from current period interest income, while the remaining principal balance is
charged off against the reserve for possible credit losses.
CREDIT CARD FEES AND COSTS
Credit card fees include annual, late, overlimit, returned check, and cash
advance transaction fees. These fees are assessed according to agreements with
Customers. Credit card fees recognized on charged-off accounts are deducted
from credit card fee income.
Annual credit card fees and incremental direct loan origination costs are
deferred and amortized on a straight-line basis over the one-year period to
which the fees pertain. The Corporation does not charge an annual credit card
fee during the first year the account is originated, while incremental direct
loan origination costs are deferred only in the first year. These costs are
included in prepaid expenses and deferred charges. As of December 31, 1996 and
1995, the incremental direct loan origination costs deferred were $34.7 million
and $34.2 million, respectively.
RESERVE FOR POSSIBLE CREDIT LOSSES
The Corporation makes certain estimates and assumptions that affect the
determination of the reserve for possible credit losses. The loan portfolio is
reviewed regularly 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 that deserve current recognition. Significant
changes in these factors could impact the appropriate reserve for possible
credit losses. A provision is charged to operating expense to maintain the
reserve level. Loans are generally charged off when 180 days contractually past
due.
CREDIT CARD FRAUD LOSSES
The Corporation incurs credit card fraud losses from unauthorized use of
Customer credit cards and counterfeiting. These fraudulent transactions, when
identified, are reclassified to other assets from loans and reduced to
estimated net recoverable values through a charge to operating expense. The
remaining net recoverable values are generally charged off after four months
(sooner if the collectibility of the account is no longer assured). The
carrying value of fraudulent credit card transactions approximates the fair
value.
PREPAID EXPENSES AND DEFERRED CHARGES
The principal components of prepaid expenses and deferred charges include
issuance costs related to asset securitizations, long-term
[42]
45
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
debt and bank notes, and commissions paid on brokered certificates of deposit.
These costs are deferred and amortized over the remaining life of the related
asset securitization or the remaining term of the liability.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization, computed principally by the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are included in
operating expense, while the cost of improvements is capitalized.
INTEREST RATE SWAP AGREEMENTS
The Corporation uses interest rate swap agreements to change fixed-rate funding
sources to floating-rate funding sources. The Corporation does not hold or
issue interest rate swap agreements for trading purposes. Interest rate swap
agreements may subject the Corporation to market risk associated with changes
in interest rates, as a result of the change to floating-rate, as well as the
risk of default by a counterparty to the agreement. Under the terms of certain
interest rate swap agreements, each party may be required to pledge certain
assets if the market value of the interest rate swap agreement exceeds an
amount set forth in the agreement or in the event of a change in its credit
rating.
Amounts paid or received related to outstanding contracts that are used in the
asset/liability management process are accrued and recognized into earnings, as
an adjustment to the related interest income or expense, over the life of the
related agreement. Gains and losses associated with the termination of interest
rate swap agreements for identified positions are deferred and amortized over
the remaining lives of the related agreements as an adjustment to the yield.
Unamortized deferred gains and losses on terminated interest rate swap
agreements are included in the underlying assets/liabilities hedged.
FOREIGN EXCHANGE SWAP AGREEMENTS
Foreign exchange swap agreements are agreements to exchange principal amounts
of different currencies, usually at a prevailing exchange rate. The Corporation
enters into foreign exchange swap agreements to reduce its exposure to foreign
currency exchange rate risk primarily related to its foreign bank subsidiary.
When the agreement matures, the underlying principal or notional amount will be
reexchanged at the agreed-upon exchange rate. The Corporation does not hold or
issue foreign exchange swap agreements for trading purposes. These foreign
exchange swap agreements are marked to market with any unrealized gains or
losses recognized in other operating income.
FORWARD EXCHANGE CONTRACTS
Forward exchange contracts are commitments to buy or sell foreign currency at a
future date for a contracted price. The Corporation enters into forward
exchange contracts to reduce its exposure to foreign currency exchange rate
risk primarily related to its foreign bank subsidiary. The Corporation does not
hold or issue forward exchange contracts for trading purposes. These financial
instruments may expose the Corporation to varying degrees of credit and market
risk and are subject to the same credit and risk limitations as those recorded
on the balance sheet. The premium paid or received for these contracts is
amortized over the life of the agreement. For contracts that are designated and
effective as hedges of its net investment in the Bank's foreign subsidiary,
gains and losses are deferred and reported in stockholders' equity, net of tax,
as an offset to translation gains and losses. Contracts, or portions thereof,
that are not effective as hedges are marked to market with any gains or losses
recognized in other operating income.
The Corporation's foreign subsidiary also enters into forward exchange
contracts to reduce its exposure to foreign currency exchange rate risk related
to its deposits. The contracts are marked to market with gains or losses
recognized in other operating income.
INCOME TAXES
The Corporation accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
the differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary differences) and are
measured at the prevailing enacted tax rates that will be in effect when these
differences are settled or realized.
STATEMENTS OF CASH FLOWS
The Corporation has presented the consolidated statements of cash flows using
the indirect method, which involves the reconciliation of net income to net
cash flow from operating activities. In addition, the Corporation nets certain
cash receipts and cash payments relating to deposits placed with and withdrawn
from other financial institutions; time deposits accepted and repayments of
those deposits; and loans made to Customers and principal collections of those
loans. For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and due from banks.
EARNINGS PER COMMON SHARE
Earnings per common share are computed using net income applicable to common
stock and the weighted average number of common shares outstanding during the
period after consideration of the dilutive effect of stock options.
For comparative purposes, earnings per common share and weighted average common
shares outstanding and common stock equivalents have been restated to reflect
the three-for-two split of the Corporation's Common Stock, effected in the form
of a dividend, issued January 1, 1997, to stockholders of record as of December
16, 1996.
INTANGIBLE ASSETS
Intangible assets, including the value of Customer accounts and goodwill, are
amortized over the periods the Corporation receives a benefit, not exceeding
fifteen years. Intangible assets, which are included in other assets, had a net
book value of $213.8 million and $53.0 million at December 31, 1996 and 1995,
respectively.
[43]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE B: INVESTMENT SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENT SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- - ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Available-for-sale:
U.S. Treasury and other U.S. government agencies obligations... $ 605,034 $ - $ (150) $ 604,884
State and political subdivisions of the United States.......... 87,521 128 (48) 87,601
Asset-backed and other securities.............................. 1,026,088 1,821 (664) 1,027,245
------------ ------------ ------------ ------------
Total investment securities available-for-sale............... $ 1,718,643 $ 1,949 $ (862) $ 1,719,730
============ ============ ============ ============
Held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations... $ 506,346 $ 368 $ (6,409) $ 500,305
State and political subdivisions of the United States.......... 454 29 (1) 482
Asset-backed and other securities................................. 91,520 373 (472) 91,421
------------ ------------ ------------ ------------
Total investment securities held-to-maturity................. $ 598,320 $ 770 $ (6,882) $ 592,208
============ ============ ============ ============
DECEMBER 31, 1995
Available-for-sale:
U.S. Treasury and other U.S. government agencies obligations... $ 209,599 $ - $ (93) $ 209,506
State and political subdivisions of the United States........ 84,519 247 (38) 84,728
Asset-backed and other securities.............................. 617,759 301 (230) 617,830
------------ ------------ ------------ ------------
Total investment securities available-for-sale............... $ 911,877 $ 548 $ (361) $ 912,064
============ ============ ============ ============
Held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations... $ 1,000,869 $ 6,768 $ (3,179) $ 1,004,458
State and political subdivisions of the United States.......... 421 90 - 511
Asset-backed and other securities............................ 182,437 1,078 (383) 183,132
------------ ------------ ------------ ------------
Total investment securities held-to-maturity................. $ 1,183,727 $ 7,936 $ (3,562) $ 1,188,101
============ ============ ============ ============
DECEMBER 31, 1994
Available-for-sale:
U.S. Treasury and other U.S. government agencies obligations... $ 208,690 $ - $ (91) $ 208,599
State and political subdivisions of the United States.......... 80,554 6 (1,079) 79,481
Asset-backed and other securities.............................. 192,798 - (121) 192,677
------------ ------------ ------------ ------------
Total investment securities available-for-sale............... $ 482,042 $ 6 $ (1,291) $ 480,757
============ ============ ============ ============
Held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations... $ 1,226,410 $ - $ (47,573) $ 1,178,837
State and political subdivisions of the United States.......... 393 2 (13) 382
Asset-backed and other securities.............................. 293,946 - (6,592) 287,354
------------ ------------ ------------ ------------
Total investment securities held-to-maturity................. $ 1,520,749 $ 2 $ (54,178) $ 1,466,573
============ ============ ============ ============
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
ESTIMATED MATURITIES OF INVESTMENT SECURITIES
- - ---------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 AMORTIZED MARKET
COST VALUE
- - ---------------------------------------------------------------------------------------------------------
Available-for-sale
Due within one year............................................. $ 752,973 $ 764,972
Due after one year through five years........................... 888,198 878,373
Due after five years through ten years.......................... 74,445 73,360
Due after ten years............................................. 3,027 3,025
---------- ----------
Total investment securities available-for-sale................ $1,718,643 $1,719,730
========== ==========
Held-to-maturity
Due within one year............................................. $ 298,483 $ 298,454
Due after one year through five years........................... 239,939 237,262
Due after five years through ten years.......................... 1,000 1,002
Due after ten years............................................. 58,898 55,490
---------- ----------
Total investment securities held-to-maturity.................. $ 598,320 $ 592,208
========== ==========
- - ---------------------------------------------------------------------------------------------------------
The Corporation did not sell any investment securities during 1996. For the
year ended December 31, 1995, the Corporation sold an investment security
resulting in a realized gain of $39,000, having a net after-tax effect of
$26,000. For 1994, the Corporation had investment security transactions
resulting in realized losses of $74,000, having a net after-tax effect of
$45,000.
At December 31, 1996, $3.0 million of U.S. Treasury Notes included in
investment securities held-to-maturity were pledged by the Corporation. There
were no securities pledged at December 31, 1995.
[44]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE C: GEOGRAPHIC DIVERSIFICATION OF LOANS
The Corporation is active in originating credit card and other consumer loans
that are distributed evenly throughout the United States. The table below
details the geographic distribution of the Corporation's loan receivables,
securitized loans, and managed loans. Credit card loans of MBNA International
are included in the "Other" geographic region category.
The Corporation's loans are primarily made on an unsecured basis after
reviewing each potential Customer's credit application and evaluating the
applicant's financial history and ability and willingness to repay. The maximum
credit line to individual credit card Customers is generally $100,000, the
average line is $9,000, and the average balance outstanding per account is
$3,300 at December 31, 1996.
- - ----------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION OF LOAN RECEIVABLES, SECURITIZED LOANS, AND MANAGED LOANS
- - ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------
LOAN RECEIVABLES SECURITIZED LOANS MANAGED LOANS
- - ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Geographic Region:
Northeast.......................... $ 2,270,100 22.4% $ 6,308,313 22.1% $ 8,578,413 22.2%
Southeast.......................... 1,796,666 17.8 5,340,563 18.7 7,137,229 18.5
Central............................ 1,490,589 14.7 4,467,284 15.7 5,957,873 15.4
Midwest............................ 1,829,213 18.1 5,200,397 18.3 7,029,610 18.2
West............................... 2,110,374 20.8 5,895,947 20.7 8,006,321 20.7
Other.............................. 632,110 6.2 1,281,977 4.5 1,914,087 5.0
------------- ------ ------------- ------ ------------ ------
Total............................ $ 10,129,052 100.0% $ 28,494,481 100.0% $ 38,623,533 100.0%
============= ====== ============= ====== ============ ======
DECEMBER 31, 1995
Geographic Region:
Northeast.......................... $ 1,774,137 21.8% $ 4,172,323 22.5% $ 5,946,460 22.3%
Southeast.......................... 1,504,104 18.5 3,680,494 19.8 5,184,598 19.4
Central............................ 1,224,961 15.0 3,020,907 16.3 4,245,868 15.9
Midwest............................ 1,366,597 16.8 3,395,152 18.3 4,761,749 17.8
West............................... 1,690,414 20.8 3,943,021 21.2 5,633,435 21.1
Other.............................. 575,705 7.1 363,889 1.9 939,594 3.5
------------- ------ ------------- ------ ------------ ------
Total............................ $ 8,135,918 100.0% $ 18,575,786 100.0% $ 26,711,704 100.0%
============= ====== ============= ====== ============ ======
- - ----------------------------------------------------------------------------------------------------------------------------
NOTE D: RESERVE FOR POSSIBLE CREDIT LOSSES
- - --------------------------------------------------------------------------------------------------
CHANGES IN THE RESERVE FOR POSSIBLE CREDIT LOSSES
- - --------------------------------------------------------------------------------------------------
(dollars in thousands)
- - --------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994
- - --------------------------------------------------------------------------------------------------
Reserve balance, beginning of year........ $ 104,886 $ 101,519 $ 97,580
Reserves acquired...................... 7,553 - -
Provision for possible credit losses... 178,224 138,176 108,477
Foreign currency translation........... 488 (90) 21
Credit losses.......................... (254,417) (174,893) (132,294)
Recoveries............................. 81,693 40,174 27,735
----------- ----------- -----------
Net credit losses.................... (172,724) (134,719) (104,559)
----------- ----------- -----------
Reserve balance, end of year.............. $ 118,427 $ 104,886 $ 101,519
=========== =========== ===========
- - --------------------------------------------------------------------------------------------------
NOTE E: PREMISES AND EQUIPMENT
- - -------------------------------------------------------------------------------
SUMMARY OF PREMISES AND EQUIPMENT
- - -------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - -------------------------------------------------------------------------------
Land ......................................... $ 111,907 $ 73,123
Buildings and improvements ................... 731,509 590,723
Furniture and equipment ...................... 463,437 338,869
----------- -----------
Total .................................... 1,306,853 1,002,715
Less accumulated depreciation and amortization (259,670) (186,438)
----------- -----------
Balance, end of year ..................... $ 1,047,183 $ 816,277
=========== ===========
- - -------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1996, 1995, and 1994, was
$76.7 million, $67.1 million, and $46.3 million, respectively.
[45]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
The Corporation leases certain office facilities and equipment under various
operating lease agreements that provide for payment of property taxes,
insurance, and maintenance costs. These leases generally include renewal
options, with certain leases providing purchase options. Rental expense for
operating leases was $26.7 million, $25.5 million, and $20.5 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
- - ----------------------------------------------------------------------
FUTURE MINIMUM RENTAL PAYMENTS UNDER NONCANCELABLE OPERATING LEASES
- - ----------------------------------------------------------------------
(dollars in thousands)
1997...............................................$ 26,174
1998............................................... 15,909
1999............................................... 7,628
2000............................................... 3,962
2001............................................... 3,589
Thereafter......................................... 8,364
-----------
Total minimum lease payments $ 65,626
===========
- - ----------------------------------------------------------------------
NOTE F: SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements are
overnight borrowings providing for the short-term funding requirements of the
Bank that generally mature within one business day of the transaction date.
Other short-term borrowings consist primarily of federal funds purchased that
mature in more than one business day, short-term bank notes issued from the
short-term bank note program established by the Bank, and other transactions
with maturities greater than one business day but less than one year.
- - ----------------------------------------------------------------------------------------------------
SUMMARY OF SHORT-TERM BORROWINGS
- - ----------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end....................................... $ - $ 115,000 $ -
Weighted average interest rate at year end................ -% 5.63% -%
Average amount outstanding
during the year.......................................... $ 67,712 $ 49,141 $ 167,012
Maximum amount outstanding at any
month end................................................ 325,000 243,477 599,000
Weighted average interest rate during
the year................................................. 5.39% 6.01% 3.82%
OTHER SHORT-TERM BORROWINGS
Balance at year end....................................... $ 693,387 $ 174,543 $ 110,500
Weighted average interest rate at year end................ 5.66% 5.61% 5.53%
Average amount outstanding
during the year.......................................... $ 269,538 $ 148,804 $ 271,589
Maximum amount outstanding at any
month end................................................ 693,387 319,417 858,467
Weighted average interest rate during
the year................................................. 5.51% 6.14% 4.92%
- - ----------------------------------------------------------------------------------------------------
NOTE G: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more.
- - ------------------------------------------------------------------------------------------------
SUMMARY OF LONG-TERM DEBT AND BANK NOTES
- - ------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - ------------------------------------------------------------------------------------------------
PARENT COMPANY
6 7/8% Senior Notes, maturing in 1999 and 2005................ $ 248,661 $ 248,390
Fixed-Rate Senior Medium-Term Notes, with a
weighted average interest rate of 6.66% for
both years, maturing in varying
amounts from 1997 through 2003............................... 405,838 405,428
Floating-Rate Senior Medium-Term Notes,
maturing in varying amounts from 1998
through 2001................................................. 356,948 182,496
----------- -----------
Total Parent Company.......................................... 1,011,447 836,314
SUBSIDIARIES
Fixed-Rate Medium-Term Bank Notes, with a
weighted average interest rate of 6.87% and
6.79%, respectively, maturing in varying
amounts from 1997 through 2005............................... 1,105,232 1,151,155
Floating-Rate Medium-Term Bank Notes,
maturing in varying amounts from 1997
through 2003................................................. 1,277,824 421,056
Fixed-Rate Bilateral Credit Facility, with an
interest rate of 7.29%, maturing in 2001..................... 17,127 -
Floating-Rate Bilateral Credit Facilities,
maturing in 1997 and 2001.................................... 34,254 -
7.25% Subordinated Notes, maturing in 2002................... 198,269 198,035
Subordinated Guaranteed Floating-Rate Notes,
maturing in 2005............................................. 56,205 51,040
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, with an interest rate of
8.278%, maturing in 2026..................................... 250,000 -
----------- -----------
Balance, end of year....................................... $ 3,950,358 $ 2,657,600
=========== ===========
- - ------------------------------------------------------------------------------------------------
6 7/8% SENIOR NOTES
These notes are direct, unsecured obligations of the Corporation and are not
subordinated to any other indebtedness of the Corporation. Interest on the
6 7/8% Senior Notes is payable semiannually. These notes may not be redeemed
prior to their stated maturity.
SENIOR MEDIUM-TERM NOTES
These notes are direct, unsecured obligations of the Corporation and are not
subordinated to any other indebtness of the Corporation. The Corporation has
$407.5 million of Fixed-Rate Senior Medium-Term Notes outstanding, with rates
ranging from 6.14% to 7.49%. Interest on the Fixed-Rate Senior Medium-Term
Notes is payable semiannually. The Corporation also has $358.0 million of
Floating-Rate Senior Medium-Term Notes outstanding. These Floating-Rate Senior
Medium-Term Notes are priced between 15 basis points and 35 basis points over
the three-month London Interbank Offered Rate (LIBOR). Interest on the
Floating-Rate Senior Medium-Term Notes is payable quarterly. At December 31,
1996, the three-month LIBOR was 5.56%.
[46]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
MEDIUM-TERM BANK NOTES
The Medium-Term Bank Notes are direct, unconditional, unsecured, and
unsubordinated obligations of the Bank. The Bank has $1.1 billion outstanding
of Fixed-Rate Medium-Term Bank Notes with rates ranging from 6.00% to 7.76%.
Interest is payable semiannually. The Bank also has $1.3 billion outstanding of
Floating-Rate Medium-Term Bank Notes, with rates priced between 5 basis points
to 30 basis points over the three-month LIBOR. Interest is payable quarterly.
BILATERAL CREDIT FACILITIES
These facilities are direct, unconditional, unsecured, and unsubordinated
obligations of MBNA International. At December 31, 1996, MBNA International has
pound sterling 10.0 million outstanding with a fixed rate of 7.29% and interest
payable monthly. MBNA International also has pound sterling 20.0 million
outstanding in floating-rate facilities at December 31, 1996. These draws were
priced from 17.5 to 22.5 basis points above the six-month Sterling LIBOR and
are payable semiannually. At December 31, 1996, the six-month Sterling LIBOR
was 6.75%.
7.25% SUBORDINATED NOTES
The 7.25% Subordinated Notes are subordinated to the claims of the depositors
and other creditors of the Bank and are not subject to redemption prior to
maturity. Interest is payable semiannually. The 7.25% Subordinated Notes were
issued by the Bank in 1992 and qualify as Tier 2 capital, which is included in
total capital, under the risk-based capital guidelines for both banks and bank
holding companies.
SUBORDINATED GUARANTEED FLOATING-RATE NOTES
MBNA International has pound sterling 34.0 million of Subordinated Guaranteed
Floating-Rate Notes. Interest on these notes is priced between 100 basis points
and 145 basis points over the three-month Sterling LIBOR for the first five
years, with a 50 basis point increase for the last five years. These notes were
issued by MBNA International in 1995. Interest on these notes is payable
quarterly or semiannually. At December 31, 1996, the three-month Sterling LIBOR
was 6.55%.
The obligations of MBNA International are unconditionally and irrevocably
guaranteed on a subordinated basis by the Bank. The obligations of the Bank,
under its guarantee, also constitute unsecured obligations, subordinated to the
claims of all senior creditors of the Bank.
Deposit liabilities have priority over the claims of other unsecured creditors
of the Bank, including the holders of obligations, such as bank notes, in the
event of liquidation.
Original issue discount and deferred issuance costs are amortized over the
terms of the related debt issuances.
The Corporation has used interest rate 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 rate sensitivity of the Corporation's assets.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
MBNA Capital A, the "Series A Issuer," a statutory business trust created under
the laws of the State of Delaware, issued $250.0 million of 8.278% Capital
Securities, Series A, and $7.7 million of 8.278% Common Securities, Series A,
in December 1996. MBNA Corporation is the owner of all the beneficial ownership
interests represented by the common securities of the Series A Issuer. The
Series A Issuer exists for the sole purpose of issuing the Series A Capital
Securities and the Series A Common Securities and investing the proceeds in
8.278% Junior Subordinated Deferrable Interest Debentures, Series A, issued by
the Corporation. The junior subordinated deferrable interest debentures are the
sole assets of the Series A Issuer, and the payments under the junior
subordinated deferrable interest debentures are the sole revenues of the Series
A Issuer. Interest on Series ACapital Securities is payable semiannually;
however, the Corporation has the right to defer payment of interest on the
junior subordinated deferrable interest debentures at any time, or from time to
time, for a period not exceeding 10 consecutive semiannual periods. If the
payment of interest is deferred on the junior subordinated deferrable interest
debentures, the distribution on the Series A securities will be deferred and
the Corporation also 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 less priority over claims as the junior subordinated deferrable
interest debentures.
The junior subordinated deferrable interest debentures mature on December 1,
2026. The 8.278%Capital Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the junior subordinated deferrable interest
debentures at their stated maturity or their earlier redemption, but are
redeemable prior to their stated maturity at the option of the Corporation, on
or after December 1, 2006, in whole at any time, or in part from time to time,
or prior to December 1, 2006, in whole only within 90 days following the
occurrence of certain tax or capital treatment events. The Series A Capital
Securities have a preference under certain circumstances with respect to cash
distributions and amounts payable on liquidation or redemption over the Series
A Common Securities.
The obligations of the Corporation, under the relevant junior subordinated
deferrable interest debentures, indenture, trust agreement, and guarantee in
the aggregate, constitute a full and unconditional guarantee by the Corporation
of all trust obligations under the capital securities issued by the trust. The
junior subordinated deferrable interest debentures are unsecured and rank
junior and are subordinate in right of payment to all senior debt obligations
of the Corporation.
For financial reporting purposes, the Series AIssuer is treated as a wholly
owned subsidiary of the Corporation. The Series A Capital Securities are
presented as "guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures."
[47]
50
- - -------------------------------------------------------------
MINIMUM ANNUAL MATURITIES OF LONG-TERM DEBT AND BANK NOTES
- - -------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------
PARENT
PARENT COMPANY AND
COMPANY SUBSIDIARIES
- - -------------------------------------------------------------
1997......................... $ 50,000 $ 307,827
1998......................... 80,000 420,000
1999......................... 305,500 829,500
2000......................... 225,000 703,000
2001......................... 120,000 564,254
- - -------------------------------------------------------------
NOTE H: ASSET SECURITIZATION
The Corporation periodically securitizes and sells certain pools of loan
receivables in both public and private markets. The senior class of these
asset-backed securities are generally credit-enhanced by a third party to
provide a AAA credit rating at the time of issuance.
These securitizations are recorded as sales. Gains on the sale of loans are
limited to amounts related to loans existing at the date of sale and do not
include amounts related to future loans expected to be sold during the
revolving period. Due to the relatively short average life of loans, no gain or
loss is recorded at the time of sale. Rather, loan servicing fees (interest
income, interchange, and other fees in excess of interest paid to
Certificateholders; credit losses; and other trust expenses) are recognized
monthly over the life of the transaction when earned. Transaction expenses are
deferred and amortized over the reinvestment period of the transaction as a
reduction of loan servicing fees.
Proceeds from these transactions were approximately $11.2 billion, $6.2
billion, and $6.1 billion in 1996, 1995, and 1994, respectively. Of these
securitized loans, approximately $28.0 billion and $18.3 billion of investor
principal (face value) remained outstanding at December 31, 1996 and 1995,
respectively.
Included in accounts receivable from securitizations in the consolidated
statements of financial condition at December 31, 1996 and 1995, were $225.2
million and $201.8 million, respectively, of receivables subject to a lien by
the providers of the credit enhancement facility for individual
securitizations. The providers of the credit enhancement have no other recourse
to the Corporation. The Corporation does not receive collateral from any party
to the securitization, and the Corporation does not have any risk of
counterparty nonperformance.
The Corporation is required to adopt Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (Statement No. 125), effective for all
transactions occurring after December 31, 1996. Statement No. 125 requires
recognition of a gain at the time of initial sale and each subsequent sale of
loan receivables in a securitization. Currently, the Corporation recognizes
this income over the life of the securitization. These gains, which are
expected to be material in 1997, will be invested in additional business
development efforts and, as a result, will have no impact on the Corporation's
1997 net income.
NOTE I: COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Corporation had outstanding lines of credit of $180.7
billion committed to its Customers. Of that total commitment, $142.1 billion is
unused. While this amount represents the total available lines of credit to
Customers, the Corporation has not experienced and does not anticipate that all
of its Customers will exercise their entire available line at any given point
in time. The Corporation has the right to reduce or cancel these available
lines of credit at any time.
The Corporation has two one-year revolving credit facilities totaling $50.0
million. These credit facilities were renewed in 1996 with $25.0 million
expiring in April 1997 and $25.0 million expiring in October 1997. The
Corporation may take advances under these facilities subject to certain
conditions, including requirements for tangible net worth. These facilities may
be used for general corporate purposes and were not drawn upon as of December
31, 1996.
In January 1997, the Bank extended its $2.0 billion committed syndicated
revolving credit facility through February 2001. Advances are subject to
covenants and conditions customary in a transaction of this kind. These
conditions include requirements for tangible net worth of at least $760.0
million, increased by 40% of the Bank's net income earned after September 30,
1996, and managed loan receivables 90 days or more past due plus nonaccrual
receivables not to exceed 6% of managed credit card receivables. Should
managed credit card losses equal or exceed 5% for a period of four consecutive
quarters, a ratio of qualifying loan receivables to outstanding borrowings
under the facility of at least 115% is required. The facility may be used for
general corporate purposes and was not drawn upon as of December 31, 1996.
MBNA International has six bilateral credit facilities, ranging from one to
five years, totaling pound sterling 60.0 million (approximately $102.8 million
at December 31, 1996). MBNA International may take advances under the
facilities subject to certain conditions, including requirements for tangible
net worth. The facilities may be used for general corporate purposes. At
December 31, 1996, MBNA International had pound sterling 30.0 million
(approximately $51.4 million) outstanding.
In addition, MBNA International also has a four-year, pound sterling 300.0
million (approximately $513.8 million at December 31, 1996) multicurrency
committed syndicated revolving credit facility which expires in October 2000.
This facility was increased by MBNA International during 1996 from pound
sterling 200.0 million to pound sterling 300.0 million. MBNA International may
take advances under the facility subject to certain conditions, including
requirements for tangible net worth, outstanding loan receivables, and account
delinquencies. The facility may be used for general corporate purposes and was
not drawn upon as of December 31, 1996.
[48]
51
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE J: EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation has a noncontributory defined benefit pension plan covering
substantially all people employed by the Corporation who meet certain age and
service requirements. The benefits are based on years of service and the
person's compensation during the last ten years of employment. The
Corporation's funding policy is to make contributions sufficient to achieve a
target-funded ratio on an accumulated benefit obligation basis between 130% and
140%. The funded ratio, as of the plan's measurement date of September 30, may
never be less than 100%, and only tax-deductible contributions may be made.
Contributions are intended to provide not only for benefits earned to date, but
also for those expected to be earned in the future.
- - ---------------------------------------------------------------------------------------
RECONCILIATION OF THE PENSION PLAN'S ACTUARIALLY DETERMINED FUNDED STATUS
- - ---------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995
- - ---------------------------------------------------------------------------------------
ACCUMULATED BENEFITS
Actuarial present value of accumulated
benefit obligation:
Vested........................................... $ 28,088 $ 25,054
Nonvested........................................ 6,998 6,468
----------- -----------
Total.......................................... $ 35,086 $ 31,522
=========== ===========
PENSION ASSET
Actuarial present value of projected benefit
obligation for service rendered to date............ $ (88,108) $ (80,916)
Plan assets at fair value--primarily listed
stocks and fixed-income securities................. 71,941 49,024
----------- -----------
Plan assets less than projected benefit obligation (16,167) (31,892)
Unrecognized prior service cost..................... (1,499) (1,611)
Unrecognized net loss from past experience
different from that assumed and effects of
change in assumptions............................... 18,801 36,403
Unrecognized net assets arising at transition....... (417) (487)
----------- -----------
Pension asset.................................... $ 718 $ 2,413
=========== ===========
- - --------------------------------------------------------------------------------------
The Corporation raised the discount rate used to value its projected benefit
obligation for the pension plan in 1996 to reflect the current rate
environment. This change in assumptions will not have a material impact on the
Corporation's consolidated financial statements for 1997.
In 1995, the Corporation lowered the discount rate used to value its projected
benefit obligation for the pension plan to reflect the current rate
environment. This change in assumptions did not have a material impact on the
Corporation's consolidated financial statements for 1996.
In determining the projected benefit obligation for the pension plan, the
assumed discount rate used was 7.75% in 1996 and 7.00% in 1995, while the
assumed average rate of compensation increase was 6.50% for both 1996 and 1995.
The expected long-term rate of
- - ---------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC PENSION COST
- - ---------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------
Service cost--benefits earned
during the period..................................... $ 16,468 $ 9,183 $ 8,224
Interest cost on projected benefit obligation.......... 6,464 4,110 3,114
Actual return on plan assets........................... (5,798) (6,272) (1,668)
Net amortization and deferral.......................... 2,656 4,001 766
---------- ---------- ----------
Net periodic pension cost.......................... $ 19,790 $ 11,022 $ 10,436
========== ========== ==========
- - ---------------------------------------------------------------------------------------------------------
return on plan assets used in determining net periodic pension cost was 9.00%
in 1996, 1995, and 1994.
401(K) PLUS SAVINGS PLAN
The MBNA Corporation 401(k) Plus Savings Plan ("the 401(k) Plan") is a defined
contribution plan that is intended to qualify under section 401(k) of the
Internal Revenue Code. The 401(k) Plan covers substantially all people who have
been employed by the Corporation for one or more years and have completed at
least one thousand hours of service in any one year. For these people, the
Corporation automatically contributes 1% of base salary. Additionally, these
people may elect to make both pretax and after-tax contributions, with
contributions up to 6% of base salary matched 50% by the Corporation. Expense
charged to operations for the 401(k) Plan was $9.9 million, $8.3 million, and
$6.2 million in 1996, 1995, and 1994, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP")
The Corporation also maintains an unfunded plan, established in 1991, that
provides certain officers with supplemental retirement benefits in excess of
limits imposed on qualified plans by federal tax law.
- - ----------------------------------------------------------------------------------------------
RECONCILIATION OF THE SERP PLAN'S ACTUARIALLY DETERMINED FUNDED STATUS
- - ----------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995
- - ----------------------------------------------------------------------------------------------
ACCUMULATED BENEFITS
Actuarial present value of accumulated
benefit obligation:
Vested................................................ $ 15,101 $ 13,304
Nonvested............................................. 10,068 8,869
----------- -----------
Total............................................... $ 25,169 $ 22,173
=========== ===========
SERP LIABILITY
Actuarial present value of projected benefit
obligation for service rendered to date................ $ (25,745) $ (25,502)
Plan assets at fair value............................... - -
----------- -----------
Plan assets less than projected benefit obligation...... (25,745) (25,502)
Unrecognized prior service cost......................... (1,922) (1,573)
Unrecognized net loss from past experience
different from that assumed and effects of
change in assumptions................................... 4,979 7,885
Unrecognized net obligation arising at transition....... 4,599 5,014
Adjustment required to recognize
minimum liability...................................... (7,080) (7,997)
----------- -----------
SERP liability....................................... $ (25,169) $ (22,173)
=========== ===========
Significant actuarial assumptions used in
determining the projected benefit obligation
are as follows:
Discount rate........................................... 7.75% 7.00%
Average rate of compensation increase................... 6.50 6.50
- - -------------------------------------------------------------------------------------------------
During 1996, the Corporation raised the discount rate used to value its
projected benefit obligation for the SERP plan to reflect the current rate
environment. This assumption change will not have a material impact on the
Corporation's consolidated financial statements for 1997.
During 1995, the Corporation lowered the discount rate used to value its
projected benefit obligation for the SERP plan to reflect the current rate
environment. This assumption change did not have a material impact on the
Corporation's consolidated financial statements for 1996.
[49]
52
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
COMPONENTS OF NET SERP COST
- - -------------------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------------
Service cost--benefits earned
during the year....................................... $ 2,253 $ 2,209 $ 2,151
Interest cost on projected benefit obligation.......... 1,847 1,438 1,289
Net amortization and deferral.......................... 477 339 551
--------- --------- ---------
Net SERP cost....................................... $ 4,577 $ 3,986 $ 3,991
========= ========= =========
- - --------------------------------------------------------------------------------------------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for people actively employed who may continue to be eligible
for these benefits upon reaching retirement. People aged 45 and older with at
least ten years of service as of December 31, 1993, are eligible for these
benefits. The Corporation records the estimated cost of benefits provided to
its former or inactive employees after employment but before retirement on an
accrual basis. Expenses charged to other operating expense were not material to
the Corporation's consolidated financial statements.
NOTE K: STOCK OPTION PLAN
The Corporation's 1991 Long-Term Incentive Plan ("the Plan") authorizes the
issuance of 45.0 million shares of common stock pursuant to incentive and
nonqualified stock options; restricted or unrestricted share awards to selected
officers and key employees of the Corporation; and nonqualifying stock options
to nonemployee directors. This plan was amended during 1995 to increase the
shares of common stock authorized for issuance to 45.0 million shares from 30.4
million shares. As of December 31, 1996 and 1995, the amount of shares of
common stock available for future grants under the Plan was 85,000 and 3.9
million, respectively.
Substantially all stock options are granted with an exercise price that is not
less than the fair market value of the Corporation's Common Stock on the date
the option is granted, and none may be exercised more than ten years from the
date of grant. Stock options granted to selected officers and key employees of
the Corporation become exercisable for one-fifth of the common shares subject
to the options each year and continue to become exercisable for up to one-fifth
per year until they are completely exercisable after five years. Those granted
to nonemployee directors are exercisable immediately following the effective
date of the grant.
During 1996, performance-based common stock options for 1.7 million shares were
granted under the Plan. In 1995, performance-based common stock options for 1.2
million shares were granted. These options become exercisable when the
Corporation achieves certain net income and stock price targets. If these
conditions are not achieved, these options then become exercisable for one day
on the day before their termination date.
Restricted shares were issued under the Plan to the Corporation's executive
officers, contingent upon their continued employment. A total of 372,000
common shares, with an approximate aggregate market value of $9.5 million at
the time of grant, were issued in 1996. A total of 727,000 common shares, with
an approximate aggregate market value of $12.0 million at the time of grant,
were issued in 1995. The market value of these restricted shares at the date of
grant is amortized into expense over a period less than the restriction period.
- - -------------------------------------------------------------------------------------------------------
SUMMARY OF STOCK OPTION PLAN ACTIVITY
- - -------------------------------------------------------------------------------------------------------
(shares in thousands)
- - -------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- - -------------------------------------------------------------------------------------------------------
1996
Options outstanding at beginning of year........... 25,364 $ 10.38
Granted......................................... 3,456 18.52
Exercised....................................... (2,921) 7.83
Canceled........................................ (13) 9.24
------- -------
Options outstanding at end of year................. 25,886 11.75
======= =======
Options exercisable at end of year................. 9,499
=======
Weighted average fair value of options
granted during the year........................... $ 5.34
=======
1995
Options outstanding at beginning of year........... 17,645 $ 7.94
Granted......................................... 10,276 13.22
Exercised........................................ (2,547) 5.02
Canceled........................................ (10) 7.78
------- -------
Options outstanding at end of year................. 25,364 10.38
======= =======
Options exercisable at end of year................. 7,472
=======
Weighted average fair value of options
granted during the year........................... $ 3.59
=======
- - ------------------------------------------------------------------------------------------------------
Excluded from the Summary of Stock Option Plan Activity are 24,000 options that
were granted subject to shareholder approval of a new stock option plan.
To the extent stock options are exercised and restricted shares are awarded
from time to time under the Plan, the Board of Directors has approved the
purchase, on the open market or in privately negotiated transactions, of the
number of common shares issued.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement No. 123), was issued. This
statement, effective for fiscal years beginning after December 15, 1995,
defines a fair-value-based method of accounting for an employee stock option or
similar equity instrument. However, it allows an entity to continue to measure
compensation cost for those instruments using the intrinsic-value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). Statement No.
123 requires certain additional disclosures about stock-based employee
compensation arrangements regardless of the method used to account for them. As
permitted by Statement No. 123, in 1996 the Corporation elected to retain its
present accounting for stock option grants in accordance with APB Opinion No.
25. The adoption of Statement No. 123 had no impact on the Corporation's
consolidated financial statements.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
2.71% and 3.10%; expected volatility of 28.74% and 29.42%; risk-free interest
rates of 6.46% and 6.41%; and expected lives of 5.4 years and 5.1 years.
The Black-Scholes model is only one technique allowed to determine the fair
value of options in accordance with Statement No. 123. The model uses
different assumptions that can significantly affect the fair value of the
options. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets.
[50]
53
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
SUMMARY OF STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1996
- - ---------------------------------------------------------------------------------------------------------------------
(shares in thousands)
- - ---------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - ---------------------------------------------------------------------------------------------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices of Shares Contractual Life Exercise Price of Shares Exercise Price
- - ---------------------------------------------------------------------------------------------------------------------
$3.00 to $ 6.99 1,806 4.8 years $ 4.58 1,806 $4.58
7.00 to 9.99 8,332 6.6 8.81 4,909 8.65
10.00 to 13.99 8,083 7.6 11.04 1,069 11.29
14.00 to 16.99 4,023 8.8 16.36 1,097 16.43
17.00 to 19.99 3,574 9.4 18.38 618 18.32
25.00 to 26.99 68 9.8 26.42 - -
-------- ------
$3.00 to $26.99 25,886 9,499
======== ======
- - -----------------------------------------------------------------------------------------------------------------------------
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Had compensation cost for the Plan been determined
consistent with the fair-value-based method of accounting under Statement No.
123, the Corporation's net income and earnings per share on a pro forma basis
would have been as indicated in the table below. The compensation expense
recognized in pro forma net income for 1996 and 1995 may not be representative
of the effects on pro forma net income for future years.
- - ---------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
- - ---------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- - ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995
- - ---------------------------------------------------------------------------------------------------
Net income:
As reported............................................. $ 474,495 $ 353,099
Pro forma............................................... 466,020 349,215
Earnings per common share:
As reported............................................. 1.33 1.03
Pro forma............................................... 1.31 1.02
- - --------------------------------------------------------------------------------------------------------
NOTE L: STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Corporation is authorized to issue 20.0 million shares of series preferred
stock with a par value of $.01 per share. On September 23, 1996, the
Corporation issued 6.0 million shares of Adjustable Rate Cumulative Preferred
Stock, Series B, with a $25 stated value per share. Dividends on the Series B
Preferred Stock are cumulative from the date of original issue and are payable
quarterly in arrears on January 15, April 15, July 15, and October 15 of each
year, commencing on October 15, 1996. The dividend rate for the initial
dividend period from September 23, 1996, to October 15, 1996, was 7.0% per
year. Thereafter, the dividend rate for any dividend period will be equal to
99.0% of the highest of the Treasury Bill Rate, the Ten-Year Constant Maturity
Rate, and the Thirty-Year Constant Maturity Rate, as determined in advance of
such dividend period, but not less than 5.5% per annum or more than 11.5% per
annum. The amount of dividends payable with respect to the Series B Preferred
Stock will be adjusted in the event of certain amendments to the Internal
Revenue Code of 1986 ("the Code") with respect to the dividends-received
deduction. The shares of the Series B Preferred Stock are redeemable, in whole
or in part, solely at the option of the Corporation on or after October 15,
2001, at a price of $25 per share, plus accrued and unpaid dividends. The
Series B Preferred Stock may also be redeemed in whole, at the option of the
Corporation, in the event of certain amendments to the Code with respect to the
dividends-received deduction.
On November 14, 1995, the Corporation issued 6.0 million shares of 7 1/2%
Cumulative Preferred Stock, Series A, with a $25 stated value per share.
Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly in arrears on January 15, April 15,
July 15, and October 15 of each year, commencing January 15, 1996, at a rate of
7.50% per annum. The shares of the Series A Preferred Stock are redeemable, in
whole or in part, solely at the option of the Corporation on or after January
15, 2001, at a price of $25 per share, plus accrued and unpaid dividends.
Shares of the series preferred stock are not convertible into any other
securities of the Corporation. The series preferred stock will not be entitled
to the benefits of any sinking fund. All preferred shares rank senior to common
shares both as to dividends and liquidation preference, but have no general
voting rights. In the event that the equivalent of six full quarterly dividend
periods are in arrears, the holders of the outstanding shares of the preferred
stock (voting as a single class) will be entitled to vote for the election of
two additional directors to serve until all dividends in arrears have been paid
in full.
The Corporation may, from time to time, acquire series preferred stock in the
open market by tender offer, exchange offer, or otherwise. The Corporation's
decision to make such acquisitions is dependent on many factors, including
market conditions in effect at the time of any contemplated acquisition.
The Board of Directors declared the following dividends for the Corporation's
Series A and Series B Preferred Stock.
[51]
54
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDENDS DECLARED
- - -----------------------------------------------------------------------------------------------------------------------------
DECLARATION DATE SERIES A SERIES B
- - -----------------------------------------------------------------------------------------------------------------------------
DIVIDEND DIVIDEND PER DIVIDEND DIVIDEND PER
RATE PREFERRED SHARE RATE PREFERRED SHARE
--------------------------------------------------------------------------
October 15, 1996............................... 7.50% $.46875 6.83% $ .42690
September 24, 1996............................. - - 7.00 .10690
July 11, 1996.................................. 7.50 .46875 - -
April 18, 1996................................. 7.50 .46875 - -
January 17, 1996............................... 7.50 .46875 - -
December 15, 1995.............................. 7.50 .31770 - -
- - -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
On October 15, 1996, the Board of Directors approved a three-for-two split of
the Corporation's Common Stock, effected in the form of a dividend. In
connection with this transaction, one additional share of common stock was
issued on January 1, 1997, for every two common shares held by stockholders of
record as of the close of business on December 16, 1996.
On April 22, 1996, the stockholders of the Corporation approved an amendment to
the Corporation's charter to increase the number of authorized shares of common
stock from 390.0 million shares to 700.0 million shares. This amendment became
effective May 3, 1996.
On January 17, 1996, the Board of Directors approved a three-for-two split of
the Corporation's Common Stock, effected in the form of a dividend. In
connection with this transaction, one additional share of common stock was
issued on February 16, 1996, for every two common shares held by stockholders
of record as of the close of business on February 2, 1996.
On January 18, 1994, the Board of Directors approved a three-for-two stock
split, effected in the form of a dividend. In connection with this transaction,
one additional share of common stock was issued on February 14, 1994, for every
two common shares held by stockholders of record as of the close of business on
February 2, 1994.
Accordingly, all common share and per common share data have been restated to
reflect all of the Corporation's stock splits.
NOTE M: CASH AND DIVIDEND RESTRICTIONS
The Bank is required by the Federal Reserve Bank to maintain cash reserves
against certain categories of average deposit liabilities. During 1996 and
1995, the average amounts of these required reserves were $0 and $110,000,
respectively, after deducting currency and coin holdings.
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 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 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. 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
December 31, 1996, the amount of retained earnings available for declaration of
dividends from the Bank to the Corporation was $588.9 million. Payment of
dividends by the Bank to the Corporation may, however, 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 Bank's revolving credit facility. This
facility was not drawn upon as of December 31, 1996. If this facility were
drawn upon as of December 31, 1996, the amount of retained earnings available
for declaration of dividends would have been further limited to $409.4 million.
[52]
55
MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE N: CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation and the Bank's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank 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 and the Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Corporation
and the Bank to maintain minimum amounts and ratios (set forth in the Capital
Adequacy table below) of Tier 1and Total Capital to risk weighted assets and of
Tier 1 Capital to average assets (Leverage ratio). Management believes, as of
December 31, 1996, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency ("the OCC") categorized the Bank as
"well-capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well-capitalized," the Bank must maintain minimum Tier 1
Capital, Total Capital, and Leverage ratios as set forth in the Capital
Adequacy table. There are no conditions or events since that notification that
management believes have changed the Bank's categorization by the OCC.
- - ---------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
- - ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- - ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
DECEMBER 31, 1996
Tier 1 Capital (to Risk Weighted Assets):
MBNA Corporation......................... $1,814,730 10.89% $ 666,342 4.00% N/A
MBNA America Bank, N.A................... 1,366,092 10.01 546,095 4.00 $ 819,142 6.00%
Total Capital (to Risk Weighted Assets):
MBNA Corporation......................... 2,201,934 13.22 1,332,684 8.00 N/A
MBNA America Bank, N.A................... 1,681,088 12.31 1,092,190 8.00 1,365,237 10.00
Tier 1 Capital (to Average Assets):
MBNA Corporation......................... 1,814,730 11.21 485,720 3.00 N/A
MBNA America Bank, N.A................... 1,366,092 9.24 443,390 3.00 738,983 5.00
DECEMBER 31, 1995
Tier 1 Capital (to Risk Weighted Assets):
MBNA Corporation......................... 1,257,204 11.06 454,759 4.00 N/A
MBNA America Bank, N.A................... 875,732 8.49 412,676 4.00 619,014 6.00
Total Capital (to Risk Weighted Assets):
MBNA Corporation......................... 1,560,125 13.72 909,518 8.00 N/A
MBNA America Bank, N.A................... 1,177,642 11.41 825,352 8.00 1,031,690 10.00
Tier 1 Capital (to Average Assets):
MBNA Corporation......................... 1,257,204 10.17 370,716 3.00 N/A
MBNA America Bank, N.A................... 875,732 7.73 340,039 3.00 566,731 5.00
- - --------------------------------------------------------------------------------------------------------------------------------
NOTE O: OTHER OPERATING EXPENSE
OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
- - -------------------------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------------------
Purchased services............... $ 177,701 $ 148,746 $ 124,681
Advertising...................... 103,407 89,020 66,722
Collection....................... 23,914 20,117 20,450
Stationery and supplies.......... 26,155 20,342 21,219
Service bureau................... 25,112 19,509 14,120
Postage and delivery............. 114,591 95,370 63,769
Telephone usage.................. 49,016 38,438 29,342
Credit card fraud losses......... 47,307 40,927 43,339
Amortization of intangible assets 14,577 9,175 11,544
Computer software................ 23,880 18,321 12,924
Other............................ 69,599 60,428 40,018
--------- --------- ---------
Total other operating expense $ 675,259 $ 560,393 $ 448,128
========= ========= =========
- - -------------------------------------------------------------------------------------------------
NOTE P: SPECIAL MARKETING PROGRAM
During the year ended December 31, 1996, the Corporation charged $32.8 million
net of tax ($54.3 million pretax) to earnings related to the launch of the MBNA
Platinum Plus Visa and MasterCard program. This item was recognized by the
Corporation during the three months ended March 31, 1996.
[53]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE Q: INCOME TAXES
- - -----------------------------------------------------------------------------------
RECONCILIATION OF STATUTORY INCOME TAXES
- - -----------------------------------------------------------------------------------
(dollars in thousands)
- - -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -----------------------------------------------------------------------------------
Income before income taxes ........ $ 731,294 $ 584,601 $ 441,101
Statutory tax rate ................ 35% 35% 35%
--------- --------- ---------
Income tax at statutory tax rate .. 255,953 204,610 154,385
State taxes, net of federal benefit 9,751 9,133 7,501
Other ............................. 23,888 17,759 12,622
--------- --------- ---------
Applicable income taxes ........... 289,592 231,502 174,508
Tax benefit from Customer-based
intangible assets ................ (32,793) - -
--------- --------- ---------
Total income taxes ............. $ 256,799 $ 231,502 $ 174,508
--------- --------- ---------
Current taxes ..................... $ 288,805 $ 221,869 $ 126,116
Deferred taxes (benefit) .......... (32,006) 9,633 48,392
--------- --------- ---------
Total income taxes ............ $ 256,799 $ 231,502 $ 174,508
========= ========= =========
- - -----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
SUMMARY OF NET DEFERRED TAX ASSETS
- - ----------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - ----------------------------------------------------------------------------
Reserve for possible credit losses ......... $ 41,500 $ 36,603
Marketing expense .......................... 16,372 19,909
Customer-based intangible assets ........... 77,310 27,098
Other deferred tax assets .................. 85,960 59,367
--------- ---------
Total deferred tax assets .............. 221,142 142,977
Valuation allowance ........................ - -
--------- ---------
Total deferred tax assets less valuation
allowance ............................ 221,142 142,977
Total deferred tax liabilities ......... (121,900) (77,637)
--------- ---------
Net deferred tax assets ................ $ 99,242 $ 65,340
========= =========
- - ------------------------------------------------------------------------------
Net income for the year ended December 31, 1996, includes a $32.8 million tax
benefit related to the recognition of tax deductions for the amortization of
Customer-based intangible assets acquired in connection with the Corporation's
1991 initial public offering. The initial public offering resulted in certain
Customer-based intangible assets being recorded for income tax purposes only,
creating future tax deductions relating to these intangible assets. The
Corporation did not initially recognize, for financial statement purposes, any
tax benefit related to those assets because there were uncertainties concerning
the tax treatment of such assets. During the second quarter of 1993, the U.S.
Supreme Court in the "Newark Morning Ledger" case affirmed that Customer-based
intangible assets may be amortized for tax purposes, and the Corporation
recognized $89.8 million of the tax benefit related to the Customer-based
intangible assets. During the three months ended March 31, 1996, the Internal
Revenue Service completed an audit of the Corporation's 1991 and 1992 tax
returns and entered into a final agreement with the Corporation regarding the
tax treatment of the intangible assets. As a result, the Corporation recognized
the remaining tax benefit relating to the intangible assets, $32.8 million,
during the three-month period ended March 31, 1996.
NOTE R: RELATED PARTY TRANSACTIONS
In the ordinary course of business, executive officers and directors of the
Corporation may have credit card loans issued on the same terms as those
prevailing at the time for comparable loans with unrelated persons and not
involving more than the normal risk of collectibility.
NOTE S: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discloses the fair value of financial instruments as of December
31, 1996 and 1995, whether or not recognized in the Corporation's consolidated
statements of financial condition, for which it is practicable to estimate that
value. In addition, certain financial instruments and all nonfinancial
instruments are excluded in accordance with generally accepted accounting
principles. In cases where quoted market prices are not available, fair values
are estimated using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in an immediate settlement of
the instrument. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
FINANCIAL ASSETS
CASH AND DUE FROM BANKS: Cash and due from banks are carried at an amount that
approximates fair value.
MONEY MARKET INSTRUMENTS: Money market instruments include interest-earning
time deposits in other banks and federal funds sold and securities purchased
under resale agreements. As a result of the short-term nature of these
instruments, the carrying amounts reported in the consolidated statements of
financial condition approximate these assets' fair value.
INVESTMENT SECURITIES: Fair value is based on the market value of the
individual investment security without regard to any premium or discount that
may result from concentrations of ownership of a financial instrument, possible
tax ramifications, or estimated transaction costs. Market value for investment
securities is based on quoted market prices or dealer quotes.
LOANS HELD FOR SECURITIZATION: The carrying value of loans held for
securitization, reported in the consolidated statements of financial condition,
approximates its fair value due to the short-term nature of these assets.
LOAN PORTFOLIO: The carrying value of the Corporation'sloan portfolio
approximates its fair value. The loan portfolio includes variable rate loans,
which are at current market rates, and fixed-rate loans, which can be repriced
frequently at market rates.
These valuations do not include the value that relates to estimated cash flows
from new loans generated from existing Customers over the remaining life of the
portfolio or the value of established Customer relationships. Accordingly, the
aggregate fair value of the loan portfolio does not represent the underlying
value of the Corporation's loan portfolio.
[54]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
CARRYING VALUES AND ESTIMATED FAIR VALUES OF THE CORPORATION'S FINANCIAL ASSETS
- - ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
----------------------------------------------------------
Financial Assets
Cash and due from banks.......................................... $ 225,063 $ 225,063 $ 291,856 $ 291,856
Money market instruments......................................... 876,614 876,614 573,611 573,611
Investment securities:
Available-for-sale............................................ 1,719,730 1,719,730 912,064 912,064
Held-to-maturity.............................................. 598,320 592,208 1,183,727 1,188,101
Loans held for securitization.................................... 2,469,974 2,469,974 3,168,427 3,168,427
Loan portfolio, net of reserve................................... 7,540,651 7,540,651 4,862,605 4,862,605
Accrued income receivable........................................ 98,160 98,160 93,636 93,636
Accounts receivable from securitizations......................... 1,777,323 1,768,000 951,568 952,000
- - -----------------------------------------------------------------------------------------------------------------------------
ACCRUED INCOME RECEIVABLE: Accrued income receivable includes interest income
earned but not yet received from investment securities, money market
instruments, loan receivables, and interest rate swap agreements. The carrying
amount reported in the consolidated statements of financial condition
approximates the fair value of these assets due to their relatively short-term
nature.
ACCOUNTS RECEIVABLE FROM SECURITIZATIONS: The fair value of accounts receivable
from securitizations was determined by discounting the future cash flows from
the securitizations using rates currently available to the Corporation for
instruments with similar terms and remaining maturities.
FINANCIAL LIABILITIES
TOTAL DEPOSITS: The fair value of noninterest-bearing demand deposits, savings
accounts, interest-bearing transaction accounts, and money market deposit
accounts is equal to the amount payable upon demand. The fair value of time
deposits was estimated by discounting the future cash flows of the stated
maturities using estimated rates currently offered for like deposits. The
valuation does not include the benefit that results from the low-cost funding
provided by the various deposit liabilities compared to the cost of borrowing
funds in the market.
SHORT-TERM BORROWINGS: Short-term borrowings include federal funds purchased
and securities sold under repurchase agreements, short-term bank notes, and
other short-term borrowings. The fair value of short-term borrowings
approximates the carrying value of these instruments based upon their
short-term nature.
LONG-TERM DEBT AND BANK NOTES: In 1996, the fair value of primarily all of the
Corporation's long-term debt and bank notes was estimated by discounting the
future cash flows of the stated maturities of the long-term debt and bank notes
using estimated rates currently offered for similar debt obligations. The fair
value of the Corporation's guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures is based upon
its quoted market price. In 1995, the fair value of the Corporation's long-term
debt and bank notes was based upon quoted market prices or dealer quotes.
ACCRUED INTEREST PAYABLE: Accrued interest payable includes interest expensed
but not yet paid for deposits, short-term borrowings, long-term debt and bank
notes, and interest rate swap agreements. The carrying amount approximates the
fair value of these liabilities due to their relatively short-term nature.
- - -----------------------------------------------------------------------------------------------------------------------
CARRYING VALUES AND ESTIMATED FAIR VALUES OF THE CORPORATION'S FINANCIAL LIABILITIES
- - -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
-----------------------------------------------------
FINANCIAL LIABILITIES
Total deposits....................................... $ 10,151,686 $ 10,243,000 $ 8,608,914 $ 8,726,000
Short-term borrowings................................ 693,387 693,387 289,543 289,543
Long-term debt and bank notes........................ 3,950,358 3,996,000 2,657,600 2,726,387
Accrued interest payable............................. 107,187 107,187 93,400 93,400
- - -----------------------------------------------------------------------------------------------------------------------
[55]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's off-balance-sheet financial instruments is
represented by the estimated unrealized gains or losses as determined by quoted
market prices or dealer quotes. This value generally reflects the estimated
amounts that the Corporation would receive or pay to terminate the instruments
at the reporting date.
As of December 31, 1996 and 1995, the Corporation had interest rate swap
agreements with underlying notional amounts of $1.4 billion. These agreements
had a net unrealized gain of approximately $5.5 million and $29.6 million at
December 31, 1996 and 1995, respectively.
The Corporation also has forward exchange contracts and foreign exchange swap
agreements that are used to manage its foreign exchange rate risk. The notional
amounts underlying the forward exchange contracts at December 31, 1996 and
1995, were $420.3 million and $270.0 million, respectively. These contracts had
net unrealized losses of $15.7 million and $192,000 at December 31, 1996 and
1995, respectively.
The notional value underlying the Corporation's foreign exchange swap
agreements at December 31, 1996 and 1995, was $40.0 million, with a net
realizable value of zero for both periods.
NOTE T: OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
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 also uses forward exchange
contracts to reduce its exposure to foreign currency exchange rate risk
primarily related to MBNA International.
The Corporation also entered into a foreign exchange swap agreement during 1995
to facilitate the issuance of a portion of the Subordinated Guaranteed
Floating-Rate Notes by MBNA International and offset this exposure to foreign
currency exchange rate risk with an additional foreign exchange swap agreement.
These foreign exchange swap agreements have no impact on the Corporation's
consolidated income statements.
Although off-balance-sheet financial instruments do not expose the Corporation
to credit risk equal to the notional amount, the Corporation is exposed to
credit risk in an off-balance-sheet financial instrument if the counterparty
fails to perform. This credit risk is measured as the gross unrealized gain on
the financial instrument. The Corporation had gross unrealized gains on
interest rate swap agreements of $5.5 million and $29.6 million at December 31,
1996 and 1995, respectively. In addition, the Corporation had no gross
unrealized gains on forward exchange contracts at December 31, 1996, and $2.0
million of unrealized gains on forward exchange contracts at December 31, 1995.
The Corporation also had gross unrealized gains on foreign exchange swap
agreements of $1.6 million and $445,000 at December 31, 1996 and 1995,
respectively. The credit risk is reduced in these instruments by dealing only
with highly rated counterparties who have credit ratings of investment grade as
rated by the major rating agencies.
There were no securities pledged under the terms of the interest rate swap
agreements at December 31, 1996 and 1995.
- - ----------------------------------------------------------------------------------------------
SUMMARY OF ACTIVITY OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
- - ----------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------
FORWARD EXCHANGE INTEREST RATE FOREIGN EXCHANGE
CONTRACTS SWAP AGREEMENTS SWAP AGREEMENTS TOTAL
- - ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $ 36,988 $ 2,200,000 $ - $ 2,236,988
Additions ................ 471,308 - - 471,308
Maturities ............... (425,220) (100,000) - (525,220)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 83,076 2,100,000 - 2,183,076
Additions ................ 1,107,469 - 40,000 1,147,469
Maturities ............... (920,572) (750,000) - (1,670,572)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 269,973 1,350,000 40,000 1,659,973
Additions ................ 2,641,344 - - 2,641,344
Maturities ............... (2,491,062) - - (2,491,062)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 $ 420,255 $ 1,350,000 $ 40,000 $ 1,810,255
=========== =========== =========== ===========
- - -----------------------------------------------------------------------------------------------
[56]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
SIGNIFICANT CLASSES OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
- - -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
- - -----------------------------------------------------------------------------------------------------------------------------
Notional Maturity Estimated
Amount Receive Rate (a) Pay Rate (b) In Years Fair Value
-----------------------------------------------------------------------
DECEMBER 31, 1996
Forward exchange contracts--pounds sterling...... $420,255 1.65 1.71 .1
Gross unrealized gains...................... $ -
Gross unrealized losses .................... (15,663)
---------
Total.................................... $ (15,663)
=========
Interest rate swap agreements.................... 1,350,000 6.42% 5.54% 1.6
Gross unrealized gains...................... $ 5,457
Gross unrealized losses..................... -
----------
Total.................................... $ 5,457
==========
Foreign exchange swap agreements................. 40,000 1.71 1.71 8.4
Gross unrealized gains...................... $ (1,630)
Gross unrealized losses .................... (1,630)
----------
Total.................................... $ -
==========
DECEMBER 31, 1995
Forward exchange contracts--pounds sterling...... 269,973 1.55 1.55 .3
Gross unrealized gains...................... $ 1,988
Gross unrealized losses .................... (2,180)
----------
Total.................................... $ (192)
==========
Interest rate swap agreements.................... 1,350,000 6.42% 5.81% 2.6
Gross unrealized gains...................... $ 29,629
Gross unrealized losses..................... -
----------
Total.................................... $ 29,629
==========
Foreign exchange swap agreements................. 40,000 1.55 1.55 9.4
Gross unrealized gains...................... $ 445
Gross unrealized losses .................... (445)
----------
Total.................................... $ -
==========
- - --------------------------------------------------------------------------------------------------------------------------
(a) Weighted average receive rate represents the fixed rate contracted for at
the time the off-balance-sheet financial instruments were entered into.
(b) Weighted average pay rate for the forward exchange contracts represents
the spot rate at December 31, 1996 and 1995, respectively. The pay rate
for the interest rate swap agreements is generally based upon the
three-month LIBOR and is the rate in effect at December 31, 1996 and 1995,
respectively.
The Corporation's interest rate swap agreements have maturities ranging from
1997 through 2002, the forward exchange contracts have maturities ranging from
1997 through 1998, and the foreign exchange swap agreements mature in 2005.
- - ----------------------------------------------------------------------------------------------------------------
EXPECTED MATURITIES OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
- - ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 WITHIN 1 YEAR 1-5 YEARS 6-10 YEARS TOTAL
- - ----------------------------------------------------------------------------------------------------------------
Forward exchange contracts--pounds sterling
Notional amount ........................ $ 403,128 $ 17,127 $ - $ 420,255
Estimated fair value ................... (12,450) (3,213) - (15,663)
Interest rate swap agreements
Notional amount ........................ 1,000,000 150,000 200,000 1,350,000
Estimated fair value ................... 3,855 474 1,128 5,457
Foreign exchange swap agreements
Notional amount ........................ - - 40,000 40,000
Estimated fair value ................... - - - -
- - ---------------------------------------------------------------------------------------------------------------
[57]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
NOTE U: PARENT COMPANY FINANCIAL INFORMATION
MBNA Corporation conducts its credit card operations primarily through its
wholly owned subsidiary, MBNA America Bank, N.A. As of December 31, 1996, the
Bank constituted 92.7% of the consolidated assets of MBNA Corporation. The
parent company's investment in subsidiaries represents the total equity of all
consolidated subsidiaries, using the equity method of accounting for
investments.
- - --------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- - --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- - --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ..................................................... $ 6,032 $ 5,005
Money market instruments .................................................... 100,175 183,339
Notes receivable from non-bank subsidiaries ................................. 1,031,716 714,034
Investment in subsidiaries:
Bank ..................................................................... 1,645,011 1,060,284
Non-bank ................................................................. 176,789 134,861
Premises and equipment, net ................................................. 47,692 39,801
Accrued income receivable ................................................... 12,757 9,220
Other assets ................................................................ 41,478 26,042
---------- ----------
Total assets ........................................................... $3,061,650 $2,172,586
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt .............................................................. $1,011,447 $ 836,314
Junior subordinated deferrable interest debentures due to non-bank subsidiary 257,732 -
Accrued interest payable .................................................... 15,039 13,637
Dividends payable ........................................................... 40,179 32,656
Accrued expenses and other liabilities ...................................... 32,945 24,921
---------- ----------
Total liabilities ...................................................... 1,357,342 907,528
Stockholders' equity ........................................................ 1,704,308 1,265,058
---------- ----------
Total liabilities and stockholders' equity ............................. $3,061,650 $2,172,586
========== ==========
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- - -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Interest income ................................................................. $ 66,056 $ 47,611 $ 28,074
Dividends from subsidiaries ..................................................... 148,023 134,000 119,156
Management fees from subsidiaries ............................................... 29,058 22,135 15,465
Loss on investment securities ................................................... - - (77)
Other ........................................................................... 23 24 38
--------- --------- ---------
Total operating income ..................................................... 243,160 203,770 162,656
OPERATING EXPENSE
Interest expense ................................................................ 60,605 48,102 28,210
Salaries and employee benefits .................................................. 16,320 9,812 5,309
Occupancy expense of premises ................................................... 2,233 2,165 1,540
Furniture and equipment expense ................................................. 4,860 3,847 3,564
Other ........................................................................... 2,157 3,659 3,275
--------- --------- ---------
Total operating expense .................................................... 86,175 67,585 41,898
--------- --------- ---------
Income before income taxes and equity in undistributed net income of subsidiaries 156,985 136,185 120,758
Applicable income taxes ......................................................... 2,560 920 1,074
Equity in undistributed net income (loss) of subsidiaries:
Bank ......................................................................... 326,590 218,215 150,134
Non-bank ..................................................................... (6,520) (381) (3,225)
--------- --------- ---------
NET INCOME ...................................................................... $ 474,495 $ 353,099 $ 266,593
========= ========= =========
- - -------------------------------------------------------------------------------------------------------------------------------
[58]
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MBNA CORPORATION AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- - ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ...................................................................... $ 474,495 $ 353,099 $ 266,593
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ............................. (320,070) (217,834) (146,909)
Loss on investment securities ................................................ - - 77
Provision (benefit) for deferred income taxes ................................ 371 (612) 752
Depreciation and amortization ................................................ 8,532 5,069 3,552
Decrease in other operating activities ....................................... 2,615 6,419 2,684
--------- --------- ---------
Net cash provided by operating activities .................................. 165,943 146,141 126,749
INVESTING ACTIVITIES
Net decrease (increase) in money market instruments ............................. 83,164 (122,372) 19,488
Purchases of investment securities available-for-sale ........................... - - (577)
Net increase in notes receivable from non-bank subsidiaries ..................... (317,682) (250,770) (166,264)
Net purchases of premises and equipment ......................................... (11,868) (13,368) (2,517)
Investment in subsidiaries ...................................................... (298,532) (19,940) (15,750)
--------- --------- ---------
Net cash used for investing activities ..................................... (544,918) (406,450) (165,620)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and bank notes ......................... 199,222 273,322 154,539
Maturity of long-term debt and bank notes ....................................... (25,000) - -
Proceeds from issuance of junior subordinated deferrable interest debentures
to non-bank subsidiary ........................................................ 257,732 - -
Proceeds from issuance of preferred stock ....................................... 146,207 145,070 -
Proceeds from exercise of stock options and other awards ........................ 22,869 12,780 4,033
Acquisition and retirement of common stock ...................................... (71,913) (49,829) (15,442)
Dividends paid .................................................................. (149,115) (120,312) (103,952)
--------- --------- ---------
Net cash provided by financing activities .................................. 380,002 261,031 39,178
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ........................................... 1,027 722 307
Cash and cash equivalents at beginning of year .................................. 5,005 4,283 3,976
--------- --------- ---------
Cash and cash equivalents at end of year ........................................ $ 6,032 $ 5,005 $ 4,283
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest expense paid ........................................................... $ 58,308 $ 44,521 $ 23,456
========= ========= =========
Income taxes paid ............................................................... $ - $ - $ -
========= ========= =========
- - -------------------------------------------------------------------------------------------------------------------------------
[59]
62
MBNA CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
- - --------------------------------------------------------------------------------
Board of Directors and Stockholders
MBNA Corporation
We have audited the accompanying consolidated statements of financial condition
of MBNA Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBNA Corporation
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
January 14, 1997
[60]
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MBNA CORPORATION AND SUBSIDIARIES
QUARTERLY DATA
- - --------------------------------------------------------------------------------
(unaudited)
- - ----------------------------------------------------------------------------------------------------------------------
SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
- - ----------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- - ----------------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- - ----------------------------------------------------------------------------------------------------------------------
1996
Interest income ........................................... $322,303 $321,814 $351,820 $387,330
Interest expense .......................................... 171,108 171,684 190,915 209,083
Net interest income ....................................... 151,195 150,130 160,905 178,247
Provision for possible credit losses ...................... 49,488 49,112 35,273 44,351
Other operating income .................................... 397,548 444,061 472,348 581,966
Other operating expense ................................... 346,532 374,020 383,538 468,461
Income before income taxes ................................ 98,392 171,059 214,442 247,401
Net income (a) ............................................ 92,222 103,320 129,523 149,430
Earnings per common share (b) ............................. .26 .29 .37 .41
Weighted average common shares outstanding and common stock
equivalents (000)(b) ................................... 344,844 345,058 345,489 348,537
1995
Interest income ........................................... $239,143 $289,599 $299,636 $312,437
Interest expense .......................................... 119,454 151,742 161,217 164,176
Net interest income ....................................... 119,689 137,857 138,419 148,261
Provision for possible credit losses ...................... 25,585 36,516 37,361 38,714
Gain on investment securities ............................. - - 39 -
Other operating income .................................... 297,231 332,602 388,978 405,768
Other operating expense ................................... 278,148 306,112 328,963 332,844
Income before income taxes ................................ 113,187 127,831 161,112 182,471
Net income ................................................ 68,725 76,835 97,327 110,212
Earnings per common share (b) ............................. .20 .22 .28 .32
Weighted average common shares outstanding and common stock
equivalents (000)(b) .................................. 339,591 342,166 343,732 344,160
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(a) Net income for the three months ended March 31, 1996, includes a $32.8
million tax benefit related to deductions for the amortization of
Customer-based intangible assets acquired in connection with the initial
public offering of the Corporation's Common Stock, and a charge of $32.8
million net of tax ($54.3 million pretax) related to the launch of the
MBNA Platinum Plus Visa and MasterCard program.
(b) Earnings per common share and weighted average common shares outstanding
and common stock equivalents have been restated to reflect the
three-for-two split of the Corporation's Common Stock, effected in the
form of a dividend, issued January 1, 1997, to stockholders of record as
of December 16, 1996.
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MBNA CORPORATION AND SUBSIDIARIES
STOCK PRICE RANGES AND DIVIDENDS
- - --------------------------------------------------------------------------------
(unaudited)
- - --------------------------------------------------------------------
COMMON STOCK PRICE RANGE AND DIVIDENDS
DIVIDENDS
DECLARED PER
HIGH LOW COMMON SHARE
- - --------------------------------------------------------------------
1996
First quarter............ $20 3/4 $15 1/8 $ .11
Second quarter........... 21 1/8 18 .11
Third quarter............ 23 1/8 17 3/4 .11
Fourth quarter........... 28 1/2 22 3/4 .11
1995
First quarter............ $12 7/8 $10 1/8 $ .09
Second quarter........... 15 1/2 12 5/8 .09
Third quarter............ 18 1/2 14 7/8 .09
Fourth quarter.......... 19 15 1/2 .09
- - --------------------------------------------------------------------
Market price and per common share data have been restated to reflect the
three-for-two split of the Corporation's Common Stock, effected in the form of
a dividend, issued January 1, 1997, to stockholders of record as of December
16, 1996.
The Corporation's Common Stock is traded on the New York Stock Exchange under
the symbol "KRB" and is listed as "MBNA" in newspapers. At February 17, 1997,
the Corporation had 2,384 common stockholders of record. This does not include
beneficial owners for whom Cede & Co. or others act as nominees.
On January 14, 1997, the Board of Directors approved an increase in the
quarterly dividend to $.12 per common share. The cash dividend is payable April
1, 1997, to stockholders of record as of March 17, 1997.
- - --------------------------------------------------------------------
PREFERRED STOCK PRICE RANGE AND DIVIDENDS
DIVIDENDS
DECLARED PER
HIGH LOW PREFERRED SHARE
- - --------------------------------------------------------------------
SERIES A
1996
First quarter......... $25 1/8 $24 1/8 $.46875
Second quarter........ 25 23 7/8 .46875
Third quarter......... 24 5/8 24 .46875
Fourth quarter........ 26 3/4 24 3/8 .46875
1995
Fourth quarter........ $25 1/4 $24 1/2 $.31770
SERIES B
1996
Third quarter......... $24 3/4 $24 5/8 $.10690
Fourth quarter........ 26 1/8 24 5/8 .42690
- - --------------------------------------------------------------------
On September 23, 1996, the Corporation issued 6.0 million shares of Adjustable
Rate Cumulative Preferred Stock, Series B, with a $25 stated value per share.
The Series B Preferred Stock is traded on the New York Stock Exchange under the
symbol "KRBpfb."
On November 14, 1995, the Corporation issued 6.0 million shares of 7 1/2%
Cumulative Preferred Stock, Series A, with a $25 stated value per share. The
Series A Preferred Stock is traded on the New York Stock Exchange under the
symbol "KRBpfa."
On January 14, 1997, the 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 $.4099 per share on the Adjustable Rate Cumulative
Preferred Stock, Series B. Both dividends are payable April 15, 1997, to
stockholders of record as of March 31, 1997.
[62]
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SENIOR EXECUTIVES
- - -------------------------------------------------------------------------------
CHARLES M. CAWLEY, 56, is chairman and chief executive officer of MBNA America
Bank, N.A., and president of MBNA Corporation. Mr. Cawley has more than 31
years of management experience in the financial services industry and was the
senior member of the management team that established MBNA in 1982. A graduate
of Georgetown University and a member of its board of directors, Mr. Cawley
also serves on the boards of the University of Delaware, the Eisenhower
Exchange Fellowships, and the American Architectural Foundation. He is chairman
of the board of The Grand Opera House in Wilmington, Delaware, and is a member
of the board and executive committee of MasterCard International.
Chief Marketing Officer JOHN R. COCHRAN III, 45, oversees all business
development and marketing activities, including sales, marketing, advertising,
regional marketing, telemarketing, Customer satisfaction, and group
administration. Mr. Cochran has 23 years of management experience in consumer
lending and was a member of the management team that established MBNA in 1982.
A graduate of Loyola College (Maryland), Mr. Cochran developed the endorsed
marketing concept that has led to MBNA signing more than 4,400 membership
groups and financial institutions. He also established what is now one of the
nation's largest financial institution telephone sales operations. Mr. Cochran
serves on MasterCard International's U.S. board of directors. He is also a
member of the board of trustees of Loyola College and a member of the board of
visitors of the Delaware Council for Economic Education.
Chief Operating Officer BRUCE L. HAMMONDS, 48, oversees MBNA's credit, loss
prevention, international, consumer finance and consumer deposit, corporate
products, and insurance services, as well as MBNA Hallmark Information
Services. Mr. Hammonds has 27 years of management experience in consumer
lending and was a member of the management team that established MBNA in 1982.
A graduate of the University of Baltimore, he is chairman of the Delaware State
Chamber of Commerce and the Delaware Housing Partnership. He serves on the
executive committee of the Delaware Workforce Development Council, the Delaware
Bankers Association, and the Delaware Business Roundtable.
Chief Financial Officer M. SCOT KAUFMAN, 47, joined the company in 1985 and
oversees MBNA's accounting, finance, treasury, and resource allocation
activities. Mr. Kaufman has 26 years of experience in the financial services
industry. A graduate of the University of Baltimore with an M.B.A. in finance,
Mr. Kaufman has held senior management positions overseeing a variety of areas
within MBNA and supervised the financial aspects of MBNA's transition to a
public company in 1991. Mr. Kaufman began his career as an internal auditor,
later becoming a corporate auditor, treasurer, and controller. He is active in
many professional associations, including the American Institute of CPAs, the
Maryland Association of CPAs, the Financial Executive Institute, and the
National Association of Accountants. He is also a member of the Delaware
Economic and Financial Advisory Council.
ALFRED LERNER, 63, is chief executive officer of MBNA Corporation and the
chairman of its board of directors. He served as chairman of the board and
chief executive officer of MNC Financial Inc. from September 1990 to July 1991
and as chairman of the board from July 1991 to October 1993. He also served as
chairman of the board of Equitable Bancorporation from July 1983 until it
merged with MNC Financial in January 1990. He has been chairman and chief
executive officer of the Town and Country trust since August 1993. A graduate
of Columbia University and a member of its board of trustees, Mr. Lerner also
is president of The Cleveland Clinic Foundation and a member of its board of
trustees. He is also a trustee of Case Western Reserve University.
Chief Administrative Officer LANCE L. WEAVER, 42, joined the company in 1991
and is responsible for personnel, facility management, medical services,
security, law, and administrative services. Mr. Weaver has 22 years of
experience in consumer lending and administration. A graduate of Georgetown
University, Mr. Weaver has had previous experience at two national banks as a
vice president and senior vice president of mortgage lending activities. He is
chairman of the United Way of Delaware fund-raising campaign and is a member of
Georgetown University's board of regents. He serves on the boards of Tower Hill
School and Wilmington 2000, a consortium of business and government planners
working toward the revitalization of downtown Wilmington and its environs.
[63]
66
MBNA CORPORATION
Board of Directors
- - --------------------------------------------------------------------------------
ALFRED LERNER
Chairman and Chief Executive Officer
MBNA Corporation
CHARLES M. CAWLEY
President
MBNA Corporation
Chairman and Chief Executive Officer
MBNA America Bank, N.A.
JAMES H. BERICK, ESQ.
Chairman
Berick, Pearlman & Mills Co., L.P.A.
BENJAMIN R. CIVILETTI, ESQ.
Chairman
Venable, Baetjer and Howard, LLP
Former Attorney General
of the United States
RANDOLPH D. LERNER, ESQ.
President
R.D. Lerner Securities, Inc.
STUART L. MARKOWITZ, M.D.
Internist and Managing Partner
Drs. Markowitz, Rosenberg & Associates
Assistant Clinical Professor
Case Western Reserve University,
College of Medicine
MICHAEL ROSENTHAL, PH.D.
Professor
Columbia University
Former Associate Dean
for Academic Administration
Columbia College
MBNA AMERICA BANK, N.A.
OFFICERS
- - --------------------------------------------------------------------------------
SENIOR EXECUTIVES
................................................................................
Charles M. Cawley M. Scot Kaufman Kenneth F. Boehl
John R. Cochran III Lance L. Weaver Steve Boyden
Bruce L. Hammonds David W. Spartin
DIVISION EXECUTIVES
................................................................................
Gregg Bacchieri Terrance R. Flynn David W. Nelms
William H. Daiger, Jr. John J. Hewes Richard K. Struthers
Ronald W. Davies Janine D. Marrone Vernon H.C. Wright
OPERATING EXECUTIVES
................................................................................
Sunil F. Antani David M. Hirt John C. Richmond
Lisa F. Baughman Richard G. Huber Karen E. Rose
Patrick M. Blewett Scott A. Hudson Michael R. Scanlan
Jules J. Bonavolonta Mark Levitt John W. Scheflen
James E. Carrington Craig S. Lewis Kevin C. Schindler
Steven P. Chambers Timothy E. Love W. Craig Schroeder
Robert V. Ciarrocki Victor P. Manning Michael S. Schuck
Douglas M. Cummings David H. Maxwell Ann W. Seybolt
Brian D. Dalphon Kathleen B. McEntee Michelle D. Shepherd
Salvatore A. DeAngelo Thomas P. McGinley Stephen K. Shock
Douglas R. Denton Frank J. McKelvey III Diane C. Sievering
Joseph A. DeSantis Maureen A. McKernan Richard B. Skinner
Robert V. DeSantis Charles K. Messick April M. Stercula
Peter S.P. Dimsey Susan D. Morrison Penelope J. Taylor
Kevin A. Dolan, M.D. William P. Morrison Steven P. Walczak
K. David Elgena Edward H. Murphy Howard C. Wallace
James H. Erskine III Terri C. Murphy Todd T. Weaver
Shane G. Flynn Patrick J. O'Dwyer Charles F. Wheatley
John M. Gala Francis H. Otenasek Dena H. Williams
Joseph J. Gatti Edward G. Plummer Robert J. Wolf
Peter J. Gatti Frank W. Quillen Kevin P. Wren
Bob B. Hallmark Michael G. Rhodes Thomas D. Wren
................................................................................
THE HEIGHTS BY GREAT PEOPLE REACHED AND KEPT WERE NOT ATTAINED BY
SUDDEN FLIGHT, BUT THEY, WHILE THEIR COMPANIONS SLEPT, WERE TOILING
UPWARD IN THE NIGHT.
--HENRY WADSWORTH LONGFELLOW
[64]
67
MBNA AMERICA BANK, N.A.
The principal subsidiary of MBNA Corporation, MBNA America is a national bank
with $38.2 billion in managed loans. The bank is the world's leading issuer of
the Gold MasterCard(R) and the world's second-largest lender through bank
credit cards. It also provides retail deposit, consumer loan, insurance, and
card acceptance services. MBNA America is the recognized industry leader in
affinity marketing, with endorsements from 4,400 membership organizations and
financial institutions.
MBNA INTERNATIONAL BANK LIMITED (MBNA INTERNATIONAL)
MBNA issues credit cards in the United Kingdom. MBNA International is located
in Chester, England, with a business development office in London.
MBNA INSURANCE SERVICES
MBNA Insurance Services, which markets and services credit-related Life and
Disability, personal Property and Casualty, and Life and Health insurance, is
located in Greenville, Delaware. MBNA is currently licensed to provide its
automobile insurance products in 27 states and plans to be licensed in all 50
states by the end of 1997.
MBNA MARKETING SYSTEMS, INC.
MBNA has state-of-the-art telephone sales facilities to support account
acquisition and maintains offices in Delaware, Florida, Georgia, Maine,
Maryland, Ohio, Pennsylvania, and Texas. In addition to credit cards, Marketing
Systems cross-sells consumer loan, deposit, and insurance products.
MBNA CONSUMER SERVICES, INC.
(subsidiary of MBNA Corporation)
MBNA Consumer Services, Inc., is licensed to provide home equity loans in 42
states and the District of Columbia.
MBNA HALLMARK INFORMATION SERVICES, INC.
MBNA Hallmark Information Services, Inc., headquartered in Dallas, Texas,
provides information technology support and services to MBNA America Bank,
N.A., and its affiliates.
Ernst & Young LLP
National City Bank (common stock)
The Bank of New York (preferred stock)
For further information about MBNA Corporation or its subsidiaries, please
contact:
Brian D. Dalphon
Director, Investor Relations
MBNA Corporation
Wilmington, DE 19884-0786
(800) 362-6255
(302) 432-1251
Listed on New York Stock Exchange
Stock Symbol KRB
[RECYCLED LOGO]
This annual report was printed on paper recycled from MBNA offices.
68
[MBNA CORPORATION LOGO]
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Picture of Antique car.
[PHOTO]
ATTENTION TO DETAIL
DRIVES EVERYTHING WE DO.
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SUCCESS IS NEVER FINAL.