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[MBNA CORPORATION LOGO]
[PHOTO] Collage of credit cards
SUCCESS IS GETTING THE RIGHT CUSTOMERS...
AND KEEPING THEM.
1997 ANNUAL REPORT
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CONTENTS
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2 FINANCIAL HIGHLIGHTS
3 TO OUR STOCKHOLDERS
4 WHAT WE DO/WHERE WE ARE TODAY
7 HOW WE MARKET
9 REGIONALIZATION
12 INTERNATIONAL
13 TECHNOLOGY
14 EDUCATION FOUNDATION
17 FINANCIALS
65 SENIOR EXECUTIVES
66 DIRECTORS AND OFFICERS
Printed on the cover
are selected credit cards
issued by MBNA Europe
1997 HIGHLIGHTS
Increased earnings by 31.2% to $622.5 million.
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Grew managed loans by 28% to $49.4 billion, a $10.8 billion increase over 1996,
while the industry's growth rate slowed to 6%.
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Added more new accounts (9.4 million)--for the third consecutive year--than any
other issuer ever added in a single year.
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Maintained superior credit quality with charge-offs at 3.97% for the year, well
below the published industry average of 6.57%.
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Acquired the endorsements of 563 new groups including, for example, Major
League Baseball, PGA of America, Subaru of America,
University of Pennsylvania, Barnes & Noble, Inc., Fidelity Investments, Royal
Naval Association (UK), and the Law Society of
Ireland.
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Extended exclusive endorsement agreements with the National Football League,
the National Hockey League, the New York Yankees, the
University of Arizona Alumni Association, the California Alumni Association,
and more than 600 other organizations.
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Expanded MBNA International to 1.9 million Customers with $2.8 billion in loan
balances just 50 months after issuing its first
credit card. Began operations of MBNA Canada with headquarters in Ottawa.
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MBNA IS A COMPANY OF PEOPLE COMMITTED TO:
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.
[PHOTO] MBNA Headquarters entrance.
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EARNINGS PER COMMON SHARE--
ASSUMING DILUTION
(dollars)
88 0.18
89 0.21
90 0.26
91 0.30
92 0.34
93 0.41
94 0.52
95 0.68
96 0.89
97 1.15
NET INCOME
(millions)
88 90.1
89 104.1
90 129.0
91 149.2
92 172.7
93 207.8
94 266.6
95 353.1
96 474.5
97 622.5
MANAGED LOANS (ENDING)
(billions)
88 4.5
89 5.7
90 7.4
91 8.8
92 9.9
93 12.4
94 18.7
95 26.7
96 38.6
97 49.4
SALES AND CASH ADVANCE VOLUME
(billions)
88 7.3
89 9.1
90 11.5
91 12.9
92 14.5
93 17.9
94 25.1
95 34.3
96 48.7
97 66.4
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
(dollars in thousands, except per share amounts)
PER COMMON SHARE DATA FOR THE YEAR (a)
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Earnings . . . . . . . . . . . . . . . . . . . $ 1.20 $ .92 $ .70 $ .53 $ .41
Earnings--assuming dilution . . . . . . . . . 1.15 .89 .68 .52 .41
Dividends (b) . . . . . . . . . . . . . . . . .32 .28 .25 .21 .19
Book value . . . . . . . . . . . . . . . . . . 3.50 2.80 2.22 1.83 1.53
RATIOS
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Return on average total assets . . . . . . . . 3.25% 3.26% 3.09% 3.16% 3.15%
Return on average stockholders' equity . . . . 35.56 34.46 35.51 32.70 30.01
Stockholders' equity to total assets . . . . . 9.25 10.00 9.56 9.51 10.51
FINANCIAL STATEMENT DATA FOR THE YEAR
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Net interest income . . . . . . . . . . . . . $ 692,390 $ 640,477 $ 544,226 $ 532,108 $ 474,323
Other operating income . . . . . . . . . . . . 2,812,879 1,895,923 1,424,618 1,013,580 739,968
Net income . . . . . . . . . . . . . . . . . . 622,500 474,495 353,099 266,593 207,796
Deposits . . . . . . . . . . . . . . . . . . . 12,913,213 10,151,686 8,608,914 6,632,489 5,241,883
Stockholders' equity . . . . . . . . . . . . . 1,970,050 1,704,308 1,265,058 919,578 769,131
MANAGED LOAN DATA
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Managed loans at year end . . . . . . . . . . $49,379,860 $38,623,533 $26,711,704 $18,743,864 $12,358,518
Sales and cash advance volume . . . . . . . . 66,399,425 48,666,129 34,272,909 25,078,918 17,889,747
(a) For comparative purposes, per common share data have been restated to
reflect the adoption of Statement of Financial Accounting Standards
No. 128, "Earnings per Share," and the three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend, issued
October 1, 1997, to stockholders of record as of September 15, 1997.
(b) On January 13, 1998, the Board of Directors approved an increase of
12.5% in the quarterly dividend to $.09 per common share.
[PHOTO]
Pictured left to right: MBNA America Executive Committee members Ronald W.
Davies, Lance L. Weaver, Bruce L. Hammonds, John R. Cochran III, M. Scot
Kaufman, and Richard K. Struthers.
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TO OUR STOCKHOLDERS
[PHOTO]
Al Lerner and Charlie Cawley.
This report presents MBNA's full-year results for 1997. During the past year,
earnings increased 31.2% to $622.5 million. Loans outstanding grew to $49.4
billion, a $10.8 billion increase over year-end 1996. We also added a record
9.4 million new accounts. The characteristics of new cardholders are consistent
with the exceptional quality of the company's existing Customers. The typical
new Customer has a $59,000 average annual household income, has been employed
for 10 years, owns a home, and has a 13-year history of paying bills promptly.
Loan losses continue to be significantly below published industry levels. In
1997, our managed loan losses were 3.97%, compared to an industry average of
6.57%. We achieved these results by focusing on the quality of each individual
Customer. This focus continues to differentiate us, even when the business
becomes more difficult--as it did last year.
During 1997, we invested heavily in the U.S. credit card business while
expanding new businesses. MBNA International, which now has 1.9 million
Customers, expanded into Ireland and Canada. MBNA Insurance Services completed
its first full year of operations, and MBNA Consumer Finance grew loans to $4.6
billion.
This year's report is similar in format to last year's because the fundamentals
of our business are unchanged. It is important that we consistently repeat
these fundamentals, not only for you, but for all of us here at MBNA. In this
year's report, we continue to focus on what we do, why we like what we do,
where we are today, and how we feel about the future.
As always, the company's success would not be possible without the
intelligence, enthusiasm, and hard work of the people of MBNA. It is their
attitude about satisfying each Customer that drives our success.
We hope you enjoy this report and find it informative.
/s/ AL LERNER /s/ CHARLIE CAWLEY
THINK OF YOURSELF AS A CUSTOMER.
COMPLACENCY IS DEVASTATING.
SUCCESS IS NEVER FINAL.
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PLATINUM PLUS
In March of 1996, MBNA began marketing the MBNA Platinum Plus credit card.
Today, more than 9 million Customers carry this card, with total balances of
$12.0 billion. The typical MBNA Platinum Plus Customer has an $80,000 annual
household income and a 14-year history of paying bills on time. These excellent
Customer characteristics are a direct result of our success in marketing this
product to members of our affinity groups. The Platinum Plus credit card is
designed for individuals who we expect will qualify for a higher credit line,
such as doctors, lawyers, and other professionals.
WHAT WE DO/WHERE WE ARE TODAY
MBNA Corporation is a bank holding company comprised of two banks. MBNA America
Bank, N.A., is a national bank in the United States, and MBNA International
Bank Limited, is a fully chartered bank in the United Kingdom. Like traditional
banks, we take deposits and make loans. MBNA Customers have deposited more than
$12 billion in MBNA money market accounts and certificates of deposit with an
average balance of $26,000. We also lend to our Customers through a variety of
loan products, including installment loans and home equity loans for such
things as home improvements, vacations, and college tuition. But that is where
the similarity to traditional banks ends. At MBNA, there are no branches, no
commercial loans, and only a small number of checking accounts. We specialize
in making loans to individuals through a credit card.
There are many opinions about what type of business we are in and what a
company must focus on to be successful. People have referred to lending through
credit cards as a technology business, an information business, and even a
marketing business. While all of these things must be done well to succeed,
none of them is our business. We are in the business of lending people money.
It is a very simple business that, done correctly, is a very good business.
It is a business with universal demand. There are approximately 150 million
people in the United States and another 20 million in the United Kingdom who
could qualify for loans through credit cards. More than 25 million of these
people have MBNA credit cards today.
It is also a very enduring business. It enables people to have the things they
need today and pay for them out of future income.
[PHOTO]
Todd Crouchek
MBNA now employs 20,000 people who work at 26 locations around the world.
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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OUR CUSTOMERS:
- - USE US MORE: MBNA INDUSTRY
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Average account balance $3,434 $2,372
Average transaction $138 $94
- - DEFAULT LESS:
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Loan losses per $1,000 of average outstanding $40 $66
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.
Our grandparents shopped for what they needed at the local grocery store, and
the grocer recorded each transaction in a ledger. Then, on payday, the bill
was settled. Even then, people purchased what they needed that day and paid out
of future income. We are in the same business, a business with an enduring life
cycle.
It is also a business that enables us to avoid concentration of risk. There are
no geographic, industry, or Customer concentrations. Our Customers are spread
across the United States and the United Kingdom just as the population is
distributed. There is no one industry whose difficulties would affect us. Our
loans are spread across millions of borrowers with an average balance of
$3,434. That's $49.4 billion in loans spread out among 14.4 million active
borrowers.
All credit cards do the same thing. That makes the credit card commodity-like,
and as with most commodity products, almost everyone wants one. That is a
strength of the business. However, it also makes this a business in which it is
hard for most credit card companies to differentiate themselves. Not for us. We
differentiate ourselves by how we attract new Customers and how we satisfy
those Customers once we have them. During 1997, our portfolio grew 28%,
compared to an industry growth rate of 6%. MBNA's formula for success remains
very simple. Success is getting the right Customers and keeping them. That has
always been our aim, and in this business--the business of lending people
money--if you're not good at both of these things, nothing else matters. We
are very good at both.
WHERE WE ARE TODAY
During 1997, MBNA added 9.4 million new accounts and increased loans by $10.8
billion to $49.4 billion. We accelerated the growth of our consumer finance
business, which markets unsecured installment loans, home equity loans, and
revolving lines of credit. This business grew to $4.6 billion in managed
loans, a $1.4 billion increase from 1996. We also expanded our insurance
business and began marketing property & casualty and life & health products in
addition to credit insurance. We increased outstanding loans in the United
Kingdom to $2.8 billion--a 56% increase over year-end 1996. In 1997, MBNA
started marketing in Ireland and received approval to begin marketing in
Canada.
CREDIT
At MBNA, credit decisions are made by combining sophisticated technology and
highly predictive models with the insight of credit professionals. We look at
each potential Customer individually. This process allows us to contact the
Customer for additional information in order to make the right credit decision.
It also ensures that people who should get an MBNA credit card get one, and
that those who shouldn't, don't. Fewer than half of all applicants qualify for
an MBNA card. Those who do, receive credit lines that properly fit their
specific situations. This personal approach to credit evaluation gets our
relationship with a new Customer off to the right start and has resulted in
losses that are consistently lower than published industry levels.
[PHOTO]
Tammy Miller
MBNA combines sophisticated technology with the insight of credit professionals
when making lending decisions.
WE ARE WHAT WE REPEATEDLY DO. EXCELLENCE, THEN, IS NOT AN ACT BUT A HABIT.
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FUNDING
MBNA continues to utilize asset-backed securitizations as a major source of
funding. In 1997, MBNA issued more than $13 billion in asset-backed securities,
resulting in $38.2 billion in outstanding securitized loans at year-end. The
innovative design of these securitizations, MBNA's reputation, and the quality
of the receivables included in the packages have enabled the company to price
these issues at very attractive rates. The completion of several global
transactions broadened our funding sources in 1997. These transactions provide
our expanded investor base with MBNA's first asset-backed securitizations
denominated in the Netherlands guilder and the French franc.
In addition to securitizations, MBNA utilized bank notes, senior debt, and
trust-preferred securities, along with a $12.9 billion deposit base, to fund
growth this past year.
[PHOTO]
Vernon Wright, Linda Phillips
MBNA continued to diversify its funding sources in 1997.
LOAN LOSS COMPARISON Six year Loan Loss Comparison to Industry
[CHART]
As a result of MBNA's ability to get the right Customers, our credit losses
remain well below industry averages.
MBNA has had twenty-eight quarters of consistent earnings growth since becoming
a public company in 1991. With this rapid growth, quality is essential. In the
lending business, quality is achieved by choosing Customers who have the
capacity to repay, proven stability, and a habit of being financially
responsible. MBNA Customers have these characteristics. Our typical Customer
has a $60,000 family income--more than enough capacity to handle a $3,400
credit card balance--has been in his or her job for 13 years, and owns a home.
More importantly, he or she has demonstrated excellent financial habits by
paying bills promptly for an average of 15 years. It is these financial habits
that we rely on most when making a loan. This focus on quality and consistency
has been constant and will continue.
The superior quality of our Customers is reflected in their account
performance. On average, MBNA Customers carry balances that are 45% higher than
the industry average. A typical purchase on an MBNA credit card is $138,
compared to an industry average of $94. This difference results in a
significant advantage as higher balances result in greater revenues per
Customer. In addition, our Customers are very loyal. More than 97% of Customers
who use our product and pay interest stay with us from year to year.
The quality of our Customer is also reflected in loan losses that have remained
consistently lower than industry averages. As loan losses in the industry have
increased, the difference between MBNA and the rest of the industry has become
clearer. From our marketing strategy to our lending practices, the focus is on
the quality of each Customer. It is the fundamental part of a successful
lending business, and it is the primary factor that guides our growth and
performance.
WHAT GETS ATTENDED TO GETS DONE.
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HOW WE MARKET
During the past year, we strengthened the things that contribute to the
continued success of our business. At MBNA, we've established a franchise,
affinity marketing--marketing products to people with a strong common interest.
Affinity marketing is done in two ways: first, by marketing to groups of people
who belong to formal organizations that endorse MBNA products, and second, by
marketing to groups of people who share common interests but do not belong to
specific organizations. Regional marketing offices give us a strong platform
for developing these programs.
ENDORSED MARKETING
More than 4,500 organizations in the United States and the United Kingdom
endorse MBNA products to their members. One significant part of this business
is MBNA's Sports sector, which markets to 600 sports-related organizations
whose members have generated nearly $4 billion in loans using MBNA products.
MBNA's credit card is the official card of the National Football League, Major
League Baseball, the National Hockey League, NASCAR, the Association of Tennis
Professionals, and the Professional Golfers Association. Sports enthusiasts
are very loyal Customers. After only three years of marketing, the National
Football League endorsement has generated 1 million Customers with $600 million
in loans. We recently extended this agreement with the NFL through the year
2003. Similar success has been achieved through the Major League Baseball
endorsement. More than 500,000 baseball fans carry MBNA credit cards and have
$400 million in loans. The characteristics of Customers acquired through sports
marketing have been very strong. A typical new Customer in the Sports sector
has a family income of $55,000, owns a home, and has a 12-year history of
paying bills promptly.
MBNA's products are also endorsed by more than 500 colleges and universities.
[PHOTO]
Joseph Gatti, Elizabeth Hershey-Ross, Natalie Di Costanza, Mike Boush
MBNA people work closely with the thousands of affinity organizations and
financial institutions that endorse MBNA products. Together, they develop
innovative marketing programs that target the interests of potential Customers.
MOTORSPORTS
MBNA's Motorsports sector has more than 300 groups that endorse MBNA products,
including NASCAR, the Indianapolis Motor Speedway, and the National Hot Rod
Association. More than 1.7 million MBNA Customers, with loan balances of $2
billion, demonstrate their loyalty by using the card of their favorite
motorsport or hobby. In 1997, MBNA people attended 500 motorsport events all
over the United States and in the United Kingdom and attracted 400,000 new
Customers. More than 115,000 of these new Customers were added through the
endorsement of NASCAR.
EVERYTHING STARTS WITH THE CUSTOMER.
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DIVERSIFIED MARKETING SOURCES
MBNA acquired 9.4 million new accounts during 1997 through a variety of
acquisition methods. Our in-house advertising agency developed thousands of
direct mail campaigns, leading to 2.9 million new accounts; the 4,000 people in
MBNA's telemarketing subsidiary generated 3.7 million new accounts; and MBNA
people attended events and sold our products directly to more than 1 million
new Customers. Choosing the right acquisition method is a critical first step
in designing customized marketing programs for each of the organizations that
endorses MBNA and the hundreds of non-endorsed affinity programs we develop
internally.
Three million alumni members and students from these institutions use MBNA
products and carry $4 billion in loans. This marketing sector provides the
opportunity to attract high-quality Customers as they enter the market after
graduation. MBNA received new endorsements from 110 colleges and universities
in 1997 including the University of Pennsylvania, Washington State University,
and Louisiana State University.
Although MBNA doesn't have branches, our products are sold in 5,000 bank
branches across the United States and the United Kingdom through the
endorsement of 800 financial institutions. Nearly $3 billion in loans have been
generated in the Financial Institution sector.
The Professional sector is one of our most important. Members of more than
1,200 professional associations have $12 billion in loans with MBNA.
Nationally, 54% of physicians, 25% of nurses, 36% of lawyers, 29% of teachers,
and 27% of engineers use an MBNA product. Two million new accounts were
generated in this sector last year. We also received endorsements from 110 new
organizations.
The endorsed marketing franchise is one of the primary reasons we are confident
about the future. We strengthened this franchise in 1997 by earning
endorsements from 563 new organizations and extending the contracts of over 600
more that already endorse us. Endorsed affinity marketing will generate about
half of our new accounts over the next three to four years. The other half will
come from direct affinity marketing programs developed in our regional
marketing offices.
[PHOTO]
C. Michael Cawley, M.D.
Fifty-four percent of all physicians and twenty-five percent of all nurses
carry an MBNA credit card.
MBNA generated 9.4 million new accounts in 1997 through a variety of
acquisition methods including direct mail, telemarketing, advertising, and
event marketing.
EXCELLENCE DOES NOT COME BY CHANCE...
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REGIONALIZATION
During the last three years, we've decentralized our marketing activities into
six regional centers in the United States. The people in these regional offices
work with local affinity groups--symphonies, colleges, high schools, alumni
associations, banks, and other organizations in their territory. Being closer
to our affinity groups gives us a better understanding of the needs and
motivations of potential MBNA Customers and allows us to develop more effective
marketing programs.
MBNA's regional presence helps us to identify and sign new affinity groups. We
have regional offices in Maine, Ohio, Maryland, Georgia, Florida, Texas, and
California. Through these offices, we obtain many groups that endorse MBNA
products, including the Maine State Nurses Association, the Cleveland Indians,
the University of Georgia, the Florida Bar, and the Stanford University Alumni
Association.
Affinity marketing also targets groups of people with common interests but no
affiliation to a specific organization. Marketing officers in 25 states
specialize in developing these types of programs. These officers have
identified hundreds of marketing opportunities by being close to their local
markets.
[PHOTO] Collage of credit cards
Regional interest credit card programs will generate a large percentage of new
accounts throughout the next three to four years.
[PHOTO] Customer using credit card
MBNA Customers used their MBNA credit cards 480 million times in 1997 and spent
$66 billion. Every one of those times was an opportunity for us to satisfy our
Customers.
One example of this approach is the I Love New York card, a program designed
for people who are proud to live in the state of New York. So far, that program
has generated nearly 80,000 accounts with $75 million in loans. The Don't mess
with Texas card is another example. More than 220,000 Texans carry this card
with loans totaling $415 million. Programs like these are continuously being
developed all across the country.
Another program under development in the Northern region will feature the work
of well-known artist Jamie Wyeth. In 1997, Mr. Wyeth signed an agreement with
us to do a painting of a lighthouse to be featured on a credit card. Because we
have a local presence in New England, we know that people who live or vacation
there appreciate the Wyeth family and will like this credit card. This card was
developed by a marketing officer in the state of Maine after meeting Mr. Wyeth.
Regional marketing generates a large percentage of new accounts, and the state
marketing initiative is an important component of MBNA's future growth.
CUSTOMER SATISFACTION
Just as important as getting the right Customers is keeping them. That is why
providing superior service is very important to people who work at MBNA.
Whenever Customers contact us--something they did 50 million times in
1997--MBNA people treat them as individuals, attempting to satisfy them one at
a time.
When Customers call us, they talk to representatives who have the ability and
authority to address inquiries promptly and courteously. MBNA Customer
Satisfaction representatives also have the tools to address most of our
Customers' concerns at the initial point of contact. Using the multiple
features of their Customer Satisfaction Super Station, a powerful,
user-friendly computer work station, representatives are able to access a wide
range of Customer information from various systems and make instant account
changes on-line. This is done millions of times a year--and each time is an
opportunity for us to demonstrate our commitment to satisfying our Customers.
...IT COMES BY CHOICE.
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MBNA AMERICA
[PHOTO] Central Region credit cards
CENTRAL REGION More than 23% of the 20 million households in the Central
region carry MBNA credit cards with total loan balances of $7.9 billion. This
region, based in Beachwood, Ohio, manages 624 affinity groups including Indiana
State University, the Cleveland Clinic, the Chicago Bulls, and the Ohio Nurses
Association. We attracted 2.3 million new Customers in the Central region in
1997.
[PHOTO] Mid-Atlantic Region credit cards
MID-ATLANTIC REGION MBNA established its Mid-Atlantic regional office in Hunt
Valley, Maryland. This office manages many of MBNA's key affinity groups, such
as The Retired Officers Association, The American Institute of Architects, and
the Baltimore Orioles. Groups managed in this region now total 617 and helped
attract 1.7 million new Customers in 1997. Nearly 30% of the 13 million
households in the region carry MBNA credit cards with loan balances of $7.5
billion.
[PHOTO] Northern Region credit cards
NORTHERN REGION In 1993, MBNA established its first regional office in Camden,
Maine. This office now manages 782 groups including the University of Maine,
the Boston Celtics, Maine State Nurses Association, and Boston College Alumni
Association. We added 1.6 million new Customers in 1997, and 29% of the 11.7
million households in the region now carry MBNA credit cards with total loan
balances of $6.4 billion.
[PHOTO] Southern Region credit cards
SOUTHERN REGION MBNA's Southern regional offices are located in Boca Raton,
Florida, and Atlanta, Georgia, and manage 490 affinity groups, including the
University of Georgia, The Florida Bar, the General Alumni Association of the
University of North Carolina at Chapel Hill, and the Florida Nurses
Association. Through our marketing efforts to these groups, we were able to add
1.7 million new Customers and increase loan balances to $7.7 billion in this
region. Nearly 20% of the 19 million total households in the region now carry
MBNA credit cards.
MBNA AMERICA--20,000 PEOPLE WITH AN ATTITUDE...
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MBNA INTERNATIONAL
[PHOTO] Southwestern Region credit cards.
SOUTHWESTERN REGION The Southwestern region, based in Dallas, Texas, manages
512 affinity groups, such as the Texas Rangers, the Dallas Cowboys, and the
Association of Former Students of Texas A&M University. We attracted 1.5
million new Customers and increased loan balances in the region to $7.2
billion. More than 21% of the 16 million households in the region now carry
MBNA credit cards.
[PHOTO] Western Region credit cards.
WESTERN REGION In 1997, MBNA opened a regional office in San Francisco that
manages 443 groups, including the Sierra Club, California Federal Bank,
Stanford University Alumni Association, and the State Bar of California. We
added 1.9 million new Customers, and currently 22% of the 19 million total
households in the region carry an MBNA credit card with total loan balances of
$9.9 billion.
[PHOTO] MBNA Europe credit cards.
MBNA EUROPE MBNA Europe grew to 1.9 million Customers with $2.8 billion in
outstanding loans. We opened sales offices in Dublin, Ireland, and in
Edinburgh, Scotland. Utilizing the same affinity marketing strategy as in the
United States, we have received endorsements from such prestigious
organizations as Burberry's, Mercedes Benz, Bradford & Bingley Building
Society, and the World Wide Fund for Nature. This year, we signed the Law
Society of Ireland, the Institute of British Engineers, Oxford University, and
the Royal Institute of Architects, bringing our total number of endorsements to
530.
[PHOTO] MBNA Canada credit cards.
MBNA CANADA MBNA began full operations in Canada from our office in Ottawa,
Ontario, in 1997. We have signed Canadian endorsements including Ducks
Unlimited Canada, the Canadian Society for Civil Engineering, and the Wildlife
Rescue Association. We will also have the opportunity to leverage existing
relationships and market group members in Canada for the National Hockey
League, Major League Baseball, and numerous professional organizations.
...SATISFY THE CUSTOMER.
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CONSUMER FINANCE
MBNA's consumer finance business reached $4.6 billion in loans at the end of
1997, up 42% from $3.3 billion at the end of 1996. Consumer finance products
are marketed the same way we market credit cards--through the mail and over the
phone. These products include lines of credit accessed by check, installment
loans, and home equity loans. We opened 500,000 new accounts in 1997 and now
offer these products to more than 2,000 of our affinity groups. Consumer
Finance established several new consumer loan products in 1997, including sales
finance programs with Gateway 2000, IBM, and Princess Cruise Lines, which
generated nearly $300 million in new loans.
INTERNATIONAL
[PHOTO] MBNA International facility.
MBNA's international business grew 56% in 1997 as loans outstanding reached
$2.8 billion.
During 1997, MBNA's international business grew to 1.9 million Customers with
$2.8 billion in loans. MBNA now has an 8% share of the United Kingdom market.
We continue to utilize the same strategy that we use in the United
States--marketing to people with strong common interests. MBNA Europe received
endorsements from 121 organizations this year, bringing the total to 530. New
endorsements included the Institute of British Engineers, British Motor
Heritage Trust, PGA, and Oxford University, which helped generate more than
550,000 new accounts in the United Kingdom in 1997.
Our international business expanded into other countries in 1997, with the
opening of sales offices in Dublin, Ireland, and in Edinburgh, Scotland. These
offices signed many new affinity groups such as the Law Society of Ireland, the
Royal Institute of Architects in Ireland, and the Edinburgh Fringe Festival. In
Ireland, Customer interest has been high since MBNA began marketing there in
March.
[PHOTO] Credit cards
MBNA will begin marketing in Canada through many of its existing endorsements
in the U.S. including Ducks Unlimited and the NHL.
MBNA opened an office in Ottawa, Ontario, Canada, during the fourth quarter of
1997. The credit card industry continues to grow in Canada and currently
consists of approximately 12 million people carrying credit cards with $20
billion in loans. In December, we signed our first Canadian endorsement, Ducks
Unlimited Canada, and marketing to this group and others will begin during the
first quarter of 1998. Canada offers an additional opportunity because existing
endorsements in the United States can be used to market there. Examples include
the National Hockey League, Major League Baseball, and many professional
organizations with members in Canada.
There are now 1,300 MBNA people working in England, Ireland, Scotland, and
Canada. The growth of our international business will continue to be an
important part of our future.
IT IS ALWAYS THE THOUSANDS OF LITTLE THINGS DONE RIGHT THAT ADD UP TO THE
UNASSAILABLE ADVANTAGE.
12
15
TECHNOLOGY
MBNA's systems continue to meet our company's expanding needs with
industry-leading capabilities. Controlling all technology through our own
subsidiary, MBNA Hallmark Information Services, enables us to customize how we
meet the needs of the company. We can control every aspect of our Customer
relationships and ensure consistency and quality in the delivery of our
products. In 1997, MBNA's systems efficiently handled 12.5 billion on-line
transactions, 120 million Customer payments, 17 million requests for credit
cards, and 192 million Customer statements and letters.
In all, MBNA invested more than $100 million in improved technologies during
1997 and made nearly 100,000 system changes. Many of these enhancements helped
us meet the challenging needs of our growing new businesses--Consumer Finance
and Insurance Services. In addition, we continue to make technology investments
that enhance service and efficiency in MBNA's credit card operations. One
initiative improved the systems used to process Customer requests for credit
line increases. The changes provided an easy-to-use graphical interface between
multiple systems and enabled credit analysts to make these lending decisions
more efficiently. The time to process these requests has been reduced by 50%.
We further upgraded our telecommunications network using fiber optic technology
that improved the flow of information and data among all our worldwide
operations.
Technology supports every aspect of MBNA's business, and we have an ongoing
commitment to invest in state-of-the-art systems that enable us to better
satisfy Customers.
[PHOTO]
Richard Ramson, Wendy Jordan
MBNA systems processed nearly 500 million Customer transactions in 1997.
[PHOTO] Insurance marketing materials
MBNA INSURANCE SERVICES
For more than 10 years, MBNA has been selling credit-related insurance and now
has more than 1.4 million Customers. During 1997, MBNA Insurance Services began
marketing automobile insurance and introduced life and disability insurance
products as well. In each of these businesses, MBNA acts as an agent for
insurance that is underwritten by a third party. As a result, MBNA bears no
underwriting risk.
The major focus for Insurance Services during 1997 was the establishment of the
automobile insurance business. Stability and financial habits are strong
indicators of how responsibly people drive their automobiles. Since MBNA's
Customers have demonstrated stability and excellent financial habits, they are
very good candidates for automobile insurance. Automobile insurance can be sold
and serviced by telephone and mail--marketing channels with which MBNA has 15
years of experience.
Insurance is a logical extension of our product offering.
ABOVE ALL, WE WANT A REPUTATION FOR DOING THE LITTLE THINGS WELL...
...AND THE BIG THINGS WILL FOLLOW.
13
16
EDUCATION FOUNDATION
MBNA is a company of "people who like other people." All of us demonstrate this
through a strong commitment to the community. MBNA people contributed more than
175,000 hours of their personal time to charitable and educational causes
during 1997, assisting people in need, including children, the homeless, and
the elderly.
Much of our community activity focuses on supporting educational initiatives.
There is no better way to contribute to the community and ensure future
excellence than by providing economically disadvantaged students with access to
a good education. MBNA recently expanded its commitment to provide financial
support to students and schools through the establishment of the MBNA Education
Foundation. This foundation has financing of $60 million over the next five
years, contributed by the corporation and personally contributed by individual
officers.
The foundation's program consists of two major components: the MBNA Excellence
in Education Grants Program, which enables teachers and principals of public,
private, and parochial schools to apply for grants to fund the development of
new, results-oriented educational initiatives; and MBNA scholarship programs,
which allow graduating high school seniors to apply for financial assistance to
be used at any accredited college or university within their state.
Scholar-ships are awarded to students who demonstrate outstanding merit as well
as financial need. In 1997, MBNA awarded more than 280 grants totaling $1.7
million and 160 scholarships providing $3.2 million in financial assistance
over four years.
As part of MBNA's Education Grants Program, we work with local schools to
develop innovative programs to broaden the educational experience of their
students. For example, the Stubbs Elementary School in Wilmington, Delaware,
used MBNA grant money to purchase books for its library and to implement a
"student of the month" recognition program. The Saturday School program at the
Central Middle School in Dover, Delaware, provides a constructive alternative
to suspensions of students with behavioral problems by focusing on academic
success. In Millsboro,
[PHOTO]
Jacqueline Loughman Powell
The people of MBNA work with local schools to develop innovative programs to
broaden the educational experience of their students.
[PHOTO]
[PHOTO] Teacher and classroom
MBNA awarded more than 280 grants in 1997 to enable teachers and other
educators to develop results-oriented education initiatives.
If every company is a portrait of its people...
14
17
[PHOTO] Graduates
In 1997, MBNA awarded 160 scholarships through the MBNA Education Foundation.
Delaware, the Long Neck Elementary School used grant money to purchase
large-screen monitors and other equipment to accommodate the learning and
research needs of all students, including those with visual and hearing
impairments. The New Castle Vo-Tech School District in Wilmington, Delaware,
initiated the Teens Exploring Construction program to rotate eighth-grade
students through building and construction trades during a week-long camp. In
Rockport, Maine, MBNA's Education Foundation helped elementary school students
put on a musical dinner theater program to teach students about different
countries' cultures through songs and ethnic cuisine. Fifth-grade students from
Prescott Memorial School in Maine used grant funding to research the problem of
marine mammals that become entangled in fishing nets. This project culminated
in a report to the Governor, who publicly applauded the students' educational
accomplishments.
MBNA also established a new College and Career Counseling and Mentoring Service
to further assist students outside the classroom with counseling, tutoring,
summer employment, and work study opportunities. The counseling service also
focuses on middle school and high school students who are at risk of not
staying in school and teaches them the value of continuing their education.
In addition to these initiatives, MBNA also assists with local educational
support and guidance programs. We continue to assist St. Benedict's
Preparatory School in Newark, New Jersey, with educational, summer work study,
and graduate workshop programs. People from our Southern regional center in
Boca Raton, Florida, tutor adults once a week in support of the Palm Beach
County Literacy Coalition. In Chester, England, people work with the Young
Enterprise Program in local schools to mentor groups of pupils so that they can
learn firsthand about business and industry. MBNA people tutor students in
Cleveland's Randallwood Elementary School. In Chicago, MBNA people mentor
scholarship recipients from the Daniel Murphy Foundation--economically
disadvantaged eighth-grade students who demonstrate high academic potential.
At MBNA, we firmly believe that a good education is the foundation for a
lifetime of achievement and reward. Not only is it beneficial to the
individual, but it is also the beginning of a very positive cycle--as educated
people in turn teach their own children the advantages of completing school.
[PHOTO] Children reading.
MBNA SCHOLARS PROGRAM
MBNA's commitment to education and excellence is reflected in its Scholars
Program. The program was established in 1993 to provide college scholarships
for the children of people who work at MBNA. Scholars must maintain a minimum
GPA to qualify for renewal each year with additional financial awards going to
those students who achieve a GPA of 3.0 or higher. In all, MBNA has awarded
more than $4.2 million in renewable scholarships to 600 recipients. Besides
scholarships, the program also provides MBNA families with a wide range of
college-oriented resources, including college counseling, leadership seminars,
summer internships, and mentoring programs. MBNA also offers financial
assistance for college education through low-cost student loans and deposit
account contributions for the parents of newborns to establish long-term
savings plans for future education expenses. Overall, the MBNA Scholars Program
has helped to provide more than $8 million in financial resources to support
the educational needs and aspirations of the sons and daughters of MBNA people.
MBNA Senior Executives personally funded 50% of the MBNA Scholars Program.
...MBNA is a masterpiece.
15
18
REGIONAL MAP
[MAP]
KEY
- Headquarters
= Regional Centers
+ Sales Offices
* Telesales Offices
HEADQUARTERS
- - MBNA Corporation
Wilmington, DE 19884
(800) 441-7048
NORTHERN REGION
= 1 Hatley Rd.
Belfast, ME 04915
(800) 843-3526
(Operations Center)
= 32 Washington St.
Camden, ME 04843
(800) 386-6262
* 16 Godfrey Dr.
Orono, ME 04473
(800) 503-6262
* 901 Washington Ave.
Portland, ME 04103
(800) 626-2488
* 5 Industrial Pkwy.
Brunswick, ME 04011
(800) 645-6682
* 100 Main St.
Dover, NH 03820
(800) 330-5929
WESTERN REGION
= 44 Montgomery St.
San Francisco, CA 94104
(800) 585-4956
MID-ATLANTIC REGION
= 11333 McCormick Rd.
Hunt Valley, MD 21031
(888) 680-6945
+ 9 W. 57th St.
New York, NY 10019
(800) 746-6262
+ 800 Connecticut Ave., NW
Washington, DC 20006
(800) 789-6262
* 400 Christiana Rd.
Newark, DE 19713
(800) 441-7048
* 860 Silver Lake Blvd.
Dover, DE 19901
(800) 346-2620
* 2568 Park Centre Blvd.
State College, PA 16801
(800) 471-6262
* 849 Fairmount Ave.
Towson, MD 21286
(800) 346-2621
SOUTHERN REGION
= 1501 Yamato Rd.
Boca Raton, FL 33431
(800) 841-6845
= 2600 Century Pkwy.
Atlanta, GA 30345
(800) 446-7048
SOUTHWESTERN REGION
=* 16001 N. Dallas Pkwy.
Dallas, TX 75248
(800) 435-9672
CENTRAL REGION
=* 25875 Science Park Dr.
Beachwood, OH 44122
(800) 410-6262
+ 676 North Michigan Ave.
Chicago, IL 60611
(800) 906-6262
* 388 S. Main St.
Akron, OH 44311
(800) 731-9260
ENGLAND
= Stansfield House
Chester Business Park
Wrexham Rd.
Chester, Cheshire CH49QQ
United Kingdom
(011) 44-1244-672000
+ 86 Jermyn St.
London SW1Y6JD
United Kingdom
(011) 44-171-389-6200
SCOTLAND
+ One St.Colme Street
Edinburgh, Scotland EH36AA
(011) 44-131-220-8949
IRELAND (THE REPUBLIC OF)
+ 46 St. Stephen's Green
Dublin 2, Ireland
(011) 353-1-619-6000
CANADA
= 1600 James Naismith Dr.
Gloucester, Ontario K1B5N8
(888) 871-6262
Ultimately, the only thing that really counts is the Customer.
16
19
MBNA CORPORATION AND SUBSIDIARIES
FINANCIAL CONTENTS
- ---------------------------------------------
18 Ten-Year Statistical Summary
20 Glossary of Financial Terms
21 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
62 Report of Independent Auditors
63 Quarterly Data
64 Stock Price Ranges and Dividends
[PHOTO] New York Stock Exchange.
20
MBNA CORPORATION AND SUBSIDIARIES
TEN-YEAR STATISTICAL SUMMARY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994
INCOME STATEMENT DATA FOR THE YEAR
Net interest income............................................. $ 692,390 $ 640,477 $ 544,226 $ 532,108
Provision for possible credit losses............................ 260,040 178,224 138,176 108,477
Other operating income.......................................... 2,812,879 1,895,923 1,424,618 1,013,580
Other operating expense......................................... 2,223,121 1,572,551 1,246,067 996,110
Net income (a).................................................. 622,500 474,495 353,099 266,593
PER COMMON SHARE DATA FOR THE YEAR (b)
Earnings (c).................................................... $ 1.20 $ .92 $ .70 $ .53
Earnings--assuming dilution (c)................................. 1.15 .89 .68 .52
Dividends....................................................... .32 .28 .25 .21
Book value...................................................... 3.50 2.80 2.22 1.83
RATIOS
Return on average total assets.................................. 3.25% 3.26% 3.09% 3.16%
Return on average stockholders' equity.......................... 35.56 34.46 35.51 32.70
Average receivables to average deposits......................... 88.82 92.50 91.60 93.05
Stockholders' equity to total assets............................ 9.25 10.00 9.56 9.51
Loan portfolio:
Delinquency (e).............................................. 3.93 3.59 3.11 2.60
Net credit losses............................................ 2.14 1.98 1.91 1.96
Managed loans (f):
Delinquency.................................................. 4.59 4.28 3.70 3.03
Net credit losses............................................ 3.97 3.35 2.74 2.59
Net interest margin (g)...................................... 7.50 7.62 7.42 8.16
MANAGED LOAN DATA (f)
At year end:
Loans held for securitization................................ $ 2,900,198 $ 2,469,974 $ 3,168,427 $ 2,299,026
Loan portfolio............................................... 8,261,876 7,659,078 4,967,491 3,407,974
Securitized loans............................................ 38,217,786 28,494,481 18,575,786 13,036,864
-------------- ----------- -------------- ------------
Total managed loans....................................... $ 49,379,860 $38,623,533 $ 26,711,704 $ 18,743,864
============== =========== ============== ============
Average:
Loans held for securitization................................ $ 2,875,212 $ 2,529,484 $ 2,269,362 $ 1,330,011
Loan portfolio............................................... 7,563,301 6,174,095 4,792,536 4,000,271
Securitized loans............................................ 32,746,963 22,514,014 15,440,499 9,462,401
-------------- ----------- -------------- ------------
Total managed loans....................................... $ 43,185,476 $31,217,593 $ 22,502,397 $ 14,792,683
============== =========== ============== ============
For the year:
Sales and cash advance volume................................ $ 66,399,425 $48,666,129 $ 34,272,909 $ 25,078,918
BALANCE SHEET DATA AT YEAR END
Investment securities and money market instruments.............. $ 4,594,709 $ 3,194,664 $ 2,669,402 $ 2,269,081
Loans held for securitization................................... 2,900,198 2,469,974 3,168,427 2,299,026
Credit card loans............................................... 5,830,221 5,722,299 4,090,553 2,882,232
Other consumer loans............................................ 2,431,655 1,936,779 876,938 525,742
-------------- ----------- -------------- ------------
Total loans.................................................. 8,261,876 7,659,078 4,967,491 3,407,974
Reserve for possible credit losses.............................. (162,476) (118,427) (104,886) (101,519)
-------------- ----------- -------------- ------------
Net loans.................................................... 8,099,400 7,540,651 4,862,605 3,306,455
Total assets.................................................... 21,305,513 17,035,342 13,228,889 9,671,858
Total deposits.................................................. 12,913,213 10,151,686 8,608,914 6,632,489
Long-term debt and bank notes................................... 5,478,917 3,950,358 2,657,600 1,687,357
Stockholders' equity............................................ 1,970,050 1,704,308 1,265,058 919,578
AVERAGE BALANCE SHEET DATA
Investment securities and money market instruments.............. $ 3,851,867 $ 2,927,351 $ 2,451,783 $ 1,684,316
Loans held for securitization................................... 2,875,212 2,529,484 2,269,362 1,330,011
Credit card loans............................................... 5,456,349 4,907,814 4,160,230 3,207,110
Other consumer loans............................................ 2,106,952 1,266,281 632,306 793,161
-------------- ----------- -------------- ------------
Total loans.................................................. 7,563,301 6,174,095 4,792,536 4,000,271
Reserve for possible credit losses.............................. (143,277) (111,041) (103,568) (99,175)
-------------- ----------- -------------- ------------
Net loans.................................................... 7,420,024 6,063,054 4,688,968 3,901,096
Total assets.................................................... 19,125,282 14,571,288 11,425,721 8,432,511
Total deposits.................................................. 11,752,887 9,408,843 7,709,840 5,728,432
Long-term debt and bank notes................................... 4,639,430 3,029,250 2,212,591 1,199,520
Stockholders' equity............................................ 1,750,459 1,377,072 994,287 815,243
Weighted average common shares outstanding (000) (b)............ 501,225 501,208 501,226 501,227
Weighted average common shares outstanding and
common stock equivalents (000) (b)............................. 526,534 518,982 513,643 508,343
- -------------------------------------------------------------------------------------------------------------------------------
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 MBNA America 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 MasterCard and Visa 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 adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement No.128), and the three-for-two split of the Corporation's Common
Stock, effected in the form of a dividend, issued October 1, 1997, to
stockholders of record as of September 15, 1997.
18
21
MBNA CORPORATION AND SUBSIDIARIES
1993 1992 1991 1990 1989 1988
$ 474,323 $ 357,515 $ 239,599 $ 164,315 $ 116,754 $ 149,641
98,795 97,534 86,723 57,951 43,319 63,262
739,968 577,505 540,708 451,863 343,551 254,828
774,872 565,467 459,035 354,462 258,357 203,853
207,796 172,732 149,213 128,998 104,109 90,065
$ .41 $ .34 $ .30 $ .26 $ .21 $ .18
.41 .34 .30 .26 .21 .18
.19 .17 .16 (d) (d) (d)
1.53 1.32 1.18 (d) (d) (d)
3.15% 2.96% 2.79% 3.87% 4.13% 3.55%
30.01 28.55 28.55 (d) (d) (d)
85.34 69.98 71.77 103.51 124.73 153.30
10.51 10.25 9.86 (d) (d) (d)
3.03 3.78 4.39 4.15 3.52 3.33
2.43 2.87 2.65 1.79 1.77 1.99
3.27 3.99 4.40 4.52 3.66 3.59
2.97 3.33 3.05 2.21 1.97 1.85
8.47 7.22 6.36 6.55 5.77 6.56
$ 741,869 $ 678,000 $ 600,000 $ 567,000 $ 418,800 $ -
3,725,509 3,300,650 2,886,405 2,672,733 1,842,473 1,906,947
7,891,140 5,881,479 5,327,901 4,137,950 3,456,587 2,600,182
------------- ------------- ------------- ------------- ------------- -------------
$ 12,358,518 $ 9,860,129 $ 8,814,306 $ 7,377,683 $ 5,717,860 $ 4,507,129
============= ============= ============= ============= ============= =============
$ 642,750 $ 733,473 $ 560,447 $ 707,632 $ 215,223 $ -
3,425,935 2,659,305 2,707,535 1,907,208 1,782,051 2,280,480
6,596,387 5,528,394 4,563,279 3,798,409 2,898,169 1,360,452
------------- ------------- ------------- ------------- ------------- -------------
$ 10,665,072 $ 8,921,172 $ 7,831,261 $ 6,413,249 $ 4,895,443 $ 3,640,932
============= ============= ============= ============= ============= =============
$ 17,889,747 $ 14,523,570 $ 12,915,104 $ 11,541,181 $ 9,075,967 $ 7,256,735
$ 1,440,684 $ 1,345,995 $ 1,768,048 $ 540,660 $ 151,973 $ 97,386
741,869 678,000 600,000 567,000 418,800 -
2,949,995 2,659,007 2,299,912 2,216,604 1,587,652 1,743,292
775,514 641,643 586,493 456,129 254,821 163,655
------------- ------------- ------------- ------------- ------------- -------------
3,725,509 3,300,650 2,886,405 2,672,733 1,842,473 1,906,947
(97,580) (97,580) (97,580) (97,580) (82,098) (74,152)
------------- ------------- ------------- ------------- ------------- -------------
3,627,929 3,203,070 2,788,825 2,575,153 1,760,375 1,832,795
7,319,756 6,454,511 6,009,028 4,579,514 2,858,924 2,276,114
5,241,883 4,568,791 5,094,011 4,202,159 1,743,969 1,521,907
779,553 470,601 - - - -
769,131 661,290 592,230 214,098 256,904 203,980
$ 1,364,350 $ 1,572,911 $ 1,401,469 $ 160,356 $ 182,254 $ 35,547
642,750 733,473 560,447 707,632 215,223 -
2,735,191 2,050,487 2,176,144 1,529,759 1,584,368 2,146,851
690,744 608,818 531,391 377,449 197,683 133,629
------------- ------------- ------------- ------------- ------------- -------------
3,425,935 2,659,305 2,707,535 1,907,208 1,782,051 2,280,480
(97,580) (97,580) (93,284) (76,509) (73,120) (64,110)
------------- ------------- ------------- ------------- ------------- -------------
3,328,355 2,561,725 2,614,251 1,830,699 1,708,931 2,216,370
6,596,419 5,829,052 5,347,990 3,330,155 2,519,192 2,538,968
4,767,669 4,847,911 4,553,186 2,526,109 1,601,225 1,487,568
537,609 116,301 - - - -
692,460 605,079 522,721 258,719 274,991 230,510
501,227 501,573 501,252 501,188 501,188 501,188
506,745 506,791 504,384 501,188 501,188 501,188
- ---------------------------------------------------------------------------------------------------------------------------------
(c) The Corporation adopted Statement No. 128 effective for financial statements
issued for periods ending after December 15, 1997. In accordance with
Statement No. 128, earnings per common share is computed using net income
applicable to common stock and weighted average common shares outstanding,
whereas earnings per common share--assuming dilution includes the potential
dilutive effect of common stock equivalents which are solely related to
employee stock options. The Corporation has no other common stock
equivalents. For comparative purposes, earnings per common share and
earnings per common share--assuming dilution 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 stockholders' equity ratios have not
been presented for the 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.
19
22
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 securitization income, while reducing the Corporation's on-balance-sheet
assets.
CREDIT CARD FEES
Credit card fees include annual, late, overlimit, returned check, cash advance,
and other miscellaneous fees.
CREDIT RISK
Credit risk is the possibility that a loss may occur should a borrower or
counterparty fail to fully honor the terms of a contract.
DIRECT DEPOSITS
Direct deposits are deposits marketed to and received from individual Customers
without the use of a third-party intermediary.
FOREIGN ACTIVITIES
The Corporation's foreign activities are primarily performed through MBNA
America Bank, N.A.'s ("the Bank") two foreign bank subsidiaries, MBNA
International Bank Limited ("MBNA International")and MBNA Canada Bank ("MBNA
Canada"). The Bank also has a foreign branch office in the Grand Cayman Islands.
FOREIGN CURRENCY EXCHANGE RATE RISK
Foreign currency exchange rate risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange rates
and occurs as a result of cross-currency investment and funding activities. The
Corporation's foreign currency exchange rate risk is limited to the unhedged
position of the Corporation's net investment in its foreign subsidiaries.
FULLY TAXABLE EQUIVALENT (FTE) BASIS
FTE basis represents the income on total interest-earning assets that is either
tax-exempt or taxed at a reduced rate, adjusted to give effect to the prevailing
incremental federal income tax rate, and adjusted for nondeductible carrying
costs and state income taxes, where applicable. Yield calculations, where
appropriate, include these adjustments.
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 RISK
Interest rate risk refers to potential changes in current and future earnings
resulting from changes in interest rates, and differences in the repricing
characteristics between interest rate sensitive assets and liabilities.
INTEREST RATE SENSITIVE ASSETS/LIABILITIES
Interest rate sensitive assets/liabilities have yields/rates that can change
within a designated time period, due to their maturity, to a change in an
underlying index rate, or to the contractual ability of the Corporation to
change the yield/rate.
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, a foreign bank subsidiary in the United
Kingdom.
The Corporation does not hold or issue off-balance-sheet financial instruments
for trading purposes.
20
23
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
("the 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
the world's largest independent credit card lender 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 insurance and
deposit products.
NET INCOME
(millions)
95 353.1
96 474.5
97 622.5
The Corporation generates interest and other income through finance charges
assessed on outstanding loan receivables, interchange income, credit card fees,
securitization income, and interest earned on investment securities and money
market instruments. The Corporation's primary costs are the costs of funding its
loan receivables and investment securities, 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 July 15, 1997, the Board of Directors approved a three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend, issued on
October 1, 1997, to stockholders of record as of September 15, 1997.
Accordingly, 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 1997 increased 31.2% to $622.5 million or $1.15 per common share
from 1996's net income of $474.5 million or $.89 per common share. Net income
for 1996 increased 34.4% to $474.5 million or $.89 per common share from $353.1
million or $.68 per common share in 1995. Earnings per common share amounts are
presented assuming dilution in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
The overall growth in earnings is primarily attributable to the growth in the
Corporation's managed loans outstanding. During 1997, managed loans increased
$10.8 billion to $49.4 billion at December 31, 1997, as the Corporation acquired
563new endorsements from organizations and added 9.4 million new accounts. The
Corporation's average managed loans increased 38.3% or $12.0 billion to $43.2
billion in 1997 from 1996. Managed loans in 1996 increased $11.9 billion to
$38.6 billion from 1995. The Corporation's average managed loans increased 38.7%
or $8.7 billion to $31.2 billion in 1996 from 1995. Included in managed loans
are the Corporation's loans held for securitization, loan portfolio, and
securitized loans.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization converts interest income,
interchange, and other fees in excess of interest paid to Certificateholders;
credit losses; and other trust expenses into securitization income, while
reducing the Corporation's on-balance-sheet assets. During 1997, the Corporation
securitized approximately $13.2 billion of loan receivables, bringing the total
amount of outstanding securitized loans to $38.2 billion at December 31, 1997.
On January 1, 1997, the Corporation adopted 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. Under Statement No. 125, gains
are recognized in securitization income at the time of initial sale and each
subsequent sale of loan receivables in a securitization. As a result of the
adoption of Statement No. 125, securitization income increased $325.1 million in
1997. The Corporation invested an amount equivalent to the increase in
securitization income from the adoption of Statement No. 125 in additional
business development efforts; therefore, this incremental increase in
securitization income did not materially impact the Corporation's consolidated
net income. Previously, the Corporation recognized the earnings from
securitization over the life of the transaction.
RETURN ON AVERAGE
TOTAL ASSETS
95 3.09%
96 3.26%
97 3.25%
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY
95 35.51%
96 34.46%
97 35.56%
Table 1 reflects the Corporation's returns on average total assets and
stockholders' equity, and other equity ratios.
Return on average total assets was essentially the same for 1997 and 1996 as a
result of the similarity between the percentage growth in net income and the
growth in average total assets. The return on average stockholders' equity for
1997 increased primarily as a result of an increase in net income partially
offset by the growth in average stockholders' equity. 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 preferred stock in both 1995 and 1996, which offset the percentage
growth in net income.
TABLE 1: RETURN ON AVERAGE TOTAL ASSETS AND STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 1996 1995
RETURN ON AVERAGE TOTAL ASSETS.................................. 3.25% 3.26% 3.09%
RETURN ON AVERAGE STOCKHOLDERS' EQUITY.......................... 35.56 34.46 35.51
AVERAGE STOCKHOLDERS' EQUITY TO AVERAGE TOTAL ASSETS............ 9.15 9.45 8.70
DIVIDEND PAYOUT RATIO........................................... 27.83 31.46 36.76
21
24
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, 1997
AVERAGE YIELD/ INCOME
AMOUNT RATE OR EXPENSE
------------------------------------
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic........................................................... $ 2,683 3.80% $ 102
Foreign............................................................ 848,229 5.77 48,971
----------- ---------
Total interest-earning time deposits in other banks........... 850,912 5.77 49,073
Federal funds sold and securities purchased under resale agreements.. 430,614 5.56 23,962
Investment securities (a):
Taxable............................................................ 2,480,722 5.70 141,429
Tax-exempt (b)..................................................... 89,619 6.03 5,402
----------- ---------
Total investment securities................................... 2,570,341 5.71 146,831
Loans held for securitization:
Domestic........................................................... 2,486,520 14.50 360,506
Foreign............................................................ 388,692 14.44 56,139
----------- ---------
Total loans held for securitization........................... 2,875,212 14.49 416,645
Loans:
Domestic:
Credit card...................................................... 5,196,643 14.16 735,971
Other consumer................................................... 1,938,292 14.49 280,822
----------- ---------
Total domestic loans.......................................... 7,134,935 14.25 1,016,793
Foreign............................................................ 428,366 13.91 59,600
----------- ---------
Total loans................................................... 7,563,301 14.23 1,076,393
----------- ---------
Total interest-earning assets................................. 14,290,380 11.99 1,712,904
Cash and due from banks................................................ 495,835
Premises and equipment, net............................................ 1,292,284
Other assets........................................................... 3,190,060
Reserve for possible credit losses..................................... (143,277)
-----------
Total assets.................................................. $19,125,282
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)................................................ $ 8,011,904 6.30 504,742
Money market deposit accounts.................................... 2,908,901 5.42 157,786
Interest-bearing transaction accounts............................ 27,779 4.72 1,310
Savings accounts................................................. 11,578 4.68 542
----------- ---------
Total domestic interest-bearing deposits...................... 10,960,162 6.06 664,380
Foreign:
Time deposits.................................................... 452,530 6.53 29,540
----------- ---------
Total interest-bearing deposits............................... 11,412,692 6.08 693,920
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.................................. 16,712 5.59 935
Other short-term borrowings........................................ 321,443 5.86 18,849
Long-term debt and bank notes:
Domestic (c)..................................................... 4,459,829 6.52 290,814
Foreign.......................................................... 179,601 7.85 14,105
----------- ---------
Total long-term debt and bank notes........................... 4,639,430 6.57 304,919
----------- ---------
Total borrowed funds.......................................... 4,977,585 6.52 324,703
----------- ---------
Total interest-bearing liabilities............................ 16,390,277 6.21 1,018,623
Demand deposits........................................................ 340,195
Other liabilities...................................................... 644,351
-----------
Total liabilities............................................. 17,374,823
Stockholders' equity................................................... 1,750,459
-----------
Total liabilities and stockholders' equity.................... $19,125,282
=========== ---------
Net interest income........................................... $ 694,281
=========
Net interest margin........................................... 4.86
Interest rate spread.......................................... 5.78
YEAR ENDED DECEMBER 31, 1996
AVERAGE YIELD/ INCOME
AMOUNT RATE OR EXPENSE
------------------------------------
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic........................................................... $ 2,250 3.87% $ 87
Foreign............................................................ 528,882 5.57 29,441
----------- ---------
Total interest-earning time deposits in other banks........... 531,132 5.56 29,528
Federal funds sold and securities purchased under resale agreements.. 184,347 5.39 9,935
Investment securities (a):
Taxable............................................................ 2,126,411 5.79 123,054
Tax-exempt (b)..................................................... 85,461 5.99 5,116
----------- ---------
Total investment securities................................... 2,211,872 5.79 128,170
Loans held for securitization:
Domestic........................................................... 2,169,426 14.02 304,118
Foreign............................................................ 360,058 14.44 52,002
----------- ---------
Total loans held for securitization........................... 2,529,484 14.08 356,120
Loans:
Domestic:
Credit card...................................................... 4,701,009 13.92 654,410
Other consumer................................................... 1,227,915 14.03 172,336
----------- ---------
Total domestic loans.......................................... 5,928,924 13.94 826,746
Foreign............................................................ 245,171 14.10 34,559
----------- ---------
Total loans................................................... 6,174,095 13.95 861,305
----------- ---------
Total interest-earning assets................................. 11,630,930 11.91 1,385,058
Cash and due from banks................................................ 350,463
Premises and equipment, net............................................ 931,455
Other assets........................................................... 1,769,481
Reserve for possible credit losses..................................... (111,041)
-----------
Total assets.................................................. $14,571,288
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)................................................ $ 6,147,083 5.89 361,934
Money market deposit accounts.................................... 2,540,850 5.30 134,777
Interest-bearing transaction accounts............................ 23,504 4.58 1,077
Savings accounts................................................. 10,181 4.56 464
----------- ---------
Total domestic interest-bearing deposits...................... 8,721,618 5.71 498,252
Foreign:
Time deposits.................................................... 497,654 5.95 29,633
----------- ---------
Total interest-bearing deposits............................... 9,219,272 5.73 527,885
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.................................. 67,712 5.39 3,648
Other short-term borrowings........................................ 269,538 5.51 14,849
Long-term debt and bank notes:
Domestic (c)..................................................... 2,926,018 6.44 188,425
Foreign.......................................................... 103,232 7.73 7,983
----------- ---------
Total long-term debt and bank notes........................... 3,029,250 6.48 196,408
----------- ---------
Total borrowed funds.......................................... 3,366,500 6.38 214,905
----------- ---------
Total interest-bearing liabilities............................ 12,585,772 5.90 742,790
Demand deposits........................................................ 189,571
Other liabilities...................................................... 418,873
-----------
Total liabilities............................................. 13,194,216
Stockholders' equity................................................... 1,377,072
-----------
Total liabilities and stockholders' equity.................... $14,571,288
=========== ---------
Net interest income........................................... $ 642,268
=========
Net interest margin........................................... 5.52
Interest rate spread.......................................... 6.01
YEAR ENDED DECEMBER 31, 1995
AVERAGE YIELD/ INCOME
AMOUNT RATE OR EXPENSE
------------------------------------
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic........................................................... $ 2,236 4.52% $ 101
Foreign............................................................ 259,763 6.06 15,731
----------- ---------
Total interest-earning time deposits in other banks........... 261,999 6.04 15,832
Federal funds sold and securities purchased under resale agreements.. 129,657 5.96 7,727
Investment securities (a):
Taxable............................................................ 1,980,322 6.03 119,322
Tax-exempt (b)..................................................... 79,805 6.41 5,116
----------- ---------
Total investment securities................................... 2,060,127 6.04 124,438
Loans held for securitization:
Domestic........................................................... 2,151,807 14.04 302,037
Foreign............................................................ 117,555 14.44 16,972
----------- ---------
Total loans held for securitization........................... 2,269,362 14.06 319,009
Loans:
Domestic:
Credit card...................................................... 3,827,429 14.10 539,642
Other consumer................................................... 630,760 13.75 86,761
----------- ---------
Total domestic loans.......................................... 4,458,189 14.05 626,403
Foreign............................................................ 334,347 14.71 49,197
----------- ---------
Total loans................................................... 4,792,536 14.10 675,600
----------- ---------
Total interest-earning assets................................. 9,513,681 12.01 1,142,606
Cash and due from banks................................................ 197,374
Premises and equipment, net............................................ 685,022
Other assets........................................................... 1,133,212
Reserve for possible credit losses..................................... (103,568)
-----------
Total assets.................................................. $11,425,721
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)................................................ $ 5,084,445 5.70 289,816
Money market deposit accounts.................................... 1,903,931 5.79 110,244
Interest-bearing transaction accounts............................ 19,212 5.10 980
Savings accounts................................................. 8,401 5.05 424
----------- ---------
Total domestic interest-bearing deposits...................... 7,015,989 5.72 401,464
Foreign:
Time deposits.................................................... 563,072 6.52 36,693
----------- ---------
Total interest-bearing deposits............................... 7,579,061 5.78 438,157
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.................................. 49,141 6.01 2,952
Other short-term borrowings........................................ 148,804 6.14 9,143
Long-term debt and bank notes:
Domestic (c)..................................................... 2,180,341 6.57 143,330
Foreign.......................................................... 32,250 9.32 3,007
----------- ---------
Total long-term debt and bank notes........................... 2,212,591 6.61 146,337
----------- ---------
Total borrowed funds.......................................... 2,410,536 6.57 158,432
----------- ---------
Total interest-bearing liabilities............................ 9,989,597 5.97 596,589
Demand deposits........................................................ 130,779
Other liabilities...................................................... 311,058
-----------
Total liabilities............................................. 10,431,434
Stockholders' equity................................................... 994,287
-----------
Total liabilities and stockholders' equity.................... $11,425,721
=========== ---------
Net interest income........................................... $ 546,017
=========
Net interest margin........................................... 5.74
Interest rate spread.......................................... 6.04
- --------------------------------------------------------------------------------
(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,
1997, 1996, and 1995, was $1,891, $1,791, and $1,791, respectively.
(c) Includes the impact of interest rate swap agreements used to change
fixed-rate funding sources to floating-rate funding sources.
22
25
MBNA CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
TABLE 3: RATE-VOLUME VARIANCE ANALYSIS (a)
(dollars in thousands, on a fully taxable equivalent basis)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
VOLUME RATE TOTAL
-------------------------------------
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic .............................................................. $ 16 $ (1) $ 15
Foreign ............................................................... 18,399 1,131 19,530
--------- --------- ---------
Total interest-earning time deposits in other banks ................. 18,415 1,130 19,545
Federal funds sold and securities purchased under resale agreements ...... 13,694 333 14,027
Investment securities:
Taxable ............................................................... 20,225 (1,850) 18,375
Tax-exempt ............................................................ 250 36 286
--------- --------- ---------
Total investment securities ......................................... 20,475 (1,814) 18,661
Loans held for securitization:
Domestic .............................................................. 45,684 10,704 56,388
Foreign ............................................................... 4,137 - 4,137
--------- --------- ---------
Total loans held for securitization ................................. 49,821 10,704 60,525
Loans:
Domestic:
Credit card ......................................................... 70,024 11,537 81,561
Other consumer loans ................................................ 102,750 5,736 108,486
--------- --------- ---------
Total domestic loans ................................................ 172,774 17,273 190,047
Foreign ............................................................... 25,494 (453) 25,041
--------- --------- ---------
Total loans ......................................................... 198,268 16,820 215,088
--------- --------- ---------
Total interest income ............................................... 300,673 27,173 327,846
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Domestic:
Time deposits ....................................................... 116,042 26,766 142,808
Money market deposit accounts ....................................... 19,904 3,105 23,009
Interest-bearing transaction accounts ............................... 201 32 233
Savings accounts .................................................... 65 13 78
--------- --------- ---------
Total domestic interest-bearing deposits ............................ 136,212 29,916 166,128
Foreign:
Time deposits ....................................................... (2,812) 2,719 (93)
--------- --------- ---------
Total interest-bearing deposits ..................................... 133,400 32,635 166,035
Borrowed funds:
Federal funds purchased and securities sold under repurchase agreements (2,848) 135 (2,713)
Other short-term borrowings ........................................... 2,997 1,003 4,000
Long-term debt and bank notes:
Domestic ............................................................ 99,987 2,402 102,389
Foreign ............................................................. 5,996 126 6,122
--------- --------- ---------
Total long-term debt and bank notes ................................. 105,983 2,528 108,511
--------- --------- ---------
Total borrowed funds ................................................ 106,132 3,666 109,798
--------- --------- ---------
Total interest expense .............................................. 239,532 36,301 275,833
--------- --------- ---------
Net interest income ................................................. $ 61,141 $ (9,128) $ 52,013
========= ========= =========
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
VOLUME RATE TOTAL
-------------------------------------
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic .............................................................. $ 1 $ (15) $ (14)
Foreign ............................................................... 15,076 (1,366) 13,710
--------- --------- ---------
Total interest-earning time deposits in other banks ................. 15,077 (1,381) 13,696
Federal funds sold and securities purchased under resale agreements ...... 3,005 (797) 2,208
Investment securities:
Taxable ............................................................... 8,576 (4,844) 3,732
Tax-exempt ............................................................ 350 (350) -
--------- --------- ---------
Total investment securities ......................................... 8,926 (5,194) 3,732
Loans held for securitization:
Domestic .............................................................. 2,464 (383) 2,081
Foreign ............................................................... 35,030 - 35,030
--------- --------- ---------
Total loans held for securitization ................................. 37,494 (383) 37,111
Loans:
Domestic:
Credit card ......................................................... 121,690 (6,922) 114,768
Other consumer loans ................................................ 83,775 1,800 85,575
--------- --------- ---------
Total domestic loans ................................................ 205,465 (5,122) 200,343
Foreign ............................................................... (12,645) (1,993) (14,638)
--------- --------- ---------
Total loans ......................................................... 192,820 (7,115) 185,705
Total interest income ............................................... 257,322 (14,870) 242,452
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Domestic:
Time deposits ....................................................... 62,295 9,823 72,118
Money market deposit accounts ....................................... 34,405 (9,872) 24,533
Interest-bearing transaction accounts ............................... 204 (107) 97
Savings accounts .................................................... 84 (44) 40
--------- --------- ---------
Total domestic interest-bearing deposits ............................ 96,988 (200) 96,788
Foreign:
Time deposits ....................................................... (4,052) (3,008) (7,060)
--------- --------- ---------
Total interest-bearing deposits ..................................... 92,936 (3,208) 89,728
Borrowed funds:
Federal funds purchased and securities sold under repurchase agreements 1,025 (329) 696
Other short-term borrowings ........................................... 6,738 (1,032) 5,706
Long-term debt and bank notes:
Domestic ............................................................ 48,075 (2,980) 45,095
Foreign ............................................................. 5,570 (594) 4,976
--------- --------- ---------
Total long-term debt and bank notes ................................. 53,645 (3,574) 50,071
--------- --------- ---------
Total borrowed funds ................................................ 61,408 (4,935) 56,473
--------- --------- ---------
Total interest expense .............................................. 154,344 (8,143) 146,201
--------- --------- ---------
Net interest income ................................................. $ 102,978 $ (6,727) $ 96,251
========= ========= =========
- --------------------------------------------------------------------------------
(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.
NET INTEREST INCOME
Table 3 illustrates the impact that rate and volume changes had on the
Corporation's net interest income for the years presented.
Net interest income, on a fully taxable equivalent basis, increased 8.1% or
$52.0 million to $694.3 million in 1997 from 1996, as shown in Table 2. The
increase in net interest income in 1997 is primarily a result of a $2.7 billion
increase in average interest-earning assets from 1996, offset by a $3.8 billion
increase in average interest-bearing liabilities and a 66 basis point decline in
the net interest margin for the same period. The growth in average
interest-earning assets is primarily a result of a $1.7 billion increase in
average loan receivables combined with an increase of $924.5 million in average
investment securities and money market instruments. The increase in
interest-bearing liabilities resulted primarily from funding the increase in
interest-earning assets and accounts receivable from securitizations, which is
included in other assets.
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 also shown in Table 2. The
increase in net interest income in 1996 was primarily a result of a $2.1 billion
increase in average interest-earning assets from 1995, offset by a $2.6 billion
increase in average interest-bearing liabilities and a 22 basis point decline
23
26
MBNA CORPORATION AND SUBSIDIARIES
in the net interest margin for the same period. The growth in average
interest-earning assets reflects a $1.6 billion increase in average loan
receivables and 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
(fully taxable equivalent basis)
(millions)
95 546.0
96 642.3
97 694.3
The net interest margin, on a fully taxable equivalent basis, was 4.86% for
1997, compared to 5.52% and 5.74% for 1996 and 1995, respectively. The decline
in the net interest margin for 1997 is primarily a result of an increase in
average interest-bearing liabilities that was partially used to fund the growth
in accounts receivable from securitizations, which is included in other assets,
combined with a 31 basis point increase in average rates paid on
interest-bearing liabilities. The decline in the net interest margin for 1996
was primarily a result of an increase in average interest-bearing liabilities
that was partially used to fund the growth of noninterest-earning assets
combined with a 10 basis point decrease in yields earned on interest-earning
assets.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
In 1997, interest income on investment securities, on a fully taxable equivalent
basis, increased $18.7 million to $146.8 million from 1996. The increase in 1997
is primarily the result of a $358.5 million increase in average investment
securities, offset by an 8 basis point decrease in yields earned on these
securities. Interest income on money market instruments increased $33.6 million
to $73.0 million in 1997 from 1996. The increase in 1997 was primarily the
result of an increase of $566.0 million in average money market instruments from
1996, combined with an 18 basis point increase in the yields earned on these
instruments.
INTEREST INCOME FROM
INVESTMENT SECURITIES AND
MONEY MARKET INSTRUMENTS
(fully taxable equivalent basis)
(millions)
95 148.0
96 167.6
97 219.9
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 was
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 was 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.
The increases in average investment securities and money market instruments are
primarily a result of the timing of the receipt of funds from asset
securitizations. Funds received from the securitization transactions 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 was 27.0% for 1997, compared to 25.2% in 1996
and 25.8% in 1995. 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, 1997.
Note C to the audited consolidated financial statements provides further detail
regarding the Corporation's investment securities.
TABLE 4: INVESTMENT SECURITIES
(dollars in thousands, yields on a fully taxable equivalent basis)
ESTIMATED MATURITIES AT DECEMBER 31, 1997
Within 1 Year 1-5 Years 6-10 Years
Book Yield Book Yield Book Yield
----------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Treasury and other U.S. government
agencies obligations ........................... $ 773,974 5.76% $ 301,406 6.03% $ - -%
State and political subdivisions of the
United States .................................. 84,778 6.61 6,538 6.39 - -
Asset-backed and other securities ............... 146,097 6.09 793,871 6.13 53,663 6.14
---------- ---------- ----------
Total investment securities available-for-sale $1,004,849 5.87 $1,101,815 6.10 $ 53,663 6.14
========== ========== ==========
HELD-TO-MATURITY:
U.S. Treasury and other U.S. government
agencies obligations .......................... $ 168,926 5.07 $ 25,963 5.92 $ - -
State and political subdivisions of the
United States ................................. - - - - - -
Asset-backed and other securities ............... 39,572 5.64 2,316 7.36 - -
---------- ---------- ----------
Total investment securities held-to-maturity . $ 208,498 5.18 $ 28,279 6.04 $ - -
========== ========== ==========
ESTIMATED MATURITIES
AT DECEMBER 31, 1997
Over 10 Years Total
Book Yield Book Yield
---------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Treasury and other U.S. government
agencies obligations ........................... $ - -% $1,075,380 5.84%
State and political subdivisions of the
United States .................................. - - 91,316 6.59
Asset-backed and other securities ............... 2,137 6.12 995,768 6.14
---------- ----------
Total investment securities available-for-sale $ 2,137 6.12 $2,162,464 6.01
========== ==========
HELD-TO-MATURITY:
U.S. Treasury and other U.S. government
agencies obligations .......................... $ 90,858 6.03 $ 285,747 5.47
State and political subdivisions of the
United States ................................. 1,628 6.04 1,628 6.04
Asset-backed and other securities ............... 16,917 6.00 58,805 5.81
---------- ----------
Total investment securities held-to-maturity . $ 109,403 6.03 $ 346,180 5.53
========== ==========
24
27
MBNA CORPORATION AND SUBSIDIARIES
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased $275.6
million to $1.5 billion in 1997. The increase is the result of a $1.7 billion
increase in average loan receivables, combined with an increase of 31 basis
points in the average yields earned on these receivables.
INTEREST INCOME FROM
LOAN RECEIVABLES
(millions)
95 994.6
96 1,217.4
97 1,493.0
Interest income on loan receivables increased $222.8 million to $1.2 billion in
1996. The increase in interest income during 1996 was 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.
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 10.2% to $11.2 billion
at December 31, 1997, compared to $10.1 billion and $8.1 billion at December 31,
1996 and 1995, respectively.
Credit card loan receivables increased to $8.7 billion at December 31, 1997,
compared to $8.2 billion and $7.3 billion at December 31, 1996 and 1995,
respectively. The increases in credit card loan receivables for 1997 and 1996
were a result of the Corporation's successful marketing programs, such as the
introduction of the MBNA Platinum Plus MasterCard and Visa program in early
1996, as well as competitive pricing strategies. The Corporation offers
variable-rate credit card loans as well as variable-rate home equity loans to
certain new and existing Customers. At December 31, 1997, variable-rate loans
made up 19.9% of total managed loans compared to 42.1% of total managed loans at
December 31, 1996. These variable-rate loans are indexed to the U.S. Prime Rate
published in The Wall Street Journal and generally reprice quarterly. The
decline in variable-rate loans was primarily the result of the Corporation
repricing outstanding credit card loans from variable-rate to fixed-rate. The
Corporation has the contractual right to reprice fixed-rate credit card loans at
any time, by giving notice to the Customer.
Other consumer loan receivables increased to $2.4 billion at December 31, 1997,
compared to $1.9 billion and $876.9 million at December 31, 1996 and 1995,
respectively. The increases in other consumer loans for 1997 and 1996 were a
result of the Corporation's increased efforts to originate other consumer loans
in both years, combined with the acquisition of other consumer loan portfolios
in 1996. Additionally, the Bank increased its securitization of other consumer
loans from $1.4 billion in 1996 to $2.4 billion in 1997.
Note D 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, 1997 1996 1995
Loans held for securitization:
Domestic:
Credit card .................... $ 2,297,400 20.6% $ 2,206,218 21.8% $ 2,780,802 34.2%
Other consumer ................. - - - - - -
----------- ----- ----------- ----- ----------- -----
Total domestic loans held for
securitization ............. 2,297,400 20.6 2,206,218 21.8 2,780,802 34.2
Foreign (a) ...................... 602,798 5.4 263,756 2.6 387,625 4.7
----------- ----- ----------- ----- ----------- -----
Total loans held for
securitization ............. 2,900,198 26.0 2,469,974 24.4 3,168,427 38.9
Loan portfolio:
Domestic:
Credit card .................... 5,475,933 49.0 5,514,326 54.4 3,957,129 48.7
Other consumer ................. 2,187,216 19.6 1,840,052 18.2 870,893 10.7
----------- ----- ----------- ----- ----------- -----
Total domestic loan portfolio 7,663,149 68.6 7,354,378 72.6 4,828,022 59.4
Foreign (a) ...................... 598,727 5.4 304,700 3.0 139,469 1.7
----------- ----- ----------- ----- ----------- -----
Total loan portfolio ........ 8,261,876 74.0 7,659,078 75.6 4,967,491 61.1
----------- ----- ----------- ----- ----------- -----
Total loan receivables ...... $11,162,074 100.0% $10,129,052 100.0% $ 8,135,918 100.0%
=========== ===== =========== ===== =========== =====
DECEMBER 31, 1994 1993
Loans held for securitization:
Domestic:
Credit card .................... $ 1,899,026 33.3% $ 741,869 16.6%
Other consumer ................. 400,000 7.0 - -
----------- ----- ----------- -----
Total domestic loans held for
securitization ............. 2,299,026 40.3 741,869 16.6
Foreign (a) ...................... - - - -
----------- ----- ----------- -----
Total loans held for
securitization ............. 2,299,026 40.3 741,869 16.6
Loan portfolio:
Domestic:
Credit card .................... 2,506,942 43.9 2,935,418 65.7
Other consumer ................. 521,036 9.1 775,514 17.4
----------- ----- ----------- -----
Total domestic loan portfolio 3,027,978 53.0 3,710,932 83.1
Foreign (a) ...................... 379,996 6.7 14,577 .3
----------- ----- ----------- -----
Total loan portfolio ........ 3,407,974 59.7 3,725,509 83.4
----------- ----- ----------- -----
Total loan receivables ...... $ 5,707,000 100.0% $ 4,467,378 100.0%
=========== ===== =========== =====
(a) Note S to the audited consolidated financial statements provides the foreign
loan receivables distribution between credit card and other consumer loans.
25
28
MBNA CORPORATION AND SUBSIDIARIES
DEPOSITS
Total interest expense on deposits was $693.9 million for 1997, compared to
$527.9 million and $438.2 million for 1996 and 1995, respectively. The increase
in interest expense of $166.0 million during 1997 is primarily the result of a
$2.2 billion increase in average interest-bearing deposits combined with a 35
basis point increase in rates paid on average interest-bearing deposits. The
increase in interest expense on deposits of $89.7 million during 1996 was 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 increases in average interest-bearing deposits for 1997 and 1996 were 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 to $19.8 million for 1997,
compared to $18.5 million and $12.1 million for 1996 and 1995, respectively. The
increase in interest expense on short-term borrowings for 1997 is primarily the
result of rates paid on average short-term borrowings which increased 37 basis
points from 1996. The increase in interest expense for 1996 was primarily the
result of an increase in average short-term borrowings of $139.3 million offset
by a 63 basis point decrease in the rates paid on these average short-term
borrowings.
Note G to the audited consolidated financial statements provides further detail
regarding the Corporation's short-term borrowings.
During 1997 and 1996, 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, average long-term debt and bank notes
increased $1.6 billion to $4.6 billion, increasing interest expense related to
long-term debt and bank notes by $108.5 million to $304.9 million in 1997 from
1996. The average rates paid on these funds increased 9 basis points during
1997.
In 1996, interest expense related to long-term debt and bank notes increased
$50.1 million to $196.4 million from 1995. This increase was 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 the rates paid on
these funds.
Note H 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 48.4% or $917.0 million to $2.8 billion
in 1997 from 1996. The increase in other operating income during 1997 is
primarily attributable to an increase of 52.0% or $857.5 million in
securitization income for the period. The increase in securitization income is
the result of a $10.2 billion or 45.5% increase in average securitized loans to
$32.7 billion from 1996, combined with the adoption of Statement No. 125 by the
Corporation. Securitization income includes the gains recognized by the
Corporation in accordance with Statement No. 125, in addition to the
contractually specified other fees earned by the Corporation for the servicing
of previously securitized loans. Interchange income also increased $26.4 million
from 1996, as the Corporation's sales volume increased. In addition, other
income increased $32.5 million to $88.3 million in 1997. The increase is
primarily attributable to the gain on the sale of the Corporation's merchant
card processing business and growth in fee income generated from the
Corporation's insurance agency business.
OTHER OPERATING INCOME
(billions)
95 1.4
96 1.9
97 2.8
On January 1, 1997, the Corporation adopted Statement No. 125, effective for all
transactions occurring after December 31, 1996. Under Statement No. 125, gains
are now recognized at the time of initial sale and each subsequent sale of loan
receivables in a securitization. As a result, the Corporation now recognizes the
gain from securitized loans in securitization income on the Corporation's
consolidated statements of income and includes the related receivable in
accounts receivable from securitizations on the consolidated statements of
financial condition at the time of sale. Securitization income also includes the
additional earnings from the Corporation's securitized loans previously reported
as loan servicing fees. Previously, the Corporation recognized the earnings from
securitization over the life of the transaction. As a result of the adoption of
Statement No. 125, securitization income increased $325.1 million in 1997. This
increase is not representative of future periods. Any future gains that will be
recognized by the Corporation in accordance with Statement No. 125 will be
dependent upon the timing and the amount of future securitizations. The
Corporation invested an amount equivalent to the increase in securitization
income from the adoption of Statement No. 125 in additional business development
efforts; therefore, this incremental increase in securitization income did not
materially impact the Corporation's consolidated net income. In accordance with
Statement No. 125, prior years have not been restated.
In 1996, total other operating income increased 33.1% or $471.3 million to $1.9
billion from 1995. The increase in 1996 was primarily attributable to an
increase of 37.8% or $452.6 million in securitization income for the period.
Securitization income, generated by securitized loans prior to the adoption of
Statement No. 125, consisted of interest income, interchange and other fees in
excess of interest paid to Certificateholders; credit losses; and other trust
expenses. The increase in securitization income was the direct result of an
increase in average securitized loans of $7.1 billion during 1996.
26
29
MBNA CORPORATION AND SUBSIDIARIES
In addition, credit card fees increased $20.3 million to $102.6 million during
1996. This increase was primarily the result of increases in late and overlimit
fees.
During 1996, MBNA Hallmark Information Services, Inc., the Corporation's
information processing subsidiary, did not renew contracts with external
Customers in order to increase its focus on providing information technology
support and services to the Bank and its affiliates. As a result, processing
fees included in other operating income decreased.
OTHER OPERATING EXPENSE
Total other operating expense increased 41.4% to $2.2 billion in 1997 from $1.6
billion in 1996, compared to an increase of 26.2% in 1996 from 1995. The growth
in other operating expense reflects the Corporation's continued investment in
business development to enhance the ability of the Corporation to attract and
retain Customers. The investment in business development included an amount
equivalent to the increase in securitization income resulting from the adoption
of Statement No. 125. The Corporation added approximately 9.4 million new
accounts in 1997 compared to 7.5 million in 1996. The Corporation also invested
in expanding its other consumer loan, foreign, and insurance agency businesses.
Note P 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, the Corporation elected to retain the
intrinsic-value-based method of 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.
Many computer applications have been written using two digits rather than four
to define the applicable year, and therefore may not recognize a date using "00"
as the Year 2000. This could result in the inability of the application to
properly process transactions with dates in the Year 2000 or thereafter. The
Corporation has substantially completed an assessment of the impact of this
problem on its computer systems and applications, including the systems that
service the Corporation's loans, and is executing a plan to make the necessary
programming changes, and has begun to test and implement them. The Corporation
expects to complete implementation of the necessary changes to its mainframe,
distributed, and desktop systems by the end of 1998, and its other systems by
mid-1999.
The Corporation is actively monitoring the progress of third parties, whose
systems provide information to the Corporation's systems, in achieving Year 2000
compliance and is developing contingency plans to address any failure of a
critical vendor to do so. Based on its efforts and the information available to
date, and assuming the continued availability of staff and other technical
resources, and no unexpected difficulty in implementing system enhancements, the
Corporation believes that it will not incur significant operational disruptions
or material costs as a result of the Year 2000 problem. However, there can be no
assurance that the systems of third parties with which the Corporation deals
will be timely converted and will not adversely affect the Corporation's
business.
SPECIAL MARKETING PROGRAM
During 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 MasterCard
and Visa program.
INCOME TAXES
The Corporation recognized applicable income taxes of $399.6 million in 1997,
compared to $289.6 million in 1996 and $231.5 million in 1995. This represents
an effective tax rate of 39.1% for 1997, and 39.6% for 1996 and 1995. Applicable
income taxes for 1996 exclude the effect of the tax benefit from Customer-based
intangible assets described below. Note R 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 1996 included 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 these assets because there were uncertainties concerning the tax treatment of
such assets. In 1993, the U.S. Supreme Court affirmed that Customer-based
intangible assets may be amortized for tax purposes. Accordingly, the
Corporation recognized a portion of the tax benefit related to the
Customer-based intangible assets. During 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.
27
30
MBNA CORPORATION AND SUBSIDIARIES
TABLE 6: DELINQUENT LOANS
(dollars in thousands)
DECEMBER 31, 1997 1996 1995 1994 1993
Loan portfolio ....... $8,261,876 $7,659,078 $4,967,491 $3,407,974 $3,725,509
Loans delinquent:
30 to 59 days ...... $ 125,870 1.52% $ 114,382 1.49% $ 65,651 1.32% $ 38,912 1.14% $ 41,501 1.11%
60 to 89 days ...... 64,275 .78 52,857 .69 30,162 .61 17,962 .53 20,984 .56
90 or more days .... 134,865 1.63 107,679 1.41 58,894 1.18 31,804 .93 50,477 1.36
---------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ----
Total ............ $ 325,010 3.93% $ 274,918 3.59% $ 154,707 3.11% $ 88,678 2.60% $ 112,962 3.03%
========== ==== ========== ==== ========== ==== ========== ==== ========== ====
Loans delinquent by
geographic area:
Domestic ........... $ 313,467 4.09% $ 269,035 3.66% $ 151,316 3.13% $ 82,664 2.73% $ 112,962 3.04%
Foreign ............ 11,543 1.93 5,883 1.93 3,391 2.43 6,014 1.58 - -
LOAN QUALITY
The Corporation's loan quality at any time reflects, among other factors, the
quality of the Corporation's credit card and other consumer loans, the general
economic conditions, the success of the Corporation's collection efforts, and
the average seasoning of the Corporation's accounts. As new accounts season, the
delinquency rate on these accounts generally rises and then stabilizes.
DELINQUENCIES
An account is contractually delinquent if the minimum payment is not received by
the specified date on the Customer's statement. However, the Corporation
generally continues to accrue interest until the loan is either paid or charged
off. Delinquency as a percentage of the Corporation's loan portfolio was 3.93%
at December 31, 1997, compared with 3.59% at December 31, 1996. Delinquency as a
percentage of managed loans was 4.59% at December 31, 1997, compared to 4.28% at
December 31, 1996. Table 6 presents the stages of delinquency of the
Corporation's loan portfolio, excluding loans held for securitization.
TABLE 7: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
DECEMBER 31, 1997 1996 1995
Reserve for possible credit losses, beginning of year .............. $ 118,427 $ 104,886 $ 101,519
Reserves acquired ................................................ 7,975 7,553 -
Provision for possible credit losses ............................. 260,040 178,224 138,176
Foreign currency translation ..................................... (203) 488 (90)
Credit losses:
Domestic:
Credit card .................................................. (294,608) (226,067) (161,004)
Other consumer ............................................... (57,970) (23,504) (10,553)
------------ ------------ ------------
Total domestic credit losses ............................... (352,578) (249,571) (171,557)
Foreign ........................................................ (6,964) (4,846) (3,336)
------------ ------------ ------------
Total credit losses ........................................ (359,542) (254,417) (174,893)
Recoveries:
Domestic:
Credit card .................................................. 126,012 76,605 37,765
Other consumer ............................................... 7,555 4,438 2,273
------------ ------------ ------------
Total domestic recoveries .................................. 133,567 81,043 40,038
Foreign ........................................................ 2,212 650 136
------------ ------------ ------------
Total recoveries ........................................... 135,779 81,693 40,174
------------ ------------ ------------
Net credit losses ................................................ (223,763) (172,724) (134,719)
------------ ------------ ------------
Reserve for possible credit losses, end of year .................... $ 162,476 $ 118,427 $ 104,886
============ ============ ============
Net credit losses as a % of average loan receivables ............... 2.14% 1.98% 1.91%
Net credit losses as a % of beginning reserve ...................... 188.95 164.68 132.70
Reserve for possible credit losses as a % of ending loan receivables 1.46 1.17 1.29
Ending loan receivables ............................................ $ 11,162,074 $ 10,129,052 $ 8,135,918
Average loan receivables ........................................... 10,438,513 8,703,579 7,061,898
DECEMBER 31, 1994 1993
Reserve for possible credit losses, beginning of year .............. $ 97,580 $ 97,580
Reserves acquired ................................................ - -
Provision for possible credit losses ............................. 108,477 98,795
Foreign currency translation ..................................... 21 -
Credit losses:
Domestic:
Credit card .................................................. (98,613) (88,099)
Other consumer ............................................... (33,331) (30,332)
------------ ------------
Total domestic credit losses ............................... (131,944) (118,431)
Foreign ........................................................ (350) -
------------ ------------
Total credit losses ........................................ (132,294) (118,431)
Recoveries:
Domestic:
Credit card .................................................. 26,052 18,577
Other consumer ............................................... 1,672 1,059
------------ ------------
Total domestic recoveries .................................. 27,724 19,636
Foreign ........................................................ 11 -
------------ ------------
Total recoveries ........................................... 27,735 19,636
------------ ------------
Net credit losses ................................................ (104,559) (98,795)
------------ ------------
Reserve for possible credit losses, end of year .................... $ 101,519 $ 97,580
============ ============
Net credit losses as a % of average loan receivables ............... 1.96% 2.43%
Net credit losses as a % of beginning reserve ...................... 107.15 101.25
Reserve for possible credit losses as a % of ending loan receivables 1.78 2.18
Ending loan receivables ............................................ $ 5,707,000 $ 4,467,378
Average loan receivables ........................................... 5,330,282 4,068,685
28
31
MBNA CORPORATION AND SUBSIDIARIES
NET CREDIT LOSSES
Net credit losses during 1997 were $223.8 million, compared to $172.7 million
for 1996 and $134.7 million for 1995. 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 for 1997 and 1996 reflect increases in the Corporation's
outstanding loan receivables, the general economic conditions, and the seasoning
of the Corporation's accounts, offset by recoveries from the sale of charged-off
receivables.
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. Periodically, the Corporation sells previously
charged-off receivables. The proceeds received by the Corporation from these
sales are recorded as recoveries and thus reduce net credit losses.
Annual net credit losses as a percentage of average loan receivables increased
to 2.14% during 1997, compared to 1.98% for 1996 and 1.91% for 1995. The
Corporation's annual managed credit losses as a percentage of average managed
loans for 1997 was 3.97%, compared to 3.35% and 2.74% for 1996 and 1995,
respectively.
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
Table 7 presents an analysis of the Corporation's reserve for possible credit
losses. The loan portfolio is regularly reviewed to determine an appropriate
reserve for possible credit losses based upon the impact of economic conditions
on the borrowers' ability to repay, past collection experience, the risk
characteristics of the portfolio, and other factors. A provision is charged to
operating expense to maintain the reserve at an appropriate level. 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
securitization income rather than the reserve for possible credit losses. The
provision for possible credit losses for the year ended December 31, 1997,
increased $81.8 million or 45.9% from 1996, compared to a $40.0 million or 29.0%
increase in 1996 from 1995.
The reserve for possible credit losses is internally allocated among domestic
credit card loans, domestic other consumer loans, and foreign loans, as
presented in Table 8.
TABLE 8: ALLOCATION OF RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
DECEMBER 31, 1997 1996 1995 1994 1993
Domestic:
Credit card ........................ $134,910 83.0% $ 95,253 80.4% $ 82,596 78.7% $ 79,396 78.2% $ 78,396 80.3%
Other consumer ..................... 23,031 14.2 18,446 15.6 18,009 17.2 20,691 20.4 18,814 19.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Domestic reserve for possible
credit losses ................... 157,941 97.2 113,699 96.0 100,605 95.9 100,087 98.6 97,210 99.6
Foreign .............................. 4,535 2.8 4,728 4.0 4,281 4.1 1,432 1.4 370 .4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Reserve for possible credit losses $162,476 100.0% $118,427 100.0% $104,886 100.0% $101,519 100.0% $ 97,580 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
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 established
quantitative measures to ensure that minimum thresholds for Tier 1 capital,
Total capital, and Leverage ratios are maintained. Failure to meet these minimum
capital requirements can initiate certain mandatory--and possible additional
discretionary--actions by the regulators, that, if undertaken, could have a
direct material effect on the Corporation's and the Bank's consolidated
financial statements. Under the 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's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. At December 31, 1997, both the
Corporation's and the Bank's capital exceeded all minimum regulatory
requirements to which they are subject, and the Bank was "well-capitalized" as
defined under the regulatory guidelines. Both the Corporation's and the Bank's
risk-based capital ratios, shown in Table 9, have been computed in accordance
with regulatory accounting practices.
TABLE 9: REGULATORY CAPITAL RATIOS
MINIMUM WELL-CAPITALIZED
DECEMBER 31, 1997 RATIOS REQUIREMENTS REQUIREMENTS
MBNA Corporation
Tier 1.................. 9.82% 4.00% (a)
Total................... 11.99 8.00 (a)
Leverage................ 11.13 4.00 (a)
MBNA America Bank, N.A.
Tier 1.................. 9.56% 4.00% 6.00%
Total................... 11.06 8.00 10.00
Leverage................ 10.90 4.00 5.00
(a) Not applicable for bank holding companies.
29
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MBNA CORPORATION AND SUBSIDIARIES
Note N to the audited consolidated financial statements provides further detail
regarding the Corporation's capital adequacy.
In 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. As a result, the
Corporation issued $250.0 million of guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures in December
1996 and $280.0 million in January 1997. These securities qualify as regulatory
capital for the Corporation. Such regulatory capital treatment, together with
the Corporation's ability to deduct, for income tax purposes, interest payable
on the junior subordinated deferrable interest debentures, provides the
Corporation with lower-cost regulatory capital. The Corporation contributed the
proceeds from the $250.0 million issuance of guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures as
capital to the Bank.
During 1997, the Corporation declared dividends on its preferred and common
stock of $176.8 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
consecutive periods covering five years on its guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
the Corporation may not be permitted to declare or pay any cash dividends on the
Corporation's capital stock or interest on debt securities that have equal or
lower priority than the junior subordinated deferrable interest debentures.
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, 1997, the
amount of retained earnings available for declaration and payment of dividends
from the Bank to the Corporation was $651.0 million. Payment of dividends by the
Bank to the Corporation, however, may 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, 1997.
LIQUIDITY AND RATE SENSITIVITY
The financial condition of the Corporation is managed with a focus on
maintaining high-quality credit standards and prudent levels of liquidity,
interest rate risk, and foreign currency exchange rate risk.
LIQUIDITY MANAGEMENT
Liquidity management is the process by which the Corporation manages 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 is
also affected by changes in the relationship between short-term and long-term
interest rates.
To facilitate liquidity management, the Corporation uses a variety of funding
sources and establishes a maturity pattern that provides a prudent mixture of
short- and long-term funds. Funding programs have been established by the
Corporation and the Bank.
During 1997, the Corporation issued $682.5 million in Senior Medium-Term Notes,
compared to $200.0 million in 1996. At December 31, 1997, the Corporation has
$1.4 billion in Senior Medium-Term Notes outstanding that mature from 1998 to
2004, as compared to $765.5 million at December 31, 1996. In addition, the
Corporation had $250.0 million in Senior Notes outstanding at December 31, 1997
and 1996, 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 1997 with $25.0 million
expiring in March 1998 and $25.0 million expiring in September 1998. 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, 1997.
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, 1997, 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. These securities qualify as regulatory capital for the Corporation,
and the proceeds were contributed as additional capital to the Bank.
30
33
MBNA CORPORATION AND SUBSIDIARIES
In January 1997, the Corporation issued $280.0 million of guaranteed preferred
beneficial interests in Corporation's junior subordinated deferrable interest
debentures. These securities qualify as regulatory capital for the Corporation,
and the proceeds were used for general corporate purposes.
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.
During 1997, the Corporation repurchased 2.0 million shares of Adjustable Rate
Cumulative Preferred Stock, Series B, for $52.5 million. At December 31, 1997,
the Corporation has 4.0 million shares of Adjustable Rate Cumulative Preferred
Stock, Series B, outstanding.
In November 1995, the Corporation issued 6.0 million shares of 71/2% 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.
During 1997, the Corporation, through MBNACapital C, issued 1.5 million shares
of 8.25% Trust Originated Preferred Securities (guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
series C) in exchange for 1.5 million shares of 71/2% Cumulative Preferred
Stock, Series A. The value of the shares exchanged was $36.3 million. After the
exchange, the Corporation has 4.5 million shares of 71/2% Cumulative Preferred
Stock, Series A, outstanding at December 31, 1997.
Shares of the Series A and B 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.
Funding programs established by the Bank include deposits, bank notes, deposit
notes, subordinated notes, and committed credit facilities.
Total deposits at December 31, 1997, were $12.9 billion, compared with $10.2
billion and $8.6 billion at December 31, 1996 and 1995, respectively. The
increase in deposits from 1996 is primarily the result of a $2.2 billion
increase in direct deposits. The increase in deposits from 1995 was the result
of a $1.6 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 10 provides the
maturities of the Corporation's deposits at December 31, 1997. Included in the
deposit maturity category of three months or less are money market deposit
accounts, noninterest-bearing demand deposits, interest-bearing transaction
accounts, and savings accounts of $3.5 billion.
TABLE 10: MATURITIES OF DEPOSITS
(dollars in thousands)
DECEMBER 31, 1997 DIRECT OTHER TOTAL
Three months or less .............. $ 4,644,221 $ 710,121 $ 5,354,342
Over three months through
twelve months .................... 2,536,352 636,518 3,172,870
Over one year through five years .. 2,717,604 1,662,601 4,380,205
Over five years ................... 5,796 - 5,796
----------- ----------- -----------
Total deposits .................. $ 9,903,973 $ 3,009,240 $12,913,213
=========== =========== ===========
In addition, Table 11 presents the maturity distribution of the Corporation's
domestic time deposits in amounts of $100,000 or more for the most recent three
years. The Corporation also has $549.2 million of foreign time deposits at
December 31, 1997. The majority of the foreign time deposits were in amounts in
excess of $100,000 and mature within one year.
TABLE 11: DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
DECEMBER 31, 1997 1996 1995
Three months or less... $ 467,227 26.8% $ 486,008 33.2% $ 271,560 23.4%
Over three months
through six months.... 314,060 18.0 226,810 15.5 331,383 28.6
Over six months
through twelve
months ............... 370,052 21.3 279,976 19.1 198,613 17.2
Over twelve months .... 590,838 33.9 470,704 32.2 356,474 30.8
---------- ----- ---------- ----- ---------- -----
Total ............... $1,742,177 100.0% $1,463,498 100.0% $1,158,030 100.0%
========== ===== ========== ===== ========== =====
An additional source of funding for the Bank is provided by a medium-term bank
note/deposit note program. These notes may be issued with maturities ranging
from nine months to fifteen years from the date of issue. During 1997, the Bank
issued $712.0 million of bank notes, compared to $860.0 million in 1996. At
December 31, 1997 and 1996, the Bank had $2.9 billion and $2.4 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 has no short-term bank notes outstanding at December 31, 1997. The Bank had
$459.0 million of short-term bank notes outstanding at December 31, 1996.
In addition to these funding sources, the Bank has $200.0 million of 7.25%
Subordinated Notes outstanding at December 31, 1997 and 1996, 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, while also 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
31
34
MBNA CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FUNDING SOURCES
(dollars in millions)
December 31, 1997 December 31, 1996
Direct deposits $9,904.0 $7,751.0
Borrowed funds $5,671.5 $4,643.7
Other deposits $3,009.2 $2,400.7
Equity $1,970.1 $1,704.3
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,
1997.
MBNA International Bank Limited ("MBNA International") has pound sterling 34.0
million (approximately $55.8 million at December 31, 1997) of Subordinated
Guaranteed Floating-Rate Notes outstanding which also provide a long-term source
of funds.
In addition, MBNA International has a pound sterling 300.0 million
(approximately $492.8 million at December 31, 1997) multi-currency committed
syndicated revolving credit facility which expires in October 2000. 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 had pound sterling 100.0 million (approximately $164.3
million) and IR pound sterling 20.0 million (approximately $28.4 million)
outstanding at December 31, 1997. These borrowings, which are included as part
of short-term borrowings in the consolidated statements of financial condition,
matured and were paid in January 1998.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
(dollars in millions)
December 31, 1997 December 31, 1996
Investment securities available-for-sale $2,162.5 $1,719.7
Interest-earning time deposits in other banks $1,427.1 $621.6
Federal funds sold and securities purchased
under resale agreements $659.0 $255.0
Investment securities held-to-maturity $346.2 $598.3
The Corporation also has $2.5 billion in investment securities and $2.1 billion
in money market instruments at December 31, 1997, compared to $2.3 billion in
investment securities and $876.6 million in money market instruments at December
31, 1996. 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, 1997, $1.2 billion is anticipated
to mature within 12 months. The Corporation has increased its investment
securities available-for-sale portfolio, which consists primarily of short-term
and variable-rate securities, to $2.2 billion at December 31, 1997, from $1.7
billion at December 31, 1996. These investment securities, along with the money
market instruments, provide increased liquidity and flexibility to support the
Corporation's funding requirements.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the change in earnings resulting from
fluctuations in interest rates, variability in spread relationships, and the
differences in repricing intervals between assets and liabilities. The
management of interest rate sensitivity attempts to maximize earnings by
minimizing any negative impacts of changing market rates, asset and liability
mix, and prepayment trends.
Table 12 presents the Corporation's interest rate risk using the static gap
methodology. This method reports the difference between interest rate sensitive
assets and liabilities at a specific point in time. Management uses the static
gap methodology to identify the Corporation's directional interest rate risk.
Interest rate sensitive assets and liabilities are reported based on estimated
and contractual repricings. Fixed-rate credit card loans, which can be repriced
by the Corporation at any time by giving notice to the Customer, are placed in
the table using a seventeen-month repricing schedule.
In addition to its on-balance-sheet activities, interest rate risk includes the
interest rate sensitivity of securitization income from securitized loans and
the impact of 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 does not have
any other off-balance-sheet financial instruments. 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. For this reason, Table 12 includes a management adjustment
to quantify and capture the full impact of interest rate risk on the
Corporation's earnings. Results of the gap analysis show that, within one year,
the Corporation's liabilities reprice faster than its assets, indicating an
earnings risk to rising interest rates.
32
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MBNA CORPORATION AND SUBSIDIARIES
TABLE 12: INTEREST RATE SENSITIVITY SCHEDULE
(dollars in thousands)
DECEMBER 31, 1997 SUBJECT TO REPRICING
Within 1 Year 1-5 Years After 5 Years Total
------------- ------------- -------------- ------------
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic ........................................................ $ 2,687 $ - $ - $ 2,687
Foreign ......................................................... 1,424,378 - - 1,424,378
------------ ------------ ------------ ------------
Total interest-earning time deposits in other banks ........ 1,427,065 - - 1,427,065
Federal funds sold and securities purchased under resale
agreements ....................................................... 659,000 - - 659,000
Investment securities (a):
Available-for-sale .............................................. 1,846,451 316,013 - 2,162,464
Held-to-maturity ................................................ 209,498 27,279 109,403 346,180
Loans held for securitization:
Domestic ........................................................ 2,297,400 - - 2,297,400
Foreign ......................................................... 602,798 - - 602,798
------------ ------------ ------------ ------------
Total loans held for securitization ........................ 2,900,198 - - 2,900,198
Loans:
Domestic:
Credit card ................................................... 4,531,266 944,667 - 5,475,933
Other consumer ................................................ 1,378,584 463,588 345,044 2,187,216
------------ ------------ ------------ ------------
Total domestic loans ....................................... 5,909,850 1,408,255 345,044 7,663,149
Foreign: ........................................................ 257,987 340,740 - 598,727
------------ ------------ ------------ ------------
Total loans ................................................ 6,167,837 1,748,995 345,044 8,261,876
------------ ------------ ------------ ------------
Total interest-earning assets .............................. 13,210,049 2,092,287 454,447 15,756,783
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Domestic:
Time deposits ................................................. 4,500,261 4,379,955 5,796 8,886,012
Money market deposit accounts ................................. 3,122,385 - - 3,122,385
Interest-bearing transaction accounts ......................... 31,669 - - 31,669
Savings accounts .............................................. 12,318 - - 12,318
------------ ------------ ------------ ------------
Total domestic interest-bearing deposits ................... 7,666,633 4,379,955 5,796 12,052,384
Foreign:
Time deposits ................................................. 548,909 250 - 549,159
------------ ------------ ------------ ------------
Total interest-bearing deposits ............................ 8,215,542 4,380,205 5,796 12,601,543
Borrowed funds:
Short-term borrowings ........................................... 192,623 - - 192,623
Long-term debt and bank notes:
Domestic ...................................................... 3,302,908 1,363,581 590,596 5,257,085
Foreign ....................................................... 76,095 145,737 - 221,832
------------ ------------ ------------ ------------
Total long-term debt and bank notes ........................ 3,379,003 1,509,318 590,596 5,478,917
------------ ------------ ------------ ------------
Total borrowed funds ....................................... 3,571,626 1,509,318 590,596 5,671,540
------------ ------------ ------------ ------------
Total interest-bearing liabilities ......................... 11,787,168 5,889,523 596,392 18,273,083
------------ ------------ ------------ ------------
Gap before managed adjustments .................................... 1,422,881 (3,797,236) (141,945) (2,516,300)
Managed adjustments (b) ........................................... (5,842,678) 7,136,319 - 1,293,641
------------ ------------ ------------ ------------
Gap after managed adjustments ..................................... $ (4,419,797) $ 3,339,083 $ (141,945) $ (1,222,659)
============ ============ ============ ============
Cumulative gap after managed adjustments .......................... $ (4,419,797) $ (1,080,714) $ (1,222,659)
============ ============ ============
Cumulative gap after managed adjustments
as a percent of total managed assets (c) ......................... (7.43)% (1.82)% (2.05)%
(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, 1997, were $59,523,299. MBNA
Corporation and Subsidiaries
Although the static gap methodology is widely accepted for its simplicity in
identifying interest rate risk, it ignores many changes that can occur such as
repricing strategies, market spread adjustments, and anticipated hedging
transactions. For these reasons, the Corporation analyzes its level of interest
rate risk using several analytical techniques including simulation analysis. All
of the analytical techniques used to measure interest rate risk include the
impact of on-balance-sheet and off-balance-sheet financial instruments.
33
36
MBNA CORPORATION AND SUBSIDIARIES
Key assumptions in the Corporation's simulation analysis include cash flows and
maturities of interest rate sensitive instruments; changes in market conditions;
loan volumes and pricing; consumer preferences; fixed-rate credit card
repricings as part of the Corporation's normal planned business strategy; and
management's capital plans. Also included in the analysis are various actions
which the Corporation would undertake to minimize the impact of adverse
movements in interest rates. The Corporation has the contractual right to
reprice fixed-rate credit card loans at any time, by giving notice to the
Customer. Accordingly, a key assumption in the simulation analysis is the
repricing of fixed-rate credit card loans in response to an upward movement in
interest rates, with a lag of approximately 45 days between interest rate
movements and fixed-rate credit card loan repricings. The Corporation has
repriced its fixed-rate credit card loans on numerous occasions in the past, and
will continue to do so in the future in response to changes in interest rates,
market conditions, or other factors.
Based on the simulation analysis at December 31, 1997, the Corporation could
experience a decrease in projected 1998 net income of approximately $39 million
if interest rates increased from current levels by 100 basis points over 12
months.
These assumptions are inherently uncertain and as a result, the analysis cannot
precisely predict the impact of higher interest rates on net income. Actual
results would differ from simulated results due to timing, magnitude, and
frequency of interest rate changes, changes in market conditions, and management
strategies to offset its potential exposure, among other factors.
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
Foreign currency exchange rate risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange rates
and occurs as a result of cross-currency investment and funding activities. The
Corporation's foreign currency exchange rate risk is limited to the unhedged
position of the Corporation's net investment in its foreign subsidiaries. The
Corporation uses forward exchange contracts and foreign exchange swap agreements
to reduce its exposure to foreign currency exchange rate risk. Management
reviews the foreign currency exchange rate risk of the Corporation on a routine
basis. During this review, management considers the net impact to stockholders'
equity under various foreign exchange rate scenarios. At December 31, 1997, the
Corporation would expect a decrease in stockholders' equity, net of tax, of
approximately $11 million as a result of a 10% depreciation of the unhedged
Pound Sterling to the U.S. dollar position.
SECURITIZATION
Securitization of the Bank's loan receivables continues to be a major funding
alternative for the Corporation. Securitization 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 sold by the trust to investors (Investor
Certificateholders), generally through a public offering, while the Seller's
interest 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 168
months, the trust makes no principal payments to the Investor
Certificateholders. The trust uses payments received on the accounts to pay
interest to the Investor Certificateholders and to purchase new loan receivables
generated by the accounts, in accordance with the terms of the transaction, 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 1997, the Bank securitized loan receivables totaling $13.2 billion
through both public and private markets, including a securitization of pound
sterling 250.0 million by MBNA International. In 1996, the Bank securitized a
total of $11.3 billion of its loan receivables, including two securitizations
totaling pound sterling 500.0 million by MBNA International. These
securitizations bring the total amount of outstanding securitized loans to $38.2
billion or 77.4% of managed loans as of December 31, 1997, compared to $28.5
billion or 73.8% at December 31, 1996. The bank increased its securitization of
other consumer loans through private multi-seller commercial paper conduits to
$2.4 billion in 1997, from $1.4 billion in 1996, and $586.5 million in 1995.
The Corporation's securitized loan distribution is shown in Table 13.
TABLE 13: SECURITIZED LOAN DISTRIBUTION
(dollars in thousands)
DECEMBER 31, 1997 1996 1995
Securitized loans:
Credit card ................ $35,775,670 $27,082,046 $17,989,333
Other consumer ............. 2,442,116 1,412,435 586,453
----------- ----------- -----------
Total securitized loans .. $38,217,786 $28,494,481 $18,575,786
=========== =========== ===========
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, 1997, to the minimum
34
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MBNA CORPORATION AND SUBSIDIARIES
TABLE 14: YIELDS ON SECURITIZED TRANSACTIONS (a)
THREE-MONTH AVERAGE
Yield in
Annualized Minimum Excess of
Yield Yield Minimum
- --------------------------------------------------------------------------
MasterTrust 92-2 (b) ................ 25.37% 14.82% 10.55%
MasterTrust 92-3 (b) ................ 21.37 13.88 7.49
MasterTrust 93-1 (b) ................ 20.56 13.63 6.93
MasterTrust 93-3 .................... 18.69 12.26 6.43
MasterTrust 93-4 .................... 18.69 13.08 5.61
MasterTrust 94-1 .................... 18.69 12.97 5.72
MasterTrust 94-2 .................... 18.69 13.04 5.65
MasterTrust II 94-A ................. 18.01 12.92 5.09
MasterTrust II 94-B ................. 18.01 12.89 5.12
MasterTrust II 94-C ................. 18.01 13.00 5.01
MasterTrust II 94-E ................. 18.01 12.78 5.23
Gold Reserve ........................ 17.86 14.03 3.83
MasterTrust II 95-A ................. 18.01 12.97 5.04
MasterTrust II 95-B ................. 18.01 12.85 5.16
MasterTrust II 95-C ................. 18.01 12.90 5.11
MasterTrust II 95-D ................. 18.01 12.76 5.25
MasterTrust II 95-E ................. 18.01 12.90 5.11
Cards No. 1 ......................... 21.14 12.38 8.76
MasterTrust II 95-F ................. 18.01 13.34 4.67
MasterTrust II 95-G ................. 18.01 12.90 5.11
MasterTrust II 95-H ................. 18.01 12.75 5.26
MasterTrust II 95-I ................. 18.01 12.84 5.17
MasterTrust II 95-J ................. 18.01 12.92 5.09
MasterTrust II 96-A ................. 18.01 12.88 5.13
MasterTrust II 96-B ................. 18.01 12.95 5.06
MasterTrust II 96-C ................. 18.01 12.82 5.19
MasterTrust II 96-D ................. 18.01 12.83 5.18
Cards No. 2 ......................... 21.14 12.33 8.81
MasterTrust II 96-E ................. 18.01 12.86 5.15
MasterTrust II 96-F ................. 18.01 12.76 5.25
MasterTrust II 96-G ................. 18.01 12.88 5.13
MasterTrust II 96-H ................. 18.04 12.85 5.19
MasterTrust II 96-I ................. 18.04 13.01 5.03
MasterTrust II 96-J ................. 18.01 12.84 5.17
MasterTrust II 96-K ................. 18.01 12.83 5.18
MasterTrust II 96-L ................. 18.04 12.79 5.25
MasterTrust II 96-M ................. 18.04 12.90 5.14
Cards No. 3 ......................... 21.14 12.42 8.72
MasterTrust II 97-A ................. 18.04 12.69 5.35
MasterTrust II 97-B ................. 18.01 12.88 5.13
MasterTrust II 97-C ................. 18.01 12.81 5.20
MasterTrust II 97-D ................. 18.04 12.84 5.20
MasterTrust II 97-E ................. 18.04 12.76 5.28
MasterTrust II 97-F ................. 18.01 12.75 5.26
MasterTrust II 97-G ................. 18.01 12.85 5.16
Cards No. 4 ......................... 21.14 12.75 8.39
MasterTrust II 97-H ................. 18.06 12.86 5.20
MasterTrust II 97-I ................. 18.01 12.79 5.22
MasterTrust II 97-J ................. 17.84 13.11 4.73
Consumer Loan MasterTrust 97-1(c) ... 16.20 12.24 3.96
(a) MasterTrust II 97-K issued on October 22, 1997, MasterTrust II 97-M issued
on November 6, 1997, MasterTrust II 97-L issued on November 13, 1997,
MasterTrust II 97-N issued on December 9, 1997, and MasterTrust II97-O
issued on December 23, 1997, 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.
(c) Yields are provided for informational purposes only. Distribution to
Investor Certificateholders may begin sooner if the credit enhancement
amount falls below a predetermined contractual level.
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.
In addition, $3.6 billion of previously securitized loans in existing trusts
amortized back into the Bank's loan portfolio during 1997, compared to $1.6
billion in 1996. After the revolving period, new charges and cash advances are
for the account of the Bank, which increases the Corporation's on-balance-sheet
assets. Table 15 presents the amounts, at December 31, 1997, of investor
principal (face value) in securitized receivables scheduled to amortize into the
Bank's loan portfolio in future years. The amortization amounts are based upon
estimated amortization periods which are subject to change.
TABLE 15: AMORTIZATIONS OF INVESTOR PRINCIPAL (FACE VALUE)
(dollars in thousands)
1998 ............................................ $ 3,068,494
1999 ............................................ 6,907,585
2000 ............................................ 5,584,383
2001 ............................................ 5,764,676
2002 ............................................ 4,588,169
Thereafter ...................................... 11,653,275
-----------
Total amortizations of investor principal ..... 37,566,582
Accrued interest included in securitized loans .. 651,204
-----------
Total securitized loans ....................... $38,217,786
===========
35
38
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(unaudited)
The following supplemental financial information presents selected managed asset
data and managed ratios pertaining to the Corporation. This information is used
to evaluate the Corporation's financial condition as well as the impact
securitizations have on the Corporation's managed assets.
MANAGED ASSET DATA
(dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
AT YEAR END:
Loans held for securitization ............. $ 2,900,198 $ 2,469,974 $ 3,168,427
Loan portfolio ............................ 8,261,876 7,659,078 4,967,491
Securitized loans ......................... 38,217,786 28,494,481 18,575,786
----------- ----------- -----------
Total managed loans .................... $49,379,860 $38,623,533 $26,711,704
=========== =========== ===========
Total managed interest-earning assets .. $53,974,569 $41,818,197 $29,381,106
=========== =========== ===========
Total managed assets ................... $59,523,299 $45,529,823 $31,804,675
=========== =========== ===========
AVERAGE:
Loans held for securitization ............. $ 2,875,212 $ 2,529,484 $ 2,269,362
Loan portfolio ............................ 7,563,301 6,174,095 4,792,536
Securitized loans ......................... 32,746,963 22,514,014 15,440,499
----------- ----------- -----------
Total managed loans .................... $43,185,476 $31,217,593 $22,502,397
=========== =========== ===========
Total managed interest-earning assets .. $47,037,343 $34,144,944 $24,954,180
=========== =========== ===========
Total managed assets ................... $51,872,245 $37,085,302 $26,866,220
=========== =========== ===========
MANAGED RATIOS:
Delinquency ............................... 4.59% 4.28% 3.70%
Net credit losses ......................... 3.97 3.35 2.74
Net interest margin (on an FTE basis) ..... 7.50 7.62 7.42
OTHER OPERATING INCOME
ENDING LOANS
(managed)
(billions)
95 26.7
96 38.6
97 49.4
DELINQUENCY
(managed)
95 3.70%
96 4.28%
97 4.59%
NET CREDIT LOSSES
(managed)
95 2.74%
96 3.35%
97 3.97%
NET INTEREST MARGIN
(managed)
95 7.42%
96 7.62%
97 7.50%
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
/s/ M. SCOT KAUFMAN /s/ KENNETH F. BOEHL
M. Scot Kaufman Kenneth F. Boehl
Chief Financial Officer General Auditor
MBNA Corporation MBNA Corporation
37
40
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------ --------- --------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 263,064 $ 225,063
Interest-earning time deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,427,065 621,614
Federal funds sold and securities purchased under resale agreements . . . . . . . . . . . . . . . . . . 659,000 255,000
Investment securities:
Available-for-sale (at market value, amortized cost of $2,160,869 and $1,718,643 at December 31, 1997
and 1996, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,162,464 1,719,730
Held-to-maturity (market value of $341,868 and $592,208 at December 31, 1997
and 1996, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,180 598,320
Loans held for securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,198 2,469,974
Loans:
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,830,221 5,722,299
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,431,655 1,936,779
------------ -----------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,261,876 7,659,078
Reserve for possible credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (162,476) (118,427)
------------ -----------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,099,400 7,540,651
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,579,058 1,047,183
Accrued income receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,964 98,160
Accounts receivable from securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,835,831 1,777,323
Prepaid expenses and deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,563 204,139
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673,726 478,185
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,305,513 $17,035,342
============ ===========
LIABILITIES
Deposits:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,435,171 $ 7,159,440
Money market deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,122,385 2,719,545
Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311,670 233,885
Interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,669 27,995
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,318 10,821
------------ -----------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,913,213 10,151,686
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,623 693,387
Long-term debt and bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,478,917 3,950,358
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,215 107,187
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,495 428,416
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,335,463 15,331,034
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000 shares authorized, 8,573,882 shares and 12,000,000 shares
issued and outstanding at December 31, 1997 and 1996, respectively) . . . . . . . . . . . . . . . . . 86 120
Common stock ($.01 par value, 700,000,000 shares authorized, 501,187,500 shares
issued and outstanding at December 31, 1997 and 1996, respectively) . . . . . . . . . . . . . . . . . 5,012 5,012
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,377 602,231
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,540,575 1,096,945
------------ -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,970,050 1,704,308
------------ -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,305,513 $17,035,342
============ ===========
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, 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
INTEREST INCOME
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,076,393 $ 861,305 $ 675,600
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,429 123,054 119,322
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,511 3,325 3,325
Time deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . 49,073 29,528 15,832
Federal funds sold and securities purchased under resale agreements . . . . 23,962 9,935 7,727
Loans held for securitization . . . . . . . . . . . . . . . . . . . . . . . 416,645 356,120 319,009
------------ ------------ ------------
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . 1,711,013 1,383,267 1,140,815
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693,920 527,885 438,157
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,784 18,497 12,095
Long-term debt and bank notes . . . . . . . . . . . . . . . . . . . . . . . 304,919 196,408 146,337
------------ ------------ ------------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . 1,018,623 742,790 596,589
------------ ------------ ------------
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692,390 640,477 544,226
Provision for possible credit losses . . . . . . . . . . . . . . . . . . . 260,040 178,224 138,176
------------ ------------ ------------
Net interest income after provision for possible credit losses . . . . . . 432,350 462,253 406,050
OTHER OPERATING INCOME
Interchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,598 88,191 88,051
Credit card fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,144 102,579 82,293
Securitization income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,506,817 1,649,337 1,196,781
Gain on investment securities . . . . . . . . . . . . . . . . . . . . . . . - - 39
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,320 55,816 57,454
------------ ------------ ------------
Total other operating income . . . . . . . . . . . . . . . . . . . . . 2,812,879 1,895,923 1,424,618
OTHER OPERATING EXPENSE
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . 990,039 732,971 552,538
Occupancy expense of premises . . . . . . . . . . . . . . . . . . . . . . . 85,552 66,536 44,915
Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . 150,410 97,785 88,221
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997,120 675,259 560,393
------------ ------------ ------------
Total other operating expense . . . . . . . . . . . . . . . . . . . . 2,223,121 1,572,551 1,246,067
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND SPECIAL MARKETING PROGRAM . . . . . . . . . 1,022,108 785,625 584,601
Special marketing program . . . . . . . . . . . . . . . . . . . . . . . . . - 54,331 -
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . 1,022,108 731,294 584,601
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 399,608 289,592 231,502
Tax benefit from Customer-based intangible assets . . . . . . . . . . . . . - (32,793) -
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
============ ============ ============
EARNINGS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ .92 $ .70
EARNINGS PER COMMON SHARE--ASSUMING DILUTION . . . . . . . . . . . . . . . 1.15 .89 .68
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
Additional
Preferred Common Preferred Common Paid-in Retained
(000) (000) Stock Stock Capital Earnings
----- ----- ----- ----- ------- --------
BALANCE, DECEMBER 31, 1994 . . . . . . . . . . . . . - 501,188 $ - $ 5,012 $ 371,561 $ 543,005
Net income . . . . . . . . . . . . . . . . . . . . . - - - - - 353,099
Cash dividends:
Common--$.25 per share . . . . . . . . . . . . . . - - - - - (124,769)
Preferred . . . . . . . . . . . . . . . . . . . . - - - - - (1,469)
Exercise of stock options and other awards . . . . . - 4,912 - 49 22,160 -
Acquisition and retirement of common stock . . . . . - (4,912) - (49) (49,780) -
Issuance of preferred stock, net of issuance costs . 6,000 - 60 - 145,010 -
Foreign currency translation, net of tax
(accumulated amount of $391 at December 31, 1995) . - - - - - 148
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $189 at December 31, 1995) . . . . . . . . . . . - - - - - 1,021
-------- --------- ------ ------- --------- ----------
BALANCE, DECEMBER 31, 1995 . . . . . . . . . . . . . 6,000 501,188 60 5,012 488,951 771,035
Net income . . . . . . . . . . . . . . . . . . . . . - - - - - 474,495
Cash dividends:
Common--$.28 per share . . . . . . . . . . . . . . - - - - - (142,583)
Preferred . . . . . . . . . . . . . . . . . . . . - - - - - (14,055)
Exercise of stock options and other awards . . . . . - 4,939 - 49 38,997 -
Acquisition and retirement of common stock . . . . . - (4,939) - (49) (71,864) -
Issuance of preferred stock, net of issuance costs . 6,000 - 60 - 146,147 -
Foreign currency translation, net of tax
(accumulated amount of $7,910 at December 31, 1996) - - - - - 7,519
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $723 at December 31, 1996) . . . . . . . . . . . - - - - - 534
-------- --------- ------- --------- ----------- ------------
BALANCE, DECEMBER 31, 1996 . . . . . . . . . . . . . 12,000 501,188 120 5,012 602,231 1,096,945
Net income . . . . . . . . . . . . . . . . . . . . . - - - - - 622,500
Cash dividends:
Common--$.32 per share . . . . . . . . . . . . . . - - - - - (160,417)
Preferred . . . . . . . . . . . . . . . . . . . . - - - - - (16,394)
Exercise of stock options and other awards . . . . . - 6,309 - 63 65,148 -
Acquisition and retirement of common stock . . . . . - (6,309) - (63) (157,383) -
Acquisition and retirement of preferred stock . . . . (3,426) - (34) - (85,619) (3,133)
Foreign currency translation, net of tax
(accumulated amount of $2,924 at December 31, 1997) - - - - - (4,986)
Net unrealized gains on investment securities
available-for-sale and other financial instruments,
net of tax (accumulated amount of $6,783
at December 31, 1997) . . . . . . . . . . . . . . . - - - - - 6,060
-------- --------- ------- --------- ------------ ------------
BALANCE, DECEMBER 31, 1997 . . . . . . . . . . . . . 8,574 501,188 $ 86 $ 5,012 $ 424,377 $ 1,540,575
======== ========= ======= ========= ============ ============
Total
Stockholders'
Equity
------
BALANCE, DECEMBER 31, 1994 . . . . . . . . . . . . . $ 919,578
Net income . . . . . . . . . . . . . . . . . . . . . 353,099
Cash dividends:
Common--$.25 per share . . . . . . . . . . . . . . (124,769)
Preferred . . . . . . . . . . . . . . . . . . . . (1,469)
Exercise of stock options and other awards . . . . . 22,209
Acquisition and retirement of common stock . . . . . (49,829)
Issuance of preferred stock, net of issuance costs . 145,070
Foreign currency translation, net of tax
(accumulated amount of $391 at December 31, 1995) . 148
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $189 at December 31, 1995) . . . . . . . . . . . 1,021
------------
BALANCE, DECEMBER 31, 1995 . . . . . . . . . . . . . 1,265,058
Net income . . . . . . . . . . . . . . . . . . . . . 474,495
Cash dividends:
Common--$.28 per share . . . . . . . . . . . . . . (142,583)
Preferred . . . . . . . . . . . . . . . . . . . . (14,055)
Exercise of stock options and other awards . . . . . 39,046
Acquisition and retirement of common stock . . . . . (71,913)
Issuance of preferred stock, net of issuance costs . 146,207
Foreign currency translation, net of tax
(accumulated amount of $7,910 at December 31, 1996) 7,519
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated amount
of $723 at December 31, 1996) . . . . . . . . . . . 534
------------
BALANCE, DECEMBER 31, 1996 . . . . . . . . . . . . . 1,704,308
Net income . . . . . . . . . . . . . . . . . . . . . 622,500
Cash dividends:
Common--$.32 per share . . . . . . . . . . . . . . (160,417)
Preferred . . . . . . . . . . . . . . . . . . . . (16,394)
Exercise of stock options and other awards . . . . . 65,211
Acquisition and retirement of common stock . . . . . (157,446)
Acquisition and retirement of preferred stock . . . . (88,786)
Foreign currency translation, net of tax
(accumulated amount of $2,924 at December 31, 1997) (4,986)
Net unrealized gains on investment securities
available-for-sale and other financial instruments,
net of tax (accumulated amount of $6,783
at December 31, 1997) . . . . . . . . . . . . . . . 6,060
------------
BALANCE, DECEMBER 31, 1997 . . . . . . . . . . . . . $ 1,970,050
============
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, 1997 1996 1995
- -------------------------------------------------------------------------------------- -------- --------- ---------
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible credit losses . . . . . . . . . . . . . . . . . . . . . . . 260,040 178,224 138,176
Depreciation, amortization, and accretion . . . . . . . . . . . . . . . . . . . . 145,957 96,602 76,584
Gain on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . - - (39)
Provision (benefit) for deferred income taxes . . . . . . . . . . . . . . . . . . 41,349 (32,006) 9,633
Increase in accrued income receivable . . . . . . . . . . . . . . . . . . . . . . (48,804) (4,524) (28,560)
Increase in accounts receivable from securitizations . . . . . . . . . . . . . . . (1,058,508) (825,755) (218,850)
Increase in accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . 30,028 13,787 24,797
Decrease (increase) in other operating activities . . . . . . . . . . . . . . . . 130,103 63,477 (14,167)
----------- --------- ----------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . 122,665 (35,700) 340,673
INVESTING ACTIVITIES
Net increase in money market instruments . . . . . . . . . . . . . . . . . . . . . . (1,209,451) (303,003) (306,036)
Proceeds from maturities of investment securities available-for-sale . . . . . . . . 8,546,878 4,450,709 2,852,934
Purchases of investment securities available-for-sale . . . . . . . . . . . . . . . . (8,947,215) (5,234,815) (3,303,589)
Proceeds from sale of investment securities available-for-sale . . . . . . . . . . . - - 35,249
Proceeds from maturities of investment securities held-to-maturity . . . . . . . . . 305,206 604,869 357,870
Purchases of investment securities held-to-maturity . . . . . . . . . . . . . . . . . (53,269) (19,302) (18,657)
Proceeds from securitization of loans . . . . . . . . . . . . . . . . . . . . . . . . 13,172,133 11,223,917 6,180,743
Portfolio acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,272,304) (1,475,498) (77,324)
Amortization of securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . (3,637,385) (1,608,334) (775,000)
Net loan originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,728,725) (10,540,920) (7,921,653)
Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . (660,046) (303,173) (344,490)
----------- --------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (3,484,178) (3,205,550) (3,319,953)
FINANCING ACTIVITIES
Net increase in money market deposit accounts, noninterest-bearing
demand deposits, interest-bearing transaction accounts, and savings accounts . . . 485,796 530,931 746,110
Net increase in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,275,731 1,011,841 1,230,315
Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . (500,764) 403,844 179,043
Proceeds from issuance of long-term debt and bank notes . . . . . . . . . . . . . . . 1,803,231 1,444,985 1,092,395
Maturity of long-term debt and bank notes . . . . . . . . . . . . . . . . . . . . . (312,770) (165,192) (123,000)
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . . . . . . - 146,207 145,070
Acquisition and retirement of preferred stock . . . . . . . . . . . . . . . . . . . . (52,483) - -
Proceeds from exercise of stock options and other awards . . . . . . . . . . . . . . 31,948 22,869 12,780
Acquisition and retirement of common stock . . . . . . . . . . . . . . . . . . . . . (157,446) (71,913) (49,829)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (173,729) (149,115) (120,312)
----------- --------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . 3,399,514 3,174,457 3,112,572
----------- --------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . 38,001 (66,793) 133,292
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . 225,063 291,856 158,564
----------- --------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . $ 263,064 $ 225,063 $ 291,856
=========== ========= ==========
SUPPLEMENTAL DISCLOSURES:
Interest expense paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 988,675 $ 728,091 $ 572,232
=========== ========= ==========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,840 $ 248,329 $ 194,364
=========== ========= ==========
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 the world's largest independent credit card lender. 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 also makes other consumer loans and
offers various insurance and 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 ACTIVITIES
The Corporation's foreign activities are primarily performed through the Bank's
two foreign bank subsidiaries, MBNA International Bank Limited ("MBNA
International") and MBNA Canada Bank ("MBNA Canada"). The Bank also has a
foreign branch office in the Grand Cayman Islands.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Corporation's foreign subsidiaries 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 from foreign currency transaction gains
and losses is immaterial for all years presented.
INVESTMENT SECURITIES
Investment securities available-for-sale are reported at market value with
unrealized gains and losses, net of tax, included as a component of
stockholders' equity. Investment securities held-to-maturity are reported at
cost (adjusted for amortization of premiums and accretion of discounts). 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 is recognized based upon the principal amount of loans
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 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, cash advance,
and other miscellaneous 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. At December 31, 1997 and
1996, the incremental direct loan origination costs deferred were $45.6 million
and $34.7 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
regularly reviewed to determine an appropriate reserve for possible credit
losses based upon the impact of economic conditions on the borrowers' ability
to repay, past collection experience, the risk characteristics of the
portfolio, and other factors. 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 at an appropriate level. The
Corporation's policy is generally to charge off accounts when they become 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).
42
45
MBNA CORPORATION AND SUBSIDIARIES
PREPAID EXPENSES AND DEFERRED CHARGES
The principal components of prepaid expenses and deferred charges include
direct loan origination costs, royalties advanced to the Corporation's
affinity groups and financial institutions, issuance costs related to long-term
debt and bank notes, and commissions paid on brokered certificates of deposit.
These costs are deferred and amortized over the period the Corporation receives
a benefit 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 interest rate swap contracts
that are used in the asset/liability management process are accrued and
recognized in earnings, as an adjustment to the related interest income or
expense of the hedged asset/liability, over the life of the related agreement.
For interest rate swap agreements to qualify for hedge accounting treatment the
following conditions must be met: the underlying asset/liability being hedged
by the interest rate swap agreement exposes the Corporation to interest rate
risk; the interest rate swap agreement reduces the Corporation's sensitivity to
interest rate risk; and the interest rate swap agreements are designated and
deemed effective in hedging the Corporation's exposure to interest rate risk.
All of the Corporation's interest rate swap agreements qualify for hedge
accounting treatment. 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 MBNA International. When the
agreement matures, the underlying principal or notional amount will be
reexchanged at the agreed-upon exchange rate. These foreign exchange swap
agreements are marked to market with any unrealized gains or losses recognized
in other operating income. The Corporation does not hold or issue foreign
exchange swap agreements for trading purposes.
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 subsidiaries. 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 to other operating
income. For contracts to effectively hedge foreign currency exchange risk,
they must reduce the Corporation's sensitivity to foreign currency exchange
risk. For contracts that are designated and effective as hedges of its net
investment in the Bank's foreign subsidiaries, 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 only has forward exchange contracts that are
designated and effective as hedges. For any contracts that are terminated
early, the remaining premium or discount is immediately recognized in other
operating income.
The Corporation can also enter 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.
43
46
MBNA CORPORATION AND SUBSIDIARIES
INTANGIBLE ASSETS
Intangible assets, including the value of acquired 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 $366.1 million and $213.8 million at December
31, 1997 and 1996, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement No. 130), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement No. 131), were issued. Statement No. 130
establishes standards for the reporting and disclosure of comprehensive income
and its components in the financial statements. This statement is effective for
fiscal years beginning after December 15, 1997, and will not have an impact on
the Corporation's consolidated financial statements. Statement No. 131
establishes standards for the disclosure of selected information pertaining to
operating segments of a public company in its interim and annual financial
statements. This statement is effective for financial statements for periods
beginning after December 15, 1997, and will not have an impact on the
Corporation's consolidated financial statements.
NOTE B: EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(Statement No. 128), effective for financial statements issued for periods
ending after December 15, 1997, specifies the computation, presentation, and
disclosure requirements for earnings per common share. Statement No. 128
replaces primary and fully diluted earnings per common share, under Accounting
Principles Board Opinion No. 15, "Earnings per Share", with basic and diluted
earnings per common share, respectively. The adoption of Statement No. 128 did
not have a material impact on the Corporation's consolidated financial
statements.
Earnings per common share ("basic") is computed using net income applicable to
common stock and weighted average common shares outstanding during the period.
Earnings per common share--assuming dilution ("diluted") is computed using net
income applicable to common stock and weighted average common shares
outstanding during the period after consideration of the potential dilutive
effect of common stock equivalents based on the treasury stock method using an
average market price for the period. The Corporation's common stock equivalents
are solely related to employee stock options. The Corporation does not have any
other common stock equivalents.
For comparative purposes, earnings per common share and weighted average common
shares outstanding and common stock equivalents have been restated to reflect
the adoption of Statement No. 128 and the three-for-two stock split of the
Corporation's Common Stock, effected in the form of a dividend, issued October
1, 1997, to stockholders of record as of September 15, 1997.
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------- -------- -------- --------
BASIC
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
Less: preferred stock dividend requirements . . . . . . . . . . . . . . . . 19,527 14,055 1,469
------------ ------------ ------------
Net income applicable to common stock . . . . . . . . . . . . . . . . . . . $ 602,973 $ 460,440 $ 351,630
============ ============ ============
Weighted average common shares outstanding (000) . . . . . . . . . . . . . 501,225 501,208 501,226
============ ============ ============
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ .92 $ .70
============ ============ ============
DILUTED
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
Less: preferred stock dividend requirements . . . . . . . . . . . . . . . . 19,527 14,055 1,469
------------ ------------ ------------
Net income applicable to common stock . . . . . . . . . . . . . . . . . . . $ 602,973 $ 460,440 $ 351,630
============ ============ ============
Weighted average common shares outstanding (000) . . . . . . . . . . . . . 501,225 501,208 501,226
Net effect of dilutive stock options--based on the treasury stock
method using average market price (000) . . . . . . . . . . . . . . . . 25,309 17,774 12,417
------------ ------------ ------------
Weighted average common shares outstanding and common stock equivalents (000) 526,534 518,982 513,643
------------ ------------ ------------
Earnings per common share--assuming dilution . . . . . . . . . . . . . . . $ 1.15 $ .89 $ .68
============ ============ ============
There were 1,675,000 stock options with an average option price of $28.75 per
share outstanding at December 31, 1997, which were not included in the
computation of earnings per common share--assuming dilution for 1997 as a
result of the stock options' exercise price being greater than the average
market price of the common shares. These stock options expire in 2007.
44
47
MBNA CORPORATION AND SUBSIDIARIES
NOTE C: INVESTMENT SECURITIES
SUMMARY OF INVESTMENT SECURITIES
(DOLLARS IN THOUSANDS)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
DECEMBER 31, 1997
Available-for-sale:
U.S. Treasury and other U.S. government agencies obligations . . . $1,074,179 $ 1,371 $ (170) $1,075,380
State and political subdivisions of the United States . . . . . . 91,282 48 (14) 91,316
Asset-backed and other securities . . . . . . . . . . . . . . . . 995,408 720 (360) 995,768
---------- ---------- ---------- ----------
Total investment securities available-for-sale . . . . . . . . . $2,160,869 $ 2,139 $ (544) $2,162,464
========== ========== ========== ==========
Held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations . . . $ 285,747 $ 105 $ (4,142) $ 281,710
State and political subdivisions of the United States . . . . . . 1,628 105 (265) 1,468
Asset-backed and other securities . . . . . . . . . . . . . . . . . 58,805 97 (212) 58,690
---------- ---------- ---------- ----------
Total investment securities held-to-maturity . . . . . . . . . . $ 346,180 $ 307 $ (4,619) $ 341,868
========== ========== ========== ==========
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
========== ========== ========== ==========
ESTIMATED MATURITIES OF INVESTMENT SECURITIES
(DOLLARS IN THOUSANDS)
AMORTIZED MARKET
DECEMBER 31, 1997 COST VALUE
-------------- --------------
Available-for-sale:
Due within one year . . . . . . . . . . . . . . . . . . . $ 1,005,018 $ 1,004,849
Due after one year through five years . . . . . . . . . . 1,100,038 1,101,815
Due after five years through ten years . . . . . . . . . . 53,674 53,663
Due after ten years . . . . . . . . . . . . . . . . . . . 2,139 2,137
-------------- --------------
Total investment securities available-for-sale . . . . . $ 2,160,869 $ 2,162,464
============== ==============
Held-to-maturity:
Due within one year . . . . . . . . . . . . . . . . . . . $ 208,498 $ 207,492
Due after one year through five years . . . . . . . . . . 28,279 28,230
Due after five years through ten years . . . . . . . . . . - -
Due after ten years . . . . . . . . . . . . . . . . . . . 109,403 106,146
-------------- --------------
Total investment securities held-to-maturity . . . . . . $ 346,180 $ 341,868
============== ==============
The Corporation did not sell any investment securities during 1997 and 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.
There were no securities pledged at December 31, 1997. At December 31, 1996,
$3.0 million of U.S. Treasury Notes included in investment securities
held-to-maturity were pledged by the Corporation.
45
48
MBNA CORPORATION AND SUBSIDIARIES
NOTE D: GEOGRAPHIC DIVERSIFICATION OF LOANS
The Corporation originates credit card and other consumer loans, primarily
throughout the United States and the United Kingdom. The table below details
the geographic distribution of the Corporation's loan receivables, securitized
loans, and managed loans. Credit card and other consumer loans originated in
the United States are broadly distributed throughout the United States'
geographic regions as presented below. Credit card and other consumer loans
issued by MBNA International are primarily located in the United Kingdom.
The Corporation's loans are generally 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 $9,900, and the average balance outstanding per account is
$3,400 at December 31, 1997.
GEOGRAPHIC DISTRIBUTION OF LOAN RECEIVABLES, SECURITIZED LOANS, AND MANAGED
LOANS
(DOLLARS IN THOUSANDS)
LOAN RECEIVABLES SECURITIZED LOANS MANAGED LOANS
---------------- ----------------- -------------
DECEMBER 31, 1997
United States:
Northeast . . . . . . . . . . . . . . . . . . $ 2,261,165 20.2% $ 8,479,769 22.2% $10,740,934 21.8%
Southeast . . . . . . . . . . . . . . . . . . 1,932,440 17.3 7,125,276 18.6 9,057,716 18.3
Central . . . . . . . . . . . . . . . . . . . 2,366,419 21.2 6,137,295 16.0 8,503,714 17.2
Midwest . . . . . . . . . . . . . . . . . . . 1,086,129 9.7 7,019,407 18.4 8,105,536 16.4
West . . . . . . . . . . . . . . . . . . . . . 2,230,451 20.0 7,782,733 20.4 10,013,184 20.3
United Kingdom . . . . . . . . . . . . . . . . . 1,201,522 10.8 1,594,320 4.2 2,795,842 5.7
Other . . . . . . . . . . . . . . . . . . . . . . 83,948 .8 78,986 .2 162,934 .3
----------- ----- ------------ ----- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $11,162,074 100.0% $ 38,217,786 100.0% $49,379,860 100.0%
=========== ===== ============ ===== =========== =====
DECEMBER 31, 1996
United States:
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
United Kingdom . . . . . . . . . . . . . . . . . 568,456 5.6 1,227,267 4.3 1,795,723 4.7
Other . . . . . . . . . . . . . . . . . . . . . . 63,654 .6 54,710 .2 118,364 .3
----------- ----- ------------ ----- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $10,129,052 100.0% $ 28,494,481 100.0% $38,623,533 100.0%
=========== ===== ============ ===== =========== =====
NOTE E: RESERVE FOR POSSIBLE CREDIT LOSSES
CHANGES IN THE RESERVE FOR POSSIBLE CREDIT LOSSES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996 1995
Reserve for possible credit losses,
beginning of year . . . . . . . . . . . . $ 118,427 $ 104,886 $ 101,519
Reserves acquired . . . . . . . . . . . 7,975 7,553 -
Provision for possible credit losses . . 260,040 178,224 138,176
Foreign currency translation . . . . . . (203) 488 (90)
Credit losses . . . . . . . . . . . . . (359,542) (254,417) (174,893)
Recoveries . . . . . . . . . . . . . . . 135,779 81,693 40,174
----------- ----------- ------------
Net credit losses . . . . . . . . . . (223,763) (172,724) (134,719)
----------- ----------- ------------
Reserve for possible credit losses,
end of year . . . . . . . . . . . . . . . $ 162,476 $ 118,427 $ 104,886
=========== =========== ============
NOTE F: PREMISES AND EQUIPMENT
SUMMARY OF PREMISES AND EQUIPMENT
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
- ------------------------------------------------------------- -------- ----------
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,876 $ 111,907
Buildings and improvements . . . . . . . . . . . . . . . . . 1,158,703 731,509
Furniture and equipment . . . . . . . . . . . . . . . . . . . 623,670 463,437
----------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,943,249 1,306,853
Accumulated depreciation and amortization . . . . . . . . . . (364,191) (259,670)
----------- --------------
Premises and equipment, net . . . . . . . . . . . . . . . $ 1,579,058 $ 1,047,183
=========== ==============
Depreciation expense for the years ended December 31, 1997, 1996, and 1995, was
$124.6 million, $76.7 million, and $67.1 million, respectively.
46
49
MBNA CORPORATION AND SUBSIDIARIES
The Corporation leases certain office facilities and equipment under 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
$31.3 million, $26.7 million, and $25.5 million for the years ended December
31, 1997, 1996, and 1995, respectively.
FUTURE MINIMUM RENTAL PAYMENTS UNDER NONCANCELABLE OPERATING LEASES
(DOLLARS IN THOUSANDS)
1998 . . . . . . . . . . . . . . . . . . . . . $ 26,876
1999 . . . . . . . . . . . . . . . . . . . . . 17,721
2000 . . . . . . . . . . . . . . . . . . . . . 10,084
2001 . . . . . . . . . . . . . . . . . . . . . 5,937
2002 . . . . . . . . . . . . . . . . . . . . . 4,520
Thereafter . . . . . . . . . . . . . . . . . . 7,997
--------
Total minimum lease payments . . . . . . . . $ 73,135
========
NOTE G: SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements are
overnight borrowings 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, 1997 1996 1995
- ------------------------------------------------------------ ----------- ----------- ----------
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 . . . . . . . . . . . . . . . . . . . . . $ 16,712 $ 67,712 $ 49,141
Maximum amount outstanding at any
month end . . . . . . . . . . . . . . . . . . . . . . . . 297,000 325,000 243,477
Weighted average interest rate during
the year . . . . . . . . . . . . . . . . . . . . . . . . . 5.59% 5.39% 6.01%
OTHER SHORT-TERM BORROWINGS
Balance at year end . . . . . . . . . . . . . . . . . . . . $ 192,623 $ 693,387 $ 174,543
Weighted average interest rate at year end . . . . . . . . 7.53% 5.66% 5.61%
Average amount outstanding
during the year . . . . . . . . . . . . . . . . . . . . . $ 321,443 $ 269,538 $ 148,804
Maximum amount outstanding at any
month end . . . . . . . . . . . . . . . . . . . . . . . . 646,529 693,387 319,417
Weighted average interest rate during
the year . . . . . . . . . . . . . . . . . . . . . . . . . 5.86% 5.51% 6.14%
NOTE H: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more.
SUMMARY OF LONG-TERM DEBT AND BANK NOTES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
- ------------------------------------------------------------- --------- ---------
PARENT COMPANY
67/8% Senior Notes, maturing in 1999 and 2005 . . . . . . . $ 248,935 $ 248,661
Fixed-Rate Senior Medium-Term Notes, with a
weighted average interest rate of 6.70% and
6.66%, respectively, maturing in varying
amounts from 1999 through 2004 . . . . . . . . . . . . . . 520,246 405,838
Floating-Rate Senior Medium-Term Notes,
maturing in varying amounts from 1998
through 2002 . . . . . . . . . . . . . . . . . . . . . . . 872,838 356,948
-------------- ---------------
Total Parent Company . . . . . . . . . . . . . . . . . . 1,642,019 1,011,447
SUBSIDIARIES
Fixed-Rate Medium-Term Bank Notes, with a
weighted average interest rate of 7.29% and
6.87%, respectively, maturing in varying
amounts from 1998 through 2005 . . . . . . . . . . . . . . 875,117 1,105,232
Floating-Rate Medium-Term Bank Notes,
maturing in varying amounts from 1998
through 2004 . . . . . . . . . . . . . . . . . . . . . . . 1,978,281 1,277,824
Fixed-Rate Bilateral Credit Facility, with an
interest rate of 7.29%, maturing in varying
amounts from 1998 through 2001 . . . . . . . . . . . . . . 10,756 17,127
Fixed-Rate Bilateral Credit Facility, with an
interest rate of 7.2033%, maturing in 2000 . . . . . . . . 16,425 -
Floating-Rate Bilateral Credit Facility,
maturing in 2001 . . . . . . . . . . . . . . . . . . . . . 16,425 34,254
Fixed-Rate Syndicated Credit Facility, with an
interest rate of 7.645%, maturing in 2001 . . . . . . . . 123,187 -
7.25% Subordinated Notes, maturing in 2002 . . . . . . . . 198,519 198,269
Subordinated Guaranteed Floating-Rate Notes,
maturing in 2005 . . . . . . . . . . . . . . . . . . . . . 55,039 56,205
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series A, with an interest
rate of 8.278%, maturing in 2026 . . . . . . . . . . . . . 250,000 250,000
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series B, with an interest
rate equal to 80 basis points above the
three-month London Interbank Offered Rate,
maturing in 2027 . . . . . . . . . . . . . . . . . . . . . 276,846 -
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series C, with an interest
rate of 8.25%, maturing in 2027 . . . . . . . . . . . . . 36,303 -
-------------- ---------------
Balance, end of year . . . . . . . . . . . . . . . . . . $ 5,478,917 $ 3,950,358
============== ===============
47
50
MBNA CORPORATION AND SUBSIDIARIES
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 indebtedness of the Corporation. The Corporation has
$522.5 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 $875.5 million of
Floating-Rate Senior Medium-Term Notes outstanding. These Floating-Rate Senior
Medium-Term Notes are priced between 15 basis points and 47 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,
1997, the three-month LIBOR was 5.81%.
MEDIUM-TERM BANK NOTES
The Medium-Term Bank Notes are direct, unconditional, unsecured, and are not
subordinated to any other obligations of the Bank. The Bank has $877.2 million
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 $2.0 billion
outstanding of Floating-Rate Medium-Term Bank Notes, with rates priced between
5 basis points to 37.5 basis points over the three-month LIBOR. Interest is
payable quarterly.
BILATERAL CREDIT FACILITIES
These facilities are direct, unsecured, and are not subordinated to any other
obligations of MBNA International. At December 31, 1997, MBNA International has
pound sterling 16.5 million outstanding with interest payable monthly. MBNA
International also has a pound sterling 10.0 million floating-rate facility
outstanding at December 31, 1997. This draw was priced at 17.5 basis points
above the three-month Sterling LIBOR and is payable semiannually. At December
31, 1997, the three-month Sterling LIBOR was 7.69%.
SYNDICATED CREDIT FACILITY
This facility is unsecured and is not subordinated to any other obligation of
MBNA International. At December 31, 1997, MBNA International has pound sterling
75.0 million outstanding with interest payable quarterly.
7.25% SUBORDINATED NOTES
The 7.25% Subordinated Notes are subordinated to the claims of depositors and
other creditors of the Bank, unsecured, and 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 outstanding. 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 and are unsecured. Interest on
these notes is payable quarterly or semiannually.
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.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
The Corporation, through MBNA Capital A, MBNA Capital B, and MBNA Capital C,
each a statutory business trust created under the laws of the State of
Delaware, issued capital securities and common securities: series A, series B,
and series C, respectively. The series capital securities are presented as
"guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures" in the summary of long-term debt
and bank notes. MBNA Corporation is the owner of all the beneficial ownership
interests represented by the common securities of the trusts. The trusts exist
for the sole purpose of issuing the series capital securities and the series
common securities and investing the proceeds in junior subordinated deferrable
interest debentures issued by the Corporation. For financial reporting
purposes, the trusts are treated as wholly owned subsidiaries of the
Corporation.
The junior subordinated deferrable interest debentures are the sole assets of
the trusts, and the payments under the junior subordinated deferrable interest
debentures are the sole revenues of the trusts. Interest on the series capital
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, distributions on the series
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 than the junior
subordinated deferrable interest debentures.
The series 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. The junior
subordinated deferrable interest debentures are redeemable prior to their
stated maturity at the option of the Corporation, on or after the contractually
specified dates, in whole at any time, or in part from time to time, or prior
to the contractually specified dates, in whole only within 90 days following
the occurrence
48
51
MBNA CORPORATION AND SUBSIDIARIES
of certain tax or capital treatment events. The series capital securities have
a preference with respect to cash distributions and amounts payable on
liquidation or redemption over the series 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 series capital securities issued by the
trusts. 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.
MINIMUM ANNUAL MATURITIES OF LONG-TERM DEBT AND BANK NOTES
(DOLLARS IN THOUSANDS)
PARENT
PARENT COMPANY AND
COMPANY SUBSIDIARIES
------- ------------
1998 . . . . . . . . . . . . . . . $ 80,000 $ 424,631
1999 . . . . . . . . . . . . . . . 591,000 1,118,295
2000 . . . . . . . . . . . . . . . 242,000 873,375
2001 . . . . . . . . . . . . . . . 120,000 670,492
2002 . . . . . . . . . . . . . . . 345,000 1,219,150
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.
NOTE I: ASSET SECURITIZATION
The Corporation periodically securitizes certain pools of loan receivables in
both public and private markets. Certificates representing undivided interests
in the trust are sold by the trust to investors, while the Seller's interest is
retained by the Bank. The Corporation includes the Seller's interest in loan
receivables and had $8.5 billion and $6.7 billion outstanding at December 31,
1997, and 1996, respectively. The carrying value of these loan receivables
approximates fair value. The senior classes of the asset-backed securities are
generally credit-enhanced by a third party to provide a AAA credit rating at
the time of issuance.
On January 1, 1997, the Corporation adopted 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. Under Statement No. 125, gains
are recognized at the time of initial sale and each subsequent sale of loan
receivables in a securitization. As a result, the Corporation recognizes the
gain from securitized loans in securitization income on the Corporation's
consolidated statements of income and includes the related receivable in
accounts receivable from securitizations on the consolidated statements of
financial condition at the time of sale. The related receivable represents the
contractual right to receive interest and other cash flows from the trusts and
is reported at market value with unrealized gains and losses, net of tax,
included as a component of stockholders' equity. Transaction costs incurred by
the Corporation are immediately recognized as a reduction to the gain recorded
from the securitization transaction. Securitization income also includes the
additional earnings from the Corporation's securitized loans previously
reported as loan servicing fees. Previously, the Corporation recognized the
earnings from securitizations over the life of the transaction. As a result of
the adoption of Statement No. 125, securitization income increased $325.1
million in 1997. This increase is not representative of future periods. Any
future gains that will be recognized by the Corporation in accordance with
Statement No. 125 will be dependent upon the timing and the amount of future
securitizations. In accordance with Statement No. 125, prior years have not
been restated.
Proceeds from securitization transactions were approximately $13.2 billion,
$11.2 billion, and $6.2 billion in 1997, 1996, and 1995, respectively. At
December 31, 1997 and 1996, approximately $37.6 billion and $28.0 billion of
investor principal (face value) remained outstanding, respectively.
Included in accounts receivable from securitizations in the consolidated
statements of financial condition at December 31, 1997 and 1996, were $284.1
million and $225.2 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.
NOTE J: EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation has a noncontributory defined benefit pension plan covering 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 10 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.
49
52
MBNA CORPORATION AND SUBSIDIARIES
RECONCILIATION OF THE PENSION PLAN'S ACTUARIALLY DETERMINED FUNDED STATUS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------- -------- ----------
ACCUMULATED BENEFITS
Actuarial present value of accumulated
benefit obligation:
Vested . . . . . . . . . . . . . . . . . . . . . $ 36,921 $ 28,088
Nonvested . . . . . . . . . . . . . . . . . . . 10,013 6,998
------------ --------------
Total . . . . . . . . . . . . . . . . . . . . $ 46,934 $ 35,086
============ ==============
Pension (Liability) Asset
Actuarial present value of projected benefit
obligation for service rendered to date . . . . . $ (120,198) $ (88,108)
Plan assets at fair value--primarily listed
stocks and fixed-income securities . . . . . . . . 108,737 71,941
------------ --------------
Plan assets less than projected
benefit obligation . . . . . . . . . . . . . . . . (11,461) (16,167)
Unrecognized prior service cost . . . . . . . . . . (1,387) (1,499)
Unrecognized net loss from past experience
different from that assumed and effects of
change in assumptions . . . . . . . . . . . . . . 11,768 18,801
Unrecognized net assets arising at transition . . . (348) (417)
------------ --------------
Pension (liability) asset . . . . . . . . . . . $ (1,428) $ 718
============ ==============
Significant actuarial assumptions used in
determining the projected benefit obligation
are as follows:
Discount rate . . . . . . . . . . . . . . . . . . 7.50% 7.75%
Average rate of compensation increase . . . . . . 6.50 6.50
The Corporation lowered the discount rate used to value its projected benefit
obligation for the pension plan in 1997 to reflect the current rate
environment. This change in assumption will not have a material impact on the
Corporation's consolidated financial statements for 1998.
In 1996, the Corporation raised the discount rate used to value its projected
benefit obligation for the pension plan to reflect the then current rate
environment. This change in assumption did not have a material impact on the
Corporation's consolidated financial statements for 1997.
COMPONENTS OF NET PERIODIC PENSION COST
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------- ------------ ----------- -----------
Service cost--benefits earned
during the period . . . . . . . . . . . . . . . . . . . $ 17,026 $ 16,468 $ 9,183
Interest cost on projected benefit obligation . . . . . . 7,694 6,464 4,110
Actual return on plan assets . . . . . . . . . . . . . . (22,009) (5,798) (6,272)
Net amortization and deferral . . . . . . . . . . . . . . 15,355 2,656 4,001
------------- ------------ ------------
Net periodic pension cost . . . . . . . . . . . . . . $ 18,066 $ 19,790 $ 11,022
============= ============ ============
The expected long-term rate of return on plan assets used in determining net
periodic pension cost was 9.00% in 1997, 1996, and 1995.
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 $12.1 million, $9.9 million, and
$8.3 million in 1997, 1996, and 1995, 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, 1997 1996
- ----------------------------------------------------------------- ----------- -----------
Accumulated Benefits
Actuarial present value of accumulated
benefit obligation:
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,835 $ 15,101
Nonvested . . . . . . . . . . . . . . . . . . . . . . . . . . 14,557 10,068
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,392 $ 25,169
============ ============
SERP Liability
Actuarial present value of projected benefit
obligation for service rendered to date . . . . . . . . . . . . $ (37,270) $ (25,745)
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . - -
Plan assets less than projected benefit obligation . . . . . . . (37,270) (25,745)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . 549 (1,922)
Unrecognized net loss from past experience
different from that assumed and effects of
change in assumptions . . . . . . . . . . . . . . . . . . . . . . 8,083 4,979
Unrecognized net obligation arising at transition . . . . . . . . 4,184 4,599
Adjustment required to recognize
minimum liability . . . . . . . . . . . . . . . . . . . . . . . (11,938) (7,080)
------------ ------------
SERP liability . . . . . . . . . . . . . . . . . . . . . . . $ (36,392) $ (25,169)
============ ============
Significant actuarial assumptions used in
determining the projected benefit obligation
are as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . 7.50% 7.75%
Average rate of compensation increase . . . . . . . . . . . . 6.50 6.50
During 1997, the Corporation lowered the discount rate used to value its
projected benefit obligation for the SERP plan to reflect the current rate
environment. This change in assumption will not have a material impact on the
Corporation's consolidated financial statements for 1998.
During 1996, the Corporation raised the discount rate used to value its
projected benefit obligation for the SERP plan to reflect the then current rate
environment. This change in assumption did not have a material impact on the
Corporation's consolidated financial statements for 1997.
50
53
MBNA CORPORATION AND SUBSIDIARIES
COMPONENTS OF NET SERP COST
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------- ---------- --------- -----------
Service cost--benefits earned
during the year . . . . . . . . . . . . . . . . . . . . $ 3,666 $ 2,253 $ 2,209
Interest cost on projected benefit obligation . . . . . . 2,552 1,847 1,438
Net amortization and deferral . . . . . . . . . . . . . . 532 477 339
---------- ----------- ------------
Net SERP cost . . . . . . . . . . . . . . . . . . . . $ 6,750 $ 4,577 $ 3,986
========== =========== ============
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 10 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
In April 1997, the shareholders approved the Corporation's new 1997 Long Term
Incentive Plan ("1997 Plan"), which authorizes the issuance of 16.5 million
shares of common stock pursuant to incentive and nonqualified stock options,
and restricted or unrestricted share awards to officers, directors, key
employees, consultants, and advisors of the Corporation. Once the 1997 Plan was
approved by the shareholders, all stock options and restricted stock awards
were granted from this plan, since essentially all of the 67.5 million shares
authorized for option and share awards under the Corporation's 1991 Long Term
Incentive Plan ("1991 Plan") had been granted. Therefore, as of December 31,
1997 and 1996, the combined amount of shares of common stock available for
future grants under both the 1991 and 1997 Plans was 5.6 million and 127,000,
respectively.
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 10 years from the date of grant.
Stock options granted to selected officers and key employees of the Corporation,
other than performance-based common stock options, 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 1997, performance-based common stock options for 8.9 million shares were
granted under the 1997 Plan. In 1996, performance-based common stock options
for 2.6 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.
The Corporation also granted 500,000 stock options during 1997 which are
exercisable in July 2001. In 1996, 36,000 options were granted subject to
shareholder approval of the 1997 Plan. These options are included in the
Summary of Stock Option Plans Activity in 1997.
SUMMARY OF STOCK OPTION PLANS ACTIVITY
(SHARES IN THOUSANDS)
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
1997
Options outstanding at beginning of year . . . . . . 38,829 $ 7.83
Granted . . . . . . . . . . . . . . . . . . . . . 10,132 21.27
Exercised . . . . . . . . . . . . . . . . . . . . (5,454) 5.86
Canceled . . . . . . . . . . . . . . . . . . . . . - -
----------
Options outstanding at end of year . . . . . . . . . 43,507 11.21
==========
Options exercisable at end of year . . . . . . . . . 17,303
==========
Weighted average fair value of options
granted during the year . . . . . . . . . . . . . . $ 7.37
==========
1996
Options outstanding at beginning of year . . . . . . 38,046 $ 6.92
Granted . . . . . . . . . . . . . . . . . . . . . 5,185 12.35
Exercised . . . . . . . . . . . . . . . . . . . . (4,382) 5.22
Canceled . . . . . . . . . . . . . . . . . . . . . (20) 6.16
Options outstanding at end of year . . . . . . . . . 38,829 7.83
==========
Options exercisable at end of year . . . . . . . . . 14,249
==========
Weighted average fair value of options
granted during the year . . . . . . . . . . . . . . $ 3.56
==========
1995
Options outstanding at beginning of year . . . . . . 26,468 $ 5.29
Granted . . . . . . . . . . . . . . . . . . . . . 15,414 8.82
Exercised . . . . . . . . . . . . . . . . . . . . (3,821) 3.35
Canceled . . . . . . . . . . . . . . . . . . . . . (15) 5.19
----------
Options outstanding at end of year . . . . . . . . . 38,046 6.92
==========
Options exercisable at end of year . . . . . . . . . 11,208
==========
Weighted average fair value of options
granted during the year . . . . . . . . . . . . . . $ 2.39
==========
Restricted shares were also issued under the 1997 Plan to the Corporation's
executive officers. A total of 855,000 common shares, with an approximate
aggregate market value of $22.1 million at the time of grant, were issued in
1997. A total of 557,000 common shares, with an approximate aggregate market
value of $9.5 million at the time of grant, were issued in 1996 under the 1991
Plan. The market value of these restricted shares at the date of grant is
amortized into expense over a period less than the restriction period. If the
restrictions have been removed, generally upon death, disability, or
retirement, the remaining unamortized market value of the restricted shares is
expensed.
To the extent stock options are exercised and restricted shares are awarded
from time to time under the Plans, the Board of Directors has approved the
purchase, on the open market or in privately negotiated transactions, of the
number of common shares issued.
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MBNA CORPORATION AND SUBSIDIARIES
SUMMARY OF STOCK OPTIONS OUTSTANDING
(SHARES IN THOUSANDS)
DECEMBER 31, 1997 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
------------------------ --------- ---------------- -------------- --------- --------------
$2.00 to 6.99 11,220 5.4 years $ 5.48 10,165 $ 5.38
7.00 to 8.99 10,932 6.7 7.37 3,253 7.48
9.00 to 12.99 11,125 8.1 11.55 3,630 11.38
17.00 to 19.99 8,440 9.3 19.69 228 18.66
24.00 to 27.99 853 9.9 27.38 15 24.70
28.00 to 30.99 937 9.6 29.55 12 28.75
------ ------
$2.00 to 30.99 43,507 17,303
====== ======
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, the Corporation elected to retain the
intrinsic-value-based method of 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 1997 and 1996, respectively: dividend yield of
2.11% and 2.71%; expected volatility of 30.08% and 28.74%; risk-free interest
rates of 6.63% and 6.46%; and expected lives of 6.5 years and 5.4 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.
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for the Plans. Had compensation cost for the Plans been determined
consistent with the fair-value-based method of accounting under Statement No.
123, the Corporation's net income, earnings per common share and earnings per
common share--assuming dilution on a pro forma basis would have been as
presented in the following table. The compensation expense recognized in pro
forma net income for 1997, 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, 1997 1996 1995
- ---------------------------------------- ------- ---------- -----------
Net income:
As reported . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
Pro forma . . . . . . . . . . . . . 608,838 466,020 349,215
Earnings per common share:
As reported . . . . . . . . . . . . 1.20 .92 .70
Pro forma . . . . . . . . . . . . . 1.18 .90 .69
Earnings per common share--
assuming dilution:
As reported . . . . . . . . . . . . 1.15 .89 .68
Pro forma . . . . . . . . . . . . . 1.12 .87 .68
NOTE L: STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Corporation is authorized to issue 20.0 million shares of preferred stock
with a par value of $.01 per share. In 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
52
55
MBNA CORPORATION AND SUBSIDIARIES
event of certain amendments to the Code with respect to the dividends-received
deduction.
In 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.
During 1997, the Corporation, through MBNA Capital C, issued 1.5 million shares
of 8.25% Trust Originated Preferred Securities (guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
series C) in exchange for 1.5 million shares of 7 1/2% Cumulative Preferred
Stock, Series A. The value of the shares exchanged was $36.3 million. After
the exchange, the Corporation had 4.5 million shares of 7 1/2% Cumulative
Preferred Stock, Series A, outstanding at December 31, 1997.
The Corporation also repurchased 2.0 million shares of Adjustable Rate
Cumulative Preferred Stock, Series B, during 1997 for $52.5 million. There were
4.0 million shares of Adjustable Rate Cumulative Preferred Stock, Series B,
outstanding at December 31, 1997. The Board of Directors declared the
following dividends for the Corporation's Series A and Series B Preferred
Stock, during 1997 and 1996.
PREFERRED STOCK DIVIDENDS DECLARED
DECLARATION DATE
SERIES A SERIES B
DIVIDEND DIVIDEND PER DIVIDEND DIVIDEND PER
RATE PREFERRED SHARE RATE PREFERRED SHARE
-------- --------------- --------- ----------------
October 14, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50% $ .46875 6.29% $ .39320
July 15, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 .46875 6.66 .41610
April 21, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 .46875 6.98 .43622
January 14, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 .46875 6.56 .40990
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 - -
COMMON STOCK
On July 15, 1997, 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
October 1, 1997, for every two common shares held by stockholders of record as
of September 15, 1997.
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 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 February 2, 1996.
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 1997 and
1996, these required cash reserves were satisfied by 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
53
56
MBNA CORPORATION AND SUBSIDIARIES
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 pay dividends will depend on its future net income and
capital requirements. At December 31, 1997, the amount of retained earnings
available for declaration and payment of dividends from the Bank to the
Corporation was $651.0 million. Payment of dividends by the Bank to the
Corporation, however, may 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, 1997.
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 possible
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's 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's and the Bank's capital amounts and
classification are subject to qualitative judgments 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 1 and Total Capital to
risk weighted assets and of Tier 1 Capital to average assets (Leverage ratio).
Management believes that the Corporation and the Bank met all capital adequacy
requirements to which they were subject at December 31, 1997.
At December 31, 1997, the Bank was "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.
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, 1997
Tier 1 Capital (to Risk Weighted Assets):
MBNA Corporation . . . . . . . . . . . . . . . $ 2,283,775 9.82% $ 930,006 4.00% (a)
MBNA America Bank, N.A. . . . . . . . . . . . 2,034,966 9.56 851,237 4.00 $ 1,276,856 6.00%
Total Capital (to Risk Weighted Assets):
MBNA Corporation . . . . . . . . . . . . . . . 2,787,958 11.99 1,860,013 8.00 (a)
MBNA America Bank, N.A. . . . . . . . . . . . 2,353,460 11.06 1,702,474 8.00 2,128,093 10.00
Tier 1 Capital (to Average Assets):
MBNA Corporation . . . . . . . . . . . . . . . 2,283,775 11.13 820,969 4.00 (a)
MBNA America Bank, N.A. . . . . . . . . . . . 2,034,966 10.90 746,553 4.00 933,191 5.00
December 31, 1996
Tier 1 Capital (to Risk Weighted Assets):
MBNA Corporation . . . . . . . . . . . . . . . 1,814,730 10.89 666,342 4.00 (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 (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 11.21 647,626 4.00 (a)
MBNA America Bank, N.A. . . . . . . . . . . . 1,366,092 9.24 591,186 4.00 738,983 5.00
(a) Not applicable for bank holding companies.
54
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MBNA CORPORATION AND SUBSIDIARIES
NOTE O: COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Corporation had outstanding lines of credit of $247.9
billion committed to its Customers. Of that total commitment, $198.5 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 1997 with $25.0 million
expiring in March 1998 and $25.0 million expiring in September 1998. 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, 1997.
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, 1997.
MBNA International has seven bilateral credit facilities, ranging from one to
five years, totaling pound sterling 66.5 million (approximately $109.3 million
at December 31, 1997). 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, 1997, MBNA International had pound sterling 40.0 million
(approximately $65.7 million) available to be drawn under the facilities.
In addition, MBNA International has a pound sterling 300.0 million
(approximately $492.8 million at December 31, 1997) 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 had
pound sterling 100.0 million (approximately $164.3 million) and IR pound
sterling 20.0 million (approximately $28.4 million) outstanding at December 31,
1997. These borrowings, which are included as part of short-term borrowings in
the consolidated statements of financial condition, matured in January 1998.
MBNA Canada, the Bank's foreign bank subsidiary organized in late 1997, has a
six-year CAD$125.0 million (approximately $87.5 million at December 31, 1997)
multi-currency syndicated revolving credit facility, which expires in December
2003. MBNA Canada may take advances under the facility subject to certain
conditions customary in a transaction of this kind. The facility may be used
for general corporate purposes and was not drawn upon as of December 31, 1997.
NOTE P: OTHER OPERATING EXPENSE
OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
Purchased services . . . . . . . . $ 287,016 $ 177,701 $ 148,746
Advertising . . . . . . . . . . . . 133,124 103,407 89,020
Collection . . . . . . . . . . . . 27,378 23,914 20,117
Stationery and supplies . . . . . . 30,960 26,155 20,342
Service bureau . . . . . . . . . . 31,516 25,112 19,509
Postage and delivery . . . . . . . 186,015 114,591 95,370
Telephone usage . . . . . . . . . . 57,647 49,016 38,438
Credit card fraud losses . . . . . 64,572 47,307 40,927
Amortization of intangible assets . 31,290 14,577 9,175
Computer software . . . . . . . . . 46,227 23,880 18,321
Other . . . . . . . . . . . . . . . 101,375 69,599 60,428
----------- ----------- -----------
Total other operating expense . $ 997,120 $ 675,259 $ 560,393
=========== =========== ===========
NOTE Q: SPECIAL MARKETING PROGRAM
During 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 MasterCard
and Visa program.
NOTE R: INCOME TAXES
RECONCILIATION OF STATUTORY INCOME TAXES
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
Income before income taxes . . . . . . $ 1,022,108 $ 731,294 $ 584,601
Statutory tax rate . . . . . . . . . . 35% 35% 35%
-------------- -------------- ------------
Income tax at statutory tax rate . . . 357,738 255,953 204,610
State taxes, net of federal benefit . . 11,182 9,751 9,133
Other . . . . . . . . . . . . . . . . . 30,688 23,888 17,759
-------------- -------------- ------------
Applicable income taxes . . . . . . . . 399,608 289,592 231,502
Tax benefit from Customer-based
intangible assets . . . . . . . . . . - (32,793) -
-------------- -------------- ------------
Total income taxes . . . . . . . . $ 399,608 $ 256,799 $ 231,502
============== ============== ============
Current income taxes . . . . . . . . . $ 358,259 $ 288,805 $ 221,869
Deferred income taxes (benefit) . . . . 41,349 (32,006) 9,633
-------------- -------------- ------------
Total income taxes . . . . . . . . $ 399,608 $ 256,799 $ 231,502
============== ============== ============
55
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MBNA CORPORATION AND SUBSIDIARIES
SUMMARY OF NET DEFERRED TAX ASSETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
Reserve for possible credit losses . . . . $ 51,979 $ 41,500
Customer-based intangible assets . . . . . 65,927 77,310
Other deferred tax assets . . . . . . . . . 141,111 102,332
------------ ------------
Total deferred tax assets . . . . . . . 259,017 221,142
Valuation allowance . . . . . . . . . . . . - -
------------ ------------
Total deferred tax assets less valuation
allowance . . . . . . . . . . . . . . . 259,017 221,142
Total deferred tax liabilities . . . . . (205,333) (121,900)
------------ ------------
Net deferred tax assets . . . . . . . . $ 53,684 $ 99,242
============ ============
Net income for 1996 included 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 these assets because there were uncertainties concerning the tax treatment
of such assets. In 1993, the U.S. Supreme Court affirmed that Customer-based
intangible assets may be amortized for tax purposes. Accordingly, the
Corporation recognized a portion of the tax benefit related to the
Customer-based intangible assets. During 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.
NOTE S: FOREIGN ACTIVITIES
The Corporation's foreign activities are primarily performed through the Bank's
two foreign bank subsidiaries, MBNA International and MBNA Canada. The Bank
also has a foreign branch office in the Grand Cayman Islands, which invests in
interest-earning time deposits and accepts eurodollar deposits. This branch
also participates in the loan receivables securitized by MBNA International.
FOREIGN LOAN RECEIVABLES DISTRIBUTION
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
LOANS HELD FOR SECURITIZATION:
Credit card . . . . . . . . . . . . . . . $ 602,798 $ 263,756
------------ -------------
Total loans held for securitization . . 602,798 263,756
LOAN PORTFOLIO:
Credit card . . . . . . . . . . . . . . . 354,288 207,973
Other consumer . . . . . . . . . . . . . . 244,439 96,727
------------ -------------
Total loan portfolio . . . . . . . . . . 598,727 304,700
------------ -------------
Total loan receivables . . . . . . . . . $ 1,201,525 $ 568,456
============ =============
Because certain foreign operations are integrated with many of the Bank's
domestic operations, estimates and assumptions have been made to attribute
certain income and expenses between domestic and foreign operations. Amounts
are allocated for interest costs to users of funds and for other items
incurred. The provision for credit losses is allocated based on specific
charge-off experience and risk characteristics of the foreign loan receivables.
The Corporation does not have a significant geographic area in which total
assets, total income, income before income taxes, or net income exceeds 10% of
the comparable amount reported in the consolidated financial statements.
Therefore, the Corporation's foreign financial information is presented on a
combined basis.
SELECTED FOREIGN DATA
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996 1995
DOMESTIC
Total assets . . . . . . . . . . . . . . . . . . . $ 18,386,590 $ 15,625,584 $ 12,166,636
Total income . . . . . . . . . . . . . . . . . . . 4,180,772 3,080,178 2,453,922
Income before income taxes . . . . . . . . . . . . 993,222 731,950 592,352
Net income . . . . . . . . . . . . . . . . . . . . 602,962 473,345 358,903
FOREIGN
Total assets . . . . . . . . . . . . . . . . . . . 2,918,923 1,409,758 1,062,253
Total income . . . . . . . . . . . . . . . . . . . 343,120 199,012 111,511
Income (loss) before income taxes . . . . . . . . . 28,886 (656) (7,751)
Net income (loss) . . . . . . . . . . . . . . . . . 19,538 1,150 (5,804)
MBNA CORPORATION
Total assets . . . . . . . . . . . . . . . . . . . 21,305,513 17,035,342 13,228,889
Total income . . . . . . . . . . . . . . . . . . . 4,523,892 3,279,190 2,565,433
Income before income taxes . . . . . . . . . . . . 1,022,108 731,294 584,601
Net income . . . . . . . . . . . . . . . . . . . . 622,500 474,495 353,099
NOTE T: RELATED PARTY TRANSACTIONS
The Corporation's directors and executive officers hold credit cards or other
lines of credit issued by the Bank on the same terms prevailing at the time for
those issued to other persons.
NOTE U: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following presents the fair value of financial instruments as of December
31, 1997 and 1996, 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
market values 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.
56
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MBNA CORPORATION AND SUBSIDIARIES
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 approximates its fair value due to the short-term nature of
these assets.
LOAN PORTFOLIO: The carrying value of the Corporation's loan 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
fair values of loans held for securitization and the loan portfolio do not
represent the underlying value of the Corporation's loan receivables.
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 is 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.
CARRYING VALUES AND ESTIMATED FAIR VALUES OF THE CORPORATION'S FINANCIAL ASSETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . $ 263,064 $ 263,064 $ 225,063 $ 225,063
Money market instruments . . . . . . . . . . . . . . . . . . . . . . 2,086,065 2,086,065 876,614 876,614
Investment securities:
Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . 2,162,464 2,162,464 1,719,730 1,719,730
Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . 346,180 341,868 598,320 592,208
Loans held for securitization . . . . . . . . . . . . . . . . . . . . 2,900,198 2,900,198 2,469,974 2,469,974
Loan portfolio, net of reserve for possible credit losses . . . . . . 8,099,400 8,099,400 7,540,651 7,540,651
Accrued income receivable . . . . . . . . . . . . . . . . . . . . . . 146,964 146,964 98,160 98,160
Accounts receivable from securitizations . . . . . . . . . . . . . . 2,835,831 2,825,000 1,777,323 1,768,000
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 is 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: The fair value of primarily all of the
Corporation's long-term debt and bank notes is 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.
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.
57
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MBNA CORPORATION AND SUBSIDIARIES
CARRYING VALUES AND ESTIMATED FAIR VALUES OF THE CORPORATION'S FINANCIAL
LIABILITIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ---------- ----------
FINANCIAL LIABILITIES
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,913,213 $13,052,000 $10,151,686 $10,243,000
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 192,623 192,623 693,387 693,387
Long-term debt and bank notes . . . . . . . . . . . . . . . . . . . . 5,478,917 5,532,000 3,950,358 3,996,000
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . 137,215 137,215 107,187 107,187
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, 1997 and 1996, the Corporation had interest rate swap
agreements with underlying notional amounts of $350.0 million and $1.4 billion,
respectively. These agreements had a net unrealized gain of approximately $5.0
million and $5.5 million at December 31, 1997 and 1996, 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, 1997 and
1996, were $512.1 million and $420.3 million, respectively. These contracts had
a net unrealized gain of $2.3 million at December 31, 1997 and a net unrealized
loss of $15.7 million at December 31, 1996.
The notional value underlying the Corporation's foreign exchange swap
agreements at December 31, 1997 and 1996, was $40.0 million, with a net
realizable value of $0 for both periods.
SUMMARY OF ACTIVITY OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (NOTIONAL
AMOUNTS)
(DOLLARS IN THOUSANDS)
FORWARD EXCHANGE INTEREST RATE FOREIGN EXCHANGE
CONTRACTS SWAP AGREEMENTS SWAP AGREEMENTS TOTAL
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
Additions . . . . . . . . . . . . . . . . . . . . . . . . 2,825,310 - - 2,825,310
Maturities . . . . . . . . . . . . . . . . . . . . . . . (2,733,440) (1,000,000) - (3,733,440)
----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 . . . . . . . . . . . . . . . $ 512,125 $ 350,000 $ 40,000 $ 902,125
=========== ============ ============ ============
NOTE V: 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 $5.0 million and $5.5 million at December 31,
1997 and 1996, respectively. In addition, the Corporation had $6.4 million of
gross unrealized gains on forward exchange contracts at December 31, 1997, and
no gross unrealized gains on forward exchange contracts at December 31, 1996.
The Corporation also had gross unrealized gains on foreign exchange swap
agreements of $765,000 and $1.6 million at December 31, 1997 and 1996,
58
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MBNA CORPORATION AND SUBSIDIARIES
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, 1997 and 1996.
At December 31, 1997, the Corporation has interest rate swap agreements with a
notional amount of $150.0 million maturing in 1999 and $200.0 million maturing
in 2002. The Corporation's forward exchange contracts mature in 1998 and the
foreign exchange swap agreements mature in 2005.
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, 1997
Forward exchange contracts--pounds sterling . . . . . . $ 512,125 1.65 1.64 .1
Gross unrealized gains . . . . . . . . . . . . . . . $ 6,360
Gross unrealized losses . . . . . . . . . . . . . . (4,022)
----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 2,338
==========
Interest rate swap agreements . . . . . . . . . . . . . 350,000 6.45% 5.91% 3.4
Gross unrealized gains . . . . . . . . . . . . . . . $ 5,033
Gross unrealized losses . . . . . . . . . . . . . . -
----------
Total . . . . . . . . . . . . . . . . . . . . . . $ 5,033
==========
Foreign exchange swap agreements . . . . . . . . . . . 40,000 1.64 1.64 7.4
Gross unrealized gains . . . . . . . . . . . . . . . $ 765
Gross unrealized losses . . . . . . . . . . . . . . (765)
----------
Total . . . . . . . . . . . . . . . . . . . . . . $ -
==========
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 . . . . . . . . . . . . . . . . . . . . . . $ -
==========
(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, 1997 and 1996, 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, 1997 and 1996,
respectively.
EXPECTED MATURITIES OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 WITHIN 1 YEAR 1-5 YEARS 6-10 YEARS TOTAL
Forward exchange contracts--pounds sterling
Notional amount . . . . . . . . . . . . . . . . . . . . . $ 512,125 $ - $ - $ 512,125
Estimated fair value . . . . . . . . . . . . . . . . . . . 2,338 - - 2,338
Interest rate swap agreements
Notional amount . . . . . . . . . . . . . . . . . . . . . - 350,000 - 350,000
Estimated fair value . . . . . . . . . . . . . . . . . . . - 5,033 - 5,033
Foreign exchange swap agreements
Notional amount . . . . . . . . . . . . . . . . . . . . . - - 40,000 40,000
Estimated fair value . . . . . . . . . . . . . . . . . . . - - - -
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MBNA CORPORATION AND SUBSIDIARIES
NOTE W: PARENT COMPANY FINANCIAL INFORMATION
MBNA Corporation conducts its credit card operations primarily through its
wholly owned subsidiary, MBNA America Bank, N.A. At December 31, 1997, the Bank
constituted 90.7% 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, 1997 1996
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,991 $ 6,032
Money market instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,413 100,175
Notes receivable from non-bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 1,678,173 1,031,716
Investment in subsidiaries:
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,096,490 1,645,011
Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,211 176,789
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,119 47,692
Accrued income receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,177 12,757
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,588 41,478
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,311,162 $ 3,061,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,642,019 $ 1,011,447
Junior subordinated deferrable interest debentures due to non-bank subsidiaries . . . . . 580,566 257,732
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,025 15,039
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,261 40,179
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 52,241 32,945
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,341,112 1,357,342
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,970,050 1,704,308
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . $ 4,311,162 $ 3,061,650
============ ============
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
OPERATING INCOME
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,351 $ 66,056 $ 47,611
Dividends from subsidiaries:
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,000 148,000 134,000
Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,201 23 -
Management fees from subsidiaries . . . . . . . . . . . . . . . . . . . . . 32,507 29,058 22,135
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 23 24
---------- ------------ -----------
Total operating income . . . . . . . . . . . . . . . . . . . . . . . . 325,082 243,160 203,770
OPERATING EXPENSE
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,997 60,605 48,102
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . 16,117 16,320 9,812
Occupancy expense of premises . . . . . . . . . . . . . . . . . . . . . . . 2,280 2,233 2,165
Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . 8,448 4,860 3,847
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,672 2,157 3,659
---------- ------------ -----------
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . 149,514 86,175 67,585
---------- ------------ -----------
Income before income taxes and equity in undistributed net
income (loss) of subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 175,568 156,985 136,185
Applicable income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . (6,807) 2,560 920
Equity in undistributed net income (loss) of subsidiaries:
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,375 326,590 218,215
Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,250) (6,520) (381)
---------- ------------ -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
========== ============ ===========
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MBNA CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 622,500 $ 474,495 $ 353,099
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . (440,125) (320,070) (217,834)
(Benefit) provision for deferred income taxes . . . . . . . . . . . . . (233) 371 (612)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 9,615 8,532 5,069
Decrease in other operating activities . . . . . . . . . . . . . . . . . 15,974 2,615 6,419
--------- --------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . 207,731 165,943 146,141
INVESTING ACTIVITIES
Net (increase) decrease in money market instruments . . . . . . . . . . . . (58,238) 83,164 (122,372)
Net increase in notes receivable from non-bank subsidiaries . . . . . . . . (646,457) (317,682) (250,770)
Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . (29,439) (11,868) (13,368)
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . (37,701) (298,532) (19,940)
--------- --------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . (771,835) (544,918) (406,450)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt and bank notes . . . . . . . . . . 679,304 199,222 273,322
Maturity of long-term debt and bank notes . . . . . . . . . . . . . . . . . (50,000) (25,000) -
Proceeds from issuance of junior subordinated deferrable interest debentures
to non-bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 286,469 257,732 -
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . - 146,207 145,070
Acquisition and retirement of preferred stock . . . . . . . . . . . . . . . (52,483) - -
Proceeds from exercise of stock options and other awards . . . . . . . . . 31,948 22,869 12,780
Acquisition and retirement of common stock . . . . . . . . . . . . . . . . (157,446) (71,913) (49,829)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (173,729) (149,115) (120,312)
--------- --------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . 564,063 380,002 261,031
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . (41) 1,027 722
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . 6,032 5,005 4,283
--------- --------- ---------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . $ 5,991 $ 6,032 $ 5,005
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest expense paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,665 $ 58,308 $ 44,521
========= ========= =========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
========= ========= =========
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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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note I to the consolidated financial statements, effective
January 1, 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities."
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
January 13, 1998
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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,
1997
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $405,288 $435,268 $437,224 $433,233
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 224,509 250,524 263,775 279,815
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 180,779 184,744 173,449 153,418
Provision for possible credit losses . . . . . . . . . . . . . . . . 58,405 87,363 60,403 53,869
Other operating income . . . . . . . . . . . . . . . . . . . . . . . 642,620 694,834 692,039 783,386
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . 559,791 565,388 523,542 574,400
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 205,203 226,827 281,543 308,535
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,942 138,433 171,826 188,299
Net income applicable to common stock . . . . . . . . . . . . . . . . 117,711 132,686 168,006 184,570
Earnings per common share (a) . . . . . . . . . . . . . . . . . . . . .23 .26 .34 .37
Earnings per common share--assuming dilution (a) . . . . . . . . . . .22 .25 .32 .35
Weighted average common shares outstanding (000) (a) . . . . . . . . 501,229 501,219 501,208 501,243
Weighted average common shares outstanding and
common stock equivalents (000) (a) . . . . . . . . . . . . . . . . . 525,280 524,925 528,310 527,576
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 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,222 103,320 129,523 149,430
Net income applicable to common stock (b) . . . . . . . . . . . . . . 89,409 100,508 126,477 144,046
Earnings per common share (a) . . . . . . . . . . . . . . . . . . . . .18 .20 .25 .29
Earnings per common share--assuming dilution (a) . . . . . . . . . . .17 .19 .24 .28
Weighted average common shares outstanding (000) (a) . . . . . . . . 501,216 501,204 501,197 501,215
Weighted average common shares outstanding and
common stock equivalents (000) (a) . . . . . . . . . . . . . . . . . 517,267 517,588 518,234 522,806
(a) The Corporation adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (Statement No. 128), effective for
financial statements issued for periods ending after December 15,
1997. In accordance with Statement No. 128, earnings per common share
is computed using net income applicable to common stock and weighted
average common shares outstanding, whereas earnings per common
share--assuming dilution includes the potential dilutive effect of
common stock equivalents which are solely related to employee stock
options. The Corporation has no other common stock equivalents. For
comparative purposes, all common share and per common share amounts
have been restated to reflect the adoption of Statement No. 128 and
for the three-for-two split of the Corporation's Common Stock,
effected in the form of a dividend, issued October 1, 1997, to
stockholders of record as of September 15, 1997.
(b) 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 MasterCard and Visa program.
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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
--------- -------- ----------------
1997
First quarter . . . . $ 24 3/4 $ 18 3/16 $ .08
Second quarter . . . 24 11/16 18 11/16 .08
Third quarter . . . . 30 1/8 24 7/8 .08
Fourth quarter . . . 29 1/4 25 9/16 .08
1996
First quarter . . . . $ 13 13/16 $ 10 1/8 $ .07
Second quarter . . . 14 1/16 12 .07
Third quarter . . . . 15 7/16 11 13/16 .07
Fourth quarter . . . 19 15 3/16 .07
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 October 1, 1997, to stockholders of record as of September
15, 1997.
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 13, 1998,
the Corporation had 2,924 common stockholders of record. This does not include
beneficial owners for whom Cede & Co. or others act as nominees.
On January 13, 1998, the Board of Directors approved an increase in the
quarterly dividend to $.09 per common share. The cash dividend is payable April
1, 1998, to stockholders of record as of March 16, 1998.
PREFERRED STOCK PRICE RANGE AND DIVIDENDS
DIVIDENDS
DECLARED PER
HIGH LOW PREFERRED SHARE
-------- ------- ---------------
SERIES A
1997
First quarter . . $ 27 5/32 $ 25 5/8 $ .46875
Second quarter . . 26 45/64 25 7/8 .46875
Third quarter . . 26 13/16 26 .46875
Fourth quarter . . 27 5/16 26 1/16 .46875
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
SERIES B
1997
First quarter . . $ 27 1/4 $ 25 1/2 $ .40990
Second quarter . . 27 1/4 26 3/4 .43622
Third quarter . . 27 26 3/8 .41610
Fourth quarter . . 26 3/4 25 13/16 .39320
1996
Third quarter . . $ 24 3/4 $ 24 5/8 $ .10690
Fourth quarter . . 26 1/8 24 5/8 .42690
The Corporation has two series of preferred stock issued and outstanding, both
with a $25 stated value per share. Each series of preferred stock is traded on
the New York Stock Exchange, the Series A Preferred Stock under the symbol
"KRBpfa" and the Series B Preferred Stock under the symbol "KRBpfb."
On January 13, 1998, the Board of Directors declared a quarterly dividend of
$.46875 per share on the 71/2% Cumulative Preferred Stock, Series A, and a
quarterly dividend of $.3660 per share on the Adjustable Rate Cumulative
Preferred Stock, Series B. Both dividends are payable April 15, 1998, to
stockholders of record as of March 31, 1998.
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SENIOR EXECUTIVES
CHARLES M. CAWLEY, 57, is president of MBNA Corporation and chief executive
officer of its banking subsidiary, MBNA America Bank, N.A. Mr. Cawley has more
than 32 years' 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.
Chief Administrative Officer JOHN R. COCHRAN III, 46, oversees all business
development and marketing activities, including sales, marketing, advertising,
regional marketing, telemarketing, and group administration. Mr. Cochran has 25
years' management experience in the financial services industry 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 thousands of membership groups and financial
institutions. He also established what is now one of the nation's largest
financial institution telephone sales operations. Mr. Cochran is 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 and the Ronald McDonald House of
Delaware.
RONALD W. DAVIES, 56, joined MBNA in 1991 and oversees MBNA Hallmark
Information Services, which provides MBNA with telecommunications, production
operations, information systems, and systems operations and development. Mr.
Davies has 33 years' experience in information systems and technology
management. A graduate of the University of California, with a master's degree
in economics, Mr. Davies gained experience in the aerospace and banking
industries in various data processing, bank operations, marketing, and
administrative positions.
Chief Operating Officer BRUCE L. HAMMONDS, 49, oversees MBNA's credit, loss
prevention, Customer satisfaction, consumer finance and loan review activities.
Mr. Hammonds has 28 years' 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, Mr. Hammonds is director of the Delaware State Chamber
of Commerce, the Delaware Housing Partnership, and the Delaware Business
Roundtable. He is on the Board of Trustees of Goldey-Beacom College and is a
member of the College of Business and Economics Visiting Committee at the
University of Delaware.
Chief Financial Officer M. SCOT KAUFMAN, 48, joined MBNA in 1985 and oversees
MBNA's accounting, finance, treasury, facilities, and security activities. Mr.
Kaufman has 26 years' 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 over-seeing 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. Mr. Kaufman is active in many
professional associations, including the American Institute 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, 64, is chief executive officer of MBNA Corporation and chairman
of its Board of Directors. Mr. Lerner 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 of the Town and
Country Trust since August 1993 and was chief executive officer from August
1993 to October 1997. He was chairman of the board of The Progressive
Corporation, an insurance holding company, from 1988 to April 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 and a member
of the board of directors of the Marine Corps Law Enforcement Foundation.
RICHARD K. STRUTHERS, 42, oversees MBNA's international, insurance, deposit,
travel, and Business Card activities. Mr. Struthers has 20 years' management
experience in consumer lending and was a member of the management team that
established MBNA in 1982. A graduate of Penn State University and the Retail
School of Banking at the University of Virginia,Mr. Struthers has held several
management positions, overseeing most of the major operating divisions of MBNA.
Mr. Struthers is a member of the board of Emmaus House and serves on the
marketing committee of Visa U.S.A.
LANCE L. WEAVER, 43, joined MBNA in 1991 and oversees industry relations,
community relations, corporate affairs, law, government relations, compensation
and benefits, and real estate. Mr. Weaver has 23 years' 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. Mr. Weaver is chairman-elect of
the United Way of Delaware and is a member of the Georgetown University Board
of Regents. He serves on the board of Tower Hill School and is chairman of
Wilmington 2000, a consortium of business and government planners working
toward the revitalization of downtown Wilmington, Delaware, and its environs.
Mr. Weaver also serves on MasterCard International's Global Board and Executive
Committee.
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68
MBNA CORPORATION
BOARD OF DIRECTORS
ALFRED LERNER
Chairman and Chief Executive Officer
MBNA Corporation
CHARLES M. CAWLEY
President
MBNA Corporation
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.
Partner
Securities Advisors, L.P.
STUART L. MARKOWITZ, M.D.
Internist and Managing Partner
Drs. Markowitz, Rosenberg,
Stein & Associates
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
EXECUTIVE COMMITTEE
Charles M. Cawley Bruce L. Hammonds Richard K. Struthers
John R. Cochran III M. Scot Kaufman Lance L. Weaver
Ronald W. Davies Alfred Lerner ex officio
MANAGEMENT COMMITTEE
Gregg Bacchieri Robert J.A. Fraser Michelle D. Shepherd
Kenneth F. Boehl John J. Hewes Diane C. Sievering
Jules J. Bonavolonta Janine D. Marrone David W. Spartin
Steve Boyden Thomas P. McGinley Kevin P. Wren
William H. Daiger, Jr. David W. Nelms Thomas D. Wren
Shane G. Flynn Michael G. Rhodes Vernon H.C. Wright
Terrance R. Flynn John W. Scheflen
OPERATING EXECUTIVES
Sunil F. Antani Richard G. Huber Frank W. Quillen
Lisa F. Baughman Scott A. Hudson John C. Richmond
John P. Carey James K. Kallstrom Karen E. Rose
James E. Carrington Alvin Kaltman Salvatore J. Rossi, Jr.
Robert V. Ciarrocki Kevin L. Kramer James J. Roszkowski
John A. Corrozi Mark Levitt Michael R. Scanlan
Douglas M. Cummings Craig S. Lewis Kevin C. Schindler
Brian D. Dalphon Timothy E. Love W. Craig Schroeder
Salvatore A. DeAngelo Victor P. Manning Michael S. Schuck
Douglas R. Denton David H. Maxwell Stephen K. Shock
Joseph A. DeSantis Kathleen B. McEntee David L. Simms
Robert V. DeSantis Frank B. McEntee Richard B. Skinner
Peter S.P. Dimsey Frank J. McKelvey III Timothy P. Staley
Theodore Dixon Charles K. Messick April M. Stercula
Kevin A. Dolan, M.D. Susan D. Morrison Penelope J. Taylor
K. David Elgena William P. Morrison James D. Thornton
James H. Erskine III Paul Muller III Thomas D. Veale
William J. Esposito Edward H. Murphy Steven P. Walczak
John M. Gala Terri C. Murphy Howard C. Wallace
Joseph J. Gatti Al Natali Todd T. Weaver
Peter J. Gatti Maureen A. O'Brien Charles F. Wheatley
Bob B. Hallmark Patrick J. O'Dwyer Dena H. Williams
Denny P. Hanysak Francis H. Otenasek Robert J. Wolf
David L. Harris Kenneth R. Pizer
David M. Hirt Edward G. Plummer
IN MATTERS OF STYLE SWIM WITH THE CURRENT;
IN MATTERS OF PRINCIPLE STAND LIKE A ROCK.
--Thomas Jefferson
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SUBSIDIARIES OF MBNA CORPORATION
MBNA AMERICA BANK, N.A.
The principal subsidiary of MBNA Corporation, MBNA America is a national bank
with $48.7 billion in managed loans, and is the largest independent credit card
lender in the world, and one of the two largest overall. It also provides
retail deposit, consumer loan, and insurance services. MBNA America is the
recognized industry leader in affinity marketing, with endorsements from
thousands of membership organizations and financial institutions.
SUBSIDIARIES OF MBNA AMERICA BANK, N.A.
MBNA INTERNATIONAL BANK LIMITED (MBNA EUROPE)
MBNA issues credit cards in the United Kingdom. MBNA Europe is located in
Chester, England, with a business development office in London and sales
offices in Dublin, Ireland, and Edinburgh, Scotland.
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 40 states.
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, New Hampshire, 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.
MBNA CANADA BANK (MBNA CANADA)
MBNA has established a bank to issue credit cards in Canada. MBNA Canada began
marketing in early 1998, and is located in Ottawa, Ontario, Canada.
INDEPENDENT AUDITORS
Ernst & Young LLP
CORPORATE REGISTRARS AND TRANSFER AGENTS
National City Bank (common stock)
The Bank of New York (preferred stock)
PRINCIPAL FINANCIAL CONTACT
For further information about MBNA Corporation or its subsidiaries, please
contact:
Brian D. Dalphon
Director, Investor Relations
MBNA Corporation
Wilmington, DE 19884-0131
(800) 362-6255
(302) 432-1251
Internet address: www.mbnainternational.com
COMMON STOCK
Listed on New York Stock Exchange
Stock Symbol KRB
[RECYCLE LOGO] This annual report was printed on paper recycled from MBNA
offices.
70
[MBNA CORPORATION LOGO]
[PHOTO] Automobile
ATTENTION TO DETAIL
DRIVES EVERYTHING WE DO.
SUCCESS IS NEVER FINAL.