UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10683
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MBNA Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1713008
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wilmington, Delaware 19884-0141
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(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---------- ----------
Common Stock, $.01 Par Value - 1,277,671,875 Shares
Outstanding as of June 30, 2002
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
June 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Income - 3
For the Three and Six Months Ended June 30, 2002 and 2001
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Six Months Ended June 30, 2002 and 2001
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Six Months Ended June 30, 2002 and 2001
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 25
and Results of Operations (unaudited)
Part II - Other Information
Item 1. Legal Proceedings 64
Item 6. Exhibits and Reports on Form 8-K 65
Signature 71
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 937,262 $ 962,118
Interest-earning time deposits in other banks..... 2,010,268 1,676,863
Federal funds sold................................ 1,935,000 1,354,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $3,425,643 and $3,077,711 at
June 30, 2002 and December 31, 2001,
respectively).................................. 3,454,567 3,106,884
Held-to-maturity (market value of $462,304
and $426,317 at June 30, 2002 and
December 31, 2001, respectively)............... 473,033 439,987
Loans held for securitization..................... 7,424,562 9,929,948
Loan portfolio:
Credit card..................................... 9,224,617 8,261,575
Other consumer.................................. 7,732,401 6,442,041
------------ ------------
Total loan portfolio.......................... 16,957,018 14,703,616
Reserve for possible credit losses.............. (960,113) (833,423)
------------ ------------
Net loan portfolio............................ 15,996,905 13,870,193
Premises and equipment, net....................... 2,140,600 2,112,139
Accrued income receivable......................... 332,720 369,383
Accounts receivable from securitization........... 7,698,153 7,495,501
Intangible assets, net............................ 2,816,027 2,582,163
Prepaid expenses and deferred charges............. 429,541 344,692
Other assets...................................... 1,583,831 1,204,074
------------ ------------
Total assets.................................. $ 47,232,469 $ 45,447,945
============ ============
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 18,909,036 $ 19,792,466
Money market deposit accounts................... 6,995,097 6,271,850
Noninterest-bearing deposits.................... 983,905 948,440
Interest-bearing transaction accounts........... 42,756 49,234
Savings accounts................................ 92,074 32,755
------------ ------------
Total deposits................................ 27,022,868 27,094,745
Short-term borrowings............................. 1,155,124 1,774,816
Long-term debt and bank notes..................... 8,383,663 6,867,033
Accrued interest payable.......................... 236,887 226,653
Accrued expenses and other liabilities............ 2,194,760 1,685,980
------------ ------------
Total liabilities............................. 38,993,302 37,649,227
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at June 30, 2002 and
December 31, 2001)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 1,277,671,875 shares
issued and outstanding at June 30, 2002 and
December 31, 2001)............................... 12,777 12,777
Additional paid-in capital........................ 2,259,613 2,529,563
Retained earnings................................. 5,954,961 5,304,725
Accumulated other comprehensive income............ 11,730 (48,433)
------------ ------------
Total stockholders' equity.................... 8,239,167 7,798,718
------------ ------------
Total liabilities and stockholders' equity.... $ 47,232,469 $ 45,447,945
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Loan portfolio................ $ 516,751 $ 466,008 $ 981,646 $ 876,517
Loans held for securitization. 237,902 223,723 532,585 471,581
Investment securities:
Taxable..................... 35,328 43,660 70,725 85,820
Tax-exempt.................. 522 978 979 1,895
Time deposits in other banks.. 13,192 18,483 23,808 40,359
Federal funds sold............ 6,962 12,979 17,913 33,897
Other interest income......... 84,961 92,453 183,663 182,370
---------- ---------- ---------- ----------
Total interest income...... 895,618 858,284 1,811,319 1,692,439
INTEREST EXPENSE
Deposits...................... 304,944 365,501 628,559 742,745
Short-term borrowings......... 9,030 1,656 20,528 4,305
Long-term debt and bank notes. 76,827 86,434 144,139 185,562
---------- ---------- ---------- ----------
Total interest expense..... 390,801 453,591 793,226 932,612
---------- ---------- ---------- ----------
NET INTEREST INCOME........... 504,817 404,693 1,018,093 759,827
Provision for possible credit
losses....................... 274,932 322,216 634,325 541,056
---------- ---------- ---------- ----------
Net interest income after
provision for possible
credit losses................ 229,885 82,477 383,768 218,771
OTHER OPERATING INCOME
Securitization income......... 1,350,111 1,357,239 2,704,560 2,608,028
Interchange................... 87,595 76,103 162,514 145,949
Credit card fees.............. 98,405 67,909 191,425 129,251
Other consumer loan fees...... 27,321 21,166 51,981 40,588
Insurance..................... 40,958 30,063 86,767 59,229
Other......................... 29,239 22,665 32,648 45,443
---------- ---------- ---------- ----------
Total other operating
income.................... $1,633,629 $1,575,145 $3,229,895 $3,028,488
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee
benefits..................... $ 465,256 $ 439,534 $ 944,214 $ 878,516
Occupancy expense of premises. 43,495 37,780 84,153 74,245
Furniture and equipment
expense...................... 57,542 54,760 112,847 107,328
Other......................... 575,072 516,369 1,166,846 1,079,505
---------- ---------- ---------- ----------
Total other operating
expense................... 1,141,365 1,048,443 2,308,060 2,139,594
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.... 722,149 609,179 1,305,603 1,107,665
Applicable income taxes....... 264,307 229,051 477,851 416,482
---------- ---------- ---------- ----------
NET INCOME.................... $ 457,842 $ 380,128 $ 827,752 $ 691,183
========== ========== ========== ==========
EARNINGS PER COMMON SHARE..... $ .36 $ .29 $ .64 $ .54
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION............ .35 .29 .63 .52
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
(unaudited)
Outstanding Shares
-----------------------
Preferred Common Preferred Common
(000) (000) Stock Stock
----------- ---------- --------- ----------
BALANCE, DECEMBER 31, 2001... 8,574 1,277,672 $ 86 $ 12,777
Comprehensive income:
Net income................. - - - -
Other comprehensive
income, net of tax........ - - - -
Comprehensive income.........
Cash dividends:
Common-$.13 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 21,657 - 217
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (21,657) - (217)
----------- ---------- --------- ----------
BALANCE, JUNE 30, 2002....... 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
BALANCE, DECEMBER 31, 2000... 8,574 1,277,706 $ 86 $ 12,777
Comprehensive income:
Net income................. - - - -
Other comprehensive
income, net of tax........ - - - -
Comprehensive income.........
Cash dividends:
Common-$.12 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 10,725 - 107
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (10,759) - (107)
----------- ---------- --------- ----------
BALANCE, JUNE 30, 2001....... 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 2001. $2,529,563 $5,304,725 $ (48,433) $ 7,798,718
Comprehensive income:
Net income............... - 827,752 - 827,752
Other comprehensive
income, net of tax...... - - 60,163 60,163
------------
Comprehensive income....... 887,915
------------
Cash dividends:
Common-$.13 per share.... - (170,400) - (170,400)
Preferred................ - (7,116) - (7,116)
Exercise of stock options
and other awards.......... 119,881 - - 120,098
Stock option tax benefit... 118,126 - - 118,126
Amortization of deferred
compensation expense...... 28,604 - - 28,604
Acquisition and retirement
of common stock........... (536,561) - - (536,778)
---------- ---------- ------------- ------------
BALANCE, JUNE 30, 2002..... $2,259,613 $5,954,961 $ 11,730 $ 8,239,167
========== ========== ============= ============
BALANCE, DECEMBER 31, 2000. $2,721,691 $3,931,248 $ (38,524) $ 6,627,278
Comprehensive income:
Net income............... - 691,183 - 691,183
Other comprehensive
income, net of tax...... - - (33,232) (33,232)
------------
Comprehensive income....... 657,951
------------
Cash dividends:
Common-$.12 per share.... - (153,339) - (153,339)
Preferred................ - (7,084) - (7,084)
Exercise of stock options
and other awards.......... 65,391 - - 65,498
Stock option tax benefit... 45,366 - - 45,366
Amortization of deferred
compensation expense...... 15,117 - - 15,117
Acquisition and retirement
of common stock........... (260,965) - - (261,072)
---------- ---------- ------------- ------------
BALANCE, JUNE 30, 2001..... $2,586,600 $4,462,008 $ (71,756) $ 6,989,715
========== ========== ============= ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 827,752 $ 691,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 634,325 541,056
Depreciation, amortization, and accretion....... 353,222 348,639
Benefit for deferred income taxes............... (67,664) (57,558)
Decrease in accrued income receivable........... 40,382 7,203
Increase in accounts receivable from
securitization................................. (184,870) (195,753)
Increase (decrease) in accrued interest payable. 7,977 (10,238)
Decrease in other operating activities.......... 372,864 60,232
------------ ------------
Net cash provided by operating activities......... 1,983,988 1,384,764
INVESTING ACTIVITIES
Net increase in money market instruments.......... (876,888) (694,918)
Proceeds from maturities of investment securities
available-for-sale............................... 678,479 765,978
Proceeds from sale of investment securities
available-for-sale............................... 13,126 505
Purchases of investment securities
available-for-sale............................... (1,031,100) (1,079,077)
Proceeds from maturities of investment securities
held-to-maturity ................................ 13,987 9,807
Purchases of investment securities
held-to-maturity................................. (46,911) (41,538)
Proceeds from securitization of loans............. 7,005,107 4,485,898
Proceeds from sale of loans....................... 472,392 289,932
Loan portfolio acquisitions....................... (2,156,421) (767,574)
Amortization of securitized loans................. (4,762,008) (3,310,666)
Net loan originations............................. (957,373) (1,946,410)
Net purchases of premises and equipment........... (178,358) (292,989)
------------ ------------
Net cash used in investing activities............. $ (1,825,968) $ (2,581,052)
For the Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing deposits, interest-bearing
transaction accounts, and savings accounts....... $ 801,846 $ 454,085
Net (decrease) increase in time deposits.......... (967,860) 42,749
Net (decrease) increase in short-term borrowings.. (626,415) 42,586
Proceeds from issuance of long-term debt
and bank notes................................... 2,069,306 1,115,405
Maturity of long-term debt and bank notes......... (874,157) (328,309)
Proceeds from exercise of stock options
and other awards................................. 120,098 65,498
Acquisition and retirement of common stock........ (536,778) (261,072)
Dividends paid.................................... (168,916) (151,982)
------------ ------------
Net cash (used in) provided by financing
activities....................................... (182,876) 978,960
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS............. (24,856) (217,328)
Cash and cash equivalents at beginning of period.. 962,118 971,469
------------ ------------
Cash and cash equivalents at end of period........ $ 937,262 $ 754,141
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 814,236 $ 958,561
============ ============
Income taxes paid................................. $ 368,366 $ 368,440
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MBNA
Corporation ("the Corporation") have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The notes to
the consolidated financial statements contained in the Annual Report on Form
10-K for the year ended December 31, 2001 should be read in conjunction with
these consolidated financial statements. For purposes of comparability,
certain prior period amounts have been reclassified. Operating results for the
three and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
NOTE B: PREFERRED STOCK
The Corporation's Board of Directors declared the following quarterly dividends
for the Corporation's Series A and Series B Preferred Stock:
Series A Series B
--------------------- ---------------------
Dividend Per Dividend Per
Dividend Preferred Dividend Preferred
Declaration Date Payment Date Rate Share Rate Share
- ---------------- ---------------- -------- ------------ -------- ------------
January 10, 2002 April 15, 2002 7.50% $ .46875 5.50% $ .34380
April 11, 2002 July 15, 2002 7.50 .46875 5.90 .36850
July 11, 2002 October 15, 2002 7.50 .46875 5.56 .34740
NOTE C: COMMON STOCK
During the six months ended June 30, 2002, 2.5 million shares of restricted
common stock were issued under the Corporation's 1997 Long Term Incentive Plan
to the Corporation's senior officers. The restricted common shares issued had
an approximate aggregate market value of $59.7 million. At June 30, 2002, the
unamortized compensation expense related to all of the Corporation's
outstanding restricted stock awards was $214.1 million.
To the extent stock options are exercised or restricted shares are awarded from
time to time under the Corporation's Long Term Incentive Plans, the Board of
Directors has approved the purchase, on the open market or in privately
negotiated transactions, of the number of common shares issued. During the six
months ended June 30, 2002, the Corporation purchased 21.7 million common
shares for $536.8 million. The Corporation issued 21.7 million common shares
upon the exercise of stock options and issuance of restricted stock. The
Corporation received $120.1 million in proceeds from the exercise of these
stock options.
On June 6, 2002, the Corporation announced a three-for-two split of the
Corporation's common stock, effected in the form of a dividend, issued
July 15, 2002, to stockholders of record as of the close of business
July 1, 2002. Accordingly, all common share and per common share data have
been adjusted to reflect this stock split.
On July 16, 2002, the Corporation's Board of Directors declared a quarterly
cash dividend of $.07 per common share, payable October 1, 2002 to stockholders
of record as of September 16, 2002.
NOTE D: EARNINGS PER COMMON SHARE
Earnings per common share is computed using net income applicable to common
stock and weighted average common shares outstanding during the period.
Earnings per common share-assuming dilution is computed using net income
applicable to common stock and weighted average common shares outstanding
during the period after consideration of the potential dilutive effect of
common stock equivalents, based on the treasury stock method using an average
market price for the period. The Corporation's common stock equivalents are
solely related to employee and director stock options. The Corporation does
not have any other common stock equivalents.
COMPUTATION OF EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
EARNINGS PER COMMON SHARE
Net income....................... $ 457,842 $ 380,128 $ 827,752 $ 691,183
Less: preferred stock dividend
requirements.................... 3,600 3,521 7,116 7,084
---------- ---------- ---------- ----------
Net income applicable to common
stock........................... $ 454,242 $ 376,607 $ 820,636 $ 684,099
========== ========== ========== ==========
Weighted average common shares
outstanding (000)............... 1,277,703 1,277,780 1,277,848 1,277,770
========== ========== ========== ==========
Earnings per common share........ $ .36 $ .29 $ .64 $ .54
========== ========== ========== ==========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
Net income....................... $ 457,842 $ 380,128 $ 827,752 $ 691,183
Less: preferred stock dividend
requirements.................... 3,600 3,521 7,116 7,084
---------- ---------- ---------- ----------
Net income applicable to common
stock........................... $ 454,242 $ 376,607 $ 820,636 $ 684,099
========== ========== ========== ==========
Weighted average common shares
outstanding (000)............... 1,277,703 1,277,780 1,277,848 1,277,770
Net effect of dilutive stock
options (000)................... 27,585 38,843 30,317 39,340
---------- ---------- ---------- ----------
Weighted average common shares
outstanding and common stock
equivalents (000)............... 1,305,288 1,316,623 1,308,165 1,317,110
========== ========== ========== ==========
Earnings per common share-
assuming dilution............... $ .35 $ .29 $ .63 $ .52
========== ========== ========== ==========
There were 16.0 million stock options with an average exercise price of $24.04
per share outstanding for the three and six months ended June 30, 2002, which
were not included in the computation of earnings per common share-assuming
dilution as a result of the stock options' exercise price being greater than
the average market price of the common shares. These stock options expire in
2011 and 2012. There were 97.5 thousand stock options with an average exercise
price of $24.12 per share outstanding for the three and six months ended
June 30, 2001, which were not included in the computation of earnings per
common share-assuming dilution as a result of the stock options' exercise price
being greater than the average market price of the common shares. These stock
options expire in 2011.
NOTE E: INVESTMENT SECURITIES
For the six months ended June 30, 2002, the Corporation sold investment
securities available-for-sale resulting in a realized loss of $95,000, having a
net after-tax loss of $62,000. For the six months ended June 30, 2001, the
Corporation sold investment securities available-for-sale resulting in a
realized loss of $36,000, having a net after-tax loss of $23,000.
NOTE F: INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"). The effective date for Statement No. 142 was for fiscal
years beginning after December 15, 2001. In accordance with Statement No. 142,
goodwill and intangible assets determined to have indefinite lives are no
longer amortized, but instead are subject to an annual impairment test. At
June 30, 2002, the Corporation did not have a material amount of intangible
assets with indefinite lives or any other nonamortizing assets. Other
separately identifiable intangible assets, which for the Corporation are
primarily the value of acquired Customer accounts, continue to be amortized
over their estimated useful lives. Prior to 2002, the Corporation amortized
the value of acquired Customer accounts over a period that was generally
limited to ten years. In accordance with Statement No. 142, the Corporation
completed an analysis of the associated benefits of the value of its acquired
Customer accounts. As a result, on January 1, 2002, the Corporation extended
the amortization period of the value of the acquired Customer accounts,
generally to 15 years, to better match their estimated useful lives. For the
three and six months ended June 30, 2002, the Corporation's pre-tax
amortization expense was reduced $23.5 million and $47.8 million, respectively,
as a result of the extension of the amortization period. These reductions do
not include the amortization expense of acquired Customer accounts added after
January 1, 2002, the effective date of the change.
Intangible assets include the value of acquired Customer accounts and all other
identifiable intangible assets. The Corporation amortizes its intangible
assets generally using an accelerated method over 15 years based on expected
future cash flows from the use of the assets. The Corporation's intangible
assets had a gross carrying value of $3.9 billion at June 30, 2002 and $3.6
billion at December 31, 2001 and accumulated amortization of $1.1 billion and
$1.0 billion at June 30, 2002 and December 31, 2001, respectively. For the
three and six months ended June 30, 2002, the Corporation acquired
approximately $2.1 billion and $2.2 billion of credit card portfolios,
respectively. As part of these acquisitions, the Corporation recognized an
additional $374.9 million and $388.5 million for the value of acquired Customer
accounts for the three and six months ended June 30, 2002, respectively. The
Corporation's identifiable intangible assets had total amortization expense of
$82.4 million and $159.1 million for the three and six months ended June 30,
2002, as compared to $92.1 million and $190.1 million for the same periods in
2001, respectively. An additional $168.7 million of unamortized identifiable
intangible assets are scheduled to amortize during the remainder of 2002 and
$332.9 million, $313.8 million, $292.7 million, and $271.2 million for the
years ending December 31, 2003, 2004, 2005, and 2006, respectively.
The Corporation reviews the carrying value of its intangible assets for
impairment on a quarterly basis. The intangible assets, which consist
primarily of the value of acquired Customer accounts, are carried at the lower
of net book value or estimated fair value with the estimated fair value
determined by discounting the expected future cash flows from the use of the
asset at an appropriate discount rate. The Corporation performs this
impairment valuation quarterly based on the size and nature of the intangible
asset. For intangible assets that are not considered material, the Corporation
performs this calculation by grouping the assets by year of acquisition. The
Corporation makes certain estimates and assumptions that affect the
determination of the fair value of the intangible assets. These estimates and
assumptions include levels of account activation, active account attrition,
funding costs, credit loss experience, servicing costs, growth in average
account balances, interest and fees assessed on loans, and other factors.
Significant changes in these estimates and assumptions could result in an
impairment of the intangible assets. This would result in a write down of
intangible assets on the consolidated statements of financial condition and an
increase to other operating expense on the consolidated statements of income.
NOTE G: ASSET SECURITIZATION
Asset securitization removes loan principal receivables from the Corporation's
consolidated statement of financial condition and converts interest income,
interchange income, credit card and other consumer loan fees, insurance income,
and recoveries in excess of interest paid to investors, gross credit losses,
and other trust expenses into securitization income. The Corporation retains
servicing responsibilities for the loans in the trust and maintains other
retained interests in the securitized assets. These retained interests include
an interest-only strip receivable, cash reserve accounts, accrued interest and
fees on securitized loans, and other subordinated interests. These retained
interests are reported at estimated fair value with changes in fair value
recorded in earnings.
ACCOUNTS RECEIVABLE FROM SECURITIZATION:
(dollars in thousands)
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
Sale of new loan receivables...................... $ 2,509,815 $ 2,202,403
Accrued interest and fees on securitized loans.... 2,302,076 2,216,839
Interest-only strip receivable.................... 992,362 1,124,063
Accrued servicing fees............................ 612,511 688,185
Cash reserve accounts............................. 469,537 397,954
Other subordinated retained interests............. 627,817 657,246
Other............................................. 184,035 208,811
------------ ------------
Total accounts receivable from securitization... $ 7,698,153 $ 7,495,501
============ ============
Included in securitization income is the net incremental change in the
interest-only strip receivable for all securitization transactions that the
Corporation recognizes as sales in accordance with Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a Replacement of FASB
Statement No. 125" ("Statement No. 140"). The net incremental change in the
interest-only strip receivable for all securitization transactions recognized
by the Corporation in securitization income, net of securitization transaction
costs, was a $105.1 million and $160.9 million decrease during the three and
six months ended June 30, 2002, as compared to a $59.6 million and a $84.0
million increase for the same periods in 2001, respectively.
In accordance with Statement No. 140, the Corporation recognizes an interest-
only strip receivable which represents the contractual right to receive from
the trust interest and other revenue less certain costs over the estimated life
of securitized loan principal receivables. The Corporation uses certain key
assumptions and estimates in determining the value of the interest-only strip
receivable. These key assumptions and estimates include projections concerning
interest income, late fees, gross credit losses, charged-off loan recoveries,
contractual servicing fees, and the coupon paid to the investors and are used
to determine the excess spread to be received by the Corporation over the
estimated life of the securitized loan principal receivables. Other key
assumptions and estimates used by the Corporation include projected loan
payment rates, which are used to determine the estimated life of the
securitized loan principal receivables, and an appropriate discount rate. The
Corporation reviews the key assumptions and estimates used in determining the
fair value of the interest-only strip receivable and other retained interests
in securitizations on a quarterly basis and adjusts them as appropriate. If
these assumptions change or actual results differ from projected results, the
interest-only strip receivable and securitization income would be affected.
The Corporation's securitization key assumptions and their sensitivities to
adverse changes are presented below. The adverse changes to the key
assumptions and estimates are hypothetical and are presented in accordance with
Statement No. 140. The sensitivities do not reflect actions management might
take to offset the impact of the adverse changes.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
June 30, 2002 June 30, 2001
-------------------- ---------------------
(unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
--------- --------- ---------- ---------
Interest-only strip receivable... $ 901,847 $ 90,515 $ 867,695 $ 108,399
Weighted average life (in years). .35 .86 .36 .91
Loan payment rate
(weighted average rate)......... 13.50% 5.10% 13.09% 4.78%
Impact on fair value of
10% adverse change............ $ 70,872 $ 7,443 $ 69,227 $ 8,809
Impact on fair value of
20% adverse change............ 129,705 13,665 123,588 16,175
Gross credit losses (b)
(weighted average rate)......... 4.81% 8.72% 5.00% 7.97%
Impact on fair value of
10% adverse change............ $ 101,320 $ 36,042 $ 98,657 $ 34,625
Impact on fair value of
20% adverse change............ 204,082 72,219 198,267 69,319
Excess spread (c)
(weighted average rate)......... 4.27% 2.18% 4.39% 2.49%
Impact on fair value of
10% adverse change............ $ 90,735 $ 9,013 $ 86,688 $ 10,774
Impact on fair value of
20% adverse change............ 181,097 18,161 174,319 21,615
Discount rate
(weighted average rate)......... 10.00% 10.00% 12.00% 12.00%
Impact on fair value of
10% adverse change............ $ 2,331 $ 523 $ 2,738 $ 786
Impact on fair value of
20% adverse change............ 4,651 1,041 5,462 1,563
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections concerning interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
March 31, 2002 March 31, 2001
-------------------- ---------------------
(unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
--------- --------- ---------- ---------
Interest-only strip receivable... $ 980,100 $ 101,025 $ 739,612 $ 139,774
Weighted average life (in years). .35 .90 .34 .81
Loan payment rate
(weighted average rate)......... 13.58% 4.84% 13.95% 5.42%
Impact on fair value of
10% adverse change............ $ 76,959 $ 8,235 $ 56,020 $ 11,436
Impact on fair value of
20% adverse change............ 141,629 15,292 106,651 20,892
Gross credit losses (b)
(weighted average rate)......... 5.01% 8.65% 4.76% 8.09%
Impact on fair value of
10% adverse change............ $ 99,076 $ 37,397 $ 88,494 $ 31,576
Impact on fair value of
20% adverse change............ 198,755 75,312 175,616 62,964
Excess spread (c)
(weighted average rate)......... 4.94% 2.32% 4.01% 3.58%
Impact on fair value of
10% adverse change............ $ 97,474 $ 9,941 $ 74,521 $ 14,138
Impact on fair value of
20% adverse change............ 195,514 19,965 147,804 28,088
Discount rate
(weighted average rate)......... 10.00% 10.00% 12.00% 12.00%
Impact on fair value of
10% adverse change............ $ 2,519 $ 611 $ 2,222 $ 907
Impact on fair value of
20% adverse change............ 5,026 1,217 4,431 1,806
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections concerning interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
December 31, 2001 December 31, 2000
--------------------- ---------------------
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,008,419 $ 115,644 $ 698,758 $ 155,568
Weighted average life (in years). .35 .93 .35 .82
Loan payment rate
(weighted average rate)......... 13.60% 4.67% 13.88% 5.26%
Impact on fair value of
10% adverse change............ $ 78,889 $ 9,372 $ 52,669 $ 12,641
Impact on fair value of
20% adverse change............ 144,892 17,304 99,982 23,224
Gross credit losses (b)
(weighted average rate)......... 5.25% 8.40% 4.31% 6.17%
Impact on fair value of
10% adverse change............ $ 102,730 $ 37,333 $ 81,657 $ 24,701
Impact on fair value of
20% adverse change............ 205,460 74,666 163,314 49,402
Excess spread (c)
(weighted average rate)......... 5.14% 2.60% 3.73% 3.89%
Impact on fair value of
10% adverse change............ $ 100,842 $ 11,564 $ 69,876 $ 15,548
Impact on fair value of
20% adverse change............ 201,684 23,129 139,752 31,096
Discount rate
(weighted average rate)......... 12.00% 12.00% 12.00% 12.00%
Impact on fair value of
10% adverse change............ $ 3,105 $ 859 $ 2,111 $ 1,033
Impact on fair value of
20% adverse change............ 6,195 1,709 4,212 2,055
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections concerning interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
NOTE H: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more. During the six months ended June 30, 2002, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
(unaudited)
Fixed-Rate Senior Medium-Term Notes, with interest
rates of 6.25% and 7.50%, payable semi-annually,
maturing in 2007 and 2012............................. $800,000
Fixed-Rate Euro Medium-Term Notes, with an interest
rate of 6.50%, payable annually, maturing in 2007
(EUR500.0 million).................................... 436,901
Fixed-Rate Medium-Term Deposit Notes, with interest
rates of 4.35% and 5.02%, payable semi-annually,
maturing in 2004 and 2005 (CAD$80.0 million).......... 50,004
6.625% Subordinated Notes, payable semiannually,
maturing in 2012...................................... 500,000
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures, series D, with an interest
rate of 8.125%, payable quarterly, maturing
in 2032............................................... 300,000
The 6.625% Subordinated Notes are subordinated to the claims of depositors and
other creditors of MBNA America Bank, N.A. ("the Bank"), unsecured, and not
subject to redemption prior to maturity. The 6.625% Subordinated Notes qualify
as regulatory capital for both the Bank and Corporation.
The Corporation, through MBNA Capital D, a statutory business trust created
under the laws of the State of Delaware, issued guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
series D, as shown above.
The Corporation owns all the common securities of the trust. For financial
reporting purposes, the trust is treated as a wholly owned subsidiary of the
Corporation and is included in the Corporation's consolidated financial
results. The junior subordinated deferrable interest debentures are the sole
assets of the trust and the payments under the junior subordinated deferrable
interest debentures are the sole revenues of the trust. The obligations of the
Corporation, under the relevant indenture, trust agreement, and guarantee, in
the aggregate, constitute a full and unconditional guarantee by the Corporation
of all trust obligations under the guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures issued by the
trust. These securities qualify as regulatory capital for the Corporation.
The Corporation uses interest rate swap agreements and foreign exchange swap
agreements to change a portion of fixed-rate long-term debt and bank notes to
floating-rate long-term debt and bank notes to better match the rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to reduce its foreign currency exchange risk on a
portion of long-term debt and bank notes issued by MBNA Europe Bank Limited
("MBNA Europe").
During the six months ended June 30, 2002, the Corporation entered into
interest rate swap agreements, with a total notional value of $800.0 million,
related to the issuance of the Fixed-Rate Senior Medium-Term Notes and $300.0
million, related to the issuance of guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures, series D.
During the six months ended June 30, 2002, the Bank entered into interest rate
swap agreements, with a total notional value of $500.0 million, related to the
issuance of the 6.625% Subordinated Notes.
During the six months ended June 30, 2002, MBNA Europe entered into interest
rate swap agreements, with a total notional value of $436.9 million (EUR500.0
million) and foreign exchange swap agreements, with a total notional value of
$436.9 million (EUR500.0 million), related to the issuance of the Fixed-Rate
Euro Medium-Term Notes. MBNA Canada Bank entered into interest rate swap
agreements, with a total notional value of $50.0 million (CAD$80.0 million),
related to the issuance of the Fixed-Rate Medium-Term Deposit Notes.
All of the interest rate swap agreements entered into during the six months
ended June 30, 2002 qualified as, and were accounted as, fair value hedges in
accordance with Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities". The foreign exchange swap
agreements that were entered into during the six months ended June 30, 2002 are
not designated as accounting hedges.
NOTE I: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited)
Net income........................ $ 457,842 $ 380,128 $ 827,752 $ 691,183
Other comprehensive income:
Foreign currency translation.... 84,324 (6,623) 69,474 (41,860)
Net unrealized gains (losses)
on investment securities
available-for-sale and other
financial instruments.......... 12,284 473 (9,311) 8,628
--------- --------- --------- ---------
Other comprehensive income........ 96,608 (6,150) 60,163 (33,232)
--------- --------- --------- ---------
Comprehensive income.............. $ 554,450 $ 373,978 $ 887,915 $ 657,951
========= ========= ========= =========
The components of accumulated other comprehensive income, net of tax, are as
follows:
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
Foreign currency translation..................... $ (6,466) $ (75,940)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments..................................... 18,196 27,507
------------ ------------
Accumulated other comprehensive income........... $ 11,730 $ (48,433)
============ ============
The Corporation's consolidated statement of financial condition includes the
statements of financial condition of the Corporation's foreign subsidiaries,
translated at period-end currency exchange rates. The differences from
historical exchange rates are reflected in other comprehensive income as
foreign currency translation.
Favorable foreign currency translation during the three and six month periods
ended June 30, 2002 were primarily related to the strengthening of foreign
currencies against the U.S. dollar.
NOTE J: SEGMENT REPORTING
The Corporation derives its income primarily from credit card loans, other
consumer loans, and insurance products. The credit card and other consumer
loan products have similar economic characteristics and, therefore, have been
aggregated into one operating segment. The Corporation's insurance products
have also been aggregated into the one operating segment due to immateriality.
The Corporation allocates resources on a managed basis, and financial
information provided to management reflects the Corporation's results on a
managed basis. Therefore, an adjustment is required to reconcile the managed
financial information to the Corporation's reported financial information in
its consolidated financial statements. This adjustment reclassifies
securitization income into interest income, interchange income, credit card and
other consumer loan fees, insurance income, recoveries, interest paid to
investors, credit losses, and other trust expenses. The managed results also
include the impact of the net incremental change recognized on securitized loan
principal receivables in accordance with Statement No. 140.
MANAGED INCOME STATEMENTS
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited)
Interest income........ $ 3,153,336 $ 3,254,691 $ 6,281,782 $ 6,502,542
Interest expense....... 850,126 1,273,057 1,703,499 2,733,131
------------ ------------ ------------ ------------
Net interest income.... 2,303,210 1,981,634 4,578,283 3,769,411
Provision for possible
credit losses......... 1,246,944 1,186,305 2,525,852 2,172,868
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 1,056,266 795,329 2,052,431 1,596,543
Other operating income. 807,248 862,293 1,561,232 1,650,716
Other operating
expense............... 1,141,365 1,048,443 2,308,060 2,139,594
------------ ------------ ------------ ------------
Income before income
taxes................. 722,149 609,179 1,305,603 1,107,665
Applicable income
taxes................. 264,307 229,051 477,851 416,482
------------ ------------ ------------ ------------
Net income............. $ 457,842 $ 380,128 $ 827,752 $ 691,183
============ ============ ============ ============
MANAGED LOANS
At period end.......... $ 99,965,120 $ 90,417,016
Average for the period. 98,073,353 89,266,188 $ 97,189,391 $ 88,629,295
SECURITIZATION ADJUSTMENTS
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited)
Interest income........ $ (2,257,718) $ (2,396,407) $ (4,470,463) $ (4,810,103)
Interest expense....... (459,325) (819,466) (910,273) (1,800,519)
------------ ------------ ------------ ------------
Net interest income.... (1,798,393) (1,576,941) (3,560,190) (3,009,584)
Provision for possible
credit losses......... (972,012) (864,089) (1,891,527) (1,631,812)
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ (826,381) (712,852) (1,668,663) (1,377,772)
Other operating income. 826,381 712,852 1,668,663 1,377,772
Other operating
expense............... - - - -
------------ ------------ ------------ ------------
Income before income
taxes................. - - - -
Applicable income
taxes................. - - - -
------------ ------------ ------------ ------------
Net income............. $ - $ - $ - $ -
============ ============ ============ ============
SECURITIZED LOANS
At period end.......... $(75,583,540) $(69,873,921)
Average for the period. (73,778,180) (69,271,510) $(73,073,904) $(69,254,389)
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited)
Interest income........ $ 895,618 $ 858,284 $ 1,811,319 $ 1,692,439
Interest expense....... 390,801 453,591 793,226 932,612
------------ ------------ ------------ ------------
Net interest income.... 504,817 404,693 1,018,093 759,827
Provision for possible
credit losses......... 274,932 322,216 634,325 541,056
------------ ------------ ------------ ------------
Net interest income
after provision for
possible credit
losses................ 229,885 82,477 383,768 218,771
Other operating income. 1,633,629 1,575,145 3,229,895 3,028,488
Other operating
expense............... 1,141,365 1,048,443 2,308,060 2,139,594
------------ ------------ ------------ ------------
Income before income
taxes................. 722,149 609,179 1,305,603 1,107,665
Applicable income
taxes................. 264,307 229,051 477,851 416,482
------------ ------------ ------------ ------------
Net income............. $ 457,842 $ 380,128 $ 827,752 $ 691,183
============ ============ ============ ============
LOAN RECEIVABLES
At period end.......... $ 24,381,580 $ 20,543,095
Average for the period. 24,295,173 19,994,678 $ 24,115,487 $ 19,374,906
NOTE K: ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Technical
Bulletin No. 01-1, "Effective Date for Certain Financial Institutions of
Certain Provisions of Statement No. 140 Related to the Isolation of Transferred
Financial Assets" ("Technical Bulletin No. 01-1"). Technical Bulletin No. 01-1
applies to single-step securitization structures utilized by the Corporation
and clarifies certain isolation criteria related to the transfer of loan
receivables that are required by Statement No. 140 to account for asset
securitizations as sales. Technical Bulletin No. 01-1 delayed the effective
date of Statement No. 140 as it applies to single-step securitization
structures for transactions occurring after December 31, 2001. Technical
Bulletin No. 01-1 also provides an extended transition period until June 30,
2006, for conversion of existing single-step master trust securitization
structures to allow issuers, if necessary, additional time to obtain sufficient
approvals from the beneficial interest holders to convert to a two-step
securitization structure and continue to meet the isolation criteria required
by Statement No. 140 to achieve sales treatment. The Corporation believes that
the required changes in its securitization structures are not significant and
that the implementation of any required changes will not have a material impact
on the Corporation's consolidated financial statements.
The State of Delaware passed legislation that should enable the Corporation to
use a single-step securitization structure and continue to meet the isolation
criteria of Statement No. 140, thereby maintaining sales treatment using a
single-step securitization structure.
In July 2002, the Federal Financial Institutions Examination Council ("FFIEC")
released draft guidance on account management and loss allowance practices (for
further discussion see Management's Discussion and Analysis of Financial
Condition and Results of Operations-"Proposed Regulatory Guidance").
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited)
This discussion is intended to further the reader's understanding of the
consolidated financial statements, financial condition, and results of
operations of MBNA Corporation. It should be read in conjunction with the
consolidated financial statements, notes, and tables included in this report.
For purposes of comparability, certain prior period amounts have been
reclassified.
INTRODUCTION
MBNA Corporation ("the Corporation"), a bank holding company located in
Wilmington, Delaware, is the parent company of MBNA America Bank, N.A. ("the
Bank"), a national bank and the Corporation's principal subsidiary. The Bank
has two wholly owned foreign bank subsidiaries, MBNA Europe Bank Limited ("MBNA
Europe") located in the United Kingdom and MBNA Canada Bank ("MBNA Canada")
located in Canada. Through the Bank, the Corporation is the largest
independent credit card lender in the world and is the leading issuer of
endorsed credit cards, marketed primarily to members of associations and
customers of financial institutions. In addition to its credit card lending,
the Corporation also makes other consumer loans and offers insurance and
deposit products. The Corporation is also the parent of MBNA America
(Delaware), N.A. ("MBNA Delaware"), which offers home equity loans and business
card products.
The Corporation's primary business is giving its Customers the ability to have
what they need today and pay for it out of future income by lending money
through credit card and other consumer loans. The Corporation obtains funds to
make these loans to its Customers primarily through raising deposits, the
issuance of short-term and long-term debt, and the process of asset
securitization. Asset securitization removes loan principal receivables from
the consolidated statement of financial condition through the sale of loan
principal receivables to a trust. The trust sells securities backed by those
loan principal receivables to investors. The trusts are independent of the
Corporation, and the Corporation has no control over the trusts. The trusts
are not subsidiaries of the Corporation, and are not included in the
Corporation's consolidated financial statements in accordance with generally
accepted accounting principles ("GAAP"). The Corporation receives interest and
fee income from its loans, investment securities and other interest-earning
assets, which the Corporation uses to pay operating and business development
expenses, cover its credit losses, and pay interest expense to its depositors
and creditors for the use of their funds.
The Corporation generates income through finance charges assessed on
outstanding loan receivables, securitization income, interchange income, credit
card and other consumer loan fees, insurance income, and interest earned on
investment securities, money market instruments, and other interest-earning
assets. The Corporation's primary costs are the costs of funding its loan
receivables, investment securities, and other assets, which include interest
paid on deposits, short-term borrowings, and long-term debt and bank notes;
credit losses; royalties paid to endorsing organizations and financial
institutions; business development and operating expenses; and income taxes.
CRITICAL ACCOUNTING POLICIES
The Corporation makes certain judgments and uses certain estimates and
assumptions when applying accounting principles in the preparation of the
Corporation's consolidated financial statements. The Corporation's critical
accounting policies that require management to make the most significant
judgements, estimates, and assumptions affect the accounting for asset
securitization, the reserve for possible credit losses, intangible assets,
interest income on loans, credit card fees and costs, and royalties. These
critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the notes to the
consolidated financial statements contained in the Annual Report on Form 10-K
for the year ended December 31, 2001 and should be read in conjunction with the
information contained in the consolidated financial statements, notes, and
tables included in this report.
Where appropriate these critical accounting policies have been further
discussed and are included in this report as follows: asset securitization
under "Note G: Asset Securitization" and "Other Operating Income", the reserve
for possible credit losses under "Reserve and Provision for Possible Credit
Losses", intangible assets under "Note F: Intangible Assets" and "Other
Operating Expense", and interest income on loans and credit card fees and
costs under "Note K: Accounting Pronouncements" and "Proposed Regulatory
Guidance".
Also important to an understanding of the Corporation's financial condition and
results of operations are the disclosures concerning asset securitization and
its impact on the Corporation's consolidated financial statements included
under "Asset Securitization" and the Corporation's liquidity included under
"Liquidity Management".
PROPOSED REGULATORY GUIDANCE
On July 22, 2002, the Federal Financial Institutions Examination Council
("FFIEC") released draft "Account Management and Loss Allowance Guidance" for
credit card lending to be effective August 16, 2002. Subsequently, the FFIEC
extended the comment period to September 23, 2002, without indicating the
expected effective date. The draft Guidance addresses credit line management,
over-limit practices, workout and forbearance practices, income recognition and
loss allowance practices and policy exceptions. The Corporation believes that
it substantially complies with the guidance for credit line management, over-
limit practices, workout and forbearance practices and policy exceptions as
presently proposed and that implementation of these guidelines would not
materially affect its business operations or earnings.
The final Guidance, if adopted, would represent a change in regulatory policy
that may require the establishment of a reserve for uncollectible accrued
interest and fees or the placement of certain delinquent loans on nonaccrual
status. Currently, in accordance with generally accepted accounting principles
and generally accepted industry practice, the Corporation accrues interest and
fees on loans until the loan is paid or charged off, at which time the
Corporation reverses the accrued interest and fees and, if the loan is charged
off, charges them against current income. The Corporation has followed this
practice and has disclosed it in its annual reports since the Corporation was
established in 1991. Depending on the final Guidance, the Corporation estimates
it could incur a one-time charge to implement the Guidance of between $200
million and $300 million (pre-tax). The estimate covers creation of a reserve
for accrued interest and fees for managed loans. The amount of the charge
would depend on the terms of the Guidance when adopted and the manner of
implementation. The Corporation does not believe an increase or decrease in
the reserve for accrued interest and fees would significantly affect earnings
in subsequent periods.
EARNINGS SUMMARY
Net income for the three months ended June 30, 2002 increased 20.4% to $457.8
million or $.35 per common share from $380.1 million or $.29 per common share
for the same period in 2001. Net income for the six months ended June 30,
2002 increased 19.8% to $827.8 million or $.63 per common share from $691.2
million or $.52 per common share for the same period in 2001. All earnings
per common share amounts are presented assuming dilution and have been
adjusted to reflect the three-for-two split of the Corporation's common stock,
effected in the form of a dividend, issued July 15, 2002, to stockholders of
record as of July 1, 2002.
The overall growth in earnings for the six months ended June 30, 2002 was
primarily attributable to the growth in the Corporation's managed loans
outstanding and an increase in the managed net interest margin, offset by
higher credit losses. Managed loans consist of the Corporation's loans held
for securitization, loan portfolio, and securitized loans. The Corporation's
average managed loans increased 9.9% to $98.1 billion and 9.7% to $97.2 billion
for the three and six months ended June 30, 2002, as compared to $89.3 billion
and $88.6 billion for the same periods in 2001, respectively. Total managed
loans at June 30, 2002 were $100.0 billion, a $9.5 billion increase from
June 30, 2001. The increase in the managed net interest margin to 8.73% and
8.79% for the three and six months ended June 30, 2002, from 8.33% and 8.02%
for the same periods in 2001, respectively, reflects actions by the Federal
Open Market Committee ("FOMC") of the Federal Reserve throughout 2001, which
impacted overall market interest rates and decreased the Corporation's on-
balance-sheet and securitization funding costs. The Corporation's managed
credit losses as a percentage of average managed loans for the three and six
months ended June 30, 2002 were 5.09% and 5.04%, compared to 4.82% and 4.59%
for the same periods in 2001, respectively.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization removes loan principal receivables
from the consolidated statement of financial condition by the sale of loan
principal receivables to investors, generally through a trust, that qualifies
as a sale under GAAP. The Corporation continues to own and service the
accounts that generate the loan principal receivables sold to the trust. Asset
securitization converts interest income, interchange income, credit card and
other consumer loan fees, insurance income, and recoveries in excess of
interest paid to investors, credit losses, and other trust expenses into
securitization income. The Corporation had $75.6 billion and $69.9 billion of
securitized loans at June 30, 2002 and 2001, respectively. During the three
and six months ended June 30, 2002, the Corporation securitized $4.9 billion
and $7.0 billion of credit card loan receivables as compared to $2.5 billion
and $4.5 billion of credit card loan receivables during the same periods in
2001, respectively. During the three and six months ended June 30, 2002, $2.5
billion and $4.8 billion of previously securitized credit card loan receivables
amortized back into the Corporation's loan portfolio, as compared to $1.5
billion and $3.3 billion of credit card and other consumer loan receivables for
the same periods in 2001, respectively.
The Corporation's return on average total assets for the three and six months
ended June 30, 2002 increased to 3.97% and 3.64% from 3.88% and 3.58% for the
same periods during 2001, respectively. The increase in return on average
total assets is a result of the Corporation's net income growing faster than
its average total assets as a result of asset securitization. The
Corporation's return on average stockholders' equity was 22.89% and 21.20% for
the three and six months ended June 30, 2002, as compared to 22.33% and 20.76%
for the same periods in 2001, respectively.
NET INTEREST INCOME
Net interest income represents interest income on total interest-earning
assets, on a fully taxable equivalent basis where appropriate, less interest
expense on total interest-bearing liabilities. A fully taxable equivalent
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.
Net interest income, on a fully taxable equivalent basis, increased $99.9
million to $505.1 million for the three months ended June 30, 2002 from the
same period in 2001. Average interest-earning assets increased $6.6 billion
for the three months ended June 30, 2002 from the same period in 2001,
primarily as a result of an increase in average loan receivables of $4.3
billion and an increase in average investment securities and money market
instruments of $1.5 billion. The yield on average interest-earning assets
decreased 175 basis points to 10.02% for the three months ended June 30, 2002
from the same period in 2001. Average interest-bearing liabilities increased
$5.3 billion for the three months ended June 30, 2002 from the same period in
2001, as a result of an increase of $2.4 billion in average interest-bearing
deposits and an increase of $2.9 billion in average borrowed funds. The
decrease in the rate paid on average interest-bearing liabilities of 163 basis
points to 4.44% for the three months ended June 30, 2002 from 6.07% for the
same period in 2001 reflects actions by the FOMC throughout 2001 which impacted
overall market interest rates and lowered the Corporation's cost of funds.
Net interest income, on a fully taxable equivalent basis, increased $257.8
million to $1.0 billion for the six months ended June 30, 2002 from the same
period in 2001. Average interest-earning assets increased $7.3 billion for the
six months ended June 30, 2002, as compared to the same period in 2001. The
increase in average interest-earning assets for the six months ended June 30,
2002 was primarily a result of an increase in average loan receivables of $4.7
billion and an increase in average investment securities and money market
instruments of $1.7 billion. The yield on average interest-earning assets
decreased 176 basis points to 10.19% for the six months ended June 30, 2002
from the same period in 2001. Average interest-bearing liabilities increased
$5.3 billion for the six months ended June 30, 2002, as compared to the same
period in 2001. The increase in average interest-bearing liabilities for the
six months ended June 30, 2002 as compared to the same period in 2001 was a
result of an increase of $2.6 billion in average interest-bearing deposits and
an increase of $2.7 billion in average borrowed funds, which were used to fund
the increase in average loan receivables, average investment securities and
money market instruments, accounts receivable from securitization, and the
value of acquired Customer accounts. The value of acquired Customer accounts
represents the premiums paid by the Corporation in excess of acquired loan
receivables. Both accounts receivable from securitization and the value of
acquired Customer accounts are included in other assets in Table 2. The rate
paid on average interest-bearing liabilities decreased 175 basis points to
4.56% for the six months ended June 30, 2002 from the same period in 2001.
The Corporation's net interest margin, on a fully taxable equivalent basis, was
5.65% and 5.73% for the three and six months ended June 30, 2002, as compared
to 5.55% and 5.37% for the same periods in 2001, respectively. The net
interest margin represents net interest income on a fully taxable equivalent
basis expressed as a percentage of average total interest-earning assets. The
actions by the FOMC throughout 2001 which impacted overall market rates did not
have as large an effect on the Corporation's net interest margin as those
actions had on the Corporation's managed net interest margin. The
Corporation's on-balance-sheet interest-bearing liabilities include a higher
percentage of fixed-rate funding sources and therefore interest rate changes do
not impact these funding sources as quickly as those changes affect the
Corporation's securitization transactions, which primarily have variable rates.
Also, the Corporation's on-balance-sheet interest-bearing liabilities fund the
Corporation's loan receivables as well as its lower yielding investment
securities and money market instruments and noninterest-earning assets, thereby
further reducing net interest income and the net interest margin. The
Corporation's securitization transactions are used to fund the Corporation's
securitized loans.
INVESTMENTS SECURITIES AND MONEY MARKET INSTRUMENTS
The Corporation seeks to maintain its investment securities and money market
instruments at a level appropriate for the Corporation's liquidity needs. The
Corporation's average investment securities and average money market
instruments are affected by the timing of receipt of funds from asset
securitizations, deposits, loan payments, long-term debt and bank notes, and
maturities of investment securities. Funds received from these sources are
generally invested in short-term, liquid money market instruments and
investment securities available-for-sale until the funds are needed for loan
growth and other liquidity needs. Average investment securities and money
market instruments as a percentage of average interest-earning assets were
21.5% and 22.0% for the three and six months ended June 30, 2002, as compared
to 21.1% and 21.5% for the same periods in 2001, respectively.
Interest income on investment securities, on a fully taxable equivalent basis,
decreased to $36.1 million and $72.3 million for the three and six months ended
June 30, 2002, as compared to $45.2 million and $88.7 million for the same
periods in 2001, respectively. The decrease in interest income on investment
securities for the three and six months ended June 30, 2002 was a result of a
162 basis point and 173 basis point decrease in the yield earned on average
investment securities, offset by an increase in average investment securities
of $511.6 million and $596.5 million for the three and six months ended
June 30, 2002 from the same periods in 2001, respectively.
Money market instruments include interest-earning time deposits in other banks
and federal funds sold. Interest income on money market instruments for the
three and six months ended June 30, 2002 decreased $11.3 million and $32.5
million to $20.2 million and $41.7 million, as compared to the same periods in
2001, respectively. The decrease in interest income on money market
instruments was a result of a 242 basis point and 307 basis point decrease in
the yield earned on average money market instruments, offset by an increase in
average money market instruments of $1.0 billion and $1.2 billion for the three
and six months ended June 30, 2002, as compared to the same periods in 2001,
respectively.
OTHER INTEREST-EARNING ASSETS
Interest income on other interest-earning assets decreased $7.5 million to
$85.0 million for the three months ended June 30, 2002 from the same period in
2001. The decrease in interest income on other interest-earning assets for the
three months ended June 30, 2002, is attributable to a decrease of 316 basis
points on the yield earned on other interest-earning assets offset by an
increase of $765.0 million on average other interest-earning assets. Interest
income on other interest-earning assets increased $1.3 million to $183.7
million for the six months ended June 30, 2002, from the same period in 2001.
The increase in interest income on other interest earning assets for the six
months ended June 30, 2002, is attributable to an increase of $781.0 million in
average other interest-earning assets offset by a decrease of 237 basis points
in the yield earned on other interest-earning assets.
The Corporation accrues interest income related to interests retained in a
securitization transaction accounted for as a sale as interest income in the
Corporation's consolidated statement of income. The Corporation includes these
retained interests in accounts receivable from securitization on the
consolidated statement of financial condition. These retained interests
include an interest-only strip receivable, cash reserve accounts, and accrued
interest and fees on securitized loans (see "Note G: Asset Securitization").
LOAN RECEIVABLES
Loan receivables consist of the Corporation's loans held for securitization and
loan portfolio.
Interest income generated by the Corporation's loan receivables increased $64.9
million and $166.1 million to $754.7 million and $1.5 billion for the three and
six months ended June 30, 2002 from the same periods in 2001, respectively.
The increase in interest income on loan receivables for the three and six
months ended June 30, 2002 was primarily the result of an increase in average
loan receivables of $4.3 billion and $4.7 billion from the same periods in
2001, respectively. The yield earned by the Corporation for the three and six
months ended June 30, 2002 on these receivables decreased 138 basis points and
137 basis points to 12.46% and 12.66%, as compared to 13.84% and 14.03% for the
same periods in 2001, respectively.
Table 1 presents the Corporation's loan receivables at period end distributed
by loan type, excluding securitized loans. Loan receivables decreased 1.0% to
$24.4 billion at June 30, 2002, as compared to $24.6 billion at December 31,
2001.
Domestic credit card loan receivables decreased to $13.7 billion at June 30,
2002 from $14.4 billion at December 31, 2001. During the first six months of
2002, domestic credit card loan receivables decreased as domestic credit card
loan originations through marketing programs and domestic credit card loan
portfolio acquisitions were offset by a net increase in securitized domestic
credit card loan receivables and higher Customer payments. The Corporation
securitized $5.9 billion of domestic credit card loan receivables, while $4.4
billion of previously securitized domestic credit card loan receivables
amortized back into the Corporation's loan portfolio during the six months
ended June 30, 2002. The Corporation acquired $1.8 billion of domestic credit
card loan receivables during the first six months of 2002, including a $1.3
billion credit card portfolio from Wachovia Corporation. The yield on average
domestic credit card loan receivables was 11.91% and 12.15% for the three and
six months ended June 30, 2002, as compared to 13.61% and 13.99% for the same
periods in 2001, respectively. The decrease in the yield on average domestic
credit card loan receivables reflects lower promotional and non-promotional
interest rates offered to attract and retain Customers and to grow loan
receivables, and an increase in the percentage of loans in the portfolio with
promotional rates.
Domestic credit card loans held for securitization decreased to $6.3 billion at
June 30, 2002 from $7.9 billion at December 31, 2001. The $1.6 billion
decrease reflects lower anticipated credit card securitizations partially
offset by a $500.0 million anticipated business card securitization.
Domestic other consumer loan receivables were $6.2 billion at June 30, 2002,
compared to $6.1 billion at December 31, 2001. The yield on average domestic
other consumer loan receivables was 14.09% and 14.23% for the three and six
months ended June 30, 2002, as compared to 15.14% and 15.11% for the same
periods in 2001, respectively. The Corporation's domestic other consumer loans
typically have higher delinquency and charge-off rates than the Corporation's
domestic credit card loans. As a result, the Corporation generally charges
higher interest rates on its domestic other consumer loans than on its domestic
credit card loans. The decrease in the yield on average domestic other
consumer loan receivables reflects lower promotional and non-promotional
interest rates offered to attract and retain Customers and to grow loan
receivables, and an increase in the percentage of loans in the portfolio with
promotional rates.
Domestic other consumer loans held for securitization decreased to $46.1
million at June 30, 2002 from $1.0 billion at December 31, 2001, as the
Corporation reduced the amount of other consumer loans it intended to
securitize or sell within one year. The Corporation originates and sells home
equity loans through MBNA Delaware. Other consumer loans held for
securitization include the home equity loans MBNA Delaware originates and
intends to sell. The net gains realized by the Corporation from the sale of
its home equity loans were not material to the Corporation's consolidated
statement of income for the three and six months ended June 30, 2002 and 2001.
Foreign loan receivables increased $427.7 million to $4.6 billion at June 30,
2002, as compared to $4.1 billion at December 31, 2001. The Corporation
securitized $1.1 billion of foreign credit card loan receivables, while $353.5
million of previously securitized foreign credit card loan receivables
amortized back into the Corporation's loan portfolio during the six months
ended June 30, 2002. Foreign loan receivables primarily increased as a result
of the strengthening of foreign currencies against the U.S. dollar. The yield
on average foreign loan receivables was 11.88% and 12.03% for the three and six
months ended June 30, 2002, as compared to 12.81% and 12.69% for the same
periods in 2001, respectively. The decrease in the yield on average foreign
loan receivables reflects lower promotional and non-promotional interest rates
offered to attract and retain Customers and to grow loan receivables.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
June 30, December 31,
2002 2001
------------- -------------
(unaudited)
Loans held for securitization(a):
Domestic:
Credit card.................................. $ 6,341,968 $ 7,943,965
Other consumer............................... 46,120 1,032,697
------------- -------------
Total domestic loans held for
securitization............................ 6,388,088 8,976,662
Foreign........................................ 1,036,474 953,286
------------- -------------
Total loans held for securitization........ 7,424,562 9,929,948
Loan portfolio:
Domestic:
Credit card.................................. 7,337,865 6,439,471
Other consumer............................... 6,104,645 5,094,198
------------- -------------
Total domestic loan portfolio.............. 13,442,510 11,533,669
Foreign........................................ 3,514,508 3,169,947
------------- -------------
Total loan portfolio....................... 16,957,018 14,703,616
------------- -------------
Total loan receivables..................... $ 24,381,580 $ 24,633,564
============= =============
(a) Loans held for securitization includes loans which were originated through
certain endorsing organizations or financial institutions who have the
contractual right to purchase the loans from the Corporation at fair value
and the lesser of loans eligible for securitization or sale, or loans
which management intends to securitize or sell within one year.
OTHER ASSETS
Other assets increased $379.8 million or 31.5% to $1.6 billion at June 30,
2002, as compared to $1.2 billion at December 31, 2001. The increase is
primarily related to an increase in the Corporation's deferred tax asset and an
increase in the fair market value of the Corporation's interest rate swap
agreements and foreign exchange swap agreements accounted for as fair value
hedges under Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement No. 133"), as
amended by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" ("Statement No. 137") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities-an Amendment of FASB Statement No. 133"
("Statement No. 138") (see "Note A: Significant Accounting Policies-Derivative
Financial Instruments and Hedging Activities" contained in the Annual Report on
Form 10-K for the year ended December 31, 2001).
DEPOSITS
Total interest expense on deposits was $304.9 million and $628.6 million for
the three and six months ended June 30, 2002, as compared to $365.5 million and
$742.7 million for the same periods in 2001, respectively. The decrease in
interest expense on deposits of $60.6 million and $114.2 million for the three
and six months ended June 30, 2002 was primarily the result of a decrease of
149 basis points and 151 basis points in the rate paid on average interest-
bearing deposits, offset by an increase of $2.4 billion and $2.6 billion in
average interest-bearing deposits for the three and six months ended June 30,
2002, respectively. The decrease in the rate paid on average interest-bearing
deposits reflects actions by the FOMC throughout 2001, which impacted overall
market interest rates and decreased the Corporation's on-balance-sheet funding
costs.
The Corporation's money market deposit accounts are variable-rate products. In
addition, the Corporation's foreign time deposits, although fixed in nature,
generally mature within one year. Therefore, the decrease in market interest
rates throughout 2001 decreased the rate paid on average money market deposit
accounts and average foreign time deposits during the three and six months
ended June 30, 2002, as compared to the same periods in 2001. The
Corporation's domestic time deposits are primarily fixed-rate deposits with
maturities that range from three months to five years. Therefore, the lower
market interest rates throughout 2001 decreased the rate paid on average
domestic time deposits during the three and six months ended June 30, 2002, as
compared to the same periods in 2001, but not to the same extent as average
money market deposit accounts and average foreign time deposits.
BORROWED FUNDS
Borrowed funds include both short-term borrowings and long-term debt and bank
notes.
Interest expense on short-term borrowings increased to $9.0 million and $20.5
million for the three and six months ended June 30, 2002, as compared to $1.7
million and $4.3 million for the same periods in 2001, respectively. The
increase in interest expense on short-term borrowings for the three and six
months ended June 30, 2002 was primarily a result of an increase of $1.0
billion and $1.1 billion in average short-term borrowings, respectively. The
increase in average short-term borrowings for the three and six months ended
June 30, 2002, as compared to the same periods in 2001, was primarily a result
of two on-balance sheet financings totaling $1.0 billion, which were entered
into during the second half of 2001. These financings are secured by $1.1
billion of domestic other consumer loan receivables. The Corporation has the
option to liquidate these financings on a monthly basis.
Interest expense on long-term debt and bank notes decreased to $76.8 million
and $144.1 million for the three and six months ended June 30, 2002, as
compared to $86.4 million and $185.6 million for the same periods in 2001,
respectively. The decrease in interest expense on long-term debt and bank
notes during the three and six months ended June 30, 2002 was primarily a
result of a decrease in the rate paid on average long-term debt and bank notes
of 183 basis points and 239 basis points, offset by an increase in average
long-term debt and bank notes of $1.9 billion and $1.6 billion, respectively.
The decrease in the rate paid on average long-term debt and bank notes reflects
actions by the FOMC throughout 2001 which impacted overall market interest
rates. Interest expense on domestic long-term debt and bank notes decreased
$18.9 million and $54.5 million during the three and six months ended June 30,
2002, respectively, primarily as a result of a decrease of 237 basis points and
299 basis points in the rate paid on average domestic long-term debt and bank
notes, as compared to the same periods in 2001, respectively. Interest expense
on foreign long-term debt and bank notes increased $9.3 million and $13.1
million during the three and six months ended June 30, 2002, respectively. The
increase in interest expense on foreign long-term debt and bank notes was a
result of an increase in average foreign long-term debt and bank notes of
$899.5 million and $787.6 million to $2.5 billion and $2.3 billion for the
three and six months ended June 30, 2002, respectively. The rate paid on
average foreign long-term debt and bank notes decreased 75 basis points and 105
basis points for the three and six months ended June 30, 2002, respectively.
The Corporation uses interest rate swap agreements and foreign exchange swap
agreements to change a portion of fixed-rate long-term debt and bank notes to
floating-rate long-term debt and bank notes to better match the rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to minimize its foreign currency exchange risk on a
portion of long-term debt and bank notes issued by MBNA Europe.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities increased $508.8 million or 30.2% to
$2.2 billion at June 30, 2002, as compared to $1.7 billion at December 31,
2001. This increase is primarily the result of accruals for compensation
expense and customer rewards programs expected to be paid in future periods.
In addition, there was an increase in the liability for payments due to
MasterCard International ("MasterCard") and Visa U.S.A., Inc. ("Visa")
associated with normal cardholder transaction activity as a result of June 30,
2002 falling on a Sunday; this liability was paid on July 1, 2002.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three and six months ended
June 30, 2002 and 2001, respectively.
TABLE 2: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
June 30, 2002
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,417 .85% $ 3
Foreign................................ 2,220,699 2.38 13,189
------------ ----------
Total interest-earning time deposits
in other banks...................... 2,222,116 2.38 13,192
Federal funds sold......................... 1,578,253 1.77 6,962
----------- ----------
Total money market instruments....... 3,800,369 2.13 20,154
Investment securities(a):
Taxable.................................. 3,799,026 3.73 35,328
Tax-exempt(b)............................ 110,850 2.95 815
------------ ----------
Total investment securities.......... 3,909,876 3.71 36,143
Other interest-earning assets(a)........... 3,855,194 8.84 84,961
Loans held for securitization:
Domestic:
Credit card............................ 5,754,413 12.01 172,344
Other consumer......................... 690,307 14.40 24,781
------------ ----------
Total domestic loans held for
securitization...................... 6,444,720 12.27 197,125
Foreign.................................. 1,341,490 12.19 40,777
------------ ----------
Total loans held for securitization.. 7,786,210 12.26 237,902
Loan portfolio:
Domestic:
Credit card............................ 7,500,014 11.83 221,191
Other consumer......................... 5,483,717 14.06 192,179
------------ ----------
Total domestic loan portfolio........ 12,983,731 12.77 413,370
Foreign.................................. 3,525,232 11.76 103,381
------------ ----------
Total loan portfolio................. 16,508,963 12.55 516,751
------------ ----------
Total loan receivables............... 24,295,173 12.46 754,653
------------ ----------
Total interest-earning assets........ 35,860,612 10.02 $ 895,911
Cash and due from banks...................... 720,384
Premises and equipment, net.................. 2,197,374
Other assets................................. 8,364,747
Reserve for possible credit losses........... (932,356)
------------
Total assets......................... $ 46,210,761
============
For the Three Months Ended
June 30, 2002
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,125,609 5.48% $ 247,463
Money market deposit accounts.......... 7,007,331 2.73 47,661
Interest-bearing transaction accounts.. 46,990 1.78 208
Savings accounts....................... 53,652 1.82 244
------------ ----------
Total domestic interest-bearing
deposits............................ 25,233,582 4.70 295,576
Foreign:
Time deposits.......................... 972,283 3.86 9,368
------------ ----------
Total interest-bearing deposits...... 26,205,865 4.67 304,944
Short-term borrowings:
Domestic............................... 1,005,892 3.24 8,115
Foreign................................ 145,844 2.52 915
------------ ----------
Total short-term borrowings.......... 1,151,736 3.14 9,030
Long-term debt and bank notes(c):
Domestic............................... 5,443,665 3.17 42,968
Foreign................................ 2,475,674 5.49 33,859
------------ ----------
Total long-term debt and bank notes.. 7,919,339 3.89 76,827
------------ ----------
Total borrowed funds................. 9,071,075 3.80 85,857
------------ ----------
Total interest-bearing liabilities... 35,276,940 4.44 390,801
Noninterest-bearing deposits................. 900,135
Other liabilities............................ 2,009,311
------------
Total liabilities.................... 38,186,386
Stockholders' equity......................... 8,024,375
------------
Total liabilities and stockholders'
equity.............................. $ 46,210,761
============ ----------
Net interest income.................. $ 505,110
==========
Net interest margin.................. 5.65
Interest rate spread................. 5.58
(a) Average balances for investment securities available-for-sale and other
interest-earning assets are based on market values; if these securities
were carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
June 30, 2002 was $293.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
For the Three Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,302 3.39% $ 11
Foreign................................ 1,562,365 4.74 18,472
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,563,667 4.74 18,483
Federal funds sold......................... 1,212,275 4.29 12,979
----------- ----------
Total money market instruments....... 2,775,942 4.55 31,462
Investment securities(a):
Taxable.................................. 3,291,136 5.32 43,660
Tax-exempt(b)............................ 107,135 5.63 1,505
------------ ----------
Total investment securities.......... 3,398,271 5.33 45,165
Other interest-earning assets(a)........... 3,090,222 12.00 92,453
Loans held for securitization:
Domestic:
Credit card............................ 5,308,943 14.06 186,078
Other consumer......................... 349,896 15.55 13,567
------------ ----------
Total domestic loans held for
securitization........ ............. 5,658,839 14.15 199,645
Foreign.................................. 706,276 13.67 24,078
------------ ----------
Total loans held for securitization.. 6,365,115 14.10 223,723
Loan portfolio:
Domestic:
Credit card............................ 6,701,403 13.25 221,405
Other consumer......................... 4,349,191 15.10 163,762
------------ ----------
Total domestic loan portfolio........ 11,050,594 13.98 385,167
Foreign.................................. 2,578,969 12.57 80,841
------------ ----------
Total loan portfolio................. 13,629,563 13.71 466,008
------------ ----------
Total loan receivables............... 19,994,678 13.84 689,731
------------ ----------
Total interest-earning assets........ 29,259,113 11.77 $ 858,811
Cash and due from banks...................... 695,043
Premises and equipment, net.................. 1,921,765
Other assets................................. 7,977,016
Reserve for possible credit losses........... (606,302)
------------
Total assets......................... $ 39,246,635
============
For the Three Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,848,281 6.60% $ 293,747
Money market deposit accounts.......... 5,308,395 4.82 63,836
Interest-bearing transaction accounts.. 43,463 3.90 423
Savings accounts....................... 10,398 3.93 102
------------ ----------
Total domestic interest-bearing
deposits............................ 23,210,537 6.19 358,108
Foreign:
Time deposits.......................... 582,155 5.09 7,393
------------ ----------
Total interest-bearing deposits...... 23,792,692 6.16 365,501
Short-term borrowings:
Domestic............................... 33,419 4.32 360
Foreign................................ 101,385 5.13 1,296
------------ ----------
Total short-term borrowings.......... 134,804 4.93 1,656
Long-term debt and bank notes(c):
Domestic............................... 4,483,592 5.54 61,905
Foreign................................ 1,576,140 6.24 24,529
------------ ----------
Total long-term debt and bank notes.. 6,059,732 5.72 86,434
------------ ----------
Total borrowed funds................. 6,194,536 5.70 88,090
------------ ----------
Total interest-bearing liabilities... 29,987,228 6.07 453,591
Noninterest-bearing deposits................. 783,827
Other liabilities............................ 1,646,519
------------
Total liabilities.................... 32,417,574
Stockholders' equity......................... 6,829,061
------------
Total liabilities and stockholders'
equity.............................. $ 39,246,635
============ ----------
Net interest income.................. $ 405,220
==========
Net interest margin.................. 5.55
Interest rate spread................. 5.70
(a) Average balances for investment securities available-for-sale and other
interest-earning assets are based on market values; if these securities
were carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
June 30, 2001 was $527.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
For the Six Months Ended
June 30, 2002
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,222 .99% $ 6
Foreign................................ 2,010,720 2.39 23,802
------------ ----------
Total interest-earning time deposits
in other banks...................... 2,011,942 2.39 23,808
Federal funds sold......................... 2,054,371 1.76 17,913
----------- ----------
Total money market instruments....... 4,066,313 2.07 41,721
Investment securities(a):
Taxable.................................. 3,717,781 3.84 70,725
Tax-exempt(b)............................ 110,633 2.79 1,529
------------ ----------
Total investment securities.......... 3,828,414 3.81 72,254
Other interest-earning assets(a)........... 3,845,696 9.63 183,663
Loans held for securitization:
Domestic:
Credit card............................ 6,343,322 12.45 391,675
Other consumer......................... 858,752 14.58 62,071
------------ ----------
Total domestic loans held for
securitization...................... 7,202,074 12.70 453,746
Foreign.................................. 1,267,421 12.54 78,839
------------ ----------
Total loans held for securitization.. 8,469,495 12.68 532,585
Loan portfolio:
Domestic:
Credit card............................ 6,843,976 11.86 402,623
Other consumer......................... 5,360,453 14.18 376,831
------------ ----------
Total domestic loan portfolio........ 12,204,429 12.88 779,454
Foreign.................................. 3,441,563 11.85 202,192
------------ ----------
Total loan portfolio................. 15,645,992 12.65 981,646
------------ ----------
Total loan receivables............... 24,115,487 12.66 1,514,231
------------ ----------
Total interest-earning assets........ 35,855,910 10.19 $1,811,869
Cash and due from banks...................... 750,294
Premises and equipment, net.................. 2,168,554
Other assets................................. 7,937,563
Reserve for possible credit losses........... (905,729)
------------
Total assets......................... $ 45,806,592
============
For the Six Months Ended
June 30, 2002
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,458,147 5.61% $ 513,806
Money market deposit accounts.......... 6,821,922 2.85 96,566
Interest-bearing transaction accounts.. 49,052 1.80 438
Savings accounts....................... 49,412 1.83 448
------------ ----------
Total domestic interest-bearing
deposits............................ 25,378,533 4.86 611,258
Foreign:
Time deposits.......................... 893,596 3.90 17,301
------------ ----------
Total interest-bearing deposits...... 26,272,129 4.82 628,559
Short-term borrowings:
Domestic............................... 1,075,449 3.44 18,354
Foreign................................ 184,878 2.37 2,174
------------ ----------
Total short-term borrowings.......... 1,260,327 3.28 20,528
Long-term debt and bank notes(c):
Domestic............................... 5,263,534 3.18 82,945
Foreign................................ 2,297,210 5.37 61,194
------------ ----------
Total long-term debt and bank notes.. 7,560,744 3.84 144,139
------------ ----------
Total borrowed funds................. 8,821,071 3.76 164,667
------------ ----------
Total interest-bearing liabilities... 35,093,200 4.56 793,226
Noninterest-bearing deposits................. 899,674
Other liabilities............................ 1,939,012
------------
Total liabilities.................... 37,931,886
Stockholders' equity......................... 7,874,706
------------
Total liabilities and stockholders'
equity.............................. $ 45,806,592
============ -----------
Net interest income.................. $ 1,018,643
===========
Net interest margin.................. 5.73
Interest rate spread................. 5.63
(a) Average balances for investment securities available-for-sale and other
interest-earning assets are based on market values; if these securities
were carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the six months ended
June 30, 2002 was $550.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
For the Six Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,277 3.95% $ 25
Foreign................................ 1,556,081 5.23 40,334
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,557,358 5.23 40,359
Federal funds sold......................... 1,358,508 5.03 33,897
----------- ----------
Total money market instruments....... 2,915,866 5.14 74,256
Investment securities(a):
Taxable.................................. 3,128,466 5.53 85,820
Tax-exempt(b)............................ 103,401 5.68 2,915
------------ ----------
Total investment securities.......... 3,231,867 5.54 88,735
Other interest-earning assets(a)........... 3,064,678 12.00 182,370
Loans held for securitization:
Domestic:
Credit card............................ 5,149,357 14.45 368,951
Other consumer......................... 680,941 14.92 50,394
------------ ----------
Total domestic loans held for
securitization...................... 5,830,298 14.50 419,345
Foreign.................................. 769,568 13.69 52,236
------------ ----------
Total loans held for securitization.. 6,599,866 14.41 471,581
Loan portfolio:
Domestic:
Credit card............................ 6,631,834 13.64 448,600
Other consumer......................... 3,716,159 15.14 278,977
------------ ----------
Total domestic loan portfolio........ 10,347,993 14.18 727,577
Foreign.................................. 2,427,047 12.38 148,940
------------ ----------
Total loan portfolio................. 12,775,040 13.84 876,517
------------ ----------
Total loan receivables............... 19,374,906 14.03 1,348,098
------------ ----------
Total interest-earning assets........ 28,587,317 11.95 $1,693,459
Cash and due from banks...................... 710,348
Premises and equipment, net.................. 1,873,078
Other assets................................. 8,346,685
Reserve for possible credit losses........... (568,758)
------------
Total assets......................... $ 38,948,670
============
For the Six Months Ended
June 30, 2001
--------------------------------
Average Yield/ Income
Balance Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,792,668 6.66% $ 587,818
Money market deposit accounts.......... 5,177,542 5.33 136,813
Interest-bearing transaction accounts.. 43,696 4.47 968
Savings accounts....................... 10,292 4.45 227
------------ ----------
Total domestic interest-bearing
deposits............................ 23,024,198 6.36 725,826
Foreign:
Time deposits.......................... 620,983 5.49 16,919
------------ ----------
Total interest-bearing deposits...... 23,645,181 6.33 742,745
Short-term borrowings:
Domestic............................... 33,696 4.96 828
Foreign................................ 129,774 5.40 3,477
------------ ----------
Total short-term borrowings.......... 163,470 5.31 4,305
Long-term debt and bank notes(c):
Domestic............................... 4,494,234 6.17 137,488
Foreign................................ 1,509,589 6.42 48,074
------------ ----------
Total long-term debt and bank notes.. 6,003,823 6.23 185,562
------------ ----------
Total borrowed funds................. 6,167,293 6.21 189,867
------------ ----------
Total interest-bearing liabilities... 29,812,474 6.31 932,612
Noninterest-bearing deposits................. 828,526
Other liabilities............................ 1,593,833
------------
Total liabilities.................... 32,234,833
Stockholders' equity......................... 6,713,837
------------
Total liabilities and stockholders'
equity.............................. $ 38,948,670
============ ----------
Net interest income.................. $ 760,847
==========
Net interest margin.................. 5.37
Interest rate spread................. 5.64
(a) Average balances for investment securities available-for-sale and other
interest-earning assets are based on market values; if these securities
were carried at amortized cost, there would not be a material impact on the
net interest margin.
(b) The fully taxable equivalent adjustment for the six months ended
June 30, 2001 was $1,020.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
OTHER OPERATING INCOME
Total other operating income increased 3.7% and 6.7% to $1.6 billion and $3.2
billion for the three and six months ended June 30, 2002 as compared to 2001,
respectively.
Securitization income decreased $7.1 million to $1.4 billion and increased
$96.5 million to $2.7 billion for the three and six months ended June 30, 2002,
respectively. These changes in securitization income reflect earnings on the
Corporation's securitized loans, offset by declines in the value of the
Corporation's interest-only strip receivable. Average securitized loans
increased $4.5 billion or 6.5% and $3.8 billion or 5.5% for the three and six
months ended June 30, 2002, as compared to the same periods in 2001,
respectively. Also, the securitized net interest margin increased to 10.32%
and 10.37% for the three and six months ended June 30, 2002, as compared to
9.56% and 9.17% for the same periods in 2001, respectively, primarily as a
result of a 224 basis point and 273 basis point decrease in the average rate
paid to investors in the Corporation's securitization transactions for the
three and six months ended June 30, 2002, respectively. The rate paid to
investors generally resets on a monthly basis. The decrease in the average
rate paid to investors reflects action by the FOMC throughout 2001, which
impacted overall market interest rates. The decrease in the average rate paid
to investors was offset by a decrease in the yield earned on average
securitized loans. The yield earned on average securitized loans decreased to
12.74% and 12.84% for the three and six months ended June 30, 2002, as compared
to 14.41% and 14.54% for the same periods in 2001, respectively. The decrease
in the yield earned on average securitized loans reflects lower promotional and
non-promotional interest rates offered to attract and retain Customers and to
grow managed loans. The 76 basis point and 120 basis point increase in the
securitized net interest margin attributed to the increase in securitized net
interest income of $221.5 million and $550.6 million for the three and six
months ended June 30, 2002, as compared to the same periods in 2001,
respectively. The increase in securitized net interest income was partially
offset by an increase of $107.9 million and $259.7 million in securitized net
charge-offs for the three and six months ended June 30, 2002, respectively.
Securitized net credit losses as a percentage of average securitized loans were
5.27% and 5.18% for the three and six months ended June 30, 2002 as compared to
4.99% and 4.71% for the same periods in 2001, respectively.
Included in securitization income is the net incremental change in the
interest-only strip receivable for all securitization transactions that the
Corporation recognizes in accordance with Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-a Replacement of FASB Statement No. 125"
("Statement No. 140"). The net incremental change in the interest-only strip
receivable for all securitization transactions recognized by the Corporation in
securitization income, net of securitization transaction costs, was a $105.1
million and $160.9 million decrease during the three and six months ended
June 30, 2002, as compared to a $59.6 million and a $84.0 million increase for
the same periods in 2001, respectively.
In accordance with Statement No. 140, the Corporation recognizes an interest-
only strip receivable which represents the contractual right to receive from
the trust interest and other revenue less certain costs over the estimated life
of securitized loan principal receivables. The Corporation uses certain key
assumptions and estimates in determining the value of the interest-only strip
receivable. These key assumptions and estimates include projections concerning
interest income, late fees, gross credit losses, charged-off loan recoveries,
contractual servicing fees, and the coupon paid to the investors which are used
to determine the excess spread to be received by the Corporation over the
estimated life of the securitized loan principal receivables. Other key
assumptions and estimates used by the Corporation include projected loan
payment rates, which are used to determine the estimated life of the
securitized loan principal receivables, and an appropriate discount rate.
The Corporation reviews the key assumptions and estimates used in determining
the fair value of the interest-only strip receivable and other retained
interests in securitizations on a quarterly basis and adjusts them as
appropriate. If these assumptions change or actual results differ from
projected results, the interest-only strip receivable and securitization income
would be affected (see "Note G: Asset Securitization" for key assumptions and
their sensitivities to adverse changes).
The decreases in the value of the interest-only strip recognized by the
Corporation on its securitized loan principal receivables during the three and
six months ended June 30, 2002, were primarily a result of a decrease in the
projected excess spread assumption related to the interest-only strip
receivable. The projected excess spread for securitized credit card principal
receivables decreased to 4.27% at June 30, 2002, as compared to 5.14% at
December 31, 2001. The projected excess spread for securitized other consumer
principal receivables decreased to 2.18% at June 30, 2002, as compared to 2.60%
at December 31, 2001. The decrease in the projected excess spread assumption
was primarily the result of a decrease in the projected interest income yields
on securitized loans due to the Corporation's pricing decisions to attract and
retain Customers and to grow loans. The decrease in the projected excess
spread assumption also reflects anticipated higher funding costs resulting from
expected increases in future market interest rates, as the rates paid to
investors in the Corporation's securitized transactions are primarily variable
in nature. These projections were partially offset by lower projected charge-
off rates on its credit card principal receivables. The net impact of these
changes in assumptions resulted in a decrease in the interest-only strip
receivable to $992.4 million at June 30, 2002, as compared to $1.1 billion at
December 31, 2001.
The Corporation's insurance income primarily relates to fees received for
marketing credit related life and disability insurance and debt cancellation
contracts to loan customers. Insurance income increased $10.9 million and
$27.5 million to $41.0 million and $86.8 million for the three and six months
ended June 30, 2002, respectively. The increase in insurance income is
primarily related to an increase in the number of debt cancellation contracts.
Credit card fees were $98.4 million and $191.4 million for the three and six
months ended June 30, 2002, as compared to $67.9 million and $129.3 million for
the same periods in 2001, respectively. Credit card fees include annual, late,
overlimit, returned check, cash advance, express payment fees, and other
miscellaneous fees earned on the Corporation's credit card loans. The increase
in credit card fees for the three and six months ended June 30, 2002 was a
result of the growth in the Corporation's outstanding loan receivables,
accounts, and the number of fees assessed.
OTHER OPERATING EXPENSE
Total other operating expense increased 8.9% to $1.1 billion and 7.9% to $2.3
billion for the three and six months ended June 30, 2002, as compared to $1.0
billion and $2.1 billion for the same periods in 2001, respectively. The
growth in other operating expense reflects the Corporation's continued
investment in attracting, servicing, and retaining domestic and foreign credit
card and other consumer loan Customers. The Corporation added 6.3 million new
accounts, including 1.2 million accounts from the Wachovia portfolio
acquisition, during the six months ended June 30, 2002, compared to 4.7 million
new accounts for the same period in 2001. The Corporation added 214 new
endorsements from organizations during the six months ended June 30, 2002,
compared to 227 new endorsements for the same period in 2001.
Salaries and employee benefits increased $25.7 million to $465.3 million and
$65.7 million to $944.2 million for the three and six months ended June 30,
2002 from the same periods in 2001, respectively. The increase in salaries and
employee benefits primarily reflects the increased number of people to service
the Corporation's higher number of Customers and increases in employee
compensation levels. At June 30, 2002, the Corporation had approximately
25,500 full-time equivalent employees, as compared to 24,000 full-time
equivalent employees at June 30, 2001.
Included in salaries and employee benefits is the net periodic benefit cost for
the Corporation's defined benefit pension plan of $19.8 million and $39.1
million for the three and six months of June 30, 2002. The Corporation
anticipates, based on current conditions, that net periodic benefit cost will
increase significantly in 2003 because of a lower return on assets, increased
covered salaries, and a lower assumed discount rate. The Corporation does not
expect the increases in the net periodic benefit cost to have a material impact
on the Corporation's consolidated statement of income for 2003.
Other operating expense also includes amortization of intangible assets. The
Corporation reviews the carrying value of its intangible assets for impairment
on a quarterly basis. The intangible assets, which consist primarily of the
value of acquired Customer accounts, are carried at the lower of net book value
or estimated fair value with the estimated fair value determined by discounting
the expected future cash flows from the use of the asset at an appropriate
discount rate. The Corporation performs this impairment valuation quarterly
based on the size and nature of the intangible asset. For intangible assets
that are not considered material, the Corporation performs this calculation by
grouping the assets by year of acquisition. The Corporation makes certain
estimates and assumptions that affect the determination of the fair value of
the intangible assets. These estimates and assumptions include levels of
account activation, active account attrition, funding costs, credit loss
experience, servicing costs, growth in average account balances, interest and
fees assessed on loans, and other factors. Significant changes in these
estimates and assumptions could result in an impairment of the intangible
assets. This would result in a write down of intangible assets on the
consolidated statements of financial condition and an increase to other
operating expense on the consolidated statements of income.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"). The effective date for Statement No. 142 was for fiscal
years beginning after December 15, 2001. In accordance with Statement No. 142,
goodwill and intangible assets determined to have indefinite lives are no
longer amortized, but instead are subject to an annual impairment test. At
June 30, 2002, the Corporation did not have a material amount of goodwill or
intangible assets with indefinite lives or any other nonamortizing assets.
Other separately identifiable intangible assets, which for the Corporation are
primarily the value of acquired Customer accounts, continue to be amortized
over their estimated useful lives. Prior to 2002, the Corporation amortized
the value of acquired Customer accounts over a period that was generally
limited to ten years. In accordance with Statement No. 142, the Corporation
completed an analysis of the associated benefits of the value of its acquired
Customer accounts. As a result, on January 1, 2002, the Corporation extended
the amortization period of the value of the acquired Customer accounts,
generally to 15 years, to better match their estimated useful lives. For the
three and six months ended June 30, 2002, the Corporation's pre-tax
amortization expense was reduced $23.5 million and $47.8 million, respectively,
as a result of the extension of the amortization period. These reductions do
not include the amortization expense of acquired Customer accounts added after
January 1, 2002, the effective date of the change.
Advertising expense increased $15.8 million and $44.8 million to $83.4 million
and $170.2 million for the three and six months ended June 30, 2002,
respectively. Postage and delivery expense increased $21.2 million and $48.0
million to $98.2 million and $208.0 million for the three and six months ended
June 30, 2002, respectively. The increase in advertising and postage and
delivery expense is attributable to an increase in the Corporation's marketing
efforts primarily through direct promotions, new account solicitations, and
activation mailings, as well as new account growth.
Table 3 provides further detail regarding the Corporation's other operating
expenses.
TABLE 3: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(unaudited)
Purchased services.............. $ 134,783 $ 117,172 $ 252,958 $ 243,170
Advertising..................... 83,380 67,623 170,185 125,393
Collection...................... 13,476 10,700 25,749 20,944
Stationery and supplies......... 11,032 10,923 21,824 21,576
Service bureau.................. 18,781 15,850 35,858 30,284
Postage and delivery............ 98,157 76,961 208,042 160,012
Telephone usage................. 20,451 21,125 42,886 41,398
Loan receivable fraud losses.... 36,206 41,127 80,368 83,549
Amortization of intangible
assets......................... 82,424 92,128 159,052 190,106
Computer software............... 25,006 20,394 49,443 39,673
Other........................... 51,376 42,366 120,481 123,400
--------- --------- ---------- ----------
Total other operating expense. $ 575,072 $ 516,369 $1,166,846 $1,079,505
========= ========= ========== ==========
INCOME TAXES
The Corporation recognized applicable income taxes of $264.3 million and $477.9
million for the three and six months ended June 30, 2002, as compared to $229.1
million and $416.5 million for the same periods in 2001, respectively. These
amounts represent an effective tax rate of 36.6% and 37.6% for the three and
six months ended June 30, 2002 and 2001, respectively. The decrease in the
effective tax rate is primarily related to favorable results from audits of
federal tax returns from prior years.
LOAN QUALITY
The Corporation's loan quality at any time reflects, among other factors, the
credit quality of the Corporation's credit card and other consumer loans, the
general economic conditions, the success of the Corporation's collection
efforts, the composition of the Corporation's loans between credit card and
other consumer loans, and the seasoning of the Corporation's loans. As new
loans season, the delinquency and charge-off rates on these loans generally
rise and then stabilize. The Corporation's financial results are sensitive to
changes in delinquencies and net credit losses related to the Corporation's
loans. During an economic downturn, delinquencies and net credit losses are
more likely to increase. These trends are considered in establishing the
reserve for possible credit losses.
DELINQUENCIES
The entire balance of an account is contractually delinquent if the minimum
payment is not received by the specified date on the Customer's billing
statement. Delinquency as a percentage of the Corporation's loan portfolio was
3.94% at June 30, 2002, compared with 4.64% at December 31, 2001. The
Corporation's delinquency as a percentage of managed loans was 4.80% at
June 30, 2002, compared to 5.09% at December 31, 2001.
Table 4 presents delinquent loans for the Corporation's loan portfolio,
excluding loans held for securitization, and the Corporation's managed loans.
Loan delinquency on the domestic credit card loan portfolio was 3.29% at
June 30, 2002, as compared to 4.58% at December 31, 2001. Loan delinquency on
the domestic other consumer loan portfolio was 5.55% at June 30, 2002, as
compared to 5.96% at December 31, 2001. Loan delinquency on the foreign loan
portfolio was 2.51% at June 30, 2002, as compared to 2.63% at December 31,
2001. The delinquency rate on the Corporation's foreign loans is typically
lower than the delinquency rate on the Corporation's domestic credit card
loans. The Corporation's domestic other consumer loans typically have a higher
delinquency and charge-off rate than the Corporation's domestic credit card
loans. As a result, the Corporation generally charges higher interest rates on
domestic other consumer loans.
TABLE 4: DELINQUENT LOANS
(dollars in thousands)
June 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Loan portfolio:
Loan portfolio outstanding............. $16,957,018 $14,703,616
Loan portfolio delinquent:
30 to 59 days........................ $ 247,619 1.46% $ 260,421 1.77%
60 to 89 days........................ 142,327 .84 145,061 .99
90 or more days...................... 278,256 1.64 276,277 1.88
----------- ----- ----------- -----
Total............................ $ 668,202 3.94% $ 681,759 4.64%
=========== ===== =========== =====
Loan portfolio delinquent by
geographic area:
Domestic:
Credit card........................ $ 241,274 3.29% $ 294,901 4.58%
Other consumer..................... 338,804 5.55 303,365 5.96
----------- -----------
Total domestic................... 580,078 4.32 598,266 5.19
Foreign.............................. 88,124 2.51 83,493 2.63
----------- -----------
Total............................ $ 668,202 3.94 $ 681,759 4.64
=========== ===========
Managed loans
Managed loans outstanding.............. $99,965,120 $97,496,051
Managed loans delinquent:
30 to 59 days........................ $ 1,759,260 1.76% $ 1,816,893 1.86%
60 to 89 days........................ 998,570 1.00 1,039,861 1.07
90 or more days...................... 2,041,635 2.04 2,105,707 2.16
----------- ----- ----------- -----
Total............................ $ 4,799,465 4.80% $ 4,962,461 5.09%
=========== ===== =========== =====
Managed loans delinquent by
geographic area:
Domestic:
Credit card........................ $ 3,711,052 4.89% $ 3,779,113 5.05%
Other consumer..................... 729,494 6.15 811,159 6.86
----------- -----------
Total domestic................... 4,440,546 5.06 4,590,272 5.29
Foreign.............................. 358,919 2.92 372,189 3.45
----------- -----------
Total............................ $ 4,799,465 4.80 $ 4,962,461 5.09
=========== ===========
The Corporation may modify the terms of its credit card and other consumer loan
agreements with borrowers who have experienced financial difficulties, by
either reducing their interest rate or placing them on nonaccrual status.
These other nonperforming loans are presented in Table 5 for the Corporation's
loan portfolio, excluding loans held for securitization, and managed loans.
Other nonperforming loans as a percentage of the Corporation's loan portfolio
and of the Corporation's managed loans increased at June 30, 2002 from
December 31, 2001 as a result of the Corporation increasing the use of reduced-
rate and nonaccrual programs to assist customers who are experiencing financial
difficulties in meeting their repayment obligations.
TABLE 5: OTHER NONPERFORMING LOANS
(dollars in thousands)
June 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Loan portfolio:
Nonaccrual loans...................... $ 23,723 $ 17,459
Reduced-rate loans.................... 394,063 299,541
------------------ -----------------
Total other nonperforming loans..... $ 417,786 $ 317,000
================== =================
Other nonperforming loans as a % of
ending loan portfolio................ 2.46% 2.16%
Managed loans:
Nonaccrual loans...................... $ 250,327 $ 173,825
Reduced-rate loans.................... 2,655,423 2,360,392
------------------ -----------------
Total other nonperforming loans..... $ 2,905,750 $ 2,534,217
================== =================
Other nonperforming loans as a % of
ending managed loans................. 2.91% 2.60%
NET CREDIT LOSSES
The Corporation's net credit losses include the principal amount of losses
charged off less current period recoveries and exclude accrued interest and
fees and fraud losses. The Corporation records current period recoveries on
loans previously charged off in the reserve for possible credit losses. The
Corporation sells charged-off loans and records the proceeds received from
these sales as recoveries. Accrued interest and fees are charged to current
earnings when the loan is charged off. The Corporation's policy is to charge
off open-end delinquent retail loans by the end of the month in which the
account becomes 180 days contractually past due, closed-end delinquent retail
loans by the end of the month in which they become 120 days contractually past
due, and bankrupt accounts within 60 days of receiving notification from the
bankruptcy courts. The Corporation charges off deceased accounts when the loss
is determined.
Net credit losses for the three and six months ended June 30, 2002 were $274.9
million and $559.9 million, compared to $211.9 million and $402.0 million for
the same periods in 2001, respectively. The increase in net credit losses for
the three and six months ended June 30, 2002 reflects a weaker economy, the
continuing seasoning of the Corporation's accounts, and an increase in average
loan receivables.
Net credit losses as a percentage of average loan receivables were 4.53% and
4.64% for the three and six months ended June 30, 2002, compared to 4.24% and
4.15% for the same periods in 2001, respectively. The Corporation's managed
credit losses as a percentage of average managed loans for the three and six
months ended June 30, 2002 were 5.09% and 5.04%, compared to 4.82% and 4.59%
for the same periods in 2001, respectively. Net charge-offs on domestic credit
card loan receivables were 4.07% and 4.43% for the three and six months ended
June 30, 2002, as compared to 4.47% and 4.45% for the same periods in 2001,
respectively. Net charge-offs on domestic other consumer loan receivables were
6.88% and 6.52% for the three and six months ended June 30, 2002, as compared
to 4.80% and 4.48% for the same periods in 2001, respectively. Net charge-offs
on foreign loan receivables were 2.78% and 2.75% for the three and six months
ended June 30, 2002, as compared to 2.60% and 2.61% for the same periods in
2001, respectively.
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
The Corporation maintains the reserve for possible credit losses at an amount
sufficient to absorb losses inherent in the Corporation's loan receivables
based on a projection of probable future net credit losses on the Corporation's
loan receivables. The Corporation's net credit losses include the principal
balance of loans charged off less current period recoveries and exclude accrued
interest and fees and fraud losses. The Corporation regularly performs a
migration analysis of delinquent and current accounts in order to determine an
appropriate reserve for possible credit losses. A migration analysis is a
technique used to estimate the likelihood that a loan receivable will progress
through the various delinquency stages and ultimately charge off. In
completing the analysis of the adequacy of the reserve for possible credit
losses, the impact of economic conditions on the borrowers' ability to repay,
past collection experience, the risk characteristics and composition of the
portfolio, and other factors are considered. Significant changes in these
factors could impact the establishment of an appropriate reserve for possible
credit losses. A provision is charged against earnings to maintain the reserve
for possible credit losses at an appropriate level.
The Corporation's reserve for possible credit losses increased to $960.1
million at June 30, 2002. The provision for possible credit losses for the
three and six months ended June 30, 2002 was $274.9 million and $634.3 million,
compared to $322.2 million and $541.1 million for the same periods in 2001,
respectively. The increase in the reserve for possible credit losses primarily
reflects a weaker economy as demonstrated by the increase in the Corporation's
net credit losses. For the three months ended March 31, 2002, the Corporation
increased its reserve for possible credit losses as the Corporation experienced
an increase in the number of bankruptcy filings. For the three months ended
June 30, 2002, the Corporation acquired reserves of $46.7 million which
increased its reserve for possible credit losses. The Corporation did not
otherwise increase reserves during the three months ended June 30, 2002, as the
Corporation did not expect net credit losses to increase during the third and
fourth quarters of 2002. However, the Corporation cannot predict with
certainty the amount of future net credit losses due to possible changes in the
economy, bankruptcy laws, and other factors.
Congress is considering changes to the bankruptcy laws which, if enacted, may
result in increased bankruptcy filings prior to the effective date of the
changes. Such an increase in expected bankruptcy filings could result in
higher than anticipated future losses which could cause the Corporation to
increase the reserve for possible credit losses.
Table 6 presents an analysis of the Corporation's reserve for possible credit
losses. The reserve for possible credit losses is a general allowance
applicable to the Corporation's loan portfolio and does not include an
allocation for credit risk related to securitized loans. Net credit losses on
securitized loans are absorbed directly by the related trusts under their
respective contractual agreements and do not affect the reserve for possible
credit losses.
TABLE 6: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited)
Reserve for possible credit
losses, beginning of period...... $ 908,186 $ 565,700 $ 833,423 $ 527,573
Reserves acquired............... 46,738 2,295 47,675 12,617
Provision for possible credit
losses:
Domestic..................... 252,113 301,388 550,553 494,768
Foreign...................... 22,819 20,828 83,772 46,288
--------- --------- --------- ---------
Total provision for
possible credit losses... 274,932 322,216 634,325 541,056
Foreign currency translation.... 5,189 (168) 4,556 (1,014)
Credit losses:
Domestic:
Credit card................. (143,687) (145,935) (311,080) (282,631)
Other consumer.............. (112,229) (59,257) (213,229) (104,373)
--------- --------- --------- ---------
Total domestic credit
losses................... (255,916) (205,192) (524,309) (387,004)
Foreign....................... (40,696) (25,897) (75,679) (50,373)
--------- --------- --------- ---------
Total credit losses....... (296,612) (231,089) (599,988) (437,377)
Recoveries:
Domestic:
Credit card................. 8,775 11,809 18,687 20,733
Other consumer.............. 6,081 2,872 10,568 5,888
--------- --------- --------- ---------
Total domestic recoveries. 14,856 14,681 29,255 26,621
Foreign....................... 6,824 4,555 10,867 8,714
--------- --------- --------- ---------
Total recoveries.......... 21,680 19,236 40,122 35,335
--------- --------- --------- ---------
Net credit losses............... (274,932) (211,853) (559,866) (402,042)
--------- --------- --------- ---------
Reserve for possible credit
losses, end of period............ $ 960,113 $ 678,190 $ 960,113 $ 678,190
========= ========= ========= =========
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank and MBNA Delaware
are also subject to similar capital requirements adopted by the Office of the
Comptroller of the Currency. Under these requirements, the federal bank
regulatory agencies have established quantitative measures to ensure that
minimum thresholds for Tier 1 Capital, Total Capital, and Leverage ratios are
maintained. Failure to meet these minimum capital requirements can initiate
certain mandatory, and possible additional discretionary, actions by the
federal bank regulators that, if undertaken, could have a direct material
effect on the Corporation's, the Bank's, and MBNA Delaware's consolidated
financial statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation, the Bank, and MBNA
Delaware must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.
The Corporation's, the Bank's, and MBNA Delaware's capital amounts and
classification are also subject to qualitative judgments by the federal bank
regulators about components, risk weightings, and other factors. At June 30,
2002 and December 31, 2001, the Corporation's, the Bank's, and MBNA Delaware's
capital exceeded all minimum regulatory requirements to which they are subject,
and the Bank and MBNA Delaware were "well-capitalized" as defined under the
federal bank regulatory guidelines. The risk-based capital ratios, shown in
Table 7, have been computed in accordance with regulatory accounting practices.
TABLE 7: REGULATORY CAPITAL RATIOS
June 30, December 31, Minimum Well-Capitalized
2002 2001 Requirements Requirements
----------- ------------ ------------ ----------------
(unaudited)
MBNA Corporation
Tier 1................. 17.51% 15.99% 4.00% (a)
Total.................. 20.51 17.97 8.00 (a)
Leverage............... 18.67 18.12 4.00 (a)
MBNA America Bank, N.A.
Tier 1................. 14.78 13.14 4.00 6.00%
Total.................. 17.89 15.13 8.00 10.00
Leverage............... 15.67 15.00 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1................. 20.81 18.24 4.00 6.00
Total.................. 22.02 19.28 8.00 10.00
Leverage............... 20.34 18.49 4.00 5.00
(a) Not applicable for bank holding companies.
During the six months ended June 30, 2002, the Corporation issued 6.625%
Subordinated Notes, maturing in 2012. These 6.625% Subordinated Notes qualify
as regulatory capital for both the Bank and the Corporation.
During the six months ended June 30, 2002, the Corporation, through MBNA
Capital D, also issued guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures. These
securities qualify as regulatory capital for the Corporation.
In November 2001, the FFIEC published revised risk-based capital guidelines to
address the treatment of recourse obligations, retained interests, and direct
credit substitutes that expose banks and bank holding companies to credit risk.
The revised guidelines treat recourse obligations and direct credit substitutes
more consistently than the agencies' current risk-based capital standards, and
introduce a credit ratings-based approach to assigning risk weights within a
securitization. The revised guidelines also impose a "dollar-for-dollar"
capital charge on retained interests and a concentration limit on the interest-
only strip receivable, a subset of retained interests. Retained interests
include an interest-only strip receivable, cash reserve accounts, accrued
interest and fees on securitized loans, and other subordinated interests
(discussed under "Note G: Asset Securitization"). The revised guidelines were
effective for all transactions settled on or after January 1, 2002. For
transactions entered into before January 1, 2002, the Corporation may elect
early adoption for any provision of the revised guidelines that results in
reduced capital requirements, and may delay adoption until December 31, 2002
for any provision that results in increased capital requirements. The revised
guidelines, when adopted, will result in an additional capital charge for the
Corporation and the Bank. If the revised guidelines imposing an additional
capital charge had been in effect at June 30, 2002, the Corporation would have
remained adequately capitalized, and the Bank would have remained "well-
capitalized" for regulatory capital purposes. MBNA Delaware's regulatory
capital ratios would not have been affected. There are no conditions or events
that have occurred since June 30, 2002 that have changed the Bank's or MBNA
Delaware's regulatory capital classification as "well-capitalized".
DIVIDEND LIMITATIONS
The payment of dividends in the future and the amount of such dividends, if
any, will be at the discretion of the Corporation's Board of Directors. The
payment of preferred and common stock dividends by the Corporation may be
limited by certain factors, including regulatory capital requirements, broad
enforcement powers of the federal bank regulatory agencies, and tangible net
worth maintenance requirements under the Corporation's revolving credit
facilities. The payment of common stock dividends may also be limited by the
terms of the Corporation's preferred stock. If the Corporation has not paid
scheduled dividends on the preferred stock, or declared the dividends and set
aside funds for payment, the Corporation may not declare or pay any cash
dividends on the common stock. In addition, if the Corporation defers interest
payments for consecutive periods covering 10 semiannual periods or 20
consecutive quarterly periods, depending on the series, on its guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures, the Corporation may not be permitted to declare or pay any
cash dividends on the Corporation's capital stock or interest on debt
securities that have equal or lower priority than the Corporation's junior
subordinated deferrable interest debentures. During the six months ended
June 30, 2002, the Corporation declared dividends on its preferred stock of
$7.1 million and on its common stock of $170.4 million.
On July 16, 2002, the Corporation's Board of Directors declared a quarterly
dividend of $.07 per common share, payable October 1, 2002 to stockholders of
record as of September 16, 2002. Also, on July 11, 2002, the Corporation's
Board of Directors declared a quarterly dividend of $.46875 per share on the
7 1/2% Cumulative Preferred Stock, Series A, and a quarterly dividend of
$.34740 per share on the Adjustable Rate Cumulative Preferred Stock, Series B.
The preferred stock dividends are payable October 15, 2002 to stockholders of
record as of September 30, 2002.
The Corporation is a legal entity separate and distinct from its banking and
other subsidiaries. The primary source of funds for payment of preferred and
common stock dividends by the Corporation is dividends received from the Bank.
The amount of dividends that a national bank may declare in any year is subject
to certain regulatory restrictions. Generally, dividends declared in a given
year by a national bank are limited to its net profit, as defined by regulatory
agencies, for that year, combined with its retained net income for the
preceding two years, less any required transfers to surplus or to a fund for
the retirement of any preferred stock. In addition, a national bank may not
pay any dividends in an amount greater than its undivided profit. Under
current regulatory practice, national banks may pay dividends only out of
current operating earnings. Also, a national bank may not declare dividends if
such declaration would leave the bank inadequately capitalized. Therefore, the
ability of the Bank to declare dividends will depend on its future net income
and capital requirements. At June 30, 2002, the amount of retained earnings
available for declaration and payment of dividends from the Bank to the
Corporation was $3.0 billion. Payment of dividends by the Bank to the
Corporation, however, can be further limited by federal bank regulatory
agencies.
The Bank's payment of dividends to the Corporation may also be limited by a
tangible net worth requirement under the Corporation's senior syndicated
revolving credit facility. This facility was not drawn upon at June 30, 2002.
If this facility had been drawn upon at June 30, 2002, the amount of retained
earnings available for declaration of dividends would have been further limited
to $1.6 billion.
LIQUIDITY AND RATE SENSITIVITY
The Corporation seeks to maintain prudent levels of liquidity, interest rate
risk, and foreign currency exchange rate risk.
LIQUIDITY MANAGEMENT
Liquidity management is the process by which the Corporation manages the use
and availability of various funding sources to meet its current and future
operating needs. These needs change as loans grow, securitizations amortize,
debt and deposits mature, and payments on other obligations are made. Because
the characteristics of the Corporation's assets and liabilities change,
liquidity management is a dynamic process, affected by the pricing and maturity
of investment securities, loans, deposits, securitizations, and other assets
and liabilities.
To facilitate liquidity management, the Corporation uses a variety of funding
sources to establish a maturity pattern that provides a prudent mixture of
short-term and long-term funds. The Corporation obtains funds through deposits
and debt issuance, and uses securitization of the Corporation's loan
receivables as a major funding alternative. At June 30, 2002, the Corporation
funded approximately 75.6% of its managed loans through securitization
transactions. Additional liquidity is provided to the Corporation through
committed credit facilities.
The consumer asset-backed securitization market in the United States currently
exceeds $1 trillion, with approximately $184.0 billion of asset-backed
securities issued during the six months ended June 30, 2002. An additional
$54.0 billion of asset-backed securities were issued in European markets during
the six months ended June 30, 2002. The Corporation is a leading issuer in
these markets, which have remained stable through adverse conditions. Despite
the size and relative stability of these markets and the Corporation's position
as a leading issuer, if these markets experience difficulties, the Corporation
may be unable to securitize its loan receivables or to do so at favorable
pricing levels. Factors affecting the Corporation's ability to securitize its
loan receivables include the overall credit quality of the Corporation's
securitized loans, the stability of the market for securitization transactions,
and the legal, regulatory, accounting, and tax environments governing
securitization transactions. The Corporation does not believe adverse outcomes
from these events are likely to occur. If the Corporation were unable to
continue to securitize its loan receivables at current levels, the Corporation
would use its investment securities and money market instruments in addition to
alternative funding sources to fund increases in loan receivables and meet its
other liquidity needs. The resulting change in the Corporation's current
liquidity sources could potentially subject the Corporation to certain risks.
These risks would include an increase in the Corporation's cost of funds, an
increase in the reserve for possible credit losses and the provision for
possible credit losses as more loans would remain on the Corporation's
consolidated statement of financial condition, and lower loan growth if the
Corporation were unable to find alternative and cost-effective funding sources.
In addition, if the Corporation could not continue to remove the loan
receivables from the Corporation's consolidated statement of financial
condition through securitizations, the Corporation would likely need to raise
additional capital to support loan and asset growth, provide additional credit
enhancement, and meet the minimum regulatory capital requirements.
Total deposits at June 30, 2002 and December 31, 2001 were $27.0 billion and
$27.1 billion, respectively. The Corporation utilizes deposits to fund loan
and other asset growth and to diversify funding sources. At June 30, 2002, the
Corporation's ratio of average receivables to average deposits was 89.63% and
88.75% for the three and six months ended June 30, 2002, respectively, as
compared to 81.36% and 79.17% for the same periods in 2001. The increase in
the percentage of average loan receivables to average deposits is a result of
average loan growth. Table 8 provides the maturities of the Corporation's
deposits at June 30, 2002.
TABLE 8: MATURITIES OF DEPOSITS AT JUNE 30, 2002
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
(unaudited)
Three months or less................ $ 10,234,195 $ 1,196,325 $ 11,430,520
Over three months through twelve
months............................. 4,591,890 1,330,458 5,922,348
Over one year through five years.... 5,099,413 4,563,377 9,662,790
Over five years..................... 7,210 - 7,210
------------ ------------ ------------
Total deposits.................... $ 19,932,708 $ 7,090,160 $ 27,022,868
============ ============ ============
The Corporation also held $3.9 billion in investment securities and $3.9
billion of money market instruments at June 30, 2002, compared to $3.5 billion
in investment securities and $3.0 billion in money market instruments at
December 31, 2001. The investment securities primarily consist of high-
quality, AAA-rated securities, most of which can be used as collateral under
repurchase agreements. Of the investment securities at June 30, 2002, $963.9
million is anticipated to mature within twelve months. The Corporation's
investment securities available-for-sale portfolio, which consists primarily of
U.S. Treasury obligations or short-term and variable-rate securities, was $3.5
billion at June 30, 2002 and $3.1 billion at December 31, 2001. These
investment securities, along with the money market instruments, provide
increased liquidity and flexibility to support the Corporation's funding
requirements. Money market instruments increased at June 30, 2002 from
December 31, 2001 to provide liquidity to support portfolio acquisition
activity and anticipated loan growth.
Estimated maturities of the Corporation's investment securities, on a fully
taxable equivalent basis, are presented in Table 9.
TABLE 9: SUMMARY OF INVESTMENT SECURITIES AT JUNE 30, 2002
(dollars in thousands) (unaudited)
Estimated Maturity
-------------------------------------------
Within 1 1-5 6-10 Over
Year Years Years 10 Years
---------- ---------- --------- --------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 889,424 $1,389,752 $ - $ -
State and political subdivisions
of the United States............. 3,160 9,245 7,185 84,180
Asset-backed and other securities. 70,347 484,528 352,733 164,013
---------- ---------- --------- --------
Total investment securities
available-for-sale............. $ 962,931 $1,883,525 $ 359,918 $248,193
========== ========== ========= ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ - $ - $ - $402,596
State and political subdivisions
of the United States............. - 166 649 5,740
Asset-backed and other securities. 1,000 1,000 - 61,882
---------- ---------- --------- --------
Total investment securities
held-to-maturity............... $ 1,000 $ 1,166 $ 649 $470,218
========== ========== ========= ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $2,279,176 $2,279,176
State and political subdivisions
of the United States............. 103,770 103,770
Asset-backed and other securities. 1,071,621 1,071,621
---------- ----------
Total investment securities
available-for-sale............. $3,454,567 $3,454,567
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 402,596 $ 391,675
State and political subdivisions
of the United States............. 6,555 6,712
Asset-backed and other securities. 63,882 63,917
---------- ----------
Total investment securities
held-to-maturity............... $ 473,033 $ 462,304
========== ==========
Table 10 provides a summary of the Corporation's estimated liquidity
requirements at June 30, 2002.
TABLE 10: SUMMARY OF ESTIMATED LIQUIDITY REQUIREMENTS
(dollars in thousands) (unaudited)
Estimated Liquidity Requirements
at June 30, 2002
-------------------------------------
Within Over
1 Year 1-5 Years 5 Years Total
----------- ----------- ----------- ------------
Deposits................... $17,352,868 $ 9,662,790 $ 7,210 $ 27,022,868
Short-term borrowings...... 1,155,124 - - 1,155,124
Long-term debt and bank
notes (par value)......... 1,550,611 4,560,602 2,132,842 8,244,055
Securitized loans
(investor principal)..... 10,110,871 46,771,291 16,829,590 73,711,752
Minimum rental payments
under noncancelable
operating leases.......... 29,802 45,289 66 75,157
----------- ----------- ----------- ------------
Total estimated
liquidity requirements.. $30,199,276 $61,039,972 $18,969,708 $110,208,956
=========== =========== =========== ============
The Corporation estimates that it will be required to pay out $30.2 billion in
liquidity obligations within the next year. These requirements include $17.4
billion in deposits and $10.1 billion in principal payments to investors in the
Corporation's securitization transactions. Based on past deposit activity, the
Corporation expects to retain a majority of its deposit balances as they
mature. Therefore, the Corporation anticipates the net cash outflow related to
deposits within the next year will be significantly less than reported above.
The Corporation has typically funded approximately 75% of its managed loans
through asset securitization. To maintain an appropriate current securitized
funding level, the Corporation expects to securitize additional loans as prior
securitized loans amortize back into the Corporation's loan portfolio. These
additional securitizations would offset principal payments to investors in the
Corporation's securitization transactions.
To the extent stock options are exercised or restricted shares are awarded from
time to time under the Corporation's Long Term Incentive Plans, the Board of
Directors has approved the purchase, on the open market or in privately
negotiated transactions, of the number of common shares issued. The
Corporation considers these stock repurchases in maintaining its liquidity
position. During the six months ended June 30, 2002, the Corporation purchased
21.7 million common shares for $536.8 million. The Corporation issued 21.7
million common shares upon the exercise of stock options and issuance of
restricted stock. The Corporation received $120.1 million in proceeds from the
exercise of these stock options.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the change in earnings resulting from
fluctuations in interest rates, variability in the yield earned on interest
earning assets and the rate paid on interest-bearing liabilities, and the
differences in repricing intervals between assets and liabilities. Interest
rate changes also impact the valuation of the interest-only strip receivable
and securitization income. 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. Interest rate
sensitive assets/liabilities have yields/rates that can change within a
designated time period due to their maturity, a change in an underlying index
rate, or the contractual ability of the Corporation to change the yield/rate.
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates and differences in the
repricing characteristics between interest rate sensitive assets and
liabilities. The Corporation analyzes its level of interest rate risk using
several analytical techniques. Interest rate risk includes the interest rate
sensitivity of securitization income from securitized loans and the impact of
interest rate swap agreements and foreign exchange swap agreements. The
Corporation uses interest rate swap agreements and foreign exchange swap
agreements to change a portion of fixed-rate funding sources to floating-rate
funding sources to better match the rate sensitivity of the Corporation's
assets. For this reason, the Corporation analyzes its level of interest rate
risk on a managed basis to quantify and capture the full impact of interest
rate risk on the Corporation's earnings.
An analytical technique that the Corporation uses to measure interest rate risk
is simulation analysis. Key assumptions in the Corporation's simulation
analysis include cash flows and maturities of interest rate sensitive
instruments, changes in market conditions, loan volumes and pricing, consumer
preferences, fixed-rate credit card repricings as part of the Corporation's
normal planned business strategy, and management's capital plans. Also
included in the analysis are various actions which the Corporation would
undertake to minimize the impact of adverse movements in interest rates. Based
on the simulation analysis at June 30, 2002, the Corporation could experience a
decrease in projected net income during the next twelve months of approximately
$65.0 million, if interest rates at the time the simulation analysis was
performed increased 100 basis points over the next 12 months evenly distributed
on the first day of each of the next four quarters. For each incremental 100
basis points introduced into the simulation analysis, the Corporation could
experience an additional decrease of approximately $65.0 million in projected
net income during the next twelve months.
These assumptions are inherently uncertain and, as a result, the analysis
cannot precisely predict the impact of higher interest rates on net income.
Actual results would differ from simulated results due to timing, magnitude,
and frequency of interest rate changes, changes in market conditions, and
management strategies to offset the Corporation's potential exposure, among
other factors. 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; its ability to do so in the future
will depend on changes in interest rates, market conditions, and 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
Corporation's net investment in its foreign subsidiaries which is unhedged.
The Corporation uses forward exchange contracts and foreign exchange swap
agreements to reduce its exposure to foreign currency exchange rate risk.
Management reviews the foreign currency exchange rate risk of the Corporation
on a routine basis. During this review, management considers the net impact to
stockholders' equity under various foreign exchange rate scenarios. At
June 30, 2002, the Corporation could experience a decrease in stockholders'
equity, net of tax, of approximately $79.9 million, as a result of a 10%
depreciation of the Corporation's unhedged capital exposure in foreign
subsidiaries to the U.S. dollar position.
The Corporation adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" ("Statement No. 137") and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-an Amendment of FASB Statement No.
133" ("Statement No. 138") on January 1, 2001. The standards required that all
derivative financial instruments be recorded on the Corporation's consolidated
statement of financial condition at fair value and established criteria for
designation and effectiveness of hedging relationships. The Corporation
recognized a $2.5 million (pre-tax) loss upon implementation of Statement No.
133, as amended by Statement No. 137 and Statement No. 138, on January 1, 2001.
The adoption of Statement No. 133 by the Corporation did not affect the
Corporation's hedging strategy.
ASSET SECURITIZATION
In September 2000, Statement No. 140, was issued. Statement No. 140 replaces
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement No. 125"), and revised the standards for accounting for
securitizations and other transfers of financial assets and collateral and
required certain disclosures, but it carried over most of Statement No. 125's
provisions without reconsideration. The Corporation adopted Statement No.
140's revised accounting standards for all transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
implementation of Statement No. 140 did not have a material impact on the
Corporation's consolidated financial statements.
Asset securitization is the process whereby loan principal receivables are
converted into securities generally referred to as asset-backed securities.
The securitization of the Corporation's loan principal receivables is
accomplished primarily through the public and private issuance of these asset-
backed securities. Asset securitization removes loan principal receivables
from the consolidated statement of financial condition through the sale of loan
principal receivables, generally to a trust. The trust then sells undivided
interests to investors that entitle the investors to specified cash flows
generated from the securitized loan principal receivables. As loan principal
receivables are securitized, the Corporation's on-balance-sheet funding needs
are reduced by the amount of loans securitized.
After a securitization, the Corporation continues to own and service the
accounts that generate the loan principal receivables. In addition, the
Corporation also sells the rights to new loan principal receivables, including
most fees generated by the accounts and payments received from the accounts.
The trust sells undivided interests in the trust to investors, while the
Corporation retains the remaining undivided interest. The senior classes of
the asset-backed securities receive a AAA credit rating at the time of
issuance. This AAA credit rating is generally achieved through the sale of
lower-rated subordinated classes of asset-backed securities. The Corporation
receives a servicing fee for servicing the accounts. The Corporation maintains
retained interests in its securitization transactions, which are included in
accounts receivable from securitization in the consolidated statement of
financial condition. The investors and providers of credit enhancement have a
lien on a portion of these retained interests. The Corporation has no further
obligation to provide funding support to either the investors or the trusts if
the securitized loans are not paid when due.
The trusts are qualified special purpose entities as defined under Statement
No. 140. To meet the criteria to be considered a qualifying special purpose
entity, a trust must be demonstrably distinct from the Corporation and have
activities that are significantly limited and entirely specified in the legal
documents that established the trust. The Corporation cannot change the
activities that the trust can perform. These activities may only be changed by
a majority of the beneficial interest holders, not including the Corporation.
As qualifying special purpose entities under Statement No. 140, the trusts'
assets and liabilities are not consolidated in the statement of financial
condition of the Corporation. The trusts are administered by an independent
trustee.
During the revolving period, which generally ranges from 24 months to 120
months, the trust makes no principal payments to the investors. Instead, the
trust uses principal payments received on the accounts to purchase new loan
principal receivables generated by these accounts, in accordance with the terms
of the transaction, so that the principal dollar amount of the investors'
undivided interest remains unchanged. Once the revolving period ends, the
amortization period begins and the trust distributes principal payments to the
investors according to the terms of the transaction. When the trust allocates
principal payments to the investors, the Corporation's on-balance-sheet loan
receivables increase by the amount of any new purchases or cash advance
activity on the accounts.
In July 2001, the Financial Accounting Standards Board issued Technical
Bulletin No. 01-1, "Effective Date for Certain Financial Institutions of
Certain Provisions of Statement No. 140 Related to the Isolation of Transferred
Financial Assets" ("Technical Bulletin No. 01-1"). Technical Bulletin No. 01-1
applies to single-step securitization structures utilized by the Corporation
and clarifies certain isolation criteria related to the transfer of loan
receivables that are required by Statement No. 140 to account for asset
securitizations as sales. Technical Bulletin No. 01-1 delayed the effective
date of Statement No. 140 as it applies to single-step securitization
structures for transactions occurring after December 31, 2001. Technical
Bulletin No. 01-1 also provides an extended transition period until June 30,
2006, for conversion of existing single-step master trust securitization
structures to allow issuers, if necessary, additional time to obtain sufficient
approvals from the beneficial interest holders to convert to a two-step
securitization structure and continue to meet the isolation criteria required
by Statement No. 140 to achieve sales treatment. The Corporation believes that
the required changes in its securitization structures are not significant, and
that the implementation of any required changes will not have a material impact
on the Corporation's consolidated financial statements. In January 2002, the
State of Delaware passed legislation that should enable the Corporation to use
a single-step securitization structure and continue to meet the isolation
criteria of Statement No. 140, thereby maintaining sales treatment using a
single-step securitization structure.
During the three and six months ended June 30, 2002, the Corporation
securitized credit card loan receivables totaling $4.9 billion and $7.0
billion, while $2.5 billion and $4.8 billion of previously securitized credit
card loan receivables amortized back into the Corporation's loan portfolio.
Included in the securitization activity during the three months ended June 30,
2002 is CAD$500.0 million (approximately $330.8 million) of credit card loan
receivables issued by MBNA Canada and EUR775.5 million (approximately $770.1
million) of credit card loan receivables issued by MBNA Europe. The total
amount of securitized loans was $75.6 billion or 75.6% of managed loans at
June 30, 2002, compared to $72.9 billion or 74.7% at December 31, 2001. An
additional $5.7 billion of previously securitized loans is scheduled to
amortize during the remainder of 2002. The amortization amount is based upon
estimated amortization periods, which are subject to change.
Table 11 shows the Corporation's securitized loans distribution.
TABLE 11: SECURITIZED LOANS DISTRIBUTION
(dollars in thousands)
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
Securitized Loans
Domestic:
Credit card.................................. $ 62,138,589 $ 60,501,860
Other consumer............................... 5,704,388 5,702,658
------------ ------------
Total domestic securitized loans........... 67,842,977 66,204,518
Foreign:
Credit card.................................. 7,740,563 6,657,969
------------ ------------
Total foreign securitized loans............ 7,740,563 6,657,969
------------ ------------
Total securitized loans.................... $ 75,583,540 $ 72,862,487
============ ============
Distribution of principal to investors may begin sooner than the scheduled
amortization period if the average annualized yield (generally including
interest income, interchange income, charged-off loan recoveries and other
fees) for three consecutive months drops below a minimum yield (generally equal
to the sum of the coupon rate payable to investors, contractual servicing
fees,and principal credit losses during the period) or certain other events
occur.
Table 12 shows summarized yields for each trust for the three-month period
ended June 30, 2002. The yield in excess of minimum yield for each of the
trusts is presented on a cash basis and includes various credit card or other
fees as specified in the securitization agreements. If the yield in excess of
minimum yield falls below 0%, for a contractually specified period, generally a
three-month average, then the securitization will begin to amortize earlier
than its scheduled contractual amortization date.
TABLE 12: SECURITIZATION TRUST YIELDS IN EXCESS OF MINIMUM YIELD DATA (a)
(dollars in thousands)
Number Average Average
Investor of Series Annualized Minimum
Principal in Trust Yield Yield
----------- --------- ---------- -------
(unaudited)
MBNA Master Credit Card Trust II.. $43,305,638 61 17.79% 9.86%
UK Receivables Trust.............. 3,894,555 9 18.96 11.75
Gloucester Credit Card Trust...... 1,786,185 8 18.41 9.66
MBNA Master Consumer Loan Trust... 5,560,278 3 (b) (b)
MBNA Triple A Master Trust........ 1,500,000 2 17.74 9.81
MBNA Credit Card Master Note
Trust (c)........................ 15,756,175 25 17.86 9.99
UK Receivables Trust II........... 1,908,921 3 19.06 11.66
Yield in Excess of Minimum (a)
--------------------------------
Series Range
Weighted --------------------
Average High Low
---------- --------- ---------
(unaudited)
MBNA Master Credit Card Trust II.. 7.93% 8.30% 5.11%
UK Receivables Trust.............. 7.21 7.98 5.14
Gloucester Credit Card Trust...... 8.75 9.65 7.69
MBNA Master Consumer Loan Trust... (b) (b) (b)
MBNA Triple A Master Trust........ 7.93 7.93 7.93
MBNA Credit Card Master Note
Trust (c)........................ 7.87 7.87 7.87
UK Receivables Trust II........... 7.40 7.60 7.30
(a) The Yield in Excess of Minimum Yield represents the trust's average
annualized yield less its average minimum yield.
(b) The MBNA Master Consumer Loan Trust yield in excess of minimum yield does
not impact the distribution of principal to investors. Distribution to
investors for transactions in this trust may begin earlier than the
scheduled time if the credit enhancement amount falls below a predetermined
contractual level. As a result, its yields are excluded from Table 12.
(c) MBNA Credit Card Master Note Trust issues a series of notes called the
MBNAseries. Through the MBNAseries, MBNA Credit Card Master Note Trust
issues specific classes of notes which contribute on a prorated basis to
the calculation of the average yield in excess of minimum. This average
yield in excess of minimum yield impacts the distribution of principal to
investors of all classes within the MBNAseries.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Several U.S. merchants have filed class action suits against MasterCard
International ("MasterCard") and Visa U.S.A., Inc. ("Visa") under U.S. federal
antitrust law. MBNA Corporation ("the Corporation") and its affiliates are not
parties to these suits. However, the Corporation's banking subsidiaries,
including MBNA America Bank, N.A., are member banks of MasterCard and Visa and
thus may be affected by these suits. The following description of the suits is
based primarily on MasterCard's disclosure in Post-Effective Amendment No. 2 to
MasterCard's Registration Statement on Form S-4 filed with the Securities
Exchange Commission on May 7, 2002.
Commencing in October 1996, several class action suits were brought by a number
of U.S. merchants against MasterCard and Visa. Those suits were later
consolidated in the U.S. District Court for the Eastern District of New York.
The plaintiffs challenge MasterCard's and Visa's rules requiring merchants who
accept their credit cards to accept their debit cards. Plaintiffs claim that
MasterCard and Visa unlawfully have tied acceptance of debit cards to
acceptance of credit cards and have conspired to monopolize the point-of-sale
debit card market. Plaintiffs allege that the plaintiff class has been forced
to pay unlawfully high prices for debit and credit card transactions. There
are related consumer class actions pending in two state courts that have been
stayed pending developments in the merchants' suits. MasterCard and Visa have
denied the merchants' allegations. The district court granted the plaintiffs'
motion for class certification, a panel of the Second Circuit Court of Appeals
affirmed, and on June 10, 2002, the U.S. Supreme Court denied MasterCard's and
Visa's petition for a writ of certiorari on the issue of class certification.
Recent press reports place the plaintiffs' estimated damage claims at
approximately $13.0 billion to $15.0 billion, or more, before mandatory
trebling under U.S. federal antitrust law. These figures reflect claims
asserted and should not be construed as an acknowledgement of the reliability
of the figures presented. Trial is currently scheduled for April 2003.
The Corporation and its affiliates are not a party to these suits and therefore
will not be directly liable for any amount related to these suits. Also, the
Corporation's banking subsidiaries have issued only credit cards and not debit
cards, and it is the acceptance of debit cards which is at issue in these
suits. However, if a judgment is entered against MasterCard and Visa, then the
associations may seek to assess the associations' member banks, including
the Corporation's banking subsidiaries, to obtain funds to satisfy the
judgment. In addition, because a judgment against the associations could
adversely affect the business operations of the member banks, they may be
compelled by business necessity to assist MasterCard and Visa to satisfy the
judgment. The outcome of these suits, the amount of any possible judgment
against the associations, and the effects on the associations' member banks,
including the Corporation's banking subsidiaries, resulting from these suits,
cannot be determined at this time.
In February 2001, Midland Credit Management Inc. and certain of its affiliates
filed a lawsuit against the Bank in the Superior Court of the State of Arizona,
County of Maricopa. The plaintiffs purchased charged-off loans from the Bank
in late 1999 and early 2000. They claim that Bank representatives committed
fraud and made misrepresentations about the Bank's collection efforts on the
loans that affected the value of the loans. They claim damages for $60.0
million based on the difference between what they expected to collect and
actually collected on the loans trebled under the Arizona RICO statute. The
Bank denies that its representatives made misrepresentations to plaintiffs and
disputes the plaintiffs' damages calculations. Trial is scheduled for
October 2002.
Item 3 of the Corporation's 2001 Annual Report on Form 10-K includes a
description of the Corporation's other pending legal proceedings.
The Corporation, the Bank and their affiliates are commonly subject to various
pending or threatened legal proceedings, including certain class actions,
arising out of the normal course of business. In view of the inherent
difficulty of predicting the outcome of such matters, the Corporation cannot
state what the eventual outcome of these matters will be. However, the
Corporation believes, based on current knowledge and after consultation with
counsel, that the outcome of such matters will not have a material adverse
effect on the Corporation's consolidated financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- -----------------------------------------------------
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
99.1 Certification of Principal Executive Officer pursuant
to Section 1350 of Chapter 63 of title 18, United
States Code
99.2 Certification of Principal Financial Officer pursuant
to Section 1350 of Chapter 63 of title 18, United
States Code
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
For the Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,305,603 $ 1,107,665
Fixed charges.................................... 799,687 938,565
Interest capitalized during period, net of
amortization of previously capitalized interest. (3,769) (2,222)
------------ ------------
Earnings, for computation purposes............... $ 2,101,521 $ 2,044,008
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 797,322 $ 935,139
Portion of rents representative of the interest
factor.......................................... 2,365 3,426
------------ ------------
Fixed charges.................................... 799,687 938,565
Preferred stock dividend requirements............ 11,224 11,353
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 810,911 $ 949,918
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.59 2.15
For the Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,305,603 $ 1,107,665
Fixed charges.................................... 171,128 195,820
Interest capitalized during period, net of
amortization of previously capitalized interest. (3,779) (2,232)
------------ ------------
Earnings, for computation purposes............... $ 1,472,952 $ 1,301,253
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 168,763 $ 192,394
Portion of rents representative of the interest
factor.......................................... 2,365 3,426
------------ ------------
Fixed charges.................................... 171,128 195,820
Preferred stock dividend requirements............ 11,224 11,353
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 182,352 $ 207,173
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 8.08 6.28
The ratio of earnings to combined fixed charges and preferred stock dividend
requirements is computed by dividing (i) income before income taxes and fixed
charges less interest capitalized during such period, net of amortization of
previously capitalized interest, by (ii) fixed charges and preferred stock
dividend requirements. Fixed charges consist of interest, expensed or
capitalized, on borrowings (including or excluding deposits, as applicable),
and the portion of rental expense which is deemed representative of interest.
The preferred stock dividend requirements represent the pre-tax earnings which
would have been required to cover such dividend requirements on the
Corporation's Preferred Stock outstanding.
Exhibit 99.1 Chief Executive Officer Certification
MBNA CORPORATION
This certification is being furnished to the Securities and Exchange Commission
solely in connection with Section 1350 of Chapter 63 of title 18, United States
Code, "Failure of corporate officers to certify financial reports", and is not
being filed as part of MBNA Corporation's Form 10-Q for the quarterly period
ended June 30, 2002 accompanying this certification.
I, Alfred Lerner, Chairman and Chief Executive Officer of MBNA Corporation,
certify that MBNA Corporation's Form 10-Q for the quarterly period ended
June 30, 2002, fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and that the information contained in
this report fairly presents, in all material respects, the financial condition
and results of operations of MBNA Corporation.
Date: August 13, 2002 By: /s/ Alfred Lerner
-------------------------------
Alfred Lerner
Chairman and Chief Executive Officer
Exhibit 99.2 Chief Financial Officer Certification
MBNA CORPORATION
This certification is being furnished to the Securities and Exchange Commission
solely in connection with Section 1350 of Chapter 63 of title 18, United States
Code, "Failure of corporate officers to certify financial reports", and is not
being filed as part of MBNA Corporation's Form 10-Q for the quarterly period
ended June 30, 2002 accompanying this certification.
I, M. Scot Kaufman, Senior Executive Vice President and Chief Financial Officer
of MBNA Corporation, certify that MBNA Corporation's Form 10-Q for the
quarterly period ended June 30, 2002, fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in this report fairly presents, in all material respects,
the financial condition and results of operations of MBNA Corporation.
Date: August 13, 2002 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer
REPORTS ON FORM 8-K
1. Report dated April 11, 2002, reporting MBNA Corporation's earnings
release for the first quarter of 2002.
2. Report dated April 24, 2002, reporting the securitization of $750.0
million of credit card loan receivables by MBNA America Bank, N.A.
3. Report dated April 30, 2002, reporting the securitization of CAD$500.0
million of credit card loan receivables by MBNA Canada Bank.
4. Report dated April 30, 2002, reporting the net credit losses and
loan delinquency ratios for MBNA America Bank, N.A., for its loan
receivables and managed loans for April 2002.
5. Report dated May 9, 2002, reporting the securitization of $1.0
billion of credit card loan receivables by MBNA America Bank, N.A.
6. Report dated May 30, 2002, reporting the securitization of $750.0
million of credit card loan receivables by MBNA America Bank, N.A.
7. Report dated May 31, 2002, reporting the net credit losses and
loan delinquency ratios for MBNA America Bank, N.A., for its loan
receivables and managed loans for May 2002.
8. Report dated June 12, 2002, reporting the securitization of $250.0
million of credit card loan receivables by MBNA America Bank, N.A.
9. Report dated June 26, 2002, reporting the securitization of $750.0
million of credit card loan receivables by MBNA America Bank, N.A.
10. Report dated June 27, 2002, reporting the securitization of EUR775.5
million of credit card loan receivables by MBNA Europe Bank Limited.
11. Report dated June 30, 2002, reporting the net credit losses and
loan delinquency ratios for MBNA America Bank, N.A., for its loan
receivables and managed loans for June 2002.
12. Report dated July 11, 2002, reporting MBNA Corporation's earnings
release for the second quarter of 2002.
13. Report dated July 31, 2002, reporting the securitization of $400.0
million of credit card loan receivables by MBNA America Bank, N.A.
14. Report dated July 31, 2002, reporting the securitization of $700.0
million of credit card loan receivables by MBNA America Bank, N.A.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBNA CORPORATION
Date: August 13, 2002 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer