UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 2002
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
September 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Income - 3
For the Three and Nine Months Ended September 30, 2002
and 2001 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Nine Months Ended September 30, 2002 and 2001
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Nine Months Ended September 30, 2002 and 2001
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations (unaudited)
Item 3. Quantitative and Qualitative Disclosure About Market Risk 77
Item 4. Controls and Procedures 77
Part II - Other Information
Item 1. Legal Proceedings 78
Item 6. Exhibits and Reports on Form 8-K 80
Signature 104
Certifications 105
ITEM 1.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
ASSETS
Cash and due from banks......................... $ 1,007,501 $ 962,118
Interest-earning time deposits in other banks... 2,076,491 1,676,863
Federal funds sold.............................. 2,005,000 1,354,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $3,405,245 and $3,077,711 at
September 30, 2002 and December 31, 2001,
respectively)................................ 3,447,467 3,106,884
Held-to-maturity (market value of $491,285
and $426,317 at September 30, 2002 and
December 31, 2001, respectively)............. 485,254 439,987
Loans held for securitization................... 8,739,327 9,929,948
Loan portfolio:
Credit card................................... 9,328,647 8,261,575
Other consumer................................ 8,268,388 6,442,041
------------- -------------
Total loan portfolio........................ 17,597,035 14,703,616
Reserve for possible credit losses............ (983,374) (833,423)
------------- -------------
Net loan portfolio.......................... 16,613,661 13,870,193
Premises and equipment, net..................... 2,157,667 2,112,139
Accrued income receivable....................... 333,000 369,383
Accounts receivable from securitization......... 8,313,066 7,495,501
Intangible assets, net.......................... 3,160,871 2,582,163
Prepaid expenses and deferred charges........... 446,127 344,692
Other assets.................................... 1,847,047 1,204,074
------------- -------------
Total assets................................ $ 50,632,479 $ 45,447,945
============= =============
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................. $ 21,638,276 $ 19,792,466
Money market deposit accounts................. 7,253,121 6,271,850
Noninterest-bearing deposits.................. 979,034 948,440
Interest-bearing transaction accounts......... 45,129 49,234
Savings accounts.............................. 183,242 32,755
------------- -------------
Total deposits.............................. 30,098,802 27,094,745
Short-term borrowings........................... 1,307,880 1,774,816
Long-term debt and bank notes................... 8,264,145 6,867,033
Accrued interest payable........................ 293,066 226,653
Accrued expenses and other liabilities.......... 2,126,476 1,685,980
------------- -------------
Total liabilities........................... 42,090,369 37,649,227
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at September 30, 2002 and
December 31, 2001)............................. 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 1,277,671,875 shares
issued and outstanding at September 30, 2002
and December 31, 2001)......................... 12,777 12,777
Additional paid-in capital...................... 2,234,813 2,529,563
Retained earnings............................... 6,259,962 5,304,725
Accumulated other comprehensive income.......... 34,472 (48,433)
------------- -------------
Total stockholders' equity.................. 8,542,110 7,798,718
------------- -------------
Total liabilities and stockholders' equity.. $ 50,632,479 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Loan portfolio................ $ 511,878 $ 458,208 $1,466,079 $1,315,359
Loans held for securitization. 237,566 240,983 797,596 731,930
Investment securities:
Taxable..................... 32,653 40,963 103,378 126,783
Tax-exempt.................. 449 675 1,428 2,570
Time deposits in other banks.. 12,056 16,152 35,864 56,511
Federal funds sold............ 8,679 12,019 26,592 45,916
Other interest income......... 84,142 98,036 267,805 280,406
---------- ---------- ---------- ----------
Total interest income...... 887,423 867,036 2,698,742 2,559,475
INTEREST EXPENSE
Deposits...................... 313,826 359,816 942,385 1,102,561
Short-term borrowings......... 11,356 8,313 31,884 12,618
Long-term debt and bank notes. 79,970 83,204 224,109 268,766
---------- ---------- ---------- ----------
Total interest expense..... 405,152 451,333 1,198,378 1,383,945
---------- ---------- ---------- ----------
NET INTEREST INCOME........... 482,271 415,703 1,500,364 1,175,530
Provision for possible credit
losses....................... 288,195 314,322 922,520 855,378
---------- ---------- ---------- ----------
Net interest income after
provision for possible
credit losses................ 194,076 101,381 577,844 320,152
OTHER OPERATING INCOME
Securitization income......... 1,402,121 1,547,483 4,106,681 4,155,511
Interchange................... 93,474 71,944 255,988 217,893
Credit card fees.............. 88,761 83,580 280,186 212,831
Other consumer loan fees...... 20,610 25,626 72,591 66,215
Insurance..................... 43,814 38,309 130,581 97,538
Other......................... 19,365 38,672 52,013 84,114
---------- ---------- ---------- ----------
Total other operating
income.................... $1,668,145 $1,805,614 $4,898,040 $4,834,102
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee
benefits..................... $ 501,713 $ 477,571 $1,445,927 $1,356,087
Occupancy expense of premises. 43,997 39,493 128,150 113,738
Furniture and equipment
expense...................... 60,496 54,424 173,343 161,752
Other......................... 628,189 568,933 1,795,035 1,648,438
---------- ---------- ---------- ----------
Total other operating
expense................... 1,234,395 1,140,421 3,542,455 3,280,015
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.... 627,826 766,574 1,933,429 1,874,239
Applicable income taxes....... 229,784 288,232 707,635 704,714
---------- ---------- ---------- ----------
NET INCOME.................... $ 398,042 $ 478,342 $1,225,794 $1,169,525
========== ========== ========== ==========
EARNINGS PER COMMON SHARE..... $ .31 $ .37 $ .95 $ .91
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION............ .30 .36 .93 .88
=============================================================================
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-$.20 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 24,015 - 240
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (24,015) - (240)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 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-$.18 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 13,389 - 134
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (13,423) - (134)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 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................ - 1,225,794 - 1,225,794
Other comprehensive
income, net of tax....... - - 82,905 82,905
------------
Comprehensive income........ 1,308,699
------------
Cash dividends:
Common-$.20 per share..... - (259,897) - (259,897)
Preferred................. - (10,660) - (10,660)
Exercise of stock options
and other awards........... 128,131 - - 128,371
Stock option tax benefit.... 125,363 - - 125,363
Amortization of deferred
compensation expense....... 36,267 - - 36,267
Acquisition and retirement
of common stock............ (584,511) - - (584,751)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2002. $2,234,813 $6,259,962 $ 34,472 $ 8,542,110
========== ========== ============= ============
BALANCE, DECEMBER 31, 2000.. $2,721,691 $3,931,248 $ (38,524) $ 6,627,278
Comprehensive income:
Net income................ - 1,169,525 - 1,169,525
Other comprehensive
income, net of tax....... - - 11,286 11,286
------------
Comprehensive income........ 1,180,811
------------
Cash dividends:
Common-$.18 per share..... - (230,005) - (230,005)
Preferred................. - (10,622) - (10,622)
Exercise of stock options
and other awards........... 77,075 - - 77,209
Stock option tax benefit.... 61,605 - - 61,605
Amortization of deferred
compensation expense....... 23,627 - - 23,627
Acquisition and retirement
of common stock............ (323,778) - - (323,912)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2001. $2,560,220 $4,860,146 $ (27,238) $ 7,405,991
========== ========== ============= ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Nine Months
Ended September 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 1,225,794 $ 1,169,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 922,520 855,378
Depreciation, amortization, and accretion....... 541,055 528,373
Benefit for deferred income taxes............... (100,201) (97,391)
Decrease (increase) in accrued income receivable 41,162 (1,809)
Increase in accounts receivable from
securitization................................. (799,890) (2,535,633)
Increase in accrued interest payable............ 62,933 19,439
Increase in other operating activities.......... 231,325 323,062
------------ ------------
Net cash provided by operating activities......... 2,124,698 260,944
INVESTING ACTIVITIES
Net increase in money market instruments.......... (1,026,783) (1,993,292)
Proceeds from maturities of investment securities
available-for-sale............................... 956,296 1,243,103
Proceeds from sale of investment securities
available-for-sale............................... 13,126 505
Purchases of investment securities
available-for-sale............................... (1,293,567) (1,487,416)
Proceeds from maturities of investment securities
held-to-maturity ................................ 26,028 16,167
Purchases of investment securities
held-to-maturity................................. (71,302) (65,666)
Proceeds from securitization of loans............. 10,822,699 9,423,565
Proceeds from sale of loans....................... 620,355 486,219
Loan portfolio acquisitions....................... (3,980,916) (1,026,610)
Increase in loans due to principal payments to
investors in the Corporation's securitization
transactions .................................... (7,497,789) (4,866,667)
Net loan originations............................. (2,942,564) (3,883,720)
Net purchases of premises and equipment........... (275,704) (452,351)
------------ ------------
Net cash used in investing activities............. $ (4,650,121) $ (2,606,163)
For the Nine Months
Ended September 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing deposits, interest-bearing
transaction accounts, and savings accounts....... $ 1,145,374 $ 897,236
Net increase in time deposits..................... 1,746,036 421,021
Net (decrease) increase in short-term borrowings.. (466,197) 1,092,630
Proceeds from issuance of long-term debt
and bank notes................................... 2,095,395 1,375,952
Maturity of long-term debt and bank notes......... (1,235,708) (793,486)
Proceeds from exercise of stock options
and other awards................................. 128,371 77,209
Acquisition and retirement of common stock........ (584,751) (323,912)
Dividends paid.................................... (257,714) (232,172)
------------ ------------
Net cash provided by financing activities......... 2,570,806 2,514,478
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS............. 45,383 169,259
Cash and cash equivalents at beginning of period.. 962,118 971,469
------------ ------------
Cash and cash equivalents at end of period........ $ 1,007,501 $ 1,140,728
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 1,171,812 $ 1,389,898
============ ============
Income taxes paid................................. $ 642,423 $ 394,581
============ ============
==============================================================================
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 nine months ended September 30, 2002, are not necessarily indicative
of the results that may be expected for the year ended December 31, 2002.
NOTE B: CHANGE IN ACCOUNTING ESTIMATE FOR INTEREST AND FEES
On July 22, 2002, the Federal Financial Institutions Examination Council
("FFIEC") released draft "Account Management and Loss Allowance Guidance"
("FFIEC 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 FFIEC guidance addresses
credit line management, over-limit practices, workout and forbearance
practices, income recognition and loss allowance practices and policy
exceptions. Management believes that the Corporation substantially complies
with the FFIEC guidance for credit line management, over-limit practices,
workout and forbearance practices and policy exceptions as presently proposed
and that adoption of these guidelines would not materially affect its business
operations or earnings.
In September 2002, the Corporation implemented the FFIEC guidance for
uncollectible accrued interest and fees for its managed loan portfolio. As a
result, the Corporation changed its estimate of the value of accrued interest
and fees in September 2002.
Prior to September 2002, the Corporation accrued interest and fees on loan
receivables until the loan receivables were paid or charged off. When loan
receivables were charged off, the Corporation deducted the accrued interest
and fees related to the loan receivables against current period income. Prior
to the change in the estimated value of accrued interest and fees, and
consistent with the treatment of the Corporation's loan receivables, interest
and fee income on securitized loans continued to be recognized until the
securitized loans were either paid or charged off. When the securitized loans
were charged off, the Corporation deducted the accrued interest and fees
against current period securitization income.
The Corporation recognizes interest income based on the amount of the loan
receivables outstanding and their contractual annual percentage rates. The
Corporation also recognizes fees on loan receivables in earnings as the fees
are assessed according to agreements with the Corporation's loan Customers.
Interest income accrued from the Customer's statement billing cycle date to the
end of the month is included in accrued income receivable on the consolidated
statement of financial condition. Interest income and fees are included in
loan receivables in the consolidated statement of financial condition when
billed. The Corporation adjusts the amount of interest income and fee income
recognized in the current period for its estimate of interest and fee income
that it does not expect to collect in subsequent periods through offsetting
adjustments to the respective income captions and loan receivables. The
estimate of uncollectible interest and fees is based on a migration analysis of
delinquent and current loan receivables that will progress through the various
delinquency stages and will ultimately not be collected. The Corporation also
adjusts the estimated value of accrued interest and fees on securitized loans
for the amount of uncollectible interest and fees that are not expected to be
collected with a corresponding adjustment to securitization income. This
estimate is also based on a migration analysis of delinquent and current
securitized loans that will progress through the various delinquency stages and
ultimately not be collected. The accrued interest and fees on securitized
loans is included in accounts receivable from securitization in the
consolidated statement of financial condition.
In accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," this change in the estimated value of accrued interest and fees has
been recorded as a change in accounting estimate in the third quarter of 2002.
The change in the estimated value of accrued interest and fees resulted in a
decrease to income before income taxes of $263.7 million ($167.2 million after
taxes) or $.13 per common share-assuming dilution for the three and nine months
ended September 30, 2002, through a reduction of $66.3 million of interest
income and $197.4 million of other operating income. This change in the
estimated value of accrued interest and fees also reduced ending total loan
receivables by $86.5 million, accrued income receivable by $5.2 million, and
accounts receivable from securitization by $172.0 million. The Corporation's
earnings per common share, excluding the change in the estimated value of
accrued interest and fees, would have been $.44 and $1.08 and earnings per
common share-assuming dilution would have been $.43 and $1.06 for the three and
nine months ended September 30, 2002, respectively. The Corporation does not
expect the change in the estimated value of accrued interest and fees to have a
material effect on earnings in subsequent periods.
NOTE C: 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
October 17, 2002 January 15, 2003 7.50 .46875 5.50 .34380
NOTE D: COMMON STOCK
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 on July 1, 2002.
Accordingly, all common share and per common share data have been adjusted to
reflect this stock split.
During the nine months ended September 30, 2002, 3.0 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 $69.1 million when
issued. At September 30, 2002, the unamortized compensation expense related to
all of the Corporation's outstanding restricted stock awards was $216.0
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
nine months ended September 30, 2002, the Corporation purchased 24.0 million
common shares for $584.8 million. The Corporation issued 24.0 million common
shares upon the exercise of stock options and issuance of restricted stock.
The Corporation received $128.4 million in proceeds from the exercise of these
stock options for the nine months ended September 30, 2002.
On October 17, 2002, the Corporation's Board of Directors declared a quarterly
cash dividend of $.07 per common share, payable January 1, 2003, to
stockholders of record as of December 13, 2002.
NOTE E: 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 Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
(unaudited)
EARNINGS PER COMMON SHARE
Net income........................ $ 398,042 $ 478,342 $1,225,794 $1,169,525
Less: preferred stock dividend
requirements..................... 3,544 3,538 10,660 10,622
--------- --------- ---------- ----------
Net income applicable to common
stock............................ $ 394,498 $ 474,804 $1,215,134 $1,158,903
========= ========= ========== ==========
Weighted average common shares
outstanding (000)................ 1,277,720 1,277,718 1,277,805 1,277,753
========= ========= ========== ==========
Earnings per common share......... $ .31 $ .37 $ .95 $ .91
========= ========= ========== ==========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
Net income........................ $ 398,042 $ 478,342 $1,225,794 $1,169,525
Less: preferred stock dividend
requirements..................... 3,544 3,538 10,660 10,622
--------- --------- ---------- ----------
Net income applicable to common
stock............................ $ 394,498 $ 474,804 $1,215,134 $1,158,903
========= ========= ========== ==========
Weighted average common shares
outstanding (000)................ 1,277,720 1,277,718 1,277,805 1,277,753
Net effect of dilutive stock
options (000).................... 19,692 34,990 26,736 37,874
--------- --------- ---------- ----------
Weighted average common shares
outstanding and common stock
equivalents (000)................ 1,297,412 1,312,708 1,304,541 1,315,627
========= ========= ========== ==========
Earnings per common share-
assuming dilution................ $ .30 $ .36 $ .93 $ .88
========= ========= ========== ==========
There were 45.2 million and 20.7 million common stock options with an average
exercise price of $22.53 and $23.91 per share outstanding for the three and
nine months ended September 30, 2002, respectively, that were not included in
the computation of earnings per common share-assuming dilution as a result of
the stock options' exercise prices being greater than the average market price
of the common shares. The common stock options outstanding for the three
months ended September 30, 2002, excluded from the earnings per common share-
assuming dilution calculation, expire from 2009 through 2012. The common stock
options outstanding for the nine months ended September 30, 2002, excluded from
the earnings per common share-assuming dilution calculation, expire in 2011 and
2012. There were .1 million common stock options with an average exercise
price of $23.72 and $24.12 per share outstanding for the three and nine months
ended September 30, 2001, respectively, that were not included in the
computation of earnings per common share-assuming dilution as a result of the
stock options' exercise prices being greater than the average market price of
the common shares. These stock options expire in 2011.
NOTE F: INVESTMENT SECURITIES
For the nine months ended September 30, 2002, the Corporation sold investment
securities available-for-sale resulting in a realized loss of $95,000 ($62,000
after taxes). For the nine months ended September 30, 2001, the Corporation
sold investment securities available-for-sale resulting in a realized loss of
$36,000 ($23,000 after taxes).
NOTE G: 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 that are determined to have indefinite lives are
no longer amortized, but instead are subject to an annual impairment test. At
September 30, 2002, and December 31, 2001, the Corporation did not have a
material amount of intangible assets with indefinite lives or any other
nonamortizing assets and, as a result, the pro forma net income, pro forma
earnings per common share, and pro forma earnings per common share-assuming
dilution amounts required by Statement No. 142 have not been shown. 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 nine months ended September 30, 2002, the Corporation's income before
income taxes increased $25.8 million and $75.0 million, respectively ($16.4
million and $47.5 million after taxes, respectively), as a result of the
extension of the amortization period. The Corporation's earnings per common
share, excluding the change in amortization period, would have been $.30 and
$.91 and earnings per common share-assuming dilution would have been $.29 and
$.90 for the three and nine months ended September 30, 2002, respectively.
Intangible assets include the value of acquired Customer accounts and all other
intangible assets. The Corporation amortizes its identifiable 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 $4.4 billion at September 30, 2002, and
$3.6 billion at December 31, 2001, and accumulated amortization of $1.2 billion
and $971.7 million at September 30, 2002, and December 31, 2001, respectively.
For the three and nine months ended September 30, 2002, the Corporation
acquired approximately $1.4 billion and $3.2 billion of credit card loan
receivables, respectively. As part of the cost of these acquisitions, the
Corporation recognized an additional $429.1 million and $817.6 million for the
value of acquired Customer accounts for the three and nine months ended
September 30, 2002, respectively.
The Corporation's identifiable intangible assets had total amortization expense
of $92.7 million and $251.7 million for the three and nine months ended
September 30, 2002, as compared to $92.2 million and $282.3 million for the
same periods in 2001, respectively. An additional $96.2 million of unamortized
identifiable intangible assets are scheduled to amortize during the remainder
of 2002 and $382.5 million, $363.6 million, $342.6 million, and $318.2 million
of unamortized identifiable intangible assets are scheduled to amortize during
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 estimated 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. An impairment would result in a
write down of intangible assets on the consolidated statement of financial
condition and an increase in other operating expense on the consolidated
statement of income (see "Critical Accounting Policies").
NOTE H: 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 on charged-off securitized loans 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 trusts 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)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Sale of new loan receivables..................... $ 3,220,437 $ 2,202,403
Accrued interest and fees on securitized loans... 2,018,032 2,216,839
Interest-only strip receivable................... 1,120,585 1,124,063
Accrued servicing fees........................... 652,002 688,185
Cash reserve accounts............................ 471,727 397,954
Other subordinated retained interests............ 626,583 657,246
Other............................................ 203,700 208,811
------------- ------------
Total accounts receivable from securitization.. $ 8,313,066 $ 7,495,501
============= ============
During September 2002, as a result of the change in the estimated value of
accrued interest and fees (for further discussion, see "Note B: Change in
Accounting Estimate for Interest and Fees"), accounts receivable from
securitization was reduced by $172.0 million. This reduction was primarily a
result of a decrease in accrued interest and fees on securitized loans.
The change in the estimated value of accrued interest and fees reduced accrued
interest and fees on securitized loans by $295.9 million. The Corporation also
adjusted the value of the interest-only strip receivable as a result of the
change in the estimated value of the uncollectible accrued interest and fees.
The Corporation has always included an estimate of uncollectible accrued
interest and fees in determining the value of the interest-only strip
receivable. Since the Corporation now recognizes uncollectible interest and
fees in the estimated value of accrued interest and fees on securitized loans,
the estimated value of the interest-only strip receivable was adjusted at
September 30, 2002. The value of uncollectible accrued interest and fees on
securitized loans that are currently owed by the underlying Customer are now
considered in the value of accrued interest and fees on securitized loans.
Accordingly, the estimated value of the interest-only strip receivable now only
considers the impact of uncollectible interest and fees that will be billed to
the underlying Customer in the future. As a result, the estimate of
uncollectible accrued interest and fees was adjusted which caused the interest-
only strip receivable to increase $123.9 million at September 30, 2002.
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 $121.3 million increase and a $39.6 million decrease during the
three and nine months ended September 30, 2002, as compared to a $131.6 million
and a $215.7 million increase for the same periods in 2001, respectively.
Excluding the change in the estimated value of accrued interest and fees, 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, would have been a $2.6 million
and a $163.5 million decrease during the three and nine months ended
September 30, 2002, respectively.
Included in securitization income is the gain from the sale of loan principal
receivables for new securitization transactions that the Corporation recognizes
as sales in accordance with Statement No. 140. The gain from the sale of loan
principal receivables in new securitization transactions is a component of the
net incremental change in the interest-only strip receivable. This gain was
$40.3 million (net of securitization transaction costs of $6.9 million) and
$104.9 million (net of securitization transaction costs of $32.1 million) for
the three and nine months ended September 30, 2002 (on the sale of $3.8 billion
and $10.9 billion of credit card loan principal receivables for the three and
nine months ended September 30, 2002), as compared to $55.9 million (net of
securitization transaction costs of $13.9 million) and $73.3 million (net
of securitization transaction costs of $51.7 million) for the same periods in
2001 (on the sale of $5.0 billion and $9.5 billion of credit card loan
principal receivables for the three and nine months ended September 30, 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 trusts 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, charged-off loan recoveries, gross
credit losses, contractual servicing fees, and the coupon paid to investors.
They are used to determine the excess spread to be earned 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 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 adverse changes presented were selected based on
changes in estimates that the Corporation has experienced. The amount of the
adverse change has been limited to the recorded amount of the interest-only
strip receivable where the hypothetical change exceeds the value of the
interest-only strip receivable. The sensitivities do not reflect actions
management might take to offset the impact of the adverse changes. For
discussion of changes in the excess spread, see "Other Operating Income" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
September 30, 2002 September 30, 2001
--------------------- ---------------------
(unaudited) (unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,022,049 $ 98,536 $1,005,789 $ 119,696
Weighted average life (in years). .35 .85 .35 .96
Loan payment rate
(weighted average rate)......... 13.40% 5.17% 13.59% 4.51%
Impact on fair value of
20% adverse change............ $ 147,124 $ 14,976 $ 144,842 $ 17,848
Impact on fair value of
40% adverse change............ 251,382 25,783 246,275 30,905
Gross credit losses (b)
(weighted average rate)......... 4.92% 8.93% 5.00% 8.67%
Impact on fair value of
20% adverse change............ $ 223,545 $ 73,784 $ 202,043 $ 79,491
Impact on fair value of
40% adverse change............ 447,090 98,536 404,086 119,237
Excess spread (c)
(weighted average rate)......... 4.49% 2.39% 4.95% 2.61%
Impact on fair value of
20% adverse change............ $ 204,410 $ 19,707 $ 201,152 $ 23,939
Impact on fair value
40% adverse change............ 408,820 39,414 402,304 47,878
Discount rate
(weighted average rate)......... 9.00% 9.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,786 $ 1,013 $ 6,157 $ 1,819
Impact on fair value of
40% adverse change............ 9,535 2,009 12,251 3,594
(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 of interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors. At September 30, 2002,
the excess spread included the change in the estimated value of accrued
interest and fees.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
June 30, 2002 June 30, 2001
-------------------- ---------------------
(unaudited) (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
20% adverse change............ $ 129,705 $ 13,665 $ 123,588 $ 16,175
Impact on fair value of
40% adverse change............ 221,487 23,635 212,469 28,004
Gross credit losses (b)
(weighted average rate)......... 4.81% 8.72% 5.00% 7.97%
Impact on fair value of
20% adverse change............ $ 204,082 $ 72,219 $ 198,267 $ 69,319
Impact on fair value of
40% adverse change............ 408,164 90,515 396,532 108,399
Excess spread (c)
(weighted average rate)......... 4.27% 2.18% 4.39% 2.49%
Impact on fair value of
20% adverse change............ $ 181,097 $ 18,161 $ 174,319 $ 21,615
Impact on fair value of
40% adverse change............ 362,192 36,320 348,636 43,228
Discount rate
(weighted average rate)......... 10.00% 10.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,651 $ 1,041 $ 5,462 $ 1,563
Impact on fair value of
40% adverse change............ 9,261 2,064 10,868 3,090
(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 of 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
20% adverse change............ $ 144,892 $ 17,304 $ 99,982 $ 23,224
Impact on fair value of
40% adverse change............ 246,857 29,870 170,920 40,312
Gross credit losses (b)
(weighted average rate)......... 5.25% 8.40% 4.31% 6.17%
Impact on fair value of
20% adverse change............ $ 205,460 $ 74,666 $ 163,314 $ 49,402
Impact on fair value of
40% adverse change............ 410,919 115,644 326,628 98,804
Excess spread (c)
(weighted average rate)......... 5.14% 2.60% 3.73% 3.89%
Impact on fair value of
20% adverse change............ $ 201,684 $ 23,129 $ 139,752 $ 31,096
Impact on fair value of
40% adverse change............ 403,368 46,258 279,504 62,192
Discount rate
(weighted average rate)......... 12.00% 12.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 6,195 $ 1,709 $ 4,212 $ 2,055
Impact on fair value of
40% adverse change............ 12,326 3,378 8,337 4,036
(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 of interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
NOTE I: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more. During the nine months ended September 30, 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 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
Floating-Rate Medium-Term Deposit Notes, priced
at 95 basis points over the ninety-day Bankers
Acceptance Rate, payable quarterly, maturing in 2004
(CAD$15.0 million).................................... 9,503
Fixed-Rate Euro Medium-Term Notes, with an interest
rate of 6.50%, payable annually, maturing in 2007
(EUR500.0 million).................................... 436,901
Floating-Rate Euro Medium-Term Notes, priced at
100 basis points over the three-month Hong Kong
Interbank Offered Rate payable quarterly,
maturing in 2004 (HKD130.0 million)................... 16,660
6.625% Subordinated Notes, payable semi-annually,
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 the 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 nine months ended September 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 with a
total notional amount of $300.0 million related to the issuance of guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures, series D.
During the nine months ended September 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 nine months ended September 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) and $16.7 million (HKD130.0
million), related to the issuance of the Fixed-Rate Euro Medium-Term Notes and
the Floating-Rate Euro Medium-Term Notes, respectively. MBNA Canada Bank
("MBNA Canada") 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 nine months
ended September 30, 2002, qualified as fair value hedges in accordance with
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".) The foreign exchange swap agreements that were entered into during the
nine months ended September 30, 2002, were not designated as accounting hedges.
NOTE J: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(unaudited)
Net income...................... $ 398,042 $ 478,342 $1,225,794 $1,169,525
Other comprehensive income:
Foreign currency translation.. 14,229 30,024 83,703 (11,836)
Net unrealized gains (losses)
on investment securities
available-for-sale and other
financial instruments........ 8,513 14,494 (798) 23,122
--------- --------- ---------- ----------
Other comprehensive income...... 22,742 44,518 82,905 11,286
--------- --------- ---------- ----------
Comprehensive income............ $ 420,784 $ 522,860 $1,308,699 $1,180,811
========= ========= ========== ==========
The components of accumulated other comprehensive income, net of tax, are as
follows:
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
Foreign currency translation..................... $ 7,763 $ (75,940)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments..................................... 26,709 27,507
------------ ------------
Accumulated other comprehensive income........... $ 34,472 $ (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 nine month period ended
September 30, 2002, was primarily related to the strengthening of foreign
currencies against the U.S. dollar.
NOTE K: NEW ACCOUNTING PRONOUNCEMENTS
In October 2002, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions" ("Statement No. 147") was
issued. Statement No. 147 provides guidance on the accounting for the
acquisition of a financial institution and eliminates the specialized
provisions of paragraph 5 of Statement of Financial Accounting Standards No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" for
acquisitions occuring after September 30, 2002. Statement No. 147 also amends
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" to include long-term customer-
relationship intangible assets such as the value of the acquired Customer
accounts in the scope of that Statement. The implementation of Statement No.
147 will not have a material impact on the Corporation's consolidated financial
statements.
ITEM 2.
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, aircraft
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 trusts 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 generates income through finance charges assessed on
outstanding loan receivables, securitization income, interchange income, credit
card and other consumer loan fees, insurance income, 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 relate to 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 that require management
to make significant judgments, estimates, and assumptions have been further
discussed and are included in this report as follows: asset securitization
under "Other Operating Income" and "Asset Securitization," the reserve for
possible credit losses under "Reserve and Provision for Possible Credit
Losses," and intangible assets under "Other Operating Expense." These critical
accounting policies are also discussed below.
Asset Securitization:
The Corporation uses securitization of its loan principal receivables as one
source to meet its funding needs. 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"), when the Corporation securitizes loan
principal receivables, an interest-only strip receivable is recognized which
represents the contractual right to receive from the trust interest and other
revenue less certain costs over the estimated life of the securitized loan
principal receivables.
The Corporation estimates the fair value of the interest-only strip receivable
based on the present value of expected future net revenue flows using
management's judgment in determining certain key assumptions and estimates,
since quoted market prices are generally not available.
These key assumptions and estimates include projections concerning interest
income, late fees, recoveries on charged-off securitized loans, gross credit
losses, contractual servicing fees, and the coupon paid to investors and are
used to determine the excess spread to be earned 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's key assumptions and estimates impacting the interest-only
strip receivable at September 30, 2002, reflect management's judgment as to the
expected excess spread to be earned and payment rates to be experienced. These
estimates are likely to change in the future, as the individual components of
the excess spread and payment rates are sensitive to market and economic
conditions. For example, the rates paid to investors in the Corporation's
securitization transactions are primarily variable in nature, and these rates
are subject to change based on changes in market interest rates. Changes in
market interest rates can also have an impact on the projected interest income
on securitized loans as the Corporation could reprice its portfolio due to
changes in market conditions. Credit loss projections could change in the
future based on the credit quality of the securitized loans, the Corporation's
success at collection efforts, and general economic conditions. Payment rates
could fluctuate based on general economic conditions and competition. Actual
and expected changes in these factors may result in future estimates of the
excess spread and payment rates being materially different than the current
estimates.
The Corporation reviews the key assumptions and estimates used in determining
the fair value of the interest-only strip receivable in the Corporation's
securitization transactions 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 H: Asset Securitization" for the Corporation's
securitization key assumptions and their sensitivities to adverse changes. If
management had made different assumptions, which raised or lowered the excess
spread, the impact of such a change could have had a material impact on the
Corporation's financial position and results of operations. For example, a 20%
change in the excess spread assumption for all securitization trusts would have
resulted in a $224.1 million change in the value of the total interest-only
strip receivable.
Reserve 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 principal
receivables based on a projection of probable future net credit losses. The
Corporation's net credit losses include the principal balance of loans charged
off less current period recoveries and exclude uncollectible 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 reserve and provision for possible credit losses. For
example, if actual loan losses exceeded projected loan losses by a material
amount, the Corporation would likely need to increase the reserve for possible
credit losses through a charge to the consolidated statements of income through
the provision for possible credit losses.
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.
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 estimated 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. An impairment would result in a
write down of intangible assets on the consolidated statement of financial
condition and an increase in other operating expense on the consolidated
statement of income. Currently, the estimated fair value of acquired Customer
accounts exceeds the net book value of acquired Customer accounts. If actual
levels of active account attrition for all acquired portfolios would adversely
change 10%, the estimated fair value of acquired Customer accounts would still
exceed the net book value of acquired Customer accounts.
CHANGE IN ACCOUNTING ESTIMATE FOR INTEREST AND FEES
On July 22, 2002, the Federal Financial Institutions Examination Council
("FFIEC") released draft "Account Management and Loss Allowance Guidance"
("FFIEC 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 FFIEC guidance addresses
credit line management, over-limit practices, workout and forbearance
practices, income recognition and loss allowance practices and policy
exceptions. Management believes that the Corporation substantially complies
with the FFIEC guidance for credit line management, over-limit practices,
workout and forbearance practices and policy exceptions as presently proposed
and that adoption of these guidelines would not materially affect its business
operations or earnings.
In September 2002, the Corporation implemented the FFIEC guidance for
uncollectible accrued interest and fees for its managed loan portfolio. As a
result, the Corporation changed its estimate of the value of accrued interest
and fees in September 2002.
Prior to September 2002, the Corporation accrued interest and fees on loan
receivables until the loan receivables were paid or charged off. When loan
receivables were charged off, the Corporation deducted the accrued interest
and fees related to the loan receivables against current period income. Prior
to the change in the estimated value of accrued interest and fees, and
consistent with the treatment of the Corporation's loan receivables, interest
and fee income on securitized loans continued to be recognized until the
securitized loans were either paid or charged off. When the securitized loans
were charged off, the Corporation deducted the accrued interest and fees
against current period securitization income.
The Corporation recognizes interest income based on the amount of the loan
receivables outstanding and their contractual annual percentage rates. The
Corporation also recognizes fees on loan receivables in earnings as the fees
are assessed according to agreements with the Corporation's loan Customers.
Interest income accrued from the Customer's statement billing cycle date to the
end of the month is included in accrued income receivable on the consolidated
statement of financial condition. Interest income and fees are included in
loan receivables in the consolidated statement of financial condition when
billed. The Corporation adjusts the amount of interest income and fee income
recognized in the current period for its estimate of interest and fee income
that it does not expect to collect in subsequent periods through offsetting
adjustments to the respective income captions and loan receivables. The
estimate of uncollectible interest and fees is based on a migration analysis of
delinquent and current loan receivables that will progress through the various
delinquency stages and will ultimately not be collected. The Corporation also
adjusts the estimated value of accrued interest and fees on securitized loans
for the amount of uncollectible interest and fees that are not expected to be
collected with a corresponding adjustment to securitization income. This
estimate is also based on a migration analysis of delinquent and current
securitized loans that will progress through the various delinquency stages and
ultimately not be collected. The accrued interest and fees on securitized
loans is included in accounts receivable from securitization in the
consolidated statement of financial condition.
In accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," this change in the estimated value of accrued interest and fees has
been recorded as a change in accounting estimate in the third quarter of 2002.
The change in the estimated value of accrued interest and fees resulted in a
decrease to income before income taxes of $263.7 million ($167.2 million after
taxes) or $.13 per common share-assuming dilution for the three and nine months
ended September 30, 2002, through a reduction of $66.3 million of interest
income and $197.4 million of other operating income. This change in the
estimated value of accrued interest and fees also reduced ending total loan
receivables by $86.5 million, accrued income receivable by $5.2 million, and
accounts receivable from securitization by $172.0 million. The Corporation's
earnings per common share, excluding the change in the estimated value of
accrued interest and fees, would have been $.44 and $1.08 and earnings per
common share-assuming dilution would have been $.43 and $1.06 for the three and
nine months ended September 30, 2002, respectively. The Corporation does not
expect the change in the estimated value of accrued interest and fees to have a
material effect on earnings in subsequent periods.
The Corporation's change in the estimated value of accrued interest and fees
resulted in a decrease to managed and reported delinquency of 30 basis points
and 40 basis points, respectively. The change also reduced the managed net
interest margin by 101 basis points and 35 basis points for the three and nine
months ended September 30, 2002, respectively, and reduced the net interest
margin by 70 basis points and 25 basis points for the three and nine months
ended September 30, 2002, respectively. Managed and net charge-off ratios
were not significantly affected by the change.
The change in the estimated value of accrued interest and fees reduced the
Corporation's Tier 1 Capital ratio by 42 basis points, Total Capital ratio by
41 basis points, and Leverage ratio by 42 basis points at September 30, 2002.
The Corporation continues to be "well-capitalized" as defined under the
federal bank regulatory guidelines.
EARNINGS SUMMARY
Net income for the three months ended September 30, 2002, decreased 16.8% to
$398.0 million or $.30 per common share from the same period in 2001. Net
income for the nine months ended September 30, 2002, increased 4.8% to $1.2
billion or $.93 per common share from the same period in 2001. Excluding the
change in the estimated value of accrued interest and fees, net income for the
three months ended September 30, 2002, would have increased 18.2% to $565.2
million or $.43 per common share from $478.3 million or $.36 per common share
for the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, net income for the nine months ended September 30,
2002, would have increased 19.1% to $1.4 billion or $1.06 per common share as
compared to $1.2 billion or $.88 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 decrease in net income for the three months ended September 30, 2002, was
primarily attributable to the change in the estimated value of accrued interest
and fees which reduced net income by $167.2 million, partially offset by growth
in the Corporation's managed loans outstanding. The increase in net income for
the nine months ended September 30, 2002, was primarily attributable to the
growth in the Corporation's managed loans outstanding and an increase in
managed net interest margin, partially offset by the change in the estimated
value of accrued interest and fees and 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 11.0% to $101.9 billion and 10.1% to $98.8 billion for the three and
nine months ended September 30, 2002, as compared to $91.9 billion and $89.7
billion for the same periods in 2001, respectively. Total managed loans at
September 30, 2002, were $102.8 billion, a $10.2 billion increase from
September 30, 2001. Excluding the change in the estimated value of accrued
interest and fees, total managed loans would have been $103.2 billion, a $10.6
billion increase from September 30, 2001.
The managed net interest margin was 7.66% and 8.40% for the three and nine
months ended September 30, 2002, respectively, as compared to 8.57% and 8.21%
for the same periods in 2001. Excluding the change in the estimated value of
accrued interest and fees, the managed net interest margin would have been
8.67% and 8.75% for the three and nine months ended September 30, 2002,
respectively. The decrease of 91 basis points for the three months ended
September 30, 2002, from the same period in 2001 reflects the change in the
estimated value of accrued interest and fees, partially offset by actions of
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 increase
of 19 basis points for the nine months ended September 30, 2002, from the same
period in 2001 reflects actions of the FOMC throughout 2001, which impacted
overall market interest rates and decreased the Corporation's on-balance-sheet
and securitization funding costs, partially offset by the change in the
estimated value of accrued interest and fees. The Corporation's managed credit
losses as a percentage of average managed loans for the three and nine months
ended September 30, 2002, were 4.84% and 4.97%, compared to 4.90% and 4.69% for
the same periods in 2001, respectively. Managed credit losses as a percentage
of average managed loans for the three and nine months ended September 30,
2002, were not significantly affected by the change in the estimated value of
accrued interest and fees.
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 on charged-off
securitized loans, gross credit losses, and other trust expenses into
securitization income. The Corporation had $76.5 billion of securitized loans
at September 30, 2002, as compared to $73.5 billion at September 30, 2001.
During the three and nine months ended September 30, 2002, the Corporation
securitized $3.8 billion and $10.9 billion of credit card loan receivables as
compared to $5.0 billion and $9.5 billion of credit card loan receivables
during the same periods in 2001, respectively. The Corporation's securitized
loans decreased and the Corporation's loan receivables increased $2.7 billion
and $7.5 billion during the three and nine months ended September 30, 2002,
respectively, when certain securitization transactions were in their scheduled
amortization period, and the trusts used principal payments on securitized loan
principal receivables to pay the investors rather than to purchase new loan
receivables from the Corporation. The Corporation's securitized loans
decreased and the Corporation's loan receivables increased $1.6 billion and
$4.9 billion during the three and nine months ended September 30, 2001,
respectively, when certain securitization transactions were in their scheduled
amortization period and the trusts used principal payments on securitized loan
receivables to pay the investors rather than to purchase new loan principal
receivables from the Corporation.
The Corporation's return on average total assets for the three and nine months
ended September 30, 2002, was 3.21% and 3.49%, as compared to 4.58% and 3.93%
for the same periods during 2001, respectively. Excluding the change in the
estimated value of accrued interest and fees, the Corporation's return on
average total assets for the three and nine months ended September 30, 2002,
would have been 4.56% and 3.97%, respectively. The Corporation's return on
average stockholders' equity was 18.55% and 20.26% for the three and nine
months ended September 30, 2002, as compared to 26.49% and 22.77% for the same
periods in 2001, respectively. Excluding the change in the estimated value of
accrued interest and fees, the Corporation's return on average stockholders'
equity would have been 26.35% and 23.02% for the three and nine months ended
September 30, 2002, 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, was $482.5 million
for the three months ended September 30, 2002, as compared to $416.1 million
from the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, net interest income, on a fully taxable equivalent
basis, would have been $548.8 million. Average interest-earning assets
increased $7.7 billion for the three months ended September 30, 2002, from the
same period in 2001, primarily as a result of an increase in average loan
receivables of $5.8 billion and an increase in average investment securities
and money market instruments of $1.2 billion. The yield on average interest-
earning assets was 9.35% for the three months ended September 30, 2002, as
compared to 11.47% for the same period in 2001. Excluding the change in the
estimated value of accrued interest and fees, the yield on average interest-
earning assets would have been 10.05% for the three months ended September 30,
2002, average interest-bearing liabilities increased $6.0 billion for the
three months ended September 30, 2002, from the same period in 2001, as
a result of an increase of $3.5 billion in average interest-bearing deposits
and an increase of $2.5 billion in average borrowed funds. The decrease in the
rate paid on average interest-bearing liabilities of 140 basis points to 4.28%
for the three months ended September 30, 2002, from 5.68% 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, was $1.5 billion for
the nine months ended September 30, 2002, as compared to $1.2 billion for the
same period in 2001. Excluding the change in the estimated value of accrued
interest and fees, net interest income, on a fully taxable basis, would have
been $1.6 billion for the nine months ended September 30, 2002. Average
interest-earning assets increased $7.4 billion for the nine months ended
September 30, 2002, as compared to the same period in 2001. The increase in
average interest-earning assets for the nine months ended September 30, 2002,
was primarily a result of an increase in average loan receivables of $5.1
billion and an increase in average investment securities and money market
instruments of $1.6 billion. The yield on average interest-earning assets was
9.90% for the nine months ended September 30, 2002, as compared to 11.78% for
the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, the yield on average interest-earning assets would
have been 10.14%. Average interest-bearing liabilities increased $5.5 billion
for the nine months ended September 30, 2002, as compared to the same period in
2001. The increase in average interest-bearing liabilities for the nine months
ended September 30, 2002, as compared to the same period in 2001 was a result
of an increase of $2.9 billion in average interest-bearing deposits and an
increase of $2.6 billion in average borrowed funds. The rate paid on average
interest-bearing liabilities decreased 163 basis points to 4.46% for the nine
months ended September 30, 2002, from the same period in 2001.
The Corporation's net interest margin, on a fully taxable equivalent basis, was
5.08% and 5.50%, respectively, for the three and nine months ended
September 30, 2002, as compared to 5.50% and 5.41% for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the net interest margin, on a fully taxable equivalent
basis, would have been 5.78% and 5.75% for the three and nine months ended
September 30, 2002. 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 42 basis point decrease in the net interest
margin for the three months ended September 30, 2002, was primarily a result of
the change in the estimated value of accrued interest and fees, partially
offset by actions by the FOMC throughout 2001, which impacted overall market
interest rates and decreased the Corporation's funding costs. The 9 basis
point increase in the net interest margin for the nine months ended
September 30, 2002, was primarily a result of actions taken by the FOMC
throughout 2001, which impacted overall market interest rates and decreased the
Corporation's funding costs, partially offset by the change in the estimated
value of accrued interest and fees.
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
20.0% and 21.3% for the three and nine months ended September 30, 2002, as
compared to 21.0% and 21.3% for the same periods in 2001, respectively. Money
market instruments increased at September 30, 2002, from December 31, 2001, to
provide liquidity to support portfolio acquisition activity and anticipated
loan growth.
Interest income on investment securities, on a fully taxable equivalent basis,
decreased to $33.4 million and $105.6 million for the three and nine months
ended September 30, 2002, as compared to $42.0 million and $130.7 million for
the same periods in 2001, respectively. The decrease in interest income on
investment securities for the three and nine months ended September 30, 2002,
was a result of a 158 basis point and 168 basis point decrease in the yield
earned on average investment securities, offset by an increase in average
investment securities of $549.4 million and $580.6 million for the three and
nine months ended September 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 nine months ended September 30, 2002, decreased $7.4 million and
$40.0 million to $20.7 million and $62.5 million, as compared to the same
periods in 2001, respectively. The decrease in interest income on money market
instruments was a result of a 152 basis point and 255 basis point decrease in
the yield earned on average money market instruments, offset by an increase in
average money market instruments of $685.1 million and $993.6 million for the
three and nine months ended September 30, 2002, as compared to the same periods
in 2001, respectively.
OTHER INTEREST-EARNING ASSETS
Interest income on other interest-earning assets decreased $13.9 million and
$12.6 million to $84.1 million and $267.8 million for the three and nine months
ended September 30, 2002, from the same periods in 2001, respectively. The
decrease in interest income on other interest-earning assets for the three and
nine months ended September 30, 2002, was attributable to a decrease of 328
basis points and 268 basis points on the yield earned on average other
interest-earning assets for the three and nine months ended September 30, 2002,
respectively, offset by an increase of $587.9 million and $715.9 million in
average other interest-earning assets, as compared to the same periods in 2001,
respectively. Other interest earning assets include the interest-only strip
receivable, cash reserve accounts, and accrued interest and fees on securitized
loans. For the three and nine months ended September 30, 2002, the yield on
average other interest-earning assets was not materially impacted by the change
in the estimated value of accrued interest and fees.
The Corporation accrues interest income related to its interests retained in a
securitization transaction accounted for as a sale in the Corporation's
consolidated financial statements. The Corporation includes these retained
interests in accounts receivable from securitization on the consolidated
statement of financial condition. These retained interests include the
interest-only strip receivable, cash reserve accounts, and accrued interest and
fees on securitized loans (see "Note H: Asset Securitization" for further
discussion). The decreases in the yield on average other interest-earning
assets for the three and nine months ended September 30, 2002, are primarily
attributable to the decrease in the discount rate assumptions related to the
Corporation's retained interests in the Corporation's securitization
transactions.
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 was $749.4
million and $2.3 billion for the three and nine months ended September 30,
2002, as compared to $699.2 million and $2.0 billion for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the interest income generated by the Corporation's loan
receivables would have been $815.7 million and $2.3 billion for the three and
nine months ended September 30, 2002, respectively. The increase in interest
income on loan receivables for the three and nine months ended September 30,
2002, was primarily the result of an increase in average loan receivables of
$5.8 billion and $5.1 billion from the same periods in 2001, respectively. The
yield earned by the Corporation for the three and nine months ended
September 30, 2002, on average loan receivables was 11.30% and 12.18%, as
compared to 13.56% and 13.87% for the same periods in 2001, respectively
Excluding the change in the estimated value of accrued interest and fees, the
yield earned by the Corporation for the three and nine months ended
September 30, 2002, on average loan receivables would have been 12.30% and
12.53%.
Table 1 presents the Corporation's loan receivables at period end distributed
by loan type, excluding securitized loans. Loan receivables at September 30,
2002, were $26.3 billion, as compared to $24.6 billion at December 31, 2001.
Domestic credit card loan receivables were $13.7 billion at September 30, 2002,
as compared to $14.4 billion at December 31, 2001. During the nine months
ended September 30, 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.
During the nine months ended September 30, 2002, the Corporation securitized
$9.0 billion of domestic credit card loan receivables, offset by an increase of
$7.2 billion in the Corporation's loan portfolio when certain securitization
transactions were in their scheduled amortization period and the trusts used
principal payments on securitized loans to pay the investors rather than to
purchase new loan principal receivables. The Corporation acquired $2.0 billion
of domestic credit card loan receivables during the nine months ended
September 30, 2002, including a $1.3 billion credit card loan portfolio from
Wachovia Corporation. The yield on average domestic credit card loan
receivables was 10.67% and 11.63% for the three and nine months ended
September 30, 2002, as compared to 13.38% and 13.80% for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the yield on average domestic credit card loan receivables
would have been 11.71% and 11.99% for the three and nine months ended
September 30, 2002, 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, an increase in the percentage of loans in the portfolio with
promotional rates, and the change in the estimated value of accrued interest
and fees.
Domestic credit card loans held for securitization decreased to $7.2 billion at
September 30, 2002, from $7.9 billion at December 31, 2001. The $738.1 million
decrease reflects lower anticipated domestic credit card securitizations.
Domestic other consumer loan receivables were $6.5 billion at September 30,
2002, as compared to $6.1 billion at December 31, 2001. The yield on average
domestic other consumer loan receivables was 12.84% and 13.75% for the three
and nine months ended September 30, 2002, as compared to 14.94% and 15.04% for
the same periods in 2001, respectively. Excluding the change in the estimated
value of accrued interest and fees, the yield on average domestic other
consumer loan receivables would have been 14.40% and 14.29% for the three and
nine months ended September 30, 2002, 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, an increase in the percentage of loans
in the portfolio with promotional rates, and the change in the estimated value
of accrued interest and fees.
Domestic other consumer loans held for securitization decreased to $19.6
million at September 30, 2002, from $1.0 billion at December 31, 2001, as the
Corporation reduced the amount of other consumer loans it intends to securitize
or sell within one year.
The Corporation originates and sells home equity loans through MBNA Delaware.
Domestic 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 nine months
ended September 30, 2002, and 2001.
Foreign loan receivables were $6.2 billion at September 30, 2002, as compared
to $4.1 billion at December 31, 2001. The increase was primarily a result of
foreign loan originations through marketing programs and MBNA Europe's
acquisition of a $1.2 billion credit card loan portfolio from Alliance and
Leicester plc during the third quarter of 2002. During the nine months ended
September 30, 2002, the Corporation securitized $1.9 billion of foreign credit
card loan principal receivables, offset by an increase of $353.5 million in the
Corporation's foreign loan portfolio which resulted when certain
securitizations were in their scheduled amortization period and the trusts used
principal payments to pay the investors rather than to purchase new loan
principal receivables from the Corporation. The strengthening of foreign
currencies against the U.S. dollar also increased foreign loan receivables by
$330.1 million during the nine months ended September 30, 2002. The yield on
average foreign loan receivables was 11.15% and 11.69% for the three and nine
months ended September 30, 2002, as compared to 12.32% and 12.54% for the same
periods in 2001, respectively. Excluding the change in the estimated value of
accrued interest and fees, the yield on average foreign loan receivables would
have been 11.43% and 11.80% for the three and nine months ended September 30,
2002, 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, and the
change in the estimated value of accrued interest and fees.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
Loans held for securitization(a):
Domestic:
Credit card.................................. $ 7,205,895 $ 7,943,965
Other consumer............................... 19,570 1,032,697
------------- -------------
Total domestic loans held for
securitization............................ 7,225,465 8,976,662
Foreign........................................ 1,513,862 953,286
------------- -------------
Total loans held for securitization........ 8,739,327 9,929,948
Loan portfolio(b):
Domestic:
Credit card.................................. 6,451,617 6,439,471
Other consumer............................... 6,493,174 5,094,198
------------- -------------
Total domestic loan portfolio.............. 12,944,791 11,533,669
Foreign........................................ 4,652,244 3,169,947
------------- -------------
Total loan portfolio....................... 17,597,035 14,703,616
------------- -------------
Total loan receivables..................... $ 26,336,362 $ 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 loan principal receivables eligible for securitization
or sale, or loan principal receivables which management intends to
securitize or sell within one year.
(b) September 30, 2002 amounts include reductions from the change in the
estimated value of accrued interest and fees as follows: the domestic
credit card loan portfolio was reduced by $48.8 million, the domestic
other consumer loan portfolio was reduced by $32.3 million, and the
foreign loan portfolio was reduced by $5.4 million.(a)
OTHER ASSETS
Other assets increased $643.0 million or 53.4% to $1.8 billion at September 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 assets 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). The increase in the fair
market value of the Corporation's interest rate swap agreements and foreign
exchange swap agreements that qualified for, and are accounted for, as fair
value hedges were offset by changes in the carrying value of the corresponding
hedged long-term debt and bank notes.
DEPOSITS
Total interest expense on deposits was $313.8 million and $942.4 million for
the three and nine months ended September 30, 2002, as compared to $359.8
million and $1.1 billion for the same periods in 2001, respectively. The
decrease in interest expense on deposits of $46.0 million and $160.2 million
for the three and nine months ended September 30, 2002, was primarily the
result of a decrease of 138 basis points and 147 basis points in the rate paid
on average interest-bearing deposits, offset by an increase of $3.5 billion and
$2.9 billion in average interest-bearing deposits for the three and nine months
ended September 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
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 nine months
ended September 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 nine months ended September 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 $11.4 million and $31.9
million for the three and nine months ended September 30, 2002, as compared to
$8.3 million and $12.6 million for the same periods in 2001, respectively. The
increase in interest expense on short-term borrowings for the three months
ended September 30, 2002, was primarily a result of an increase of $571.8
million in average short-term borrowings, offset by a decrease of 130 basis
points in the rate paid on average short-term borrowings from the same period
in 2001. The increase in interest expense on short-term borrowings for the
nine months ended September 30, 2002, was primarily a result of an increase of
$919.9 million in average short-term borrowings, offset by a decrease of 166
basis points in the rate paid on average short-term borrowings from the same
period in 2001. The increase in average short-term borrowings for the three
and nine months ended September 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 $80.0 million
and $224.1 million for the three and nine months ended September 30, 2002, as
compared to $83.2 million and $268.8 million for the same periods in 2001,
respectively. The decrease in interest expense on long-term debt and bank
notes during the three and nine months ended September 30, 2002, from the same
period in 2001 was primarily a result of a decrease in the rate paid on average
long-term debt and bank notes of 134 basis points and 202 basis points, offset
by an increase in average long-term debt and bank notes of $1.9 billion and
$1.7 billion, respectively.
Interest expense on domestic long-term debt and bank notes decreased $12.8
million during the three months ended September 30, 2002, primarily as a result
of a decrease of 180 basis points in the rate paid on average domestic long-
term debt and bank notes, offset by a $1.2 billion increase in average domestic
long-term debt and bank notes as compared to the same period in 2001. Interest
expense on domestic long-term debt and bank notes decreased $67.3 million
during the nine months ended September 30, 2002, primarily as result of a
decrease of 257 basis points on the rate paid on average domestic long-term
debt and bank notes, offset by a $903.4 million increase in average domestic
long-term debt and bank notes, as compared to the same period in 2001. The
decrease in the rate paid on average domestic long-term debt and bank notes
reflects actions by the FOMC throughout 2001 which impacted overall market
interest rates. Interest expense on foreign long-term debt and bank notes
increased $9.6 million and $22.7 million during the three and nine months ended
September 30, 2002, respectively, as compared to the same periods in 2001. The
increase in interest expense on foreign long-term debt and bank notes was
primarily a result of an increase in average foreign long-term debt and bank
notes of $747.1 million and $774.0 million to $2.4 billion and $2.3 billion for
the three and nine months ended September 30, 2002, respectively, as compared
to the same periods in 2001.
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 in order to more closely match the
interest 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 $440.5 million or 26.1% to
$2.1 billion at September 30, 2002, as compared to $1.7 billion at December 31,
2001. This increase was primarily the result of increases in accruals for
compensation expense, taxes payable, and Customer rewards programs expected to
be paid in future periods.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three and nine months ended
September 30, 2002, and 2001, respectively. The change in the estimated value
of accrued interest and fees did not materially impact average balances for the
three and nine months ended September 30, 2002, due to the timing of the change
in the estimated value of accrued interest and fees. The yields and income
related to the loan portfolio and other interest-earning assets for the three
and nine months ended September 30, 2002, include the impact of the change in
the estimated value of accrued interest and fees.
TABLE 2: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
September 30, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,332 1.19% $ 4
Foreign................................ 1,667,423 2.87 12,052
------------ ----------
Total interest-earning time deposits
in other banks...................... 1,668,755 2.87 12,056
Federal funds sold....................... 1,961,712 1.76 8,679
----------- ----------
Total money market instruments....... 3,630,467 2.27 20,735
Investment securities(a):
Taxable.................................. 3,795,482 3.41 32,653
Tax-exempt(b)............................ 109,609 2.54 702
------------ ----------
Total investment securities.......... 3,905,091 3.39 33,355
Other interest-earning assets(a)........... 3,829,176 8.72 84,142
Loans held for securitization:
Domestic:
Credit card............................ 6,032,181 12.44 189,136
Other consumer......................... 17,767 11.86 531
------------ ----------
Total domestic loans held for
securitization...................... 6,049,948 12.44 189,667
Foreign.................................. 1,470,615 12.92 47,899
------------ ----------
Total loans held for securitization.. 7,520,563 12.53 237,566
Loan portfolio:
Domestic:
Credit card............................ 7,965,858 9.32 187,215
Other consumer......................... 6,393,234 12.84 206,931
------------ ----------
Total domestic loan portfolio........ 14,359,092 10.89 394,146
Foreign.................................. 4,422,541 10.56 117,732
------------ ----------
Total loan portfolio................. 18,781,633 10.81 511,878
------------ ----------
Total loan receivables............... 26,302,196 11.30 749,444
------------ ----------
Total interest-earning assets........ 37,666,930 9.35 887,676
Cash and due from banks...................... 756,102
Premises and equipment, net.................. 2,139,829
Other assets................................. 9,593,619
Reserve for possible credit losses........... (972,589)
------------
Total assets......................... $ 49,183,891
============
For the Three Months Ended
September 30, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 19,601,407 5.15% $ 254,352
Money market deposit accounts.......... 7,076,786 2.70 48,086
Interest-bearing transaction accounts.. 43,659 1.74 192
Savings accounts....................... 138,547 1.79 624
------------ ----------
Total domestic interest-bearing
deposits............................ 26,860,399 4.48 303,254
Foreign:
Time deposits.......................... 1,100,869 3.81 10,572
------------ ----------
Total interest-bearing deposits...... 27,961,268 4.45 313,826
Short-term borrowings:
Domestic............................... 999,953 3.80 9,575
Foreign................................ 240,389 2.94 1,781
------------ ----------
Total short-term borrowings.......... 1,240,342 3.63 11,356
Long-term debt and bank notes(c):
Domestic............................... 5,938,863 3.01 45,087
Foreign................................ 2,385,680 5.80 34,883
------------ ----------
Total long-term debt and bank notes.. 8,324,543 3.81 79,970
------------ ----------
Total borrowed funds................. 9,564,885 3.79 91,326
------------ ----------
Total interest-bearing liabilities... 37,526,153 4.28 405,152
Noninterest-bearing deposits................. 951,662
Other liabilities............................ 2,194,561
------------
Total liabilities.................... 40,672,376
Stockholders' equity......................... 8,511,515
------------
Total liabilities and stockholders'
equity.............................. $ 49,183,891
============ ----------
Net interest income.................. $ 482,524
==========
Net interest margin.................. 5.08
Interest rate spread................. 5.07
(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
September 30, 2002, was $253.
(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
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,179 3.03% $ 9
Foreign................................ 1,546,745 4.14 16,143
------------ ----------
Total interest-earning time
deposits in other banks............. 1,547,924 4.14 16,152
Federal funds sold....................... 1,397,437 3.41 12,019
----------- ----------
Total money market instruments....... 2,945,361 3.79 28,171
Investment securities(a):
Taxable.................................. 3,255,589 4.99 40,963
Tax-exempt(b)............................ 100,130 4.12 1,039
------------ ----------
Total investment securities.......... 3,355,719 4.97 42,002
Other interest-earning assets(a)........... 3,241,288 12.00 98,036
Loans held for securitization:
Domestic:
Credit card............................ 5,428,515 14.25 194,983
Other consumer......................... 35,582 19.90 1,785
------------ ----------
Total domestic loans held for
securitization........ ............. 5,464,097 14.29 196,768
Foreign.................................. 1,377,303 12.74 44,215
------------ ----------
Total loans held for securitization.. 6,841,400 13.97 240,983
Loan portfolio:
Domestic:
Credit card............................ 5,381,858 12.50 169,517
Other consumer......................... 5,287,749 14.91 198,694
------------ ----------
Total domestic loan portfolio........ 10,669,607 13.69 368,211
Foreign.................................. 2,945,753 12.12 89,997
------------ ----------
Total loan portfolio................. 13,615,360 13.35 458,208
------------ ----------
Total loan receivables............... 20,456,760 13.56 699,191
------------ ----------
Total interest-earning assets........ 29,999,128 11.47 867,400
Cash and due from banks...................... 774,133
Premises and equipment, net.................. 2,043,433
Other assets................................. 9,293,412
Reserve for possible credit losses........... (697,713)
------------
Total assets......................... $ 41,412,393
============
For the Three Months Ended
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,004,394 6.37% $ 289,102
Money market deposit accounts.......... 5,692,703 4.26 61,195
Interest-bearing transaction accounts.. 40,569 3.00 307
Savings accounts....................... 14,055 2.99 106
------------ ----------
Total domestic interest-bearing
deposits............................ 23,751,721 5.86 350,710
Foreign:
Time deposits.......................... 714,938 5.05 9,106
------------ ----------
Total interest-bearing deposits...... 24,466,659 5.83 359,816
Short-term borrowings:
Domestic............................... 450,596 5.20 5,903
Foreign................................ 217,962 4.39 2,410
------------ ----------
Total short-term borrowings.......... 668,558 4.93 8,313
Long-term debt and bank notes(c):
Domestic............................... 4,771,587 4.81 57,871
Foreign................................ 1,638,538 6.13 25,333
------------ ----------
Total long-term debt and bank notes.. 6,410,125 5.15 83,204
------------ ----------
Total borrowed funds................. 7,078,683 5.13 91,517
------------ ----------
Total interest-bearing liabilities... 31,545,342 5.68 451,333
Noninterest-bearing deposits................. 915,056
Other liabilities............................ 1,786,717
------------
Total liabilities.................... 34,247,115
Stockholders' equity......................... 7,165,278
------------
Total liabilities and stockholders'
equity.............................. $ 41,412,393
============ ----------
Net interest income.................. $ 416,067
==========
Net interest margin.................. 5.50
Interest rate spread................. 5.79
(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
September 30, 2001, was $364.
(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 Nine Months Ended
September 30, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,259 1.06% $ 10
Foreign................................ 1,895,030 2.53 35,854
------------ ----------
Total interest-earning time
deposits in other banks............. 1,896,289 2.53 35,864
Federal funds sold....................... 2,023,145 1.76 26,592
------------ ----------
Total money market instruments....... 3,919,434 2.13 62,456
Investment securities(a):
Taxable.................................. 3,743,966 3.69 103,378
Tax-exempt(b)............................ 110,288 2.70 2,231
------------ ----------
Total investment securities.......... 3,854,254 3.66 105,609
Other interest-earning assets(a)........... 3,840,129 9.32 267,805
Loans held for securitization:
Domestic:
Credit card............................ 6,238,469 12.94 603,971
Other consumer......................... 575,343 15.48 66,629
------------ ----------
Total domestic loans held for
securitization...................... 6,813,812 13.16 670,600
Foreign.................................. 1,335,897 12.71 126,996
------------ ----------
Total loans held for securitization.. 8,149,709 13.08 797,596
Loan portfolio:
Domestic:
Credit card............................ 7,222,046 10.49 566,679
Other consumer......................... 5,708,496 13.58 579,734
------------ ----------
Total domestic loan portfolio........ 12,930,542 11.85 1,146,413
Foreign.................................. 3,772,149 11.33 319,666
------------ ----------
Total loan portfolio................. 16,702,691 11.74 1,466,079
------------ ----------
Total loan receivables............... 24,852,400 12.18 2,263,675
------------ ----------
Total interest-earning assets........ 36,466,217 9.90 2,699,545
Cash and due from banks...................... 752,251
Premises and equipment, net.................. 2,158,874
Other assets................................. 8,495,648
Reserve for possible credit losses........... (928,261)
------------
Total assets......................... $ 46,944,729
============
For the Nine Months Ended
September 30, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,843,421 5.45% $ 768,158
Money market deposit accounts.......... 6,907,810 2.80 144,652
Interest-bearing transaction accounts.. 47,235 1.78 630
Savings accounts....................... 79,450 1.80 1,072
------------ ----------
Total domestic interest-bearing
deposits............................ 25,877,916 4.72 914,512
Foreign:
Time deposits.......................... 963,447 3.87 27,873
------------ ----------
Total interest-bearing deposits...... 26,841,363 4.69 942,385
Short-term borrowings:
Domestic............................... 1,050,007 3.56 27,929
Foreign................................ 203,585 2.60 3,955
------------ ----------
Total short-term borrowings.......... 1,253,592 3.40 31,884
Long-term debt and bank notes(c):
Domestic............................... 5,491,117 3.12 128,032
Foreign................................ 2,327,024 5.52 96,077
------------ ----------
Total long-term debt and bank notes.. 7,818,141 3.83 224,109
------------ ----------
Total borrowed funds................. 9,071,733 3.77 255,993
------------ ----------
Total interest-bearing liabilities... 35,913,096 4.46 1,198,378
Noninterest-bearing deposits................. 917,194
Other liabilities............................ 2,025,131
------------
Total liabilities.................... 38,855,421
Stockholders' equity......................... 8,089,308
------------
Total liabilities and stockholders'
equity.............................. $ 46,944,729
============ ----------
Net interest income.................. $1,501,167
==========
Net interest margin.................. 5.50
Interest rate spread................. 5.44
(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 nine months ended
September 30, 2002, was $803.
(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 Nine Months Ended
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,244 3.65% $ 34
Foreign................................ 1,552,934 4.86 56,477
------------ ----------
Total interest-earning time
deposits in other banks............. 1,554,178 4.86 56,511
Federal funds sold....................... 1,371,627 4.48 45,916
----------- ----------
Total money market instruments....... 2,925,805 4.68 102,427
Investment securities(a):
Taxable.................................. 3,171,306 5.35 126,783
Tax-exempt(b)............................ 102,299 5.17 3,954
------------ ----------
Total investment securities.......... 3,273,605 5.34 130,737
Other interest-earning assets(a)........... 3,124,194 12.00 280,406
Loans held for securitization:
Domestic:
Credit card............................ 5,243,432 14.83 581,557
Other consumer......................... 463,457 15.77 54,677
------------ ----------
Total domestic loans held for
securitization...................... 5,706,889 14.91 636,234
Foreign.................................. 974,373 13.13 95,696
------------ ----------
Total loans held for securitization.. 6,681,262 14.65 731,930
Loan portfolio:
Domestic:
Credit card............................ 6,210,597 12.93 600,494
Other consumer......................... 4,245,779 14.96 475,173
------------ ----------
Total domestic loan portfolio........ 10,456,376 13.75 1,075,667
Foreign.................................. 2,601,849 12.32 239,692
------------ ----------
Total loan portfolio................. 13,058,225 13.47 1,315,359
------------ ----------
Total loan receivables............... 19,739,487 13.87 2,047,289
------------ ----------
Total interest-earning assets........ 29,063,091 11.78 2,560,859
Cash and due from banks...................... 731,843
Premises and equipment, net.................. 1,930,488
Other assets................................. 8,665,729
Reserve for possible credit losses........... (612,215)
------------
Total assets......................... $ 39,778,936
============
For the Nine Months Ended
September 30, 2001
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 17,864,019 6.56% $ 876,920
Money market deposit accounts.......... 5,351,149 4.95 198,008
Interest-bearing transaction accounts.. 42,642 4.00 1,275
Savings accounts....................... 11,560 3.85 333
------------ ----------
Total domestic interest-bearing
deposits............................ 23,269,370 6.19 1,076,536
Foreign:
Time deposits.......................... 652,646 5.33 26,025
------------ ----------
Total interest-bearing deposits...... 23,922,016 6.16 1,102,561
Short-term borrowings:
Domestic............................... 174,189 5.17 6,731
Foreign................................ 159,493 4.93 5,887
------------ ----------
Total short-term borrowings.......... 333,682 5.06 12,618
Long-term debt and bank notes(c):
Domestic............................... 4,587,702 5.69 195,359
Foreign................................ 1,553,044 6.32 73,407
------------ ----------
Total long-term debt and bank notes.. 6,140,746 5.85 268,766
------------ ----------
Total borrowed funds................. 6,474,428 5.81 281,384
------------ ----------
Total interest-bearing liabilities... 30,396,444 6.09 1,383,945
Noninterest-bearing deposits................. 857,686
Other liabilities............................ 1,658,835
------------
Total liabilities.................... 32,912,965
Stockholders' equity......................... 6,865,971
------------
Total liabilities and stockholders'
equity.............................. $ 39,778,936
============ ----------
Net interest income.................. $1,176,914
==========
Net interest margin.................. 5.41
Interest rate spread................. 5.69
(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 nine months ended
September 30, 2001, was $1,384.
(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 was $1.7 billion and $4.9 billion for the three
and nine months ended September 30, 2002, as compared to $1.8 billion and $4.8
billion for the same periods in 2001, respectively. Excluding the change in
the estimated value of accrued interest and fees, total other operating income
for the three and nine months ended September 30, 2002, would have been $1.9
billion and $5.1 billion, respectively.
Securitization income was $1.4 billion and $4.1 billion for the three and nine
months ended September 30, 2002, as compared to $1.5 billion and $4.2 billion
for the same periods in 2001, respectively. Excluding the change in the
estimated value of accrued interest and fees, securitization income would have
been $1.6 billion and $4.3 billion for the three and nine months ended
September 30, 2002, respectively. These decreases in securitization income
primarily reflect the Corporation's change in the estimated value of accrued
interest and fees which reduced securitization income by $172.0 million for the
three and nine months ended September 30, 2002, as compared to the same periods
in 2001. Average securitized loans increased $4.2 billion or 5.9% and $4.0
billion or 5.7% for the three and nine months ended September 30, 2002, as
compared to the same periods in 2001, respectively. Also, the securitized net
interest margin was 9.01% and 9.90% for the three and nine months ended
September 30, 2002, as compared to 9.92% and 9.43% for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the securitized net interest margin would have increased to
10.18% and 10.31% for the three and nine months ended September 30, 2002,
respectively.
The securitized net interest margin represents securitized net interest income
expressed as a percentage of average securitized interest-earning assets.
Changes in the rate paid to investors on the Corporation's securitization
transactions and the yield earned on average securitized loans impact the
securitized net interest margin. The average rate paid to investors in the
Corporation's securitization transactions for the three and nine months ended
September 30, 2002, decreased 149 basis points and 230 basis points,
respectively. The rate paid to investors generally resets on a monthly basis.
The decrease in the average rate paid to investors reflects actions by the FOMC
throughout 2001, which impacted overall market interest rates. The yield
earned on average securitized loans was 11.46% and 12.37% for the three and
nine months ended September 30, 2002, as compared to 13.97% and 14.34% for the
same periods in 2001, respectively. Excluding the change in the estimated
value of accrued interest and fees, the yield earned on average securitized
loans decreased to 12.57% and 12.75% for the three and nine months ended
September 30, 2002, 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. It also
reflects the change in the estimated value of accrued interest and fees. Also,
securitized net charge-offs increased $29.0 million and $288.7 million for the
three and nine months ended September 30, 2002, respectively. Securitized net
credit losses as a percentage of average securitized loans were 4.99% and 5.11%
for the three and nine months ended September 30, 2002, as compared to 5.13%
and 4.85% for the same periods in 2001, respectively. Securitized net credit
losses as a percentage of average securitized loans for the three and nine
months ended September 30, 2002, were not significantly affected by the change
in the estimated value of accrued interest and fees.
During September 2002, as a result of the change in the estimated value of
accrued interest and fees (for further discussion, see "Note B: Change in
Accounting Estimate for Interest and Fees"), accounts receivable from
securitization was reduced by $172.0 million. This reduction was primarily a
result of a decrease in accrued interest and fees on securitized loans.
The change in the estimated value of accrued interest and fees reduced accrued
interest and fees on securitized loans by $295.9 million. The Corporation also
adjusted the value of the interest only-strip receivable as a result of the
change in the estimated value of the uncollectible accrued interest and fees.
The Corporation has always included an estimate of uncollectible accrued
interest and fees in determining the value of the interest-only strip
receivable. Since the Corporation now recognizes uncollectible interest and
fees in the estimated value of accrued interest and fees on securitized loans,
the estimated value of the interest-only strip receivable was adjusted at
September 30, 2002. The value of uncollectible accrued interest and fees on
securitized loans that are currently owed by the underlying Customer are now
considered in the value of accrued interest and fees on securitized loans.
Accordingly, the estimated value of the interest-only strip receivable now only
considers the impact of uncollectible interest and fees that will be billed to
the underlying Customer in the future. As a result, the estimate of
uncollectible accrued interest and fees was adjusted which caused the interest-
only strip receivable to increase $123.9 million during the three and nine
months ended September 30, 2002.
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 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 $121.3 million increase
and a $39.6 million decrease during the three and nine months ended
September 30, 2002, as compared to a $131.6 million and a $215.7 million
increase for the same periods in 2001, respectively. Excluding the change in
the estimated value of accrued interest and fees, 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, would have been a $2.6 million and a $163.5 million decrease
during the three and nine months ended September 30, 2002, respectively.
Included in securitization income is the gain from the sale of loan principal
receivables for new securitization transactions that the Corporation recognizes
as sales in accordance with Statement No. 140. The gain from the sale of loan
principal receivables in new securitization transactions is a component of the
net incremental change in the interest-only strip receivable. This gain was
$40.3 million (net of securitization transaction costs of $6.9 million) and
$104.9 million (net of securitization transaction costs of $32.1 million) for
the three and nine months ended September 30, 2002 (on the sale of $3.8 billion
and $10.9 billion of credit card loan principal receivables for the three and
nine months ended September 30, 2002), as compared to $55.9 million (net of
securitization transaction costs of $13.9 million) and $73.3 million (net
of securitization transaction costs of $51.7 million) for the same periods in
2001 (on the sale of $5.0 billion and $9.5 billion of credit card loan
principal receivables for the three and nine months ended September 30, 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 trusts 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, charged-off loan recoveries, gross
credit losses, contractual servicing fees, and the coupon paid to investors.
They are used to determine the excess spread to be earned 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 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 changes in the value of the interest-only strip recognized by the
Corporation on its securitized loan principal receivables during the three and
nine months ended September 30, 2002, were primarily a result of changes in the
projected excess spread assumption related to the interest-only strip
receivable. The projected excess spread for securitized credit card principal
receivables was 4.49% at September 30, 2002, as compared to 5.14% at
December 31, 2001. The projected excess spread for securitized other consumer
principal receivables was 2.39% at September 30, 2002, as compared to 2.60% at
December 31, 2001. Excluding the change in estimated value of accrued interest
and fees, the projected excess spread for securitized credit card principal
receivables and other consumer principal receivables would have been 4.09% and
1.67% at September 30, 2002, respectively. The decrease in the projected
excess spread assumptions 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. These
projections were partially offset by the change in the estimated value of
uncollectible interest and fees and lower projected charge-off rates on its
credit card principal receivables. The net impact of these changes in
assumptions, along with changes in the amount of securitized loan principal
receivables, resulted in a decrease in the interest-only strip receivable of
$3.5 million at September 30, 2002, from $1.1 billion at December 31, 2001.
The projected excess spread for securitized credit card principal receivables
increased 22 basis points at September 30, 2002, from 4.27% at June 30, 2002,
and the projected excess spread for securitized other consumer principal
receivables increased 21 basis points at September 30, 2002, from 2.18% at
June 30, 2002. The increase in the projected excess spread assumptions from
June 30, 2002, to September 30, 2002, primarily reflects the change in the
estimated value of uncollectible interest and fees, partially offset by lower
projected interest income yields on securitized loans due to the Corporation's
pricing decisions to attract and retain Customers and to grow loans. The net
impact of these changes in assumptions, along with changes in the amount of
securitized loan principal receivables, resulted in an increase in the
interest-only strip receivable of $128.2 million at September 30, 2002, from
$992.4 million at June 30, 2002.
The Corporation's insurance income primarily relates to fees received for
marketing credit related life and disability insurance and debt cancellation
contracts to its loan Customers. Insurance income was $43.8 million and $130.6
million for the three and nine months ended September 30, 2002, as compared to
$38.3 million and $97.5 million for the same periods in 2001, respectively.
Excluding the change in the estimated value of accrued interest and fees,
insurance income would have been $45.4 million and $132.2 million for the three
and nine months ended September 30, 2002, respectively. The increase in
insurance income was primarily related to an increase in the number of debt
cancellation contracts.
Credit card fees were $88.8 million and $280.2 million for the three and nine
months ended September 30, 2002, as compared to $83.6 million and $212.8
million for the same periods in 2001, respectively. Excluding the change in
the estimated value of accrued interest and fees, credit card fees would have
been $103.7 million and $295.1 million for the three and nine months ended
September 30, 2002, 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 nine months ended September 30, 2002, was
a result of the growth in the Corporation's outstanding loan receivables,
accounts, and the number of fees assessed.
Other consumer loan fees were $20.6 million and $72.6 million for the three and
nine months ended September 30, 2002, as compared to $25.6 million and $66.2
million for the same periods in 2001, respectively. Excluding the change in
the estimated value of accrued interest and fees, other consumer loan fees
would have been $29.4 million and $81.4 million for the three and nine months
ended September 30, 2002, respectively. Other consumer loan fees include
annual, late, overlimit, returned check, cash advance, express payment fees,
and other miscellaneous fees earned on the Corporation's other consumer loans.
OTHER OPERATING EXPENSE
Total other operating expense increased 8.2% to $1.2 billion and 8.0% to $3.5
billion for the three and nine months ended September 30, 2002, as compared to
$1.1 billion and $3.3 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 9.8 million new
accounts, including 1.2 million accounts from the Wachovia portfolio
acquisition, and 1.0 million accounts from the Alliance & Leicester plc
portfolio acquisition during the nine months ended September 30, 2002, compared
to 7.1 million new accounts for the same period in 2001. The Corporation added
300 new endorsements from organizations during the nine months ended
September 30, 2002, compared to 329 new endorsements for the same period in
2001.
Salaries and employee benefits increased $24.1 million to $501.7 million and
$89.8 million to $1.4 billion for the three and nine months ended September 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 September 30, 2002, the Corporation had approximately
25,500 full-time equivalent employees, as compared to 24,400 full-time
equivalent employees at September 30, 2001.
Included in salaries and employee benefits is the net periodic benefit cost for
the Corporation's benefit plans of $20.0 million and $59.0 million for the
three and nine months ended September 30, 2002, respectively. The Corporation
anticipates, based on current conditions, that net periodic benefit cost will
increase in 2003 because of a lower assumed discount rate, lower return on
plan assets for the period ended September 30, 2002, and increased service cost
resulting from normal plan operations. The Corporation does not expect the
increase in the net periodic benefit cost to have a material impact on the
Corporation's consolidated statement of income for the year ended December 31,
2003.
Other operating expense also includes amortization of identifiable 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. An impairment would result in a write
down of intangible assets on the consolidated statement of financial condition
and an increase in other operating expense on the consolidated statement of
income (see "Critical Accounting Policies").
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 that are determined to have indefinite lives are
no longer amortized, but instead are subject to an annual impairment test. At
September 30, 2002, and December 31, 2001, the Corporation did not have a
material amount of intangible assets with indefinite lives or any other
nonamortizing assets and, as a result, the pro forma net income, pro forma
earnings per common share, and pro forma earnings per common share-assuming
dilution amounts required by Statement No. 142 have not been shown. 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 nine months ended September 30, 2002, the Corporation's income before
income taxes increased $25.8 million and $75.0 million, respectively ($16.4
million and $47.5 million after taxes, respectively), as a result of the
extension of the amortization period. The Corporation's earnings per common
share, excluding the change in amortization period, would have been $.30 and
$.91 and earnings per common share-assuming dilution would have been $.29 and
$.90 for the three and nine months ended September 30, 2002, respectively.
Purchased services increased $29.9 million and $39.7 million to $147.3 million
and $400.2 million for the three and nine months ended September 30, 2002,
respectively. Advertising expense increased $10.7 million and $55.5 million to
$81.9 million and $252.1 million for the three and nine months ended
September 30, 2002, respectively. Postage and delivery expense increased $42.5
million to $297.9 million for the nine months ended September 30, 2002. The
increases in purchased services, advertising, and postage and delivery expense
reflects the Corporation's continued investment in attracting, servicing, and
retaining domestic and foreign credit card and other consumer loan Customers.
Loan receivable fraud losses decreased $3.8 million and $7.0 million to $39.2
million and $119.5 million for the three and nine months ended September 30,
2002, respectively. The decrease in loan receivable fraud losses was
attributable to an increase in the number of employees dedicated to fraud
detection and improved fraud detection strategies.
Table 3 provides further detail regarding the Corporation's other operating
expenses.
TABLE 3: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(unaudited)
Purchased services.............. $ 147,258 $ 117,326 $ 400,216 $ 360,496
Advertising..................... 81,912 71,252 252,097 196,645
Collection...................... 14,075 12,340 39,824 33,284
Stationery and supplies......... 13,620 10,949 35,444 32,525
Service bureau.................. 19,328 16,843 55,186 47,127
Postage and delivery............ 89,844 95,387 297,886 255,399
Telephone usage................. 23,726 21,052 66,612 62,450
Loan receivable fraud losses.... 39,153 42,929 119,521 126,478
Amortization of intangible
assets......................... 92,651 92,152 251,703 282,258
Computer software............... 26,036 21,156 75,479 60,829
Other........................... 80,586 67,547 201,067 190,947
--------- --------- ---------- ----------
Total other operating expense. $ 628,189 $ 568,933 $1,795,035 $1,648,438
========= ========= ========== ==========
INCOME TAXES
The Corporation recognized applicable income taxes of $229.8 million and $707.6
million for the three and nine months ended September 30, 2002, as compared to
$288.2 million and $704.7 million for the same periods in 2001, respectively.
These amounts represent an effective tax rate of 36.6% for the three and nine
months ended September 30, 2002, and 37.6% for the three and nine months ended
September 30, 2001. 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 credit card and other consumer loans included in
the Corporation's loan receivables, 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. The Corporation's change
in the estimated value of accrued interest and fees in September 2002 (for
further discussion, see "Note B: Change in Accounting Estimate for Interest and
Fees") resulted in a decrease of $86.5 million in loan receivables at
September 30, 2002. This decrease in loan receivables reduced delinquencies
and other non-performing loans at September 30, 2002, in comparison to
December 31, 2001. The managed and net charge-off ratios for the three and
nine months ended September 30, 2002, were not significantly affected by the
change in the estimated value of accrued interest and fees.
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
4.06% at September 30, 2002, as compared with 4.64% at December 31, 2001.
Excluding the change in the estimated value of accrued interest and fees,
delinquency as a percentage of the loan portfolio would have been 4.46% at
September 30, 2002. The Corporation's delinquency as a percentage of managed
loans was 4.80% at September 30, 2002, as compared to 5.09% at December 31,
2001. Excluding the change in the estimated value of accrued interest and
fees, delinquency as a percentage of managed loans would have been 5.10% at
September 30, 2002.
Table 4 presents delinquent loans for the Corporation's loan portfolio,
excluding loans held for securitization, and the Corporation's managed loans
and includes the impact of the change in the estimated value of accrued
interest and fees.
Loan delinquency on the domestic credit card loan portfolio was 3.79% at
September 30, 2002, as compared to 4.58% at December 31, 2001. Excluding the
change in the estimated value of accrued interest and fees, loan delinquency on
the domestic credit card loan portfolio would have been 4.43%. Loan
delinquency on the domestic other consumer loan portfolio was 5.80% at
September 30, 2002, as compared to 5.96% at December 31, 2001. Excluding the
change in the estimated value of accrued interest and fees, loan delinquency on
the domestic other consumer loan portfolio would have been 6.18%. Loan
delinquency on the foreign loan portfolio was 2.00% at September 30, 2002, as
compared to 2.63% at December 31, 2001. Excluding the change in the estimated
value of accrued interest and fees, loan delinquency on the foreign loan
portfolio would have been 2.09%. 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)
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Loan portfolio:
Loan portfolio outstanding............. $ 17,597,035 $14,703,616
Loan portfolio delinquent:
30 to 59 days........................ $ 269,268 1.53% $ 260,421 1.77%
60 to 89 days........................ 164,116 .93 145,061 .99
90 or more days...................... 280,750 1.60 276,277 1.88
------------ ----- ----------- -----
Total............................ $ 714,134 4.06% $ 681,759 4.64%
============ ===== =========== =====
Loan portfolio delinquent by
geographic area:
Domestic:
Credit card........................ $ 244,513 3.79% $ 294,901 4.58%
Other consumer..................... 376,389 5.80 303,365 5.96
------------ -----------
Total domestic................... 620,902 4.80 598,266 5.19
Foreign.............................. 93,232 2.00 83,493 2.63
------------ -----------
Total............................ $ 714,134 4.06 $ 681,759 4.64
============ ===========
Managed loans:
Managed loans outstanding.............. $102,799,447 $97,496,051
Managed loans delinquent:
30 to 59 days........................ $ 1,819,201 1.77% $ 1,816,893 1.86%
60 to 89 days........................ 1,085,838 1.06 1,039,861 1.07
90 or more days...................... 2,028,761 1.97 2,105,707 2.16
------------ ----- ----------- -----
Total............................ $ 4,933,800 4.80% $ 4,962,461 5.09%
============ ===== =========== =====
Managed loans delinquent by
geographic area:
Domestic:
Credit card........................ $ 3,760,233 4.96% $ 3,779,113 5.05%
Other consumer..................... 760,506 6.24 811,159 6.86
------------ -----------
Total domestic................... 4,520,739 5.13 4,590,272 5.29
Foreign.............................. 413,061 2.80 372,189 3.45
------------ -----------
Total............................ $ 4,933,800 4.80 $ 4,962,461 5.09
============ ===========
A Customer's account may be re-aged to remove existing delinquency. The intent
of a re-age is to assist Customers who have recently overcome temporary
financial difficulties, and have clearly demonstrated both the ability and
willingness to resume regular payments, but are unable to pay the entire past
due amount. Generally, to qualify for re-aging, the account must have been
opened for at least one year and cannot have been re-aged during the preceding
365 days. An account may not be re-aged more than two times in a five year
period. To qualify for re-aging, the Customer must also have made payments
equal to a total of three minimum payments in the last 90 days, including one
full minimum payment during the last 30 days. All re-age strategies are
approved by senior management and the Loan Review Department. Re-ages can have
the effect of delaying charge-offs. There were $1.1 billion and $4.1 billion
of managed loans re-aged during the three and nine months ended September 30,
2002, respectively, compared to $1.4 billion and $4.2 billion for the same
periods in 2001. Of those accounts which were re-aged during the three months
ended September 30, 2001, approximately 16% have returned to delinquency
status and approximately 17% have been charged-off at September 30, 2002.
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
increased at September 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 in light of the current economic environment. These
results include the change in the estimated value of accrued interest and fees
in September 2002, which did not have a significant impact on these ratios.
TABLE 5: OTHER NONPERFORMING LOANS
(dollars in thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Loan portfolio:
Nonaccrual loans...................... $ 25,185 $ 17,459
Reduced-rate loans.................... 383,524 299,541
------------------ -----------------
Total other nonperforming loans..... $ 408,709 $ 317,000
================== =================
Other nonperforming loans as a % of
ending loan portfolio................ 2.32% 2.16%
Managed loans:
Nonaccrual loans...................... $ 271,928 $ 173,825
Reduced-rate loans.................... 2,777,685 2,360,392
------------------ -----------------
Total other nonperforming loans..... $ 3,049,613 $ 2,534,217
================== =================
Other nonperforming loans as a % of
ending managed loans................. 2.97% 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 uncollectible 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. 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 nine months ended September 30, 2002, were
$288.2 million and $848.1 million, compared to $210.1 million and $612.2
million for the same periods in 2001, respectively. The increase in net credit
losses for the three and nine months ended September 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 4.38% and
4.55% for the three and nine months ended September 30, 2002, compared to 4.11%
and 4.14% for the same periods in 2001, respectively. The Corporation's
managed credit losses as a percentage of average managed loans for the three
and nine months ended September 30, 2002, were 4.84% and 4.97%, compared to
4.90% and 4.69% for the same periods in 2001, respectively. Net charge-offs on
domestic credit card loan receivables were 4.33% and 4.40% for the three and
nine months ended September 30, 2002, as compared to 4.06% and 4.32% for the
same periods in 2001, respectively. Net charge-offs on domestic other consumer
loan receivables were 6.37% and 6.47% for the three and nine months ended
September 30, 2002, as compared to 5.32% and 4.79% for the same periods in
2001, respectively. Net charge-offs on foreign loan receivables were 2.35% and
2.60% for the three and nine months ended September 30, 2002, as compared to
2.74% and 2.66% for the same periods in 2001, respectively. The net charge-off
ratio is calculated by dividing net charge-offs for the period which exclude
uncollectible accrued interest and fees and fraud losses by average loan
receivables which includes billed interest and fees for the corresponding
period. These results include the change in the estimated value of accrued
interest and fees in September 2002, which did not have a significant impact on
these ratios.
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. The Corporation's
net credit losses include the principal balance of loans charged off less
current period recoveries and exclude uncollectible 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 reserve and provision 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 $983.4
million at September 30, 2002. The provision for possible credit losses for
the three and nine months ended September 30, 2002, was $288.2 million and
$922.5 million, compared to $314.3 million and $855.4 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, and September 30, 2002, the Corporation
acquired reserves of $46.7 million and $21.9 million, respectively, which
increased its reserve for possible credit losses. The Corporation did not
otherwise increase reserves during the nine months ended September 30, 2002, as
the Corporation did not expect net credit losses to increase during the fourth
quarter 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited)
Reserve for possible credit
losses, beginning of period...... $ 960,113 $ 678,190 $ 833,423 $ 527,573
Reserves acquired............... 21,883 5,744 69,558 18,361
Provision for possible credit
losses:
Domestic..................... 247,220 283,248 797,773 778,016
Foreign...................... 40,975 31,074 124,747 77,362
--------- --------- --------- ---------
Total provision for
possible credit losses... 288,195 314,322 922,520 855,378
Foreign currency translation.... 1,378 969 5,934 (45)
Credit losses:
Domestic:
Credit card................. (159,803) (118,136) (470,883) (400,767)
Other consumer.............. (108,951) (74,036) (322,180) (178,409)
--------- --------- --------- ---------
Total domestic credit
losses................... (268,754) (192,172) (793,063) (579,176)
Foreign....................... (39,993) (34,997) (115,672) (85,370)
--------- --------- --------- ---------
Total credit losses....... (308,747) (227,169) (908,735) (664,546)
Recoveries:
Domestic:
Credit card................. 8,442 8,525 27,129 29,258
Other consumer.............. 6,789 3,179 17,357 9,067
--------- --------- --------- ---------
Total domestic recoveries. 15,231 11,704 44,486 38,325
Foreign....................... 5,321 5,335 16,188 14,049
--------- --------- --------- ---------
Total recoveries.......... 20,552 17,039 60,674 52,374
--------- --------- --------- ---------
Net credit losses............... (288,195) (210,130) (848,061) (612,172)
--------- --------- --------- ---------
Reserve for possible credit
losses, end of period............ $ 983,374 $ 789,095 $ 983,374 $ 789,095
========= ========= ========= =========
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank and MBNA Delaware
are also subject to similar capital requirements adopted by the Office of the
Comptroller of the Currency. Under these requirements, the federal bank
regulatory agencies have established quantitative measures to ensure that
minimum thresholds for Tier 1 Capital, Total Capital, and Leverage ratios are
maintained. Failure to meet these minimum capital requirements can initiate
certain mandatory, and possible additional discretionary, actions by the
federal bank regulators that, if undertaken, could have a direct material
effect on the Corporation's, the Bank's, and MBNA Delaware's consolidated
financial statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation, the Bank, and MBNA
Delaware must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.
The Corporation's, the Bank's, and MBNA Delaware's capital amounts and
classification are also subject to qualitative judgments by the federal bank
regulators about components, risk weightings, and other factors. At
September 30, 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 (a)
Well-
September 30, December 31, Minimum Capitalized
2002 2001 Requirements Requirements
------------- ------------ ------------ ------------
(unaudited)
MBNA Corporation
Tier 1.................. 16.36% 15.99% 4.00% (b)
Total................... 19.25 17.97 8.00 (b)
Leverage................ 17.68 18.12 4.00 (b)
MBNA America Bank, N.A.
Tier 1.................. 14.12 13.14 4.00 6.00%
Total................... 17.11 15.13 8.00 10.00
Leverage................ 15.19 15.00 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1.................. 21.27 18.24 4.00 6.00
Total................... 22.43 19.28 8.00 10.00
Leverage................ 20.74 18.49 4.00 5.00
(a) September 30, 2002 ratios include the change in the estimated value of
accrued interest and fees. Excluding the change in the estimated value of
accrued interest and fees, the Tier 1 Capital ratio for the Corporation,
the Bank, and MBNA Delaware would have been 16.78%, 14.59%, and 21.33%,
respectively. Excluding the change in the estimated value of accrued
interest and fees, the Total Capital ratio for the Corporation, the Bank,
and MBNA Delaware would have been 19.66%, 17.58%, and 22.49%,
respectively. Excluding the change in the estimated value of accrued
interest and fees, the Leverage ratio for the Corporation, the Bank, and
MBNA Delaware would have been 18.10%, 15.63%, and 20.82%, respectively.
(b) Not applicable for bank holding companies.
During the nine months ended September 30, 2002, the Bank 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 nine months ended September 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 H: 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 September 30, 2002, the Corporation's and
the Bank's regulatory capital ratios would have been impacted by approximately
300 basis points to 400 basis points. 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 September 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 semi-annual 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 nine months ended
September 30, 2002, the Corporation declared dividends on its preferred stock
of $10.7 million and on its common stock of $259.9 million.
On October 17, 2002, the Corporation's Board of Directors declared a quarterly
dividend of $.07 per common share, payable January 1, 2003, to stockholders of
record as of December 13, 2002. Also, on October 17, 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
$.34380 per share on the Adjustable Rate Cumulative Preferred Stock, Series B.
The preferred stock dividends are payable January 15, 2003, to stockholders of
record as of December 31, 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 September 30, 2002, the amount of retained
earnings available for declaration and payment of dividends from the Bank to
the Corporation was $3.3 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 September 30,
2002. If this facility had been drawn upon at September 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 mature,
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 general capital
markets' environment, and 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 September 30, 2002, the
Corporation funded approximately 74.4% 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 $251.0 billion of asset-backed
securities issued during the nine months ended September 30, 2002.
Approximately $82.0 billion of additional asset-backed securities were also
issued in European markets during the nine months ended September 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 principal receivables or to do so at favorable pricing levels.
Factors affecting the Corporation's ability to securitize its loan principal
receivables include the overall credit quality of the Corporation's securitized
loan principal receivables, 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 principal 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 principal
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 September 30, 2002, and December 31, 2001, were $30.1 billion
and $27.1 billion, respectively. The Corporation utilizes deposits to fund
loan and other asset growth and to diversify funding sources. Total deposits
increased as a result of heightened consumer demand for deposit products and
attractive pricing relative to other investment opportunities. The
Corporation's ratio of average receivables to average deposits was 90.97% and
89.53% for the three and nine months ended September 30, 2002, respectively, as
compared to 80.60% and 79.66% for the same periods in 2001. The increase in
the ratio of average loan receivables to average deposits for the three and
nine months ended September 30, 2002, as compared to the same periods in 2001,
is due to a larger increase of average receivables than average deposits.
Table 8 provides the maturities of the Corporation's deposits at September 30,
2002.
TABLE 8: MATURITIES OF DEPOSITS AT SEPTEMBER 30, 2002
(dollars in thousands) (unaudited)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
Three months or less................ $ 10,299,377 $ 1,368,443 $ 11,667,820
Over three months through twelve
months............................. 4,596,489 1,528,628 6,125,117
Over one year through five years.... 6,105,080 6,193,126 12,298,206
Over five years..................... 7,659 - 7,659
------------ ------------ ------------
Total deposits.................... $ 21,008,605 $ 9,090,197 $ 30,098,802
============ ============ ============
Included in the Corporation's other deposits at September 30, 2002, and
December 31, 2001, were brokered deposits of $8.4 billion and $7.0 billion,
representing 28.0% and 25.9% of total deposits, respectively. If these
brokered deposits were not renewed at maturity, 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 Federal Deposit Insurance Corporation Improvement Act of
1991 limits the use of brokered deposits to well capitalized insured depository
institutions and, with a waiver from the Federal Deposit Insurance Corporation,
to adequately capitalized institutions. At September 30, 2002, 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. Based on the Corporation's historical access to the brokered
deposit market, it expects to replace maturing brokered deposits with new
brokered deposits or through the Corporation's direct deposit program.
The Corporation also held $3.9 billion in investment securities and $4.1
billion of money market instruments at September 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 September 30, 2002,
$1.2 billion is anticipated to mature within twelve months. The Corporation's
investment securities available-for-sale portfolio, which consists primarily of
U.S. Treasury obligations or short-term and variable-rate securities, was $3.4
billion at September 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 September 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 SEPTEMBER 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.. $1,079,996 $1,281,062 $ - $ -
State and political subdivisions
of the United States............. - 9,145 6,350 89,120
Asset-backed and other securities. 82,902 487,843 259,406 151,643
---------- ---------- --------- --------
Total investment securities
available-for-sale............. $1,162,898 $1,778,050 $ 265,756 $240,763
========== ========== ========= ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ - $ - $ - $414,818
State and political subdivisions
of the United States............. - 155 649 5,750
Asset-backed and other securities. 1,000 1,000 - 61,882
---------- ---------- --------- --------
Total investment securities
held-to-maturity............... $ 1,000 $ 1,155 $ 649 $482,450
========== ========== ========= ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $2,361,058 $2,361,058
State and political subdivisions
of the United States............. 104,615 104,615
Asset-backed and other securities. 981,794 981,794
---------- ----------
Total investment securities
available-for-sale............. $3,447,467 $3,447,467
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 414,818 $ 420,616
State and political subdivisions
of the United States............. 6,554 6,755
Asset-backed and other securities. 63,882 63,914
---------- ----------
Total investment securities
held-to-maturity............... $ 485,254 $ 491,285
========== ==========
Table 10 provides a summary of the Corporation's estimated liquidity
requirements at September 30, 2002.
TABLE 10: SUMMARY OF ESTIMATED LIQUIDITY REQUIREMENTS
(dollars in thousands) (unaudited)
Estimated Liquidity Requirements
at September 30, 2002
-------------------------------------
Within Over
1 Year 1-5 Years 5 Years Total
----------- ----------- ----------- ------------
Deposits................... $17,792,937 $12,298,206 $ 7,659 $ 30,098,802
Short-term borrowings...... 1,307,880 - - 1,307,880
Long-term debt and bank
notes (par value)......... 1,354,391 4,388,961 2,132,140 7,875,492
Securitized loans
(investor principal)...... 8,552,772 49,100,774 17,201,915 74,855,461
Minimum rental payments
under noncancelable
operating leases.......... 27,972 41,076 142 69,190
----------- ----------- ----------- ------------
Total estimated
liquidity requirements.. $29,035,952 $65,829,017 $19,341,856 $114,206,825
=========== =========== =========== ============
The Corporation estimates that it will have $29.0 billion in liquidity
requirements within the next year. These requirements include $17.8
billion in deposits and $8.6 billion for certain securitization transactions
that have entered their scheduled amortization period 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 loan principal receivables as prior
securitized loan principal receivables enter their amortization period and the
trusts use principal payments on securitized loan principal receivables to pay
the investors rather than purchasing new loan principal receivables from the
Corporation.
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 nine months ended September 30, 2002, the Corporation
purchased 24.0 million common shares for $584.8 million. The Corporation
issued 24.0 million common shares upon the exercise of stock options and
issuance of restricted stock. The Corporation received $128.4 million in
proceeds from the exercise of the stock options for the nine months ended
September 30, 2002.
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 loan principal
receivables 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 September 30, 2002, the Corporation could
experience a decrease in projected net income during the next twelve months of
approximately $56.0 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 $56.0
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
September 30, 2002, the Corporation could experience a decrease in
stockholders' equity, net of tax, of approximately $117.0 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 No. 133, 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
The Corporation allocates resources on a managed basis, and financial data
provided to management reflects the Corporation's results on a managed basis.
Managed data assumes the Corporation's securitized loan principal receivables
have not been sold and present the results of the securitized loan principal
receivables in the same fashion as the Corporation's owned loans. The
Corporation, analysts, and others evaluate its operations on a managed basis
because the loans that are securitized are subject to underwriting standards
comparable to the Corporation's owned loans, and the Corporation services the
securitized and owned loans, and the related accounts, together and in the same
manner without regard to ownership of the loans. In a securitization, the
account relationships are not sold to the trust. The Corporation continues to
own and service the accounts that generate the securitized loan principal
receivables. The credit performance of the entire managed loan portfolio is
important to understand the quality of originations and the related credit
risks inherent in the owned portfolio and retained interests in
securitizations.
Managed financial data, after a securitization adjustment, results in the
Corporation's reported financial information in its consolidated financial
statements. This securitization adjustment reclassifies interest income,
interchange income, credit card and other consumer loan fees, insurance
income, and recoveries on charged-off securitized loan principal receivables in
excess of interest paid to investors, gross credit losses, and other trust
expenses into securitization income.
The securitization adjustment for interest income was $2.1 billion and $6.6
billion for the three and nine months ended September 30, 2002, as compared to
$2.4 billion and $7.2 billion for the same periods in 2001, respectively.
Excluding the change in the estimated value of accrued interest and fees, the
securitization adjustment for interest income would have been $2.3 billion and
$6.8 billion for the three and nine months ended September 30, 2002,
respectively. The securitization adjustment for interest expense was $469.5
million and $1.4 billion for the three and nine months ended September 30,
2002, as compared to $711.2 million and $2.5 billion for the same periods in
2001, respectively. The securitization adjustment for provision for possible
credit losses was $943.8 million and $2.8 billion for the three and nine months
ended September 30, 2002, as compared to $914.8 million and $2.5 billion for
the same periods in 2001, respectively. The securitization adjustment for
other operating income was $687.3 million and $2.4 billion for the three and
nine months ended September 30, 2002, as compared to $789.5 million and $2.2
billion for the same periods in 2001, respectively. Excluding the change in
the estimated value of accrued interest and fees, the securitization adjustment
for other operating income would have been $898.7 million and $2.6 billion for
the three and nine months ended September 30, 2002, respectively.
The managed financial data also includes the impact of the gain recognized on
securitized loan principal receivables based on Statement No. 140. Managed
financial data is presented in Table 11 below:
TABLE 11: MANAGED FINANCIAL DATA
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited)
Managed interest
income (a)........... $ 2,988,099 $ 3,282,620 $ 9,269,881 $ 9,785,162
Managed interest
expense.............. 874,694 1,162,554 2,578,193 3,895,685
Managed provision for
possible credit
losses............... 1,231,994 1,229,167 3,757,846 3,402,035
Managed other
operating income (a). 980,810 1,016,096 2,542,042 2,666,812
MANAGED LOANS
At period end......... $102,799,447 $ 92,585,150
Average for the
period............... 101,921,178 91,852,750 $ 98,783,986 $ 89,715,588
(a) Includes the change in the estimated value of accrued interest and fees.
Excluding the change in the estimated value of accrued interest and fees,
managed interest income would have been $3.3 billion and $9.5 billion for
the three and nine months ended September 30, 2002, respectively.
Excluding the change in the estimated value of accrued interest and fees,
managed other operating income would have been $966.8 million and $2.5
billion for the three and nine months ended September 30, 2002,
respectively. Excluding the change in the estimated value of accrued
interest and fees, managed loans would have been $103.2 billion at
September 30, 2002.
Managed interest income was $3.0 billion and $9.3 billion for the three and
nine months ended September 30, 2002, as compared to $3.3 billion and $9.8
billion for the same periods in 2001, respectively. The decrease in managed
interest income is due to a decrease in the average yield earned on managed
interest-earning assets of 244 basis points and 201 basis points to 10.83% and
11.63% for the three and nine months ended September 30, 2002, partially offset
by an increase in managed average interest-earning assets of $11.3 billion and
$10.6 billion for the three and nine months ended September 30, 2002,
respectively. The change in the estimated value of the accrued interest and
fees decreased the yield on managed average interest-earning assets by 101
basis points and 35 basis points for the three and nine months ended
September 30, 2002, respectively. The further decrease in the yield earned on
managed interest-earning assets primarily reflects lower promotional and non-
promotional interest rates offered to attract and retain Customers and to grow
managed loans.
Managed interest expense decreased $287.9 million and $1.3 billion for the
three and nine months ended September 30, 2002, as compared to the same periods
in 2001, respectively. The decrease in managed interest expense is due to a
decrease in the rate paid on average managed interest-bearing liabilities of
141 basis points and 205 basis points for the three and nine months ended
September 30, 2002, partially offset by an increase in the average managed
interest-bearing liabilities of $10.2 million and $9.5 billion for the three
and nine months ended September 30, 2002, respectively. The decrease in the
rate paid on average managed interest-bearing liabilities is a result of
actions by the FOMC throughout 2001, which impacted overall market interest
rates.
The managed provision for possible credit losses increased $2.8 million and
$355.8 million for the three and nine months ended September 30, 2002, as
compared to the same periods in 2001, respectively. The increase in the
managed provision for possible credit losses reflects increases in the
Corporation's managed net credit losses.
Managed other operating income was $980.8 million and $2.5 billion for the
three and nine months ended September 30, 2002, as compared to $1.0 billion and
$2.7 billion for the same periods in 2001, respectively. Excluding the change
in the estimated value of accrued interest and fees, managed other operating
income would have been $966.8 million and $2.5 billion for the three and nine
months ended September 30, 2002, respectively. The decrease in managed other
operating income for the three and nine months ended September 30, 2002, was a
result of the change in the estimated value of accrued interest and fees,
partially offset by an increase in interchange and insurance income.
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,
The 2001. implementation of Statement No. 140 did not have a material impact
2001. 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 asset-backed
securities and is accounted for under Statement No. 140. Asset securitization
removes loan principal receivables from the consolidated statement of financial
condition through the transfer 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. The Corporation also retains the undivided interest in the
securitization trust not sold to investors and is entitled to specified cash
flows allocable to that retained interest. As loan principal receivables are
securitized, the Corporation's on-balance-sheet funding needs are reduced by
the amount of loans securitized.
A credit card account represents a contractual relationship between the lender
and the Customer. A loan receivable represents a financial asset. Unlike a
mortgage or other closed-end loan account, the terms of a credit card account
permit a Customer to borrow additional amounts and to repay each month an
amount the Customer chooses, subject to a minimum payment requirement. The
account remains open after repayment of the balance and the Customer may
continue to use it to borrow additional amounts. The Corporation reserves the
right to change the account terms, including interest rates and fees, in
accordance with the terms of the agreement and applicable law. The credit card
account is, therefore, separate and distinct from the loan receivable.
In a credit card securitization, the account relationships are not sold to the
securitization trust. The Corporation retains ownership of the account
relationship, including the right to change the terms of the account and
the right to additional principal receivables generated by the account,
although the Corporation agrees to sell the additional principal receivables to
the trust until the trust begins using principal collections to make payments
to investors. When the revolving period of the securitization ends, the
account relationship between the Corporation and the Customer continues.
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 and
payments received from the accounts. The undivided interests in the trust sold
to investors are issued through different classes of securities with different
risk levels and credit ratings. The Corporation's securitization transactions
are generally structured to include up to three classes of securities sold to
investors. With the exception of the most senior class, each class of
securities issued by the trust provides credit enhancement, in the form of
subordination, to the more senior, higher rated classes. The most senior class
of asset-backed securities is the largest and generally receives a AAA credit
rating at the time of issuance. In order to issue senior classes of
securities, it is necessary to obtain the appropriate amount of credit
enhancement, generally through the issuance of the above described subordinated
classes. 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 statements 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 in the
securitization. Instead, during the revolving period, the trust uses principal
payments received from Customers, which pay off the loan principal receivables
that were sold to the trust, to purchase for the trust from the Corporation 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 uses
principal payments to pay the investors, the Corporation's on-balance-sheet
loan receivables increase by the amount of any new loans on the Customer
accounts because the trust is no longer purchasing new loan receivables from
the Corporation.
During the three and nine months ended September 30, 2002, the Corporation
securitized credit card loan principal receivables totaling $3.8 billion and
$10.9 billion, respectively. During the three and nine months ended
September 30, 2002, there was an increase of $2.7 billion and $7.5 billion,
respectively, in the Corporation's loan receivables which resulted when certain
securitizations matured as scheduled and the trusts used principal payments to
pay the investors rather than purchasing new loan principal receivables from
the Corporation. Included in securitization activity during the nine months
ended September 30, 2002, was $1.9 billion of foreign credit card loan
principal receivables that were securitized. The total amount of securitized
loans was $76.5 billion or 74.4% of managed loans at September 30, 2002,
compared to $72.9 billion or 74.7% at December 31, 2001. The Corporation's
loan portfolio is expected to increase an additional $2.7 billion during 2002
as a result of future scheduled maturities of existing securitization
transactions when the trusts use principal payments to pay the investors rather
than purchasing new loan principal receivables from the Corporation. This
amount is based upon the estimated maturity of outstanding securitization
transactions, which are subject to change.
TABLE 12: SECURITIZED LOANS DISTRIBUTION
(dollars in thousands)
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
Securitized Loans
Domestic:
Credit card.................................. $ 62,200,063 $ 60,501,860
Other consumer............................... 5,676,399 5,702,658
------------ ------------
Total domestic securitized loans........... 67,876,462 66,204,518
Foreign:
Credit card.................................. 8,586,623 6,657,969
------------ ------------
Total securitized loans.......................... $ 76,463,085 $ 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 13 shows summarized yields for each trust for the three-month period
ended September 30, 2002 on a cash basis. 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 13: 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.. $40,560,957 57 17.83% 9.66%
UK Receivables Trust.............. 3,985,274 9 19.72 11.30
Gloucester Credit Card Trust...... 1,710,477 8 18.34 9.24
MBNA Master Consumer Loan Trust... 5,560,277 3 (b) (b)
MBNA Triple A Master Trust........ 1,500,000 2 18.08 9.63
MBNA Credit Card Master Note
Trust (c)........................ 18,803,425 32 17.89 9.60
UK Receivables Trust II........... 2,735,051 4 18.94 11.38
Yield in Excess of Minimum (a)
--------------------------------
Series Range
Weighted --------------------
Average High Low
---------- --------- ---------
(unaudited)
MBNA Master Credit Card Trust II.. 8.17% 8.57% 5.32%
UK Receivables Trust.............. 8.42 9.20 6.34
Gloucester Credit Card Trust...... 9.10 9.75 8.71
MBNA Master Consumer Loan Trust... (b) (b) (b)
MBNA Triple A Master Trust........ 8.45 8.45 8.45
MBNA Credit Card Master Note
Trust (c)........................ 8.29 8.29 8.29
UK Receivables Trust II........... 7.56 7.81 7.20
(a) The Yield in Excess of Minimum Yield represents the trust's average
annualized yield less its average minimum yield. The yields are on a cash
basis and were not affected by the change in estimated value of accrued
interest and fees (for further discussion, see "Note B: Change in
........... Accounting Estimate for Interest and Fees").
(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 13.
(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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information called for by this item is provided under the caption "Interest
Rate Sensitivity" and "Foreign Currency Exchange Rate Sensitivity" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC rules, the Corporation's management (including the Chief
Executive Officer and the Chief Financial Officer) conducted an evaluation of
the Corporation's disclosure controls and procedures (as such term is defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) within 90 days prior to the filing date of this quarterly report as
described in the Certifications in this report. Based on such evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer concluded as
of the date of such evaluation that the Corporation's disclosure controls and
procedures were effective in alerting them on a timely basis to material
information required to be included in the Corporations' reports filed or
submitted under the Exchange Act, particularly during the period in which this
quarterly report was being prepared.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of such
evaluation.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1996, Andrew B. Spark filed a lawsuit against MBNA Corporation ("the
Corporation"), MBNA America Bank, N.A. ("the Bank") and certain of its officers
and its subsidiary MBNA Marketing Systems, Inc. The case is pending in the
United States District Court for the District of Delaware. This suit is a
purported class action. The plaintiff alleges that the Bank's advertising of
its cash promotional annual percentage rate program was fraudulent and
deceptive. The plaintiff seeks unspecified damages including actual, treble
and punitive damages and attorneys' fees for an alleged breach of contract,
violation of the Delaware Deceptive Trade Practices Act and violation of the
Federal Racketeer Influenced and Corrupt Organizations Act. In February 1998,
a class was certified by the District Court. In September 2000, the Court gave
preliminary approval to a settlement of this suit for approximately $8.7
million. In August 2001, the Court entered an order approving a settlement
payout, including fees and costs, of approximately $5.1 million. Various
members of the class who had filed objections to the proposed settlement
appealed the order approving the settlement to the Third Circuit Court of
Appeals. In September 2002, the Third Circuit Court of Appeals affirmed the
District Court order approving the settlement.
In October 1998, Gerald D. Broder filed a lawsuit against the Corporation and
the Bank in the Supreme Court of New York, County of New York. This suit is a
purported class action. The plaintiff alleges that the Bank's advertising of
its cash promotional annual percentage rate program was fraudulent and
deceptive. The plaintiff seeks unspecified damages including actual, treble
and punitive damages and attorneys' fees for an alleged breach of contract,
common law fraud and violation of New York consumer protection statutes. In
April 2000, summary judgment was granted to the Corporation and the Bank on the
common law fraud claim and a class was certified by the Court. In November
2001, the court gave preliminary approval to the settlement of this suit for an
estimated $18.0 million, including fees and costs.
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 January
2003.
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. The Corporation and its affiliates are not parties to these
suits. However, the Corporation's banking subsidiaries, including the Bank 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
Incorporated's disclosure in its Quarterly Report on Form 10-Q for the period
ended June 30, 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 in June 2002, the U.S. Supreme Court denied MasterCard's and
Visa's petition for a writ of certiorari on the issue of class certification.
Both sides have filed motions for summary judgment, with an argument date set
for December 2002. A trial date has been set for April 2003. Based upon
publicly available information, the plaintiffs previously have asserted damage
claims of approximately $8.0 billion, before mandatory trebling under U.S.
federal antitrust law. Recent press reports place the plaintiffs' estimated
damage claims at approximately $13.0 billion to $16.0 billion, or more, before
trebling. These figures reflect claims asserted and should not be construed as
an acknowledgement of the reliability of the figures presented.
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 plaintiffs, the associations or the associations' creditors may seek to
assess or otherwise assert claims against the associations' member banks,
including the Corporation's banking subsidiaries, to satisfy the judgment. In
addition, even if no claim is asserted against the associations' member banks,
the impact of a judgment against the associations could adversely affect the
business operations of the member banks. The outcome of these suits, the
amount of any possible judgment against the associations, and the likelihood,
amount and validity of any claims against the associations' member banks,
including the Corporation's banking subsidiaries, resulting from these suits,
cannot be determined at this time.
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
------- -----------------------------------------------------
3 By-laws, as amended.
10 1997 Long Term Incentive Plan and Policies, as
amended.
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
(unaudited)
EXHIBIT 3: BY-LAWS, AS AMENDED
MBNA CORPORATION
Composite Bylaws
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting
The annual meeting of the stockholders of the Corporation, for the election of
the directors and for the transaction of such other business within the power
of the Corporation as properly may come before the meeting, shall be held at
such place as the Board of Directors may designate, at such date and hour
during the period of April 15 through May 15 as shall be determined by the
Board of Directors. (as amended January 22, 2002)
Section 2. Special Meeting
At any time in the intervals between annual meetings, a special meeting of the
stockholders may be called by the Chief Executive Officer or by the President
or by the Board of Directors. Upon the request in writing by stockholders
entitled to cast at least 25% of all the votes entitled to be cast at the
meeting, the Secretary shall call a special meeting of the stockholders. The
request shall state the purpose of the meeting and the matters proposed to be
acted on. The Secretary shall inform such stockholders of the reasonably
estimated costs of preparing and mailing the notice of the meeting and, upon
payment to the Corporation of such costs, the Secretary shall give notice of
the time, place and purpose of the meeting in the manner provided in these
Bylaws. Unless requested by stockholders entitled to cast a majority of all
the votes entitled to be cast at the meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding 12
months.
Section 3. Notice of Meeting
Not less than ten (10) days nor more than ninety (90) days before the date of
every stockholder's meeting, the Secretary shall give to each stockholder
entitled to vote thereat, written, printed or electronic notice stating the
time and place of such meeting, and in the case of a special meeting, the
purpose or purposes for which the meeting is called. Notice is given to a
stockholder when it is personally delivered to the stockholder; left at the
stockholder's residence or usual place of business; mailed to the stockholder's
address as it appears on the Corporation's records; or transmitted to the
stockholder by electronic mail to any electronic mail address of the
stockholder or by any other electronic means.
Section 4. Notice of Stockholders Business
At any annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, the business, including any
nomination for election of directors, must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the board
of directors, (ii) otherwise properly brought before the meeting by or at the
direction of the board of directors, or (iii) otherwise properly brought before
the meeting by a stockholder who complies with the notice procedures set forth
in this Section 4.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such business must be a proper matter for
stockholder action. To be timely, such notice must be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting. If the date of the annual meeting is more
than 30 days before or more than 60 days after such anniversary date, to be
timely any such notice must be so delivered not later than the close of
business on the later of the 90th day prior to such annual meeting or the 10th
day following the day on which public announcement of such meeting is first
made. In no event shall the public announcement of an adjournment of an annual
meeting commence a new time period for the giving of a stockholder's notice as
described above. In the event that the number of directors is increased and
there is a public announcement of the increase or a public announcement naming
all of the nominees for director at least 100 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
shall be considered timely if delivered within the time period described above.
If such public announcement is made later, a stockholder's notice shall be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
Any such notice by a stockholder shall set forth as to each matter the
stockholder proposes to bring before the meeting (i) a brief description of the
business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and address of the
stockholder proposing such business, as they appear on the Corporation's books,
and of the beneficial owner, if any, on whose behalf the proposal is made,
(iii) the class and number of shares of the capital stock of the Corporation
which are beneficially owned by such stockholder and such beneficial owner, if
any, and (iv) any material interest of such stockholder and such beneficial
owner, if any, in such business. If a stockholder proposes the nomination for
election of directors, such notice by the stockholder shall also set forth as
to each person whom the stockholder proposes to nominate (i) the name, age,
business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of the capital stock of the Corporation which are beneficially owned by such
person and (iv) any other information relating to such person that is required
to be disclosed in solicitations of proxies for the election of directors
pursuant to Regulation 14A under the Securities Exchange Act of 1934 ("Exchange
Act") or any successor regulation thereto, including without limitation such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected and whether any person intends to seek
reimbursement from the Corporation of the expenses of any solicitation of
proxies should such person be elected a director of the Corporation. No person
shall be entitled to receive reimbursement from the Corporation of the expenses
of a solicitation of proxies for the election as a director of a person named
in such notice unless such notice states that such reimbursement will be sought
from the Corporation.
Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the Corporation's notice
of meeting. Nominations of persons for election to the board of directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the Corporation's notice of meeting (i) by or at the
direction of the board of directors or (ii) by a stockholder who complies with
the notice procedures set forth in this Section 4. In the event the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the board of directors, any such stockholder may
nominate a person or persons, as the case may be, for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder gives timely notice thereof to the Secretary of the Corporation in
writing and setting forth the information required in the paragraph immediately
above. To be timely, any such notice must be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the later of the 90th day prior to such special meeting or the 10th
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the board of directors to
be elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
For purposes of this Section 4, "public announcement" shall mean disclosure in
a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any annual or special meeting except in accordance with the
procedures set forth in this Section. The chairman of the annual or special
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section and, if he should so determine, he shall so declare
to the meeting that any such business not properly brought before the meeting
shall not be considered or transacted.
Notwithstanding the foregoing provisions of this Section 4, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this
Section 4. Nothing in this Section 4 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or the holders of any
series of preferred stock to elect directors under specified circumstances.
Section 5. Quorum
At any meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of the votes thereat shall constitute
a quorum.
A meeting of stockholders convened on the date for which it was called may be
adjourned from time to time by vote of a majority of the shares present in
person or by proxy even if less than a quorum without further notice to a date
not more than 120 days after the original record date. At such reconvened
meeting at which a quorum shall be present, any business may be transacted
which might have been transacted at the meeting originally called. The
stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 6. Proxies
At all meetings of stockholders, a stockholder may vote the shares owned of
record by him either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney-in-fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven (11) months from the date of its
execution, unless otherwise provided in the proxy.
Section 7. Voting
Each stockholder shall be entitled to one vote for each share of stock held by
him. At all elections of directors of the Corporation, each stockholder shall
have the right to vote, in person or by proxy, the shares owned of record by
him, for as many persons as there are directors to be elected and for whose
election he has a right to vote. A plurality of the votes cast at a meeting of
stockholders, duly called and at which a quorum is present, shall be sufficient
to elect any director. A majority of the votes cast at a meeting of
stockholders, duly called and at which a quorum is present, shall be sufficient
to take or authorize action upon any other matter which may properly come
before the meeting unless more than a majority of votes is required by law or
the Charter.
ARTICLE II - DIRECTORS
Section 1. Powers
The business and affairs of the Corporation shall be managed by or under the
direction of its Board of Directors, which may exercise all of the powers of
the Corporation, except such as are by statute expressly conferred upon or
reserved to the stockholders.
Section 2. Number and Tenure
The number of directors of the Corporation shall be that number as may be fixed
from time to time by resolution of the Board of Directors but in no event shall
be less than the lesser of three (3) or the number of stockholders or more than
twenty (20).
Section 3. Vacancies
Any vacancy occurring in the Board of Directors, other than one occurring
because of an increase in the number of directors, may be filled by the
affirmative vote of a majority of the remaining directors. A vacancy occurring
in the Board of Directors by reason of an increase in the number of directors
may be filled by a majority of the entire Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office.
Section 4. Regular Meetings
The Board of Directors shall meet for the purpose of organization, the election
of officers, and the transaction of other business as soon as practicable after
each annual election of directors. Notice of such meeting need not be given.
The Board of Directors shall also meet regularly at such times as may be stated
from time to time by the Board.
Section 5. Special Meetings
Special meetings of the Board of Directors may be called by the Chairman of the
Board of Directors, the Chief Executive Officer or by a majority of the Board.
Section 6. Notice
Notice of every regular, except as otherwise provided in Article II, Section 4
of these Bylaws, or special meeting of the Board shall be given to each
director at least one (l) day previous thereto by written notice delivered
personally or mailed to his last known business or residence address, or by
telegram sent to his last known business or residence address, or by personal
telephone call. Any director may waive notice of any meeting by written waiver
filed with the records of the meeting, either before or after the holding
thereof. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 7. Quorum
A majority of the Board of Directors shall constitute a quorum for the
transaction of business, but if less than such quorum is present at a meeting,
a majority of the directors present may adjourn the meeting from time to time
without further notice.
Section 8. Manner of Acting
The action of a majority of the directors present at a meeting at which a
quorum is present shall be the action of the Board of Directors unless the
concurrence of a greater proportion is required for such action by law, the
Charter or these Bylaws.
Section 9. Committees
The Board of Directors may establish committees, composed of at least two
directors, from among its members. Any such committee shall serve at the
pleasure of the Board of Directors and shall have such powers in the management
of the business and affairs of the Corporation as may be delegated by the Board
of Directors consistent with law. The Board of Directors may fill any vacancy
on a committee. Committees shall meet at the call of the Chairman of the Board
of Directors or the Chief Executive Officer or any two or more members. A
majority of the members of a committee shall constitute a quorum for the
transaction of business and the actions of a majority of the members present at
a meeting at which a quorum is present shall be the action of the committee.
The members of any committee present at a meeting, whether or not they
constitute a quorum, may appoint a director to act in the place of an absent
member. Each committee shall report its actions to the Board of Directors.
Any action taken by a committee shall be subject to review or alteration by the
Board of Directors, provided that no rights of third persons arising from any
action taken or permitted upon the failure of approval of such committee shall
be affected by any such review or alteration or by disapproval by the Board of
Directors of any report by the committee.
Section 10. Compensation
Directors shall receive for their services as directors of the Corporation such
compensation as shall be determined by resolution of the Board of Directors. A
director may serve the Corporation or its subsidiaries in any other capacity
and receive compensation therefor.
Section 11. Informal Action
Any action required or permitted to be taken at any meeting of the Board of
Directors may be taken without a meeting, if a written consent to such action
is signed by all members of the Board of Directors and such written consent is
filed with the minutes of proceedings of the Board of Directors.
ARTICLE III - OFFICERS
Section 1. Number
The officers of the Corporation shall be a Chairman of the Board, a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary, a
Treasurer, and such other officers as the Board of Directors may elect or may
be appointed as provided in Section 2 hereof. Any two offices may be held by
the same persons, except those of President and Vice President, but no officer
shall execute, acknowledge or verify any instrument in more than one capacity,
if such instrument is required to be executed, acknowledged or verified by any
two or more officers. In its discretion, the Board of Directors may leave
unfilled any offices except those of President, Treasurer and Secretary.
Section 2. Election and Tenure
The officers of the Corporation shall be elected by the Board of Directors at
the first meeting of the Board of Directors held after each annual meeting of
the stockholders, or as soon after such first meeting as may be convenient.
Each officer shall hold office for a term of one (l) year and until his
successor shall have been duly elected and shall have qualified.
Section 3. Removal
Any officer or agent of the Corporation may be removed by the Board of
Directors whenever, in its judgment, the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. The Board of Directors may authorize
any officer to remove subordinate officers.
Section 4. Vacancies
A vacancy in any office may be filled by the Board of Directors for the
unexpired portion of the term.
Section 5. Chairman of the Board
The Chairman of the Board, if one is elected by the Board of Directors, shall
preside at all meetings of the Board of Directors and stockholders and shall
have such other duties as are provided in these Bylaws and as from time to time
may be assigned by the Board of Directors or the Chief Executive Officer.
Section 6. Chief Executive Officer
The Chief Executive Officer shall have general charge and supervision of the
policies and affairs of the Corporation and shall have such other duties as are
provided in these Bylaws and as from time to time may be assigned by the Board
of Directors. The person who is Chief Executive Officer may also serve as the
Chairman of the Board or President. In the absence of the Chairman of the Board
of Directors or if one is not elected, the Chief Executive Officer shall
perform the duties and exercise the functions of the Chairman of the Board of
Directors.
Section 7. President
The President shall have such duties as are provided in these Bylaws or as from
time to time may be assigned by the Board of Directors or the Chief Executive
Officer. In the absence of the Chief Executive Officer or if one is not
elected, the President shall perform the duties and exercise the functions of
the Chief Executive Officer.
Section 8. Vice Presidents
The Vice President or Vice Presidents shall have such duties and functions as
from time to time may be assigned by the Chief Executive Officer, except as may
otherwise be provided by the Board of Directors.
Section 9. Secretary
The Secretary shall be responsible for the minute books of the Corporation, in
which he shall maintain and preserve the organization papers of the
Corporation, the Articles of Incorporation, the Bylaws and the proceedings of
regular and special meetings of the stockholders, the Board of Directors and
any committees. He shall be responsible for the custody of the seal of the
Corporation and shall be responsible for such other duties and functions as may
be assigned from time to time by the Chief Executive Officer.
Section 10. Treasurer
The Treasurer shall have general charge of the financial affairs of the
Corporation. He shall in general have all powers and perform all duties and
functions incident to the office of Treasurer and such as may from time to time
be prescribed by the Chief Executive Officer.
Section 11. Other Officers
Such other officers as may be elected by the Board of Directors shall have such
powers and perform such duties as the Chief Executive Officer may from time to
time prescribe.
Section 12. Salaries
Salaries to be paid to all officers and employees shall be fixed in such manner
as the Board of Directors may determine from time to time and no officer shall
be prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
Section 13. Special Appointments
In the absence or incapacity of any officer, or in the event of a vacancy in
any office, the Board of Directors may designate any person to fill any such
office pro tempore or for any particular purpose.
Section 14. Voting Stock Held by the Corporation
Unless otherwise ordered by the Board of Directors, the Chairman of the Board
of Directors or the Chief Executive Officer or other officer thereunto duly
authorized by the Chairman of the Board of Directors or the Chief Executive
Officer shall have full power and authority on behalf of the Corporation to
attend and to vote at any meeting of stockholders of any corporation in which
this Corporation may hold stock, and may exercise on behalf of the Corporation
any and all of the rights and powers incident to the ownership of such stock at
any such meeting, and shall have power and authority to execute and deliver
proxies and consents on behalf of this Corporation in connection with the
exercise by this Corporation of the rights and powers incident to the ownership
of such stock. The Board of Directors, from time to time, may confer like
powers upon any other person or persons.
ARTICLE IV - INDEMNIFICATION
The Corporation shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The Corporation
shall indemnify its directors and officers who, while serving as directors or
officers of the Corporation, also serve at the request of the Corporation as a
director, officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan to the fullest extent consistent with law. The indemnification
and other rights provided by this Article shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Any director or officer seeking indemnification within the scope of this
Article shall be entitled to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with the matter as to which
he is seeking indemnification in the manner and to the fullest extent
permissible under the Maryland General Corporation Law without requiring a
preliminary determination of ultimate entitlement of indemnification.
The Board of Directors may make further provision consistent with law for
indemnification and advance of expenses to directors, officers, employees and
agents by resolution, agreement or otherwise. The indemnification provided by
this Article shall not be deemed exclusive of any other right, with respect to
indemnification or otherwise, to which those seeking indemnification may be
entitled under any insurance or other agreement or resolution of stockholders
or disinterested directors or otherwise.
References in this Article are to the Maryland General Corporation Law as from
time to time amended. No amendment of these Bylaws shall affect any right of
any person under this Article based on any event, omission or proceeding prior
to the amendment.
ARTICLE V - SEAL
The seal of the Corporation shall be in the form of two concentric circles
inscribed with the name of the Corporation and the year and State in which it
is incorporated.
ARTICLE VI - ISSUE AND TRANSFER OF STOCK
Section 1. Issue
Certificates representing shares of the Corporation shall be in such form as
shall be determined by the Board of Directors. Each certificate shall be
signed manually by, or bear the facsimile signature of, the Chairman of the
Board, the Chief Executive Officer, the President, or a Vice President and
countersigned by, or bear the facsimile signature of, the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and shall be
sealed with the corporate seal or a facsimile thereof. All certificates
surrendered to the Corporation for transfer shall be cancelled, and no new
certificates shall be issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a
lost, stolen, destroyed or mutilated certificate, a new one may be issued
therefor upon such terms and indemnity to the Corporation as the Board of
Directors may prescribe.
Section 2. Transfer of Shares
Transfer of shares of the Corporation shall be made only on its stock transfer
books by the holder of record thereof, or by his attorney thereunto authorized
by power of attorney duly executed and filed with the Secretary of the
Corporation, and on surrender for cancellation of the certificate for such
shares. The person in whose name shares stand on the books of the Corporation
shall be deemed to be the owner thereof for all purposes.
Section 3. Fixing Date for Determination of Stockholders' Rights
The Board of Directors may fix, in advance, a date as the record date for the
purpose of determining stockholders entitled to notice of, or to vote at, any
meeting of stockholders, or stockholders entitled to receive payment of any
dividend or the allotment of any rights, or in order to make a determination of
stockholders for another proper purpose. Only stockholders of record on such
date shall be entitled to notice of, and to vote at, such meeting or to receive
such dividends or rights, as the case may be and notwithstanding any transfer
of any stock on the books of the Corporation after such record date fixed as
aforesaid.
ARTICLE VII - EMERGENCIES
During the period of an emergency declared by the President of the United
States, or the person performing his functions, of a nature and sufficient
severity to prevent the conduct and management of the affairs and business of
the Corporation by its directors, officers and committees in the manner
contemplated by these Bylaws (other than this Article VII), any two or more
available members of the Board of Directors shall constitute a quorum of the
Board of Directors for the full conduct and management of the affairs and
business of the Corporation. Other provisions of the Bylaws or resolutions
contrary to or inconsistent with the provisions hereof shall be suspended until
it shall be determined by said interim Board of Directors that it shall be to
the advantage of the Corporation to resume the conduct and management of its
affairs and business under all the other provisions of the Bylaws and
resolutions.
If during any such emergency any authorized place of business of the
Corporation shall be unable to function, all or part of the business ordinarily
conducted at such location may be relocated elsewhere in suitable quarters as
may be designated by the interim Board of Directors or by such persons as are
then conducting the affairs of the Corporation. Any such temporarily relocated
place of business of the Corporation shall be returned to its authorized
location as soon as practicable.
ARTICLE VIII - CONTROL SHARE ACQUISITION STATUTE EXEMPTIONS
Any acquisition of shares of the Corporation on or after January 21, 1991 by
Alfred Lerner (or his successor in interest) ("Lerner") or by The Progressive
Corporation (or its successors in interest) ("Progressive"), or by any present
or future affiliate or associate thereof so long as such affiliate or associate
is at the time in question such an affiliate or associate (or any person acting
in concert or in a group with any of the foregoing) is, pursuant to Section 3-
702(b) of the Maryland General Corporation Law (the "MGCL") (or any successor
or replacement provision or statute), hereby approved for purposes of, and
exempted from the provisions of, Subtitle 7 of Title 3 of the MGCL (or any
successor or replacement provision or statute) with the result that any shares
acquired by any such person shall have all voting rights otherwise appurtenant
thereto, notwithstanding Subtitle 7 of Title 3 of the MGCL (or any successor or
replacement provision or statute).
Notwithstanding anything in the Charter or Bylaws of the Corporation (as each
may be amended from time to time) to the contrary, this ARTICLE may not be
amended, altered or repealed except with the unanimous approval of all of the
members of the Board of Directors and the written consent of all persons or
entities then in existence and specified above that may be adversely affected,
or that may lose any privilege or right, as a result of such amendment,
alteration or repeal.
ARTICLE IX - AMENDMENTS
These Bylaws may be altered, amended or repealed, and new Bylaws may be
adopted, by the Board of Directors. The stockholders of the Corporation shall
have no power to make, amend or repeal any Bylaw.
EXHIBIT 10: 1997 LONG TERM INCENTIVE PLAN AND POLICIES, AS AMENDED
MBNA CORPORATION
1997 LONG TERM INCENTIVE PLAN
(as amended effective April 24, 2000 and restated, and as adjusted for July
2002 stock split)
1. Establishment
MBNA Corporation (the "Corporation") hereby establishes the 1997 LONG TERM
INCENTIVE PLAN (the "Plan"). The Plan permits the grant of stock options and
restricted share awards for shares of the Corporation's Common Stock ("Common
Stock").
2. Administration
The Plan shall be administered by the Board of Directors of the Corporation or
a committee ("Committee") of the Board of Directors. All references herein to
"Committee" shall mean the Board of Directors if no committee of the Board of
Directors is appointed or otherwise authorized to act on a particular matter.
The Committee shall have all power and authority necessary to administer the
Plan, including but not limited to the power to select persons to participate
in the Plan, determine the terms of grants made under the Plan, interpret the
Plan and adopt such policies for carrying out the Plan as it may deem
appropriate. The decisions of the Committee on all matters relating to the Plan
shall be conclusive.
3. Shares Available for the Plan; Limitations
(a) Shares of Common Stock may be issued by the Corporation pursuant to
incentive or nonqualified stock options or restricted share awards granted
under the Plan.
(b) On any given date, the maximum number of shares of Common Stock with
respect to which option and restricted share awards may be made pursuant to the
Plan shall be equal to the number of shares of Common Stock which, when added
to the number of shares of Common Stock subject to outstanding option and
restricted share awards immediately prior to the grant, equals 10% of "fully
diluted shares outstanding" immediately after the grant. "Fully diluted shares
outstanding" for purposes of the Plan shall mean all issued and outstanding
shares of Common Stock, including restricted shares, and shares of Common Stock
subject to all outstanding options. If the Corporation has outstanding
securities convertible into or exercisable for shares of Common Stock, the
shares of Common Stock into which the securities may be converted or for which
the securities may be exercised shall also be included in "fully diluted shares
outstanding."
(c) In addition to the limitation in Section 3(b), the maximum number of
restricted shares which may be granted in any calendar year beginning in 1999
is 3,000,000.
(d) For purposes of the formula and limitation in Sections 3(b) and 3(c),
restricted shares shall not include restricted shares issued in lieu of payment
of cash bonuses under the Corporation's Senior Executive Performance Plan or
other annual bonus plans.
(e) In addition to the limitation in Section 3(b), the maximum number of
shares of Common Stock with respect to which incentive stock options may be
granted from April 26, 1999 through the remaining term of the Plan is
15,000,000.
(f) The maximum number of shares of Common Stock with respect to which options
may be granted pursuant to the Plan in any calendar year to any one participant
is 3,375,000.
(g) In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, share exchange, consolidation,
substantial distribution of assets, or any other change in the corporate
structure or shares of the Corporation, the maximum numbers of shares provided
in Sections 3(b), 3(c), 3(e) and 3(f), but not Section 5(e), and the kinds of
shares under the Plan shall be appropriately adjusted.
4. Participation
Participation in the Plan is limited to officers, directors, key employees,
consultants and advisors of the Corporation and its subsidiaries selected by
the Committee. Only officers and key employees of the Corporation and its
subsidiaries are eligible to receive incentive stock options.
5. Stock Options
(a) The Committee may from time to time grant to participants non-qualified
stock options or incentive stock options.
(b) The price per share payable upon the exercise of each option shall not be
less than 100% of the fair market value of a share of Common Stock on the date
the option is granted.
(c) The Committee shall determine all terms and conditions of options,
including but not limited to the period for exercise, the expiration date and
any conditions to exercise. The Committee may amend or modify the terms of any
outstanding option grant except that the Committee may not reprice any
outstanding option grant.
(d) Options may be exercised in any manner approved by the Committee. If
authorized by the Committee, a participant may deliver Common Stock, including
shares acquired upon exercise of the option, to pay the exercise price or
withholding taxes in connection with exercise of an option.
(e) Each person who becomes a nonemployee director of the Corporation shall be
granted an option to purchase 5,000 shares of Common Stock on the date the
person becomes a director and each person who is a nonemployee director on
January 2 of each year beginning in 1998 shall be granted an option to purchase
5,000 shares of Common Stock on that date or the next day the New York Stock
Exchange is open for trading. The exercise price shall be the closing price of
the Common Stock on the New York Stock Exchange on the grant date. All
nonemployee director's options are exerciseable immediately following the
effective date of the grant, shall have a term of ten years, and shall expire
90 days after the grantee is no longer a director.
6. Restricted Share Awards
The Committee may from time to time make restricted share awards of shares of
Common Stock to participants in such amounts and on such terms as it
determines. Each award of shares shall specify the restrictions on the shares.
The Committee may waive or modify any restriction.
7. Deferral of Shares
A director, employee or other holder of a stock option or restricted share
award may defer delivery of shares of Common Stock issuable upon exercise of a
stock option or upon the vesting of a restricted share award pursuant to
policies approved by the Committee. Deferral arrangements may include the
issuance of deferred share units, the issuance of shares to a trust, or other
arrangements approved by the Committee. The arrangements may include the
payment of dividend equivalents on deferred share units if approved by the
Committee.
8. Amendment and Termination of the Plan
The Plan may be amended or terminated at any time by the Board of
Directors. The Board of Directors may condition any amendment of the Plan on
approval by the stockholders of the Corporation. No further grants may be made
under the Plan after December 31, 2006.
POLICIES
1. General
Unless otherwise provided by the committee (the "Committee") administering the
MBNA Corporation 1997 Long Term Incentive Plan ("Plan"), the grants of stock
options and restricted or unrestricted share awards shall be governed by the
terms and policies set forth herein.
2. Definitions
(a) "Cause" means the occurrence of one of the following:
(i) Conviction for a felony or for any crime or offense lesser than a felony
involving the property of the Corporation or a subsidiary.
(ii) Conduct that has caused demonstrable and serious injury to the Corporation
or a subsidiary, monetary or otherwise as evidenced by a final determination of
a court or governmental agency of competent jurisdiction in effect after
exhaustion or lapse of all rights of appeals.
(iii) Gross neglect or dereliction of duty to the Corporation or other grave
misconduct by the participant and failure to cure such situation within 30 days
after receipt of notice thereof from the Chief Executive Officer of the
Corporation. If the participant who receives such a notice is the Chief
Executive Officer of the Corporation, it shall be received from the Committee,
as authorized by not less than two-thirds of all of the members thereof.
(b) "Change in Control" means:
(i) The acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"))(a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A)
the then outstanding shares of the common stock of the Corporation (the
"Outstanding Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Corporation entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
however, that for purposes of this subsection (i), the following acquisitions
shall not constitute a Change in Control: (A) any acquisition directly from the
Corporation, (B) any acquisition by the Corporation, (C) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any corporation controlled by the Corporation, (D) any
acquisition by any corporation pursuant to a transaction which complies with
clauses (A), (B) and (C) of subsection (iii) and (E) any acquisition by Alfred
Lerner or his personal representatives, heirs, executors, beneficiaries or
trustees, any group (as defined above) including Alfred Lerner, or any
corporation, partnership, trust or other entity controlled by Alfred Lerner; or
(ii) Individuals who, as of the date hereof, constitute the Board of Directors
of the Corporation (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors of the Corporation; provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Corporation's shareholders,
was approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a member
of the Incumbent Board, but excluding for this purpose any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies by or on behalf
of a Person other than the Board of Directors of the Corporation; or
(iii) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Corporation
(a "Business Combination"), in each case unless, following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which as a
result of such transaction owns the Corporation or all or substantially all of
the Corporation's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Common Stock and Outstanding
Voting Securities, as the case may be, (B) no Person (excluding any corporation
resulting from such Business Combination or any employee benefit plan (or
related trust) of the Corporation or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination and
(C) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Corporation of a complete liquidation
or dissolution of the Corporation.
(c) "Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
(d) "Corporation" means, for purposes of Sections 2(b) and 8 hereof, MBNA
Corporation, and for all other purposes, MBNA Corporation and any "subsidiary
corporation" of MBNA Corporation as defined in Section 424(f) of the Code, or
any successor statute of similar import.
(e) "Competition" means acting as a director, trustee, partner, officer,
employee, consultant or advisor with or to, or acquiring an ownership interest
in excess of 5% of, a corporation, partnership, or other entity that
engages in any business which competes with the Corporation or any subsidiary
of the Corporation as determined by the Committee in its sole discretion.
(f) "Disability" means a permanent and total disability as defined in the
Corporation's long term disability or similar plan, as from to time in effect,
or by the Committee.
(g) "Retirement" means voluntary termination of employment with the Corporation
and its Subsidiaries at or after age 60 except with the approval of the
Committee.
3. Stock Options
(a) Exercise Price. The exercise price of stock options may be paid in cash
or, with respect to incentive stock options, by delivery of any previously
owned shares of Common Stock acquired upon exercise of an incentive stock
option provided that the shares have been held by the optionee for at least
twelve months. The fair market value of shares of Common Stock delivered as
payment of the exercise price of options shall be determined on the date of
exercise. Any fractional share will be paid in cash.
(b) Term. The Committee shall determine when each option may be exercised at
the time of grant. Unless otherwise determined by the Committee at the time of
grant and specified in the document evidencing the grant, each option shall
have a term of ten years from the date of grant. The Committee may amend any
outstanding option to accelerate the date on which an option becomes
exercisable.
(c) Termination of Employment. If a participant ceases to be an employee of
the Corporation due to death or Disability, each of the participant's options
shall become fully vested and exercisable and shall remain so for a period of
one year from the date of termination of employment, but in no event after its
expiration date.
If a participant ceases to be an employee of the Corporation upon Retirement,
each of the participant's options shall become fully vested and exercisable and
shall remain so for a period of two years from the date of Retirement, but in
no event after its expiration date.
If a participant ceases to be an employee of the Corporation due to Cause, each
of the participant's options shall be forfeited immediately, whether or not
vested.
If a participant ceases to be an employee of the Corporation for any reason
other than death, Disability, Retirement or Cause, each option of the
participant which is vested and exercisable at the termination date shall
remain so for a period of ninety days from the date of termination of
employment, but in no event after its expiration date. Options which have not
vested at the termination date will be forfeited.
If a participant engages in Competition without written approval from the
Corporation to do so, each of the participant's options shall be forfeited
immediately, whether or not vested.
The Committee may amend any outstanding option to extend the period for
exercise following termination of employment.
(d) Restrictions on Incentive Stock Options. The aggregate fair market value
(determined as of the grant date) of shares of Common Stock with respect to
which all incentive stock options first become exercisable by any participant
in any calendar year under this or any other plan of the Corporation or any
related or predecessor corporation of the Corporation or any related
corporation (as defined in the applicable regulations under the Code) may not
exceed $100,000.
The exercise price of any incentive stock option granted to a participant who
owns (within the meaning of Section 422(b)(6) of the Code, after the
application of the attribution rules in Section 424(d) of the Code) more than
10% of the combined voting power of all classes of shares of the Corporation or
any related corporation shall be not less than 110% of the fair market value of
the Common Stock on the grant date and the term of such option shall not exceed
five years.
4. Restricted and Unrestricted Share Awards
Each award of shares shall specify the applicable restrictions, if any, on such
shares, the duration of such restrictions, and the time or times at which such
restrictions shall lapse with respect to all or a portion of the shares that
are part of the award. The Committee may reduce or shorten the duration of any
restriction applicable to any shares awarded to any participant under the Plan.
Restricted shares shall be issued at the time of award, subject to forfeiture
if the restrictions do not lapse. The holder of the restricted shares will be
required to deposit the certificates with the Corporation during the period of
any restriction thereon and to execute a blank stock power therefor. During
such period of restriction the participant shall have all of the rights of a
holder of Common Stock, including but not limited to the rights to receive cash
dividends (or amounts equivalent to dividends) and to vote, except that
additional shares of stock distributed to the participant pursuant to a stock
dividend or stock split shall be restricted shares and shall be deposited with
the Corporation during the period of any restriction thereon.
Except as otherwise provided by the Committee, on termination of a grantee's
employment due to death, Disability, Retirement or a Change in Control during
any period of restriction, all restrictions on shares awarded to such grantee
shall lapse. On termination of a grantee's employment for any other reason, all
shares granted to such grantee which are subject to restriction shall be
forfeited to the Corporation.
5. Withholding of Taxes
The Corporation shall require that the grantee pay to the Corporation any
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant, payment or issuance or delivery of shares. The payment
may be made in cash or, with respect to the exercise of stock options or
vesting of restricted shares, by delivering shares of Common Stock, including
shares of Common Stock otherwise deliverable in connection with the exercise of
the stock options or vesting of the restricted shares, at fair market value on
the date as of which the withholding tax liability is determined. In the event
of vesting of restricted shares upon the death of the holder of the restricted
shares, the holder's estate or other successor in interest shall have up to 90
days after the vesting date to deliver shares of Common Stock to satisfy the
tax withholding payment, with the shares valued at fair market value on the
date of delivery of the shares or the date the Corporation receives
instructions to withhold shares otherwise deliverable upon vesting. The
Corporation, to the extent permitted or required by law, shall have the right
to deduct from any payment of any kind (including salary or bonus) otherwise
due to a grantee any federal, state or local taxes of any kind required by law
to be withheld with respect to any grant or payment or the issuance or delivery
of shares under the Plan, or to retain or sell without notice a sufficient
number of shares to be issued to such grantee to cover any such taxes.
6. Transferability
Except as provided below, no option or restricted share award (prior to lapse
of the restrictions) granted under the Plan shall be transferable by the
recipient otherwise than by will or the laws of descent and distribution. The
holder of non-qualified options or restricted shares may designate a
beneficiary to receive nonqualified options or restricted shares in the event
of his or her death, with such designation to be made on a form provided by the
Corporation and signed by the holder, and in accordance with such other
procedures as the Corporation may determine. A beneficiary designation form
will be effective when received and accepted by the Corporation's Benefits
Department. An option may be exercised during the lifetime of an optionee only
by the optionee or his or her guardian or legal representative, and after the
optionee's death only by the optionee's designated beneficiary or the person to
whom such option is transferred pursuant to the optionee's will or by laws of
descent or distribution.
7. Transfer of Employee; Rights
Transfer of an employee from the Corporation to a subsidiary, from a subsidiary
to the Corporation, or from one subsidiary to another shall not be considered a
termination of employment. Nor shall it be considered a termination of
employment if an employee is placed on military or sick leave or such other
leave of absence which is considered by the Corporation as continuing intact
the employment relationship, until the employee's right to reemployment shall
no longer be guaranteed by law, contract or Corporation policy.
Nothing in the Plan or in any grant thereunder shall confer any right on an
employee to continue in the employ of the Corporation or shall interfere in any
way with the right of the Corporation to terminate an employee at any time.
8. Adjustments; Change in Control
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, share exchange, consolidation,
substantial distribution of assets, or any other change in the corporate
structure or shares of the Corporation, the number and kind of shares covered
by outstanding options and share awards made under the Plan and the exercise
price of outstanding options shall be appropriately adjusted.
In the event of a Change in Control, all outstanding options and all restricted
shares shall be exercisable and shall vest, notwithstanding any restriction on
exercise or vesting, upon the effective date of the Change in Control.
The Committee may amend or modify the grant of any outstanding option or
restricted share award in any manner determined by the Committee. No
modification may be made that would materially adversely affect any grant
previously made under the Plan without the approval of the grantee.
9. Deferral of Shares Upon Exercise of Director Stock Options
(a) A nonemployee director may make an advance election to defer receipt of the
shares deliverable by the Corporation upon exercise of a stock option. A
deferral election with respect to a stock option must be made (i) at least six
months prior to the date the director exercises the stock option and (ii) in a
calendar year prior to the year in which the director exercises the stock
option. A deferral election may not be revoked or changed after it is made.
(b) The exercise price for a stock option subject to a deferral election shall
be paid by the tender of shares of Common Stock with a then-fair market value
equal to the option exercise price. The shares must be shares purchased on the
open market with cash, or shares acquired pursuant to exercise of a nonemployee
director stock option at least six months prior to the date of tender, or
shares that otherwise constitute "mature shares" for financial accounting
purposes. The tendered shares may not be shares previously tendered for the
exercise of a stock option within the previous six months. Shares may be
tendered by the actual delivery of the certificate(s) representing the shares
or by certifying ownership of the shares on forms provided by the Corporation.
The Committee expressly approves the disposition of the tendered shares to the
Corporation as described in this section 9(a).
(c) For the period that the shares are deferred, the Corporation shall pay the
director an amount equal to the dividends that the director would have received
after exercise of the option had the deferred shares been outstanding shares of
Common Stock ("dividend equivalent payment"). Each dividend equivalent payment
shall be paid in cash or, if elected by the director on the deferral election
form, shall be deferred into and otherwise subject to the terms of the
Corporation's deferred compensation plan.
(d) The director's right to receive the shares deferred and the dividend
equivalent payments shall at all times be fully vested, but shall be an
unfunded, unsecured promise of future delivery of shares or payment by the
Corporation and shall be not greater than the right of an unsecured general
creditor of the Corporation. The shares deferred shall be distributed to the
director on the date or dates specified by the director on the deferral
election form, provided that a distribution may not be any earlier than two
years from the exercise date of the option or any later than ten years from the
date the person ceases to be a director of the Corporation. In the event of
the death of the director, any remaining deferred shares shall be delivered to
the beneficiary designated by the director or to the director's estate if no
beneficiary is designated.
(e) In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, share exchange, consolidation,
substantial distribution of assets, or any other change in the corporate
structure or shares of the Corporation, the Committee shall adjust the number
and kind of shares deferred as it deems appropriate to prevent dilution or
enlargement of rights. In addition to making such adjustments, the Committee
may make appropriate provision for the protection of outstanding deferred share
units by the substitution of appropriate equity interests or awards similar to
the deferred share units or by providing for the distribution of shares or the
exchange of shares for cash or other value pursuant to such terms and
conditions as the Committee deems appropriate to protect the rights and
interests of the director and the Corporation.
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
For the Nine Months Ended
September 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,933,429 $ 1,874,239
Fixed charges.................................... 1,207,663 1,392,987
Interest capitalized during period, net of
amortization of previously capitalized interest. (5,864) (4,458)
------------ ------------
Earnings, for computation purposes............... $ 3,135,228 $ 3,262,768
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 1,204,733 $ 1,388,829
Portion of rents representative of the interest
factor.......................................... 2,930 4,158
------------ ------------
Fixed charges.................................... 1,207,663 1,392,987
Preferred stock dividend requirements............ 16,814 17,022
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 1,224,477 $ 1,410,009
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.56 2.31
For the Nine Months Ended
September 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,933,429 $ 1,874,239
Fixed charges.................................... 265,258 290,426
Interest capitalized during period, net of
amortization of previously capitalized interest. (5,880) (4,474)
------------ ------------
Earnings, for computation purposes............... $ 2,192,807 $ 2,160,191
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 262,328 $ 286,268
Portion of rents representative of the interest
factor.......................................... 2,930 4,158
------------ ------------
Fixed charges.................................... 265,258 290,426
Preferred stock dividend requirements............ 16,814 17,022
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 282,072 $ 307,448
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 7.77 7.03
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.
REPORTS ON FORM 8-K
1. Report dated July 11, 2002, reporting MBNA Corporation's earnings
release for the second quarter of 2002.
2. Report dated July 31, 2002, reporting the securitization of $400.0
million of credit card loan receivables by MBNA America Bank, N.A.
3. Report dated July 31, 2002, reporting the securitization of $700.0
million of credit card loan receivables by MBNA America Bank, N.A.
4. Report dated July 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 July 2002.
5. Report dated August 14, 2002, reporting MBNA Corporation Statement under
oath of Chief Executive Officer and Chief Financial Officer regarding facts
and circumstances relating to Exchange Act filings.
6. Report dated August 29, 2002, reporting the securitization of $450.0
million of credit card loan receivables by MBNA America Bank, N.A.
7. Report dated August 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 August 2002.
8. Report dated September 19, 2002, reporting the securitization of $1.0
billion of credit card loan receivables by MBNA America Bank, N.A.
9. Report dated September 24, 2002, reporting the securitization of EUR795.0
million of credit card loan receivables by MBNA Europe Bank Limited.
10. Report dated September 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 September 2002.
11. Report dated October 17, 2002, reporting MBNA Corporation's earnings
release for the third quarter of 2002.
12. Report dated October 29, 2002, reporting the securitization of $300.0
million of credit card loan receivables by MBNA America Bank, N.A.
13. Report dated November 5, 2002, reporting MBNA Corporation's new Chairman
and new Chief Executive Officer, and a new Director.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBNA CORPORATION
Date: November 14, 2002 By: /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Senior Executive Vice President
Chief Financial Officer
Chief Executive Officer Certification
I, Charles M. Cawley, President and Chief Executive Officer of MBNA
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MBNA Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Charles M. Cawley
-------------------------------
Charles M. Cawley
President and Chief Executive Officer
Chief Financial Officer Certification
I, M. Scot Kaufman, Chief Financial Officer of MBNA Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MBNA Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ M. Scot Kaufman
-------------------------------
M. Scot Kaufman
Chief Financial Officer
49
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