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 March 31, 2003
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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 19884-0131
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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
---------- ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No
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Common Stock, $.01 Par Value - 1,277,671,875 Shares
Outstanding as of March 31, 2003
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
March 31, 2003(unaudited), and December 31, 2002
Consolidated Statements of Income - 3
For the Three Months Ended March 31, 2003, and 2002 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Three Months Ended March 31, 2003, and 2002
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Three Months Ended March 31, 2003, and 2002
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations (unaudited)
Item 3. Quantitative and Qualitative Disclosure About Market Risk 72
Item 4. Controls and Procedures 72
Part II - Other Information
Item 1. Legal Proceedings 73
Item 4. Submission of Matters to a Vote of Security Holders 74
Item 6. Exhibits and Reports on Form 8-K 75
Signature 77
Certifications
Item 1.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 839,820 $ 721,972
Interest-earning time deposits in other banks..... 4,996,487 3,703,052
Federal funds sold................................ 2,890,000 1,645,000
Investment securities:
Available-for-sale (amortized cost of $3,570,856
and $3,617,505 at March 31, 2003, and
December 31, 2002, respectively)............... 3,601,099 3,655,808
Held-to-maturity (market value of $410,032
and $428,472 at March 31, 2003, and
December 31, 2002, respectively)............... 402,243 419,760
Loans held for securitization..................... 9,523,377 11,029,627
Loan portfolio:
Credit card..................................... 9,663,795 9,484,115
Other consumer.................................. 8,238,099 8,212,766
------------ ------------
Total loan portfolio.......................... 17,901,894 17,696,881
Reserve for possible credit losses.............. (1,151,394) (1,111,299)
------------ ------------
Net loan portfolio............................ 16,750,500 16,585,582
Premises and equipment, net....................... 2,522,113 2,519,101
Accrued income receivable......................... 325,337 371,089
Accounts receivable from securitization........... 7,105,875 6,926,876
Intangible assets, net............................ 3,166,766 3,188,501
Prepaid expenses and deferred charges............. 514,110 412,609
Other assets...................................... 1,928,018 1,677,769
------------ ------------
Total assets.................................. $ 54,565,745 $ 52,856,746
============ ============
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
(dollars in thousands, except per share amounts)
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 22,659,363 $ 22,079,031
Money market deposit accounts................... 7,672,260 7,520,119
Noninterest-bearing deposits.................... 1,125,496 915,687
Interest-bearing transaction accounts........... 54,217 45,414
Savings accounts................................ 67,712 55,965
------------ ------------
Total deposits................................ 31,579,048 30,616,216
Short-term borrowings............................. 1,198,424 1,250,103
Long-term debt and bank notes..................... 9,988,687 9,538,173
Accrued interest payable.......................... 284,283 286,158
Accrued expenses and other liabilities............ 2,175,005 2,064,777
------------ ------------
Total liabilities............................. 45,225,447 43,755,427
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at March 31, 2003, and
December 31, 2002)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 1,277,671,875 shares
issued and outstanding at March 31, 2003,
and December 31, 2002)........................... 12,777 12,777
Additional paid-in capital........................ 2,230,301 2,296,568
Retained earnings................................. 7,033,921 6,707,162
Accumulated other comprehensive income............ 63,213 84,726
------------ ------------
Total stockholders' equity.................... 9,340,298 9,101,319
------------ ------------
Total liabilities and stockholders' equity.... $ 54,565,745 $ 52,856,746
============ ============
===============================================================================
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 Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
INTEREST INCOME
Loan portfolio.................................... $ 527,475 $ 451,002
Loans held for securitization..................... 284,580 308,576
Investment securities:
Taxable......................................... 30,382 34,487
Tax-exempt...................................... 361 457
Time deposits in other banks...................... 18,137 10,616
Federal funds sold................................ 7,954 10,951
Other interest income............................. 75,138 99,612
------------ ------------
Total interest income......................... 944,027 915,701
INTEREST EXPENSE
Deposits.......................................... 292,862 323,615
Short-term borrowings............................. 10,318 11,498
Long-term debt and bank notes..................... 85,251 67,312
------------ ------------
Total interest expense........................ 388,431 402,425
------------ ------------
NET INTEREST INCOME............................... 555,596 513,276
Provision for possible credit losses.............. 378,877 359,393
------------ ------------
Net interest income after provision for
possible credit losses........................... 176,719 153,883
OTHER OPERATING INCOME
Securitization income............................. 1,475,500 1,354,449
Interchange....................................... 89,666 74,919
Credit card fees.................................. 126,784 93,020
Other consumer loan fees.......................... 26,075 24,660
Insurance......................................... 53,487 45,809
Other............................................. 16,497 3,409
------------ ------------
Total other operating income.................. $ 1,788,009 $ 1,596,266
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.................... $ 526,454 $ 478,958
Occupancy expense of premises..................... 43,248 40,658
Furniture and equipment expense................... 87,464 79,742
Other............................................. 630,709 567,337
------------ ------------
Total other operating expense.................. 1,287,875 1,166,695
------------ ------------
INCOME BEFORE INCOME TAXES........................ 676,853 583,454
Applicable income taxes........................... 244,344 213,544
------------ ------------
NET INCOME........................................ $ 432,509 $ 369,910
============ ============
EARNINGS PER COMMON SHARE......................... $ .34 $ .29
EARNINGS PER COMMON SHARE-ASSUMING DILUTION....... .33 .28
===============================================================================
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, 2002... 8,574 1,277,672 $ 86 $ 12,777
Comprehensive income:
Net income................. - - - -
Other comprehensive
income, net of tax........ - - - -
Comprehensive income.........
Cash dividends:
Common-$.08 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 6,142 - 61
Stock-based compensation
tax benefit................. - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (6,142) - (61)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2003...... 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
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-$.07 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 19,654 - 196
Stock-based compensation
tax benefit................. - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (19,641) - (196)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2002...... 8,574 1,277,685 $ 86 $ 12,777
=========== ========== ========= ==========
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(dollars in thousands, except per share amounts)
(unaudited)
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 2002. $2,296,568 $6,707,162 $ 84,726 $ 9,101,319
Comprehensive income:
Net income............... - 432,509 - 432,509
Other comprehensive
income, net of tax...... - - (21,513) (21,513)
------------
Comprehensive income....... 410,996
------------
Cash dividends:
Common-$.08 per share.... - (102,234) - (102,234)
Preferred................ - (3,516) - (3,516)
Exercise of stock options
and other awards.......... 3,525 - - 3,586
Stock-based compensation
tax benefit............... 1,922 - - 1,922
Amortization of deferred
compensation expense...... 28,955 - - 28,955
Acquisition and retirement
of common stock........... (100,669) - - (100,730)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2003.... $2,230,301 $7,033,921 $ 63,213 $ 9,340,298
========== ========== ============= ============
BALANCE, DECEMBER 31, 2001. $2,529,563 $5,304,725 $ (48,433) $ 7,798,718
Comprehensive income:
Net income............... - 369,910 - 369,910
Other comprehensive
income, net of tax...... - - (36,445) (36,445)
------------
Comprehensive income....... 333,465
------------
Cash dividends:
Common-$.07 per share.... - (85,218) - (85,218)
Preferred................ - (3,516) - (3,516)
Exercise of stock options
and other awards.......... 109,799 - - 109,995
Stock-based compensation
tax benefit............... 108,941 - - 108,941
Amortization of deferred
compensation expense...... 13,006 - - 13,006
Acquisition and retirement
of common stock........... (488,984) - - (489,180)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2002.... $2,272,325 $5,585,901 $ (84,878) $ 7,786,211
========== ========== ============= ============
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 Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 432,509 $ 369,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 378,877 359,393
Depreciation, amortization, and accretion....... 214,584 172,214
Benefit for deferred income taxes............... (14,832) (70,180)
Decrease in accrued income receivable........... 45,709 106,958
Increase in accounts receivable from
securitization................................. (193,275) (278,898)
(Decrease) increase in accrued interest payable. (291) 15,035
(Increase) decrease in other operating
activities..................................... (34,489) 292,975
------------ ------------
Net cash provided by operating activities......... 828,792 967,407
INVESTING ACTIVITIES
Net increase in money market instruments.......... (2,531,218) (2,401,906)
Proceeds from maturities of investment securities
available-for-sale............................... 318,805 293,478
Proceeds from sale of investment securities
available-for-sale............................... - 13,126
Purchases of investment securities
available-for-sale............................... (284,069) (585,512)
Proceeds from maturities of investment securities
held-to-maturity................................. 18,570 6,009
Purchases of investment securities
held-to-maturity................................. (1,019) (19,908)
Proceeds from securitization of loans............. 2,784,670 2,146,106
Loan portfolio acquisitions....................... (529,100) (63,027)
Increase in loans due to principal payments to
investors in the Corporation's securitization
transactions..................................... (2,592,955) (2,331,721)
Net loan repayments............................... 1,157,887 1,728,251
Net purchases of premises and equipment........... (77,872) (134,634)
------------ ------------
Net cash used in investing activities............. $ (1,736,301) $ (1,349,738)
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing deposits, interest-bearing
transaction accounts, and savings accounts....... $ 387,075 $ 792,061
Net increase (decrease) in time deposits.......... 585,138 (660,805)
Net decrease in short-term borrowings.. .......... (67,787) (503,541)
Proceeds from issuance of long-term debt
and bank notes................................... 612,699 1,276,141
Maturity of long-term debt and bank notes......... (301,665) (87,230)
Proceeds from exercise of stock options
and other awards................................. 3,586 109,995
Acquisition and retirement of common stock........ (100,730) (489,180)
Dividends paid.................................... (92,959) (80,181)
------------ ------------
Net cash provided by financing activities..... 1,025,357 357,260
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. 117,848 (25,071)
Cash and cash equivalents at beginning of period.. 721,972 962,118
------------ ------------
Cash and cash equivalents at end of period........ $ 839,820 $ 937,047
============ ============
SUPPLEMENTAL DISCLOSURES
Interest expense paid............................. $ 379,029 $ 380,301
============ ============
Income taxes paid................................. $ 27,212 $ 91,177
============ ============
==============================================================================
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
accounting principles generally accepted in the United States ("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, 2002, 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 months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
NOTE B: STOCK-BASED EMPLOYEE COMPENSATION
The Corporation has two stock-based employee compensation plans (which are more
fully described in "Note 21: Stock-Based Employee Compensation" contained in
the Annual Report on Form 10-K for the year ended December 31, 2002). The
Corporation measures compensation cost for employee stock options and similar
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), as interpreted by FASB Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation"
("Interpretation No. 44"). No options-based employee compensation cost is
reflected in net income, as all options are granted with an exercise price that
is not less than the fair market value of the Corporation's Common Stock on the
date the option is granted. For grants of restricted shares of common stock,
the market value of restricted shares at the date of grant is amortized into
expense over a period that approximates the restriction period, which is
10 years, or less if the restricted common shares had a specific vesting date
less than 10 years from the date of grant. The table below illustrates the
effect on net income and earnings per share as required by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"
("Statement No. 148") if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-based
Compensation," ("Statement No. 123") to options-based employee compensation.
Statement No. 123, as amended, defines a fair-value-based method of accounting
for an employee stock option or similar equity instrument. However, it allows
an entity to continue to measure compensation cost for those instruments using
the intrinsic-value-based method of accounting prescribed by APB Opinion
No. 25. As permitted by Statement No. 123, the Corporation elected to retain
the intrinsic-value-based method of accounting for employee stock option grants
in accordance with APB Opinion No. 25. Statement No. 123 required certain
additional disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. In accordance with
Statement No. 123, the Black-Scholes option pricing model is one technique
allowed to determine the fair value of employee stock options. The model uses
different assumptions that can significantly affect the fair value of the
employee stock options. The derived fair value estimates cannot be
substantiated by comparison to independent markets.
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
NET INCOME
As reported....................................... $ 432,509 $ 369,910
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects....................... 28,955 13,006
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related
tax effects............................... (52,631) (46,584)
------------ ------------
Pro forma......................................... $ 408,833 $ 336,332
============ ============
EARNINGS PER COMMON SHARE
As reported..................................... $ .34 $ .29
Pro forma....................................... .32 .26
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
As reported..................................... .33 .28
Pro forma....................................... .31 .25
NOTE C: CAPITALIZED SOFTWARE
Effective January 1, 2003, the Corporation reclassified capitalized computer
software from other assets to premises and equipment in the Corporation's
consolidated statements of financial condition. Amortization of capitalized
computer software is included in furniture and equipment expense in the
Corporation's consolidated statements of income. Capitalized computer software
was $354.9 million (net of accumulated amortization of $239.0 million) and
$330.5 million (net of accumulated amortization of $216.2 million) at
March 31, 2003, and December 31, 2002, respectively. Amortization of
capitalized computer software was $30.4 million and $24.4 million for the
three months ended March 31, 2003, and 2002, respectively (see "Note 3:
Significant Accounting Policies-Capitalized Software" contained in the Annual
Report on Form 10-K for the year ended December 31, 2002). For purposes of
comparability, prior period amounts have been reclassified.
NOTE D: 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 23, 2003 April 15, 2003 7.50% $ .46875 5.50% $ .34380
April 23, 2003 July 15, 2003 7.50 .46875 5.50 .34380
NOTE E: COMMON STOCK
The Corporation effected a three-for-two split of the Corporation's Common
Stock in the form of a dividend issued July 15, 2002. All common share and per
common share data have been adjusted to reflect this stock split.
During the three months ended March 31, 2003, 5.2 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
stock issued had an approximate aggregate market value of $105.0 million when
issued. The unamortized compensation expense related to all of the
Corporation's outstanding restricted stock awards was $234.0 million and
$158.2 million at March 31, 2003, and December 31, 2002, respectively.
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
three months ended March 31, 2003, the Corporation issued 6.1 million common
shares upon the exercise of stock options and issuance of restricted stock, and
purchased 6.1 million common shares for $100.7 million. The Corporation
received $3.6 million in proceeds from the exercise of stock options for the
three months ended March 31, 2003.
On April 23, 2003, the Corporation's Board of Directors declared a quarterly
cash dividend of $.08 per common share, payable July 1, 2003, to stockholders
of record as of June 13, 2003.
NOTE F: 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.
COMPUTATION OF EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
EARNINGS PER COMMON SHARE
Net income........................................ $ 432,509 $ 369,910
Less: preferred stock dividend requirements....... 3,516 3,516
------------ ------------
Net income applicable to common stock............. $ 428,993 $ 366,394
============ ============
Weighted average common shares outstanding (000).. 1,278,980 1,277,995
============ ============
Earnings per common share......................... $ .34 $ .29
============ ============
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Net income........................................ $ 432,509 $ 369,910
Less: preferred stock dividend requirements....... 3,516 3,516
------------ ------------
Net income applicable to common stock............. $ 428,993 $ 366,394
============ ============
Weighted average common shares outstanding (000).. 1,278,980 1,277,995
Net effect of dilutive stock options (000)........ 13,667 33,079
------------ ------------
Weighted average common shares outstanding and
common stock equivalents (000)................... 1,292,647 1,311,074
============ ============
Earnings per common share-assuming dilution....... $ .33 $ .28
============ ============
There were 71.1 million stock options with an average option price of $21.26
per share outstanding at March 31, 2003, that were not included in the
computation of earnings per common share-assuming dilution for the three months
ended March 31, 2003, as a result of the stock options' exercise prices being
greater than the average market price of the common shares. These stock options
expire from 2008 through 2013. There were 90,000 stock options with an average
option price of $24.15 per share outstanding at March 31, 2002, that were not
included in the computation of earnings per common share-assuming dilution for
the three months ended March 31, 2002, 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 G: INVESTMENT SECURITIES
For the three months ended March 31, 2003, the Corporation did not sell any
investment securities available-for-sale. For the three months ended
March 31, 2002, the Corporation sold investment securities available-for-sale
resulting in a realized loss of $95,000 ($62,000 after taxes).
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.
ACCOUNTS RECEIVABLE FROM SECURITIZATION
(dollars in thousands)
March 31, December 31,
2003 2002
------------- ------------
(unaudited)
Sale of new loan principal receivables........... $ 1,983,948 $ 1,813,589
Accrued interest and fees on securitized loans... 1,968,656 2,027,281
Interest-only strip receivable................... 1,201,058 1,129,965
Accrued servicing fees........................... 717,686 667,246
Cash reserve accounts............................ 483,282 473,271
Other subordinated retained interests............ 598,384 613,659
Other............................................ 152,861 201,865
------------- ------------
Total accounts receivable from securitization.. $ 7,105,875 $ 6,926,876
============= ============
The gain from the sale of loan principal receivables for new 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") is included in
securitization income in the Corporation's consolidated statements of income.
The gain was $25.3 million (net of securitization transaction costs of
$8.7 million) for the three months ended March 31, 2003, (on the sale of
$2.8 billion of credit card loan principal receivables for the three months
ended March 31, 2003), as compared to $19.0 million (net of securitization
transaction costs of $12.8 million) for the three months ended March 31, 2002,
(on the sale of $2.2 billion of credit card loan principal receivables for the
three months ended March 31, 2002).
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 interest rate 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 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)
March 31, 2003 March 31, 2002
--------------------- ---------------------
(unaudited) (unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,117,888 $ 83,170 $ 980,100 $ 101,025
Weighted average life (in years). .33 .85 .35 .90
Loan payment rate
(weighted average rate)......... 14.45% 5.18% 13.58% 4.84%
Impact on fair value of
20% adverse change............ $ 158,528 $ 12,644 $ 141,629 $ 15,292
Impact on fair value of
40% adverse change............ 274,875 21,756 240,728 26,370
Gross credit losses (b)
(weighted average rate)......... 5.43% 8.90% 5.01% 8.65%
Impact on fair value of
20% adverse change............ $ 245,609 $ 73,405 $ 198,755 $ 75,312
Impact on fair value of
40% adverse change............ 491,219 83,170 394,878 101,025
Excess spread (c)
(weighted average rate)......... 4.94% 2.02% 4.94% 2.32%
Impact on fair value of
20% adverse change............ $ 223,578 $ 16,634 $ 195,514 $ 19,965
Impact on fair value of
40% adverse change............ 447,155 33,268 391,713 40,448
Discount rate
(weighted average rate)......... 9.00% 9.00% 10.00% 10.00%
Impact on fair value of
20% adverse change............ $ 4,951 $ 853 $ 5,026 $ 1,217
Impact on fair value of
40% adverse change............ 9,865 1,693 10,008 2,411
(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 interest rate paid to investors.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
December 31, 2002 December 31, 2001
--------------------- ---------------------
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,091,447 $ 38,518 $1,008,419 $ 115,644
Weighted average life (in years). .33 .87 .35 .93
Loan payment rate
(weighted average rate)......... 14.44% 5.05% 13.60% 4.67%
Impact on fair value of
20% adverse change............ $ 156,897 $ 5,835 $ 144,892 $ 17,304
Impact on fair value of
40% adverse change............ 268,019 10,081 246,857 29,870
Gross credit losses (b)
(weighted average rate)......... 5.43% 9.83% 5.25% 8.40%
Impact on fair value of
20% adverse change............ $ 244,432 $ 38,518 $ 205,460 $ 74,666
Impact on fair value of
40% adverse change............ 488,865 38,518 410,919 115,644
Excess spread (c)
(weighted average rate)......... 4.84% .91% 5.14% 2.60%
Impact on fair value of
20% adverse change............ $ 218,289 $ 7,704 $ 201,684 $ 23,129
Impact on fair value of
40% adverse change............ 436,579 15,407 403,368 46,258
Discount rate
(weighted average rate)......... 9.00% 9.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,870 $ 404 $ 6,195 $ 1,709
Impact on fair value of
40% adverse change............ 9,703 801 12,326 3,378
(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 interest rate 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 three months ended March 31, 2003, 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 an
interest rate of 6.125%, payable semi-annually,
maturing in 2013...................................... $500,000
Fixed-Rate Medium-Term Deposit Notes, with interest
rates of 6.00%, payable semi-annually, maturing in
2008 (CAD$120.0 million).............................. 80,262
Floating-Rate Medium-Term Deposit Notes, priced at
105 basis points over the ninety-day Bankers
Acceptance Rate, payable quarterly, maturing in
2005 (CAD$10.0 million)............................... 6,538
Floating-Rate Euro Medium-Term Notes, priced at
155 basis points over the three-month Sterling London
Interbank Offered Rate, payable quarterly, maturing in
2008 (GBP20.0 million)................................ 31,517
The Corporation uses interest rate swap agreements and foreign exchange swap
agreements to change a portion of fixed-rate long-term debt and bank notes to
floating-rate long-term debt and bank notes to better match the interest rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to reduce its foreign currency exchange risk and to
change a portion of fixed-rate long-term debt and bank notes issued by MBNA
Europe Bank Limited ("MBNA Europe") to floating-rate long-term debt.
During the three months ended March 31, 2003, the Corporation entered into
interest rate swap agreements, with a total notional value of $500.0 million,
related to the issuance of the Fixed-Rate Senior Medium-Term Notes.
During the three months ended March 31, 2003, MBNA Canada Bank ("MBNA Canada")
entered into interest rate swap agreements, with a total notional value of
$80.3 million (CAD$120.0 million), related to the issuance of the Fixed-Rate
Medium-Term Deposit Notes.
All of the interest rate swap agreements entered into during the three months
ended March 31, 2003, 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.
During the three months ended March 31, 2003, $95.0 million of Senior Medium-
Term Notes, $13.4 million of Medium-Term Deposit Notes, and $193.3 million of
Euro Medium Term Notes matured.
NOTE J: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
Net income........................................ $ 432,509 $ 369,910
Other comprehensive income:
Foreign currency translation.................... (16,425) (14,850)
Net unrealized losses on investment
securities available-for-sale and other
financial instruments.......................... (5,088) (21,595)
------------ ------------
Other comprehensive income........................ (21,513) (36,445)
------------ ------------
Comprehensive income.............................. $ 410,996 $ 333,465
============ ============
The components of accumulated other comprehensive income, net of tax, are as
follows:
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
Foreign currency translation...................... $ 48,392 $ 64,817
Net unrealized gains on investment
securities available-for-sale and other
financial instruments........................... 19,097 24,185
Minimum benefit plan liability adjustment......... (4,276) (4,276)
------------ ------------
Accumulated other comprehensive income............ $ 63,213 $ 84,726
============ ============
The financial statements of the Corporation's foreign subsidiaries have been
translated into U.S. dollars in accordance with GAAP. Assets and liabilities
have been translated using the exchange rate at period end. Income and expense
amounts have been translated using the exchange rate for the period in which
the transaction took place. The translation gains and losses resulting from the
change in exchange rates have been reported as a component of other
comprehensive income included in stockholders' equity, net of tax.
NOTE K: NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("Statement No. 149").
Statement No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. Statement No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The implementation of
Statement No. 149 is not expected to have a material impact on the
Corporation's consolidated financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), was issued. Interpretation No. 46
clarified the rules for consolidation by an investor of an entity for which the
investor's ownership interest changes with changes in the entity's net asset
value. The Corporation's securitization trusts are qualified special purpose
entities as defined by Statement No. 140 that are specifically exempted from
the requirements of Interpretation No. 46. As a result, the implementation of
Interpretation No. 46 did not have an impact on the accounting for the
Corporation's asset securitizations. In addition, the implementation of
Interpretation No. 46 is not expected to have a material impact on the
accounting for the Corporation's community development investments in the form
of limited partnership interests that qualify under the Community Reinvestment
Act or the accounting for the Corporation's operating leases.
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 and other organizations. In addition to its credit card
lending, the Corporation also makes other consumer loans, which include
installment and revolving unsecured loan products, and offers insurance and
deposit products. The Corporation is also the parent of MBNA America
(Delaware), N.A. ("MBNA Delaware"), which offers business card products,
mortgage loans, and aircraft loans. Mortgage and aircraft loans are included in
other consumer loan receivables, and business card products are included in
credit card loan receivables in the Corporation's consolidated statements of
financial condition.
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 statements of financial condition through the sale of loan
principal receivables to a trust. The trust sells securities backed by those
loan principal receivables to investors. The trusts are independent of the
Corporation and the Corporation has no control over the trusts. The trusts are
not subsidiaries of the Corporation and are excluded from the Corporation's
consolidated financial statements in accordance with accounting principles
generally accepted in the United States ("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, and interest earned on
investment securities and 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; business development
and operating expenses; and income taxes.
CRITICAL ACCOUNTING POLICIES
Management makes certain judgments and uses certain estimates and assumptions
when applying accounting principles in the preparation of the Corporation's
consolidated financial statements. The Corporation's critical accounting
policies that require management to make significant judgments, estimates, and
assumptions related to the accounting for asset securitization, the reserve for
possible credit losses, intangible assets, and revenue recognition. The
development and selection of the critical accounting policies, and the related
disclosure below have been reviewed with the Audit Committee of the Board of
Directors.
Asset Securitization:
The Corporation uses securitization of its loan principal receivables as one
source to meet its funding needs. The Corporation accounts for its
securitization transactions 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"), issued by the Financial
Accounting Standards Board ("FASB"). When the Corporation securitizes loan
principal receivables, the Corporation recognizes a gain on sale and retained
beneficial interests, including an interest-only strip receivable. The
interest-only strip receivable 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 ("excess
spread"). Since quoted market prices for the interest-only strip receivable are
not available, management uses certain assumptions and estimates in determining
the fair value of the interest-only strip receivable. These assumptions and
estimates include projections concerning interest income and late fees on
securitized loans, recoveries on charged-off securitized loans, gross credit
losses on securitized loans, contractual servicing fees, and the interest rate
paid to investors in a securitization transaction. These projections are used
to determine the excess spread to be earned by the Corporation over the
estimated life of the securitized loan principal receivables. The other
assumptions and estimates used by the Corporation in estimating the fair value
of the interest-only strip receivable 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 assumptions and estimates used to estimate the fair value of the interest-
only strip receivable at March 31, 2003, reflect management's judgment as to
the expected excess spread to be earned and payment rates to be experienced on
the securitized loans. 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 rates
subject to change based on changes in market interest rates. Changes in market
interest rates can also affect the projected interest income on securitized
loans, as the Corporation could reprice the managed loan portfolio. Credit loss
projections could change in the future based on changes in the credit quality
of the securitized loans, the Corporation's account management and collection
practices, 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 from the estimates used in the periods covered
by this report.
On a quarterly basis, the Corporation reviews and adjusts as appropriate, the
assumptions and estimates used in determining the fair value of the interest-
only strip receivable. If these assumptions change, or actual results differ
from projected results, the interest-only strip receivable and securitization
income would be affected. If management had made different assumptions for the
periods covered by this report that raised or lowered the excess spread or
payment rate, the Corporation's financial position and results of operations
could have differed materially. For example, a 20% change in the excess spread
assumption for all securitized loan principal receivables could have resulted
in a change of approximately $240 million in the value of the total interest-
only strip receivable at March 31, 2003, and a related change in securitization
income for the three months ended March 31, 2003.
Note H provides further detail regarding the Corporation's assumptions and
estimates used in determining the fair value of the interest-only strip
receivable and their sensitivities to adverse changes.
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 net credit losses. To project
probable net credit losses, the Corporation regularly performs a migration
analysis of delinquent and current accounts. 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. The
Corporation's projection of probable net credit losses considers 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. The Corporation establishes appropriate levels of the reserve
for possible credit losses for its products based on their risk
characteristics. The Corporation then reserves for the projected probable net
credit losses based on its projection of these amounts. A provision is charged
against earnings to maintain the reserve for possible credit losses at an
appropriate level. The Corporation's projections of probable net credit losses
are inherently uncertain, and as a result the Corporation cannot predict with
certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws or regulatory
policies, and other factors could impact the Corporation's actual and projected
net credit losses and the related reserve for possible credit losses. If
management had made different assumptions about probable net credit losses, the
Corporation's financial position and results of operations could have differed
materially. For example, a 10% change in management's projection of probable
net credit losses could have resulted in a change of approximately
$115 million in the reserve for possible credit losses and the provision for
possible credit losses.
Intangible Assets:
The Corporation's intangible assets include purchased credit card relationships
("PCCRs") which are carried at net book value. The Corporation records these
intangible assets as part of the acquisition of credit card loans and the
corresponding Customer relationships. The Corporation's intangible assets are
amortized over the period the assets are expected to contribute to the cash
flows of the Corporation which reflect the expected pattern of benefit. PCCRs
are amortized using an accelerated method based upon the projected cash flows
the Corporation will receive from the Customer relationships during the
estimated useful lives of the PCCRs.
The Corporation's PCCRs are subject to impairment tests in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement No. 144"). The
Corporation reviews the carrying value of its PCCRs for impairment on a
quarterly basis, or sooner whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable, by comparing their carrying
value to the sum of the undiscounted expected future cash flows from the credit
card relationships. In accordance with Statement No. 144, an impairment exists
if the sum of the undiscounted expected future cash flows is less than the
carrying amount of the asset. An impairment would result in a write-down of the
PCCRs to estimated fair value based on the discounted future cash flows
expected from the PCCRs. The Corporation performs the impairment test on a
specific portfolio basis, since it represents the lowest level for which
identifiable cash flows are independent of the cash flows of other assets and
liabilities.
The Corporation makes certain estimates and assumptions that affect the
determination of the expected future cash flows from the credit card
relationships. 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 PCCRs. The estimated
undiscounted cash flows of acquired Customer credit card relationships exceeds
the $3.1 billion net book value of the Corporation's PCCRs at March 31, 2003.
If actual levels of active account attrition for all acquired portfolios would
adversely change 10%, the estimated undiscounted cash flows of acquired
Customer accounts in the aggregate would still exceed the net book value of
acquired Customer accounts at March 31, 2003.
Prior to 2003, the Corporation amortized the value of foreign PCCRs over a
period of 10 years. Effective January 1, 2003 the Corporation extended the
amortization period for foreign PCCRs to 15 years to more appropriately match
the amortization period with the PCCRs' estimated useful lives. The change in
estimate did not have a material impact on the Corporation's financial
condition or results of operations.
Revenue Recognition:
Interest income is recognized based upon the amount of loans outstanding and
their contractual annual percentage rates. Interest income is included in loan
receivables when billed to the Customer. The Corporation accrues unbilled
interest income on a monthly basis from the Customer's statement billing cycle
date to the end of the month. The Corporation uses certain estimates and
assumptions (for example, estimated yield) in the determination of the accrued
unbilled portion of interest income that is included in accrued income
receivable in the Corporation's consolidated statements of financial condition.
The Corporation also uses certain assumptions and estimates in the valuation of
the accrued interest and fees on securitized loans which is included in
accounts receivable from securitization in the Corporation's consolidated
statements of financial condition. If management had made different assumptions
about the determination of the accrued unbilled portion of interest income and
the valuation of accrued interest and fees on securitized loans, the
Corporation's financial position and results of operations could have differed
materially. For example, a 5% change in management's projection of the
estimated yield could have resulted in a change totaling approximately
$32 million in interest income and other operating income.
The Corporation also recognizes fees on loan receivables in earnings (except
annual fees) as the fees are assessed according to agreements with the
Corporation's Customers. Credit card and other consumer loan fees include
annual, late, overlimit, returned check, cash advance, express payment, and
other miscellaneous fees. These fees are included in the Corporation's loan
receivables when billed. Annual fees and incremental direct loan origination
costs are deferred and amortized on a straight-line basis over the one-year
period to which they pertain.
The Corporation adjusts the amount of interest 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 adjustments to the respective
income statement captions, loan receivables, and accrued income receivable. 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 charge off. 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
through an adjustment to accounts receivable from securitization and
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 charge off.
If management had made different assumptions about uncollectible interest and
fees, the Corporation's financial position and results of operations could have
differed materially. For example, a 10% change in management's estimate of
uncollectible interest and fees could have resulted in a change totaling
approximately $41 million in interest and other operating income.
EARNINGS SUMMARY
Net income for the three months ended March 31, 2003, increased 16.9% to
$432.5 million or $.33 per common share from $369.9 million or $.28 per common
share for the same period in 2002. All earnings per common share amounts are
presented assuming dilution and have been adjusted to reflect the three-for-two
split of the Corporation's Common Stock, effected in the form of a dividend,
issued July 15, 2002, to stockholders of record as of July 1, 2002.
The overall growth in earnings for the three months ended March 31, 2003, was
primarily the result of growth in the Corporation's managed loans outstanding
and an increase in interest income and fee income, partially offset by higher
managed credit losses and an increase in other operating expenses which
reflects the Corporation's continued investment in attracting, servicing, and
retaining credit card and other consumer loan Customers.
Ending loan receivables at March 31, 2003, were $27.4 billion, an increase of
$4.6 billion or 20.3% over the same period in 2002. Total managed loans at
March 31, 2003, were $106.1 billion, an increase of $10.8 billion or 11.3% over
the same period in 2002. Average loan receivables for the three months ended
March 31, 2003, were $27.4 billion, an increase of $3.4 billion or 14.3% over
the same period in 2002. Total average managed loans for the three months ended
March 31, 2003, were $106.0 billion, an increase of $9.7 billion or 10.1% over
the first quarter of 2002.
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 presents the earnings on securitized loan principal
receivables in the same fashion as the Corporation's owned loans. Management,
equity and debt analysts, rating agencies and others evaluate the Corporation's
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 securitization transactions. Whenever managed data is
included in this report, a reconciliation of the managed data to the most
directly comparable financial measure is calculated and presented in accordance
with GAAP.
Table 1 reconciles the Corporation's loan receivables to its managed loans and
average loan receivables to its average managed loans.
TABLE 1: RECONCILIATION OF LOAN RECEIVABLES TO MANAGED LOANS
(dollars in thousands)
For the Three Months Ended
March 31,
----------------------------
2003 2002
------------- -------------
At Period End: (unaudited)
Loans held for securitization.................. $ 9,523,377 $ 8,202,513
Loan portfolio................................. 17,901,894 14,591,952
------------- -------------
Loan receivables............................. 27,425,271 22,794,465
Securitized loans.............................. 78,698,578 72,566,991
------------- -------------
Total managed loans.......................... $ 106,123,849 $ 95,361,456
============= =============
Average for the Period:
Loans held for securitization.................. $ 9,807,427 $ 9,160,373
Loan portfolio................................. 17,555,619 14,773,432
------------- -------------
Loan receivables............................. 27,363,046 23,933,805
Securitized loans.............................. 78,669,738 72,361,802
------------- -------------
Total managed loans.......................... $ 106,032,784 $ 96,295,607
============= =============
The Corporation acquired 80 new endorsements from organizations and added
2.3 million new accounts during the three months ended March 31, 2003.
The net credit losses ratio on loan receivables and managed loans for the first
quarter of 2003 were 5.12% and 5.47%, respectively. As previously reported in
the Corporation's current reports on Form 8-K dated January 31, 2003,
February 28, 2003, March 31, 2003, and April 30, 2003, after a typical seasonal
increase in loss rates in January, net credit loss rates have declined from
January levels. Although there may be minor monthly fluctuations, management
expects the declining trend in managed net credit loss rates to continue
throughout the year. The Corporation's projections of future net credit losses
are by their nature uncertain and changes in economic conditions, bankruptcy
laws, regulatory policies, and other factors may impact actual losses.
Delinquency on the loan receivables and managed loans was 3.88% and 4.74%,
respectively, at March 31, 2003. Refer to "LOAN QUALITY - NET CREDIT LOSSES"
and "LOAN QUALITY - DELINQUENCIES" for a reconciliation of the loan receivables
net credit losses ratio to the managed net credit losses ratio for the three
months ended March 31, 2003, and the loan receivables delinquency ratio to the
managed delinquency ratio at March 31, 2003.
The Corporation's return on average total assets for the three months ended
March 31, 2003, was 3.28%, as compared to 3.30% for the same period in 2002.
The decrease in the return on average total assets was primarily the result of
net income growing at a slower rate than average total assets.
The Corporation's return on average stockholders' equity was 18.95% for the
three months ended March 31, 2003, as compared to 19.42% for the same period
in 2002. The decline in the return on average stockholders' equity is
primarily the result of net income growing at a slower rate than average
stockholders' equity.
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 $555.8 million
for the three months ended March 31, 2003, as compared to $513.5 million for
the same period in 2002. Average interest-earning assets increased $5.6 billion
for the three months ended March 31, 2003, from the same period in 2002,
primarily as a result of an increase in average loan receivables of
$3.4 billion and an increase in average investment securities and money market
instruments of $2.2 billion. The yield on average interest-earning assets
decreased 112 basis points to 9.24% for the three months ended March 31, 2003,
as compared to 10.36% for the same period in 2002. The decrease in the yield on
average interest-earning assets was primarily the result of the decrease in the
yield earned on average loan receivables. Average interest-bearing liabilities
also increased $6.0 billion for the three months ended March 31, 2003, from the
same period in 2002, as a result of an increase of $3.8 billion in average
interest-bearing deposits and an increase of $2.2 billion in average borrowed
funds. The decrease in the rate paid on average interest-bearing liabilities
of 83 basis points to 3.85% for the three months ended March 31, 2003, from
4.68% for the same period in 2002 reflect actions by the Federal Open Market
Committee ("FOMC") throughout 2001 and in the fourth quarter of 2002 that
impacted overall market interest rates and lowered the Corporation's cost of
funds.
The Corporation's net interest margin, on a fully taxable equivalent basis, was
5.44% for the three months ended March 31, 2003, as compared to 5.81% for the
same period in 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 37 basis point decrease in the net interest
margin for the three months ended March 31, 2003, was primarily the result of
the yield earned on average interest-earning assets decreasing more than the
rate paid on average interest-bearing liabilities combined with the increase in
average interest-earning assets.
See "IMPACT OF SECURITIZATION TRANSACTIONS ON THE CORPORATION'S RESULTS" for a
discussion of the managed net interest margin.
INVESTMENT 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
securitization transactions, deposits, loan payments, and long-term debt and
bank note issuances. 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 was 24.8% for the three months ended
March 31, 2003, as compared to 22.4% for the same period in 2002. Money market
instruments increased during the three months ended March 31, 2003, to provide
liquidity to support portfolio acquisition activity and anticipated loan
growth. Also, during the three months ended March 31, 2003, the Corporation
increased its liquidity position in anticipation of possible market disruptions
due to uncertainty created by world events and capital market conditions.
Interest income on investment securities, on a fully taxable equivalent basis,
decreased $4.2 million to $31.0 million for the three months ended
March 31, 2003, as compared to the same period in 2002. The decrease in
interest income on investment securities for the three months ended
March 31, 2003, was primarily the result of a 71 basis point decrease in the
yield earned on average investment securities, partially offset by an increase
in average investment securities of $289.7 million for the three months ended
March 31, 2003, from the same period in 2002.
Interest income on money market instruments increased $4.5 million to
$26.1 million for the three months ended March 31, 2003, as compared to the
same period in 2002. The increase in interest income on money market
instruments was primarily the result of an increase in average money market
instruments of $2.0 billion for the three months ended March 31, 2003,
partially offset by a 34 basis point decrease in the yield earned on average
money market instruments, as compared to the same period in 2002. Money market
instruments include interest-earning time deposits in other banks and federal
funds sold.
OTHER INTEREST-EARNING ASSETS
Other interest-earning assets include the Corporation's retained interests in
securitization transactions, which are the interest-only strip receivable, cash
reserve accounts, and accrued interest and fees on securitized loans. Also
included in other interest-earning assets is Federal Reserve Bank stock. 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 in the consolidated
statements of financial condition (see "Note H: Asset Securitization" for
further discussion).
Interest income on other interest-earning assets decreased $24.5 million to
$75.1 million for the three months ended March 31, 2003, from the same period
in 2002. The decrease in interest income on other interest-earning assets for
the three months ended March 31, 2003, was primarily the result of a decrease
in the yield earned on other interest-earning assets of 235 basis points
combined with a decrease of $96.8 million in average other interest-earning
assets, as compared to the same period in 2002. The decrease in the yield
earned on average other interest-earning assets was primarily the result of the
decrease in the discount rate assumptions used in the valuation of the
Corporation's retained beneficial interest in its 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 increased
$52.5 million to $812.1 million for the three months ended March 31, 2003, from
the same period in 2002. The increase in interest income on loan receivables
for the three months ended March 31, 2003, was primarily the result of an
increase in average loan receivables of $3.4 billion from the same period in
2002. The yield earned by the Corporation for the three months ended
March 31, 2003, on average loan receivables decreased 83 basis points to
12.04%, as compared to 12.87% for the same period in 2002.
Table 2 presents the Corporation's loan receivables at period end distributed
by loan type, excluding securitized loans. Loan receivables were $27.4 billion
at March 31, 2003, as compared to $28.7 billion at December 31, 2002.
Domestic credit card loan receivables decreased to $14.6 billion at
March 31, 2003, from $15.6 billion at December 31, 2002. The decrease in
domestic credit card loan receivables at March 31, 2003, was primarily the
result of Customers paying down balances that existed at December 31, 2002.
Customers typically pay down balances that were built up over the holiday
shopping season in the first quarter of the subsequent year. These decreases
were partially offset by domestic credit card loans originated through
marketing programs and domestic credit card loan acquisitions.
During the three months ended March 31, 2003, the Corporation securitized
$2.0 billion of domestic credit card loan receivables, offset by an increase of
$2.2 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
$453.7 million of domestic credit card loan receivables during the three months
ended March 31, 2003.
The yield on average domestic credit card loan receivables was 11.64% for the
three months ended March 31, 2003, as compared to 12.39% for the same period in
The decrease of 75 basis points in the yield on average domestic credit
card loan receivables reflects lower average promotional and non-
promotional interest rates offered to attract and retain Customers and
to grow loan receivables.
Domestic credit card loans held for securitization decreased to $8.0 billion at
March 31, 2003, from $9.2 billion at December 31, 2002. The $1.2 billion
decrease reflects lower anticipated domestic credit card securitizations.
Domestic other consumer loan receivables were $6.3 billion at
March 31, 2003, and December 31, 2002. The yield on average domestic other
consumer loan receivables was 13.96% for the three months ended March 31, 2003,
as compared to 14.37% for the same period in 2002. 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 a change in
the mix of unsecured lending products relative to sales finance products.
Sales finance products are offered by the Corporation through associations with
retailers where the Corporation provides financing to Customers to purchase the
retailer's goods and services. The Corporation generally charges a higher
interest rate for its sales finance products than its other unsecured lending
products.
Foreign loan receivables were $6.5 billion at March 31, 2003, as compared to
$6.8 billion at December 31, 2002. The decrease was primarily a result of a
net increase in securitized foreign loan principal receivables. During the
three months ended March 31, 2003, the Corporation securitized $790.0 million
of foreign credit card loan principal receivables, partially offset by an
increase of $394.0 million in the Corporation's foreign loan portfolio which
resulted when certain securitizations entered 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 the U.S. dollar against foreign currencies also decreased
foreign loan receivables by $54.6 million at March 31, 2003, as compared to
December 31, 2002. The yield on average foreign loan receivables was 11.06%
for the three months ended March 31, 2003, as compared to 12.20% for the same
period in 2002. The decrease in the yield on average foreign loan receivables
reflects lower average promotional and non-promotional interest rates offered
to attract and retain Customers and to grow loan receivables.
TABLE 2: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
March 31, December 31,
2003 2002
------------- ------------
(unaudited)
Loans held for securitization(a):
Domestic:
Credit card.................................. $ 7,970,737 $ 9,157,751
Other consumer............................... 63,508 40,962
------------- ------------
Total domestic loans held for
securitization............................ 8,034,245 9,198,713
Foreign........................................ 1,489,132 1,830,914
------------- ------------
Total loans held for securitization........ 9,523,377 11,029,627
Loan portfolio:
Domestic:
Credit card.................................. 6,657,905 6,413,116
Other consumer............................... 6,278,782 6,285,751
------------- ------------
Total domestic loan portfolio.............. 12,936,687 12,698,867
Foreign........................................ 4,965,207 4,998,014
------------- ------------
Total loan portfolio....................... 17,901,894 17,696,881
------------- ------------
Total loan receivables..................... $ 27,425,271 $ 28,726,508
============= ============
(a) Loans held for securitization includes loans 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.
PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses and deferred charges increased $101.5 million or 24.6% to
$514.1 million at March 31, 2003, as compared to $412.6 million at
December 31, 2002. The increase was primarily the result of an increase in
prepaid postage expense and prepaid employee benefit plan costs of
$54.7 million and $33.5 million, respectively.
OTHER ASSETS
Other assets increased $250.2 million or 14.9% to $1.9 billion at
March 31, 2003, as compared to $1.7 billion at December 31, 2002. The increase
is primarily the result of 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 (see "Note 3: Significant
Accounting Policies-Derivative Financial Instruments and Hedging Activities"
contained in the Annual Report on Form 10-K for the year ended
December 31, 2002). 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 partially
offset by changes in the carrying value of the corresponding hedged long-term
debt and bank notes.
DEPOSITS
Total interest expense on deposits was $292.9 million for the three months
ended March 31, 2003, as compared to $323.6 million for the same period in
The decrease in interest expense on deposits for the three months ended
March 31, 2003, was primarily the result of a decrease of 104 basis
points in the rate paid on average interest-bearing deposits, partially
offset by an increase of $3.8 billion in average interest-bearing deposits for
the three months ended March 31, 2003. The decrease in the rate paid on
average interest-bearing deposits reflects actions by the FOMC throughout 2001
and in the fourth quarter of 2002, that 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-rate,
generally mature within one year. Therefore, the decrease in market interest
rates in the fourth quarter of 2002 permitted the Corporation to decrease the
rate paid on average money market deposit accounts and average foreign time
deposits during the three months ended March 31, 2003, as compared to the same
period in 2002. The Corporation's domestic time deposits are primarily fixed-
rate deposits with maturities that range from three months to five years.
Therefore, the Corporation realized the benefits of lower market rates on
domestic time deposits more slowly than the benefits of lower market rates on
money market deposits.
BORROWED FUNDS
Borrowed funds include both short-term borrowings and long-term debt and bank
notes.
Interest expense on short-term borrowings decreased to $10.3 million for the
three months ended March 31, 2003, as compared to $11.5 million for the same
period in 2002. The decrease in interest expense on short-term borrowings was
primarily the result of a decrease of $182.5 million in average short-term
borrowings, partially offset by an increase of 12 basis points in the rate paid
on average short-term borrowings from the same period in 2002.
Interest expense on domestic short-term borrowings decreased to $8.9 million
for the three months ended March 31, 2003, as compared to $10.2 million for the
same period in 2002. The decrease in interest expense on domestic short-term
borrowings was primarily the result of a $145.8 million decrease in average
domestic short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002. Domestic short-term borrowings for the
three months ended March 31, 2003, were solely related to two on-balance-sheet
structured financings.
Interest expense on foreign short-term borrowings increased to $1.5 million for
the three months ended March 31, 2003, as compared to the same period in 2002.
The increase in interest expense on foreign short-term borrowings was primarily
the result of an 86 basis point increase in the rate paid on foreign short-term
borrowings for the three months ended March 31, 2003, as compared to the same
period in 2002, partially offset by a decrease of $36.7 million in average
foreign short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002. Foreign short-term borrowings for the
three months ended March 31, 2003, consisted of short-term deposit notes issued
by MBNA Canada. The 86 basis point increase in the rate paid on average
foreign short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002, primarily relates to an increase in the
underlying benchmark interest rate.
Interest expense on long-term debt and bank notes increased to $85.3 million
for the three months ended March 31, 2003, as compared to $67.3 million for the
same period in 2002. The increase in interest expense on long-term debt and
bank notes during the three months ended March 31, 2003, from the same period
in 2002 was primarily the result of an increase in average long-term debt and
bank notes of $2.4 billion, as compared to the same period in 2002, partially
offset by a decrease in the rate paid on average long-term debt and bank notes
of 18 basis points.
Interest expense on domestic long-term debt and bank notes increased
$6.4 million during the three months ended March 31, 2003, as compared to the
same period in 2002, primarily as a result of a $2.0 billion increase in
average domestic long-term debt and bank notes, partially offset by a decrease
of 54 basis points in the rate paid on average domestic long-term debt and bank
notes. The Corporation issued additional long-term debt and bank notes over
the past 12 months to fund loan and other asset growth and to diversify funding
sources. The decrease in the rate paid on average domestic long-term debt and
bank notes reflects actions by the FOMC in the fourth quarter of 2002 that
impacted overall market interest rates. Interest expense on foreign long-term
debt and bank notes increased $11.5 million during the three months ended
March 31, 2003, as compared to the same period in 2002. The increase in
interest expense on foreign long-term debt and bank notes was primarily the
result of an increase in average foreign long-term debt and bank notes of
$361.8 million to $2.5 billion for three months ended March 31, 2003, as
compared to the same period in 2002, combined with an increase of 112 basis
points in the rate paid on average foreign long-term debt and bank notes. The
increase in the rate paid on foreign long-term debt and bank notes is primarily
a result of an increase in the underlying benchmark interest rate on medium-
term deposit notes issued by MBNA Canada.
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.
Table 3 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three months ended
March 31, 2003, and 2002, respectively.
TABLE 3: 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
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,135 .71% $ 2
Foreign................................ 3,717,536 1.98 18,135
------------ ----------
Total interest-earning time deposits
in other banks...................... 3,718,671 1.98 18,137
Federal funds sold....................... 2,568,556 1.26 7,954
------------ ----------
Total money market instruments....... 6,287,227 1.68 26,091
Investment securities(a):
Domestic:
Taxable................................ 3,649,308 3.11 27,994
Tax-exempt(b).......................... 107,805 2.17 578
------------ ----------
Total domestic investment securities. 3,757,113 3.08 28,572
Foreign.................................. 217,955 4.44 2,388
------------ ----------
Total investment securities.......... 3,975,068 3.16 30,960
Other interest-earning assets(a)........... 3,800,002 8.02 75,138
Loan receivables:
Loans held for securitization:
Domestic:
Credit card............................ 7,807,967 11.86 228,430
Other consumer......................... 38,723 5.39 515
------------ ----------
Total domestic loans held for
securitization...................... 7,846,690 11.83 228,945
Foreign.................................. 1,960,737 11.51 55,635
------------ ----------
Total loans held for securitization.. 9,807,427 11.77 284,580
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
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS - CONTINUED
Loan portfolio:
Domestic:
Credit card............................ $ 6,496,637 11.37% $ 182,129
Other consumer......................... 6,296,235 14.02 217,615
------------ ----------
Total domestic loan portfolio........ 12,792,872 12.67 399,744
Foreign.................................. 4,762,747 10.88 127,731
------------ ----------
Total loan portfolio................. 17,555,619 12.19 527,475
------------ ----------
Total loan receivables............... 27,363,046 12.04 812,055
------------ ----------
Total interest-earning assets........ 41,425,343 9.24 944,244
Cash and due from banks...................... 805,316
Premises and equipment, net.................. 2,524,429
Other assets................................. 9,787,992
Reserve for possible credit losses........... (1,111,019)
------------
Total assets......................... $ 53,432,061
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 21,795,904 4.60% $ 247,088
Money market deposit accounts.......... 7,604,653 2.13 39,873
Interest-bearing transaction accounts.. 52,695 1.32 171
Savings accounts....................... 68,030 1.38 232
------------ ----------
Total domestic interest-bearing
deposits............................ 29,521,282 3.95 287,364
Foreign:
Time deposits.......................... 645,618 3.45 5,498
------------ ----------
Total interest-bearing deposits...... 30,166,900 3.94 292,862
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
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY - CONTINUED
Borrowed funds:
Short-term borrowings:
Domestic................................. $ 1,000,000 3.60% $ 8,865
Foreign.................................. 187,665 3.14 1,453
------------ ----------
Total short-term borrowings.......... 1,187,665 3.52 10,318
Long-term debt and bank notes(c):
Domestic................................. 7,088,338 2.65 46,384
Foreign.................................. 2,478,556 6.36 38,867
------------ ----------
Total long-term debt and bank notes.. 9,566,894 3.61 85,251
------------ ----------
Total borrowed funds................. 10,754,559 3.60 95,569
------------ ----------
Total interest-bearing liabilities... 40,921,459 3.85 388,431
Noninterest-bearing deposits................. 960,409
Other liabilities............................ 2,293,821
------------
Total liabilities.................... 44,175,689
Stockholders' equity......................... 9,256,372
------------
Total liabilities and stockholders'
equity.............................. $ 53,432,061
============ ----------
Net interest income.................. $ 555,813
==========
Net interest margin.................. 5.44
Interest rate spread................. 5.39
(a) Average balances for investment securities available-for-sale and
other interest-earning assets are based on market values or estimated
market values; if these assets 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
March 31, 2003, was $217.
(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.
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
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,025 1.19% $ 3
Foreign................................ 1,798,407 2.39 10,613
------------ ----------
Total interest-earning time
deposits in other banks............. 1,799,432 2.39 10,616
Federal funds sold....................... 2,535,779 1.75 10,951
------------ ----------
Total money market instruments....... 4,335,211 2.02 21,567
Investment securities(a):
Domestic:
Taxable................................ 3,379,880 3.86 32,140
Tax-exempt(b).......................... 110,414 2.62 714
------------ ----------
Total domestic investment securities. 3,490,294 3.82 32,854
Foreign.................................. 195,071 4.88 2,347
------------ ----------
Total investment securities.......... 3,685,365 3.87 35,201
Other interest-earning assets(a)........... 3,896,774 10.37 99,612
Loan receivables:
Loans held for securitization:
Domestic:
Credit card............................ 6,938,775 13.49 230,795
Other consumer......................... 1,029,068 15.61 39,608
------------ ----------
Total domestic loans held for
securitization...................... 7,967,843 13.76 270,403
Foreign.................................. 1,192,530 12.98 38,173
------------ ----------
Total loans held for securitization.. 9,160,373 13.66 308,576
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
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS - CONTINUED
Loan portfolio:
Domestic:
Credit card............................ $ 6,180,650 11.15% $ 169,968
Other consumer......................... 5,235,819 14.12 182,334
------------ ----------
Total domestic loan portfolio........ 11,416,469 12.52 352,302
Foreign.................................. 3,356,963 11.92 98,700
------------ ----------
Total loan portfolio................. 14,773,432 12.38 451,002
------------ ----------
Total loan receivables............... 23,933,805 12.87 759,578
------------ ----------
Total interest-earning assets........ 35,851,155 10.36 915,958
Cash and due from banks...................... 780,537
Premises and equipment, net.................. 2,373,729
Other assets................................. 7,271,317
Reserve for possible credit losses........... (878,806)
------------
Total assets......................... $ 45,397,932
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,794,380 5.75% $ 266,343
Money market deposit accounts.......... 6,634,452 2.99 48,905
Interest-bearing transaction accounts.. 51,137 1.82 230
Savings accounts....................... 45,126 1.83 204
------------ ----------
Total domestic interest-bearing
deposits............................ 25,525,095 5.02 315,682
Foreign:
Time deposits.......................... 814,035 3.95 7,933
------------ ----------
Total interest-bearing deposits...... 26,339,130 4.98 323,615
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
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY - CONTINUED
Borrowed funds:
Short-term borrowings:
Domestic................................. $ 1,145,779 3.62% $ 10,239
Foreign.................................. 224,345 2.28 1,259
------------ ----------
Total short-term borrowings.......... 1,370,124 3.40 11,498
Long-term debt and bank notes(c):
Domestic................................. 5,081,401 3.19 39,977
Foreign.................................. 2,116,763 5.24 27,335
------------ ----------
Total long-term debt and bank notes.. 7,198,164 3.79 67,312
------------ ----------
Total borrowed funds................. 8,568,288 3.73 78,810
------------ ----------
Total interest-bearing liabilities... 34,907,418 4.68 402,425
Noninterest-bearing deposits................. 899,208
Other liabilities............................ 1,867,931
------------
Total liabilities.................... 37,674,557
Stockholders' equity......................... 7,723,375
------------
Total liabilities and stockholders'
equity.............................. $ 45,397,932
============ ----------
Net interest income.................. $ 513,533
==========
Net interest margin.................. 5.81
Interest rate spread................. 5.68
(a) Average balances for investment securities available-for-sale and
other interest-earning assets are based on market values or estimated
market values; if these assets 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
March 31, 2002, was $257.
(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 $1.8 billion for the three months ended
March 31, 2003, as compared to $1.6 billion for the same period in 2002.
Securitization income was $1.5 billion for the three months ended
March 31, 2003, as compared to $1.4 billion for the same period in 2002. The
levels of securitization income are affected by the levels of average
securitized interest-earning assets for the period, the net interest margin on
securitized interest-earning assets for the period, other fee income generated
by securitized loans, net charge-offs on securitized loans and the net gain (or
loss) from securitization activity. In accordance with Statement No. 140, the
Corporation recognizes an interest-only strip receivable that 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.
Securitization income increased $121.1 million or 8.9% for the three months
ended March 31, 2003, as compared to the same period in 2002. This increase
was primarily the result of the net gains from securitization activity and
higher level of net interest income from higher average securitized loans,
offset by the higher level of net charge-offs on securitized loans and the
lower net interest margin on securitized interest-earning assets during the
three months ended March 31, 2003, as compared to the same period in 2002. The
net gain (or loss) from securitization activity consists of gains associated
with the sale of new loan principal receivables (net of securitization
transaction costs), changes in the projected excess spread used to value the
interest-only strip receivable for securitized credit card and other consumer
loan principal receivables, and all other changes in the fair value of the
interest-only strip receivable and resulted in an $37.4 million net gain during
the three months ended March 31, 2003, as compared to a $55.8 million net loss
for the same period in 2002, resulting in an increase in securitization income
of $93.2 million for the three months ended March 31, 2003, from the same
period in 2002. Certain components of the net gain (or loss) from
securitization activity are discussed separately below.
The projected excess spread for securitized credit card loan principal
receivables was 4.94% at March 31, 2003, as compared to 4.84% at December 31,
2002. The impact of the increase in the projected excess spread used to value
the interest-only strip receivable for securitized credit card loan principal
receivables was an approximate $23 million increase in securitization income
for the three months ended March 31, 2003. The increase in the projected
excess spread used to value the interest-only strip receivable was the result
of an increase in projected interest yields on securitized credit card loan
principal receivables. The projected excess spread used to value the
interest-only strip receivable for securitized other consumer loan principal
receivables was 2.02% at March 31, 2003, as compared to .91% at December 31,
2002. The impact of the increase in the projected excess spread used to value
the interest-only strip receivable for securitized other consumer loan
principal receivables was an approximate $46 million increase in
securitization income for the three months ended March 31, 2003. The increase
in the projected excess spread used to value the interest-only strip
receivable was the result of lower projected charge-off rates on securitized
other consumer loan principal receivables.
The projected excess spread used to value the interest-only strip receivable
for securitized credit card loan principal receivables was 4.94% at March 31,
2002, as compared to 5.14% at December 31, 2001. The impact of the decrease in
the projected excess spread used to value the interest-only strip receivable
for securitized credit card loan principal receivables was an approximate
$40 million decrease in securitization income for the three months ended
March 31, 2002. The decrease in the projected excess spread used to value the
interest-only strip receivable was the result of a decrease in the projected
interest yields on securitized credit card loan principal receivables resulting
from the Corporation's pricing decisions to attract and retain Customers and to
grow loans, along with an increase in the projected interest rate paid to
investors. These changes were partially offset by a projected decline in the
charge-off rates on securitized credit card loan principal receivables. The
projected excess spread used to value the interest-only strip receivable for
securitized other consumer loan principal receivables was 2.32% at March 31,
2002, as compared to 2.60% at December 31, 2001. The impact of the decrease in
the projected excess spread used to value the interest-only strip receivable
for securitized other consumer loan principal receivables was an approximate
$12 million decrease in securitization income for the three months ended March
31, 2002. The decrease in the projected excess spread used to value the
interest-only strip receivable was the result of a decrease in the projected
interest yields on securitized other consumer loan principal receivables
resulting from the Corporation's pricing decisions to attract and retain
Customers and to grow loans, along with an increase in projected charge-off
rates on securitized other consumer loan principal receivables.
Note H provides further detail regarding the sensitivity to changes in the key
assumptions and estimates used in determining the estimated value of the
interest-only strip receivable.
Securitization income was also affected by the growth in average securitized
loans which increased $6.3 billion or 8.7% for the three months ended
March 31, 2003, as compared to the same period in 2002. This growth in average
securitized loans reflects the overall growth in the Corporation's average
managed loans, which increased 10.1% for the three months ended March 31, 2003,
as compared to the same period in 2002. In addition, the net interest margin on
securitized interest-earning assets decreased to 10.27% for the three months
ended March 31, 2003, as compared to 10.43% for the same period in 2002. The
securitized net interest margin represents securitized net interest income for
the period expressed as a percentage of average securitized interest-earning
assets. Refer to "ASSET SECURITIZATION - IMPACT OF SECURITIZATION TRANSACTIONS
ON THE CORPORATION'S RESULTS" for a reconciliation of the Corporation's net
interest margin on securitized interest-earning assets to the net interest
margin. Changes in the yield earned on average securitized loans and the
interest rate paid to investors in the Corporation's securitization
transactions impact the securitized net interest margin. The yield earned on
average securitized loans was 12.28% for the three months ended March 31, 2003,
as compared to 12.95% for the same period in 2002. The decrease in the yield
earned on average securitized loans for the three months ended March 31, 2003,
reflects lower average promotional and non-promotional interest rates offered
to attract and retain Customers and to grow managed loans. The average
interest rate paid to investors in the Corporation's securitization
transactions was 2.12% for the three months ended March 31, 2003, as compared
to 2.53% for the same period in 2002. The decrease in the average interest rate
paid to investors in 2003 reflects actions by the FOMC in the fourth quarter of
2002 that impacted overall market interest rates. The interest rate paid to
investors generally resets on a monthly basis.
The growth in average securitized loans, partially offset by the decrease in
the net interest margin, increased securitization income $135.3 million for the
three months ended March 31, 2003, as compared to the same period in 2002.
Other fee income generated by securitized loans also increased $73.4 million
for the three months ended March 31, 2003, as compared to the same period in
2002, or 12.9%, primarily as a result of higher average securitized loans.
The net charge-off rate on securitized loans increased 51 basis points to 5.59%
for the three months ended March 31, 2003, as compared to the same period in
2002. This increase is consistent with the overall trend in the Corporation's
managed loan portfolio, partially offsetting the increase in earnings from
securitization activity. This increase in the net charge-off rate for the
three months ended March 31, 2003, decreased securitization income $180.8
million for the three months ended March 31, 2003, from the same period in
2002.
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 is a component of the gain (or loss) from securitization
activity along with the changes in fair value of the interest only-strip
receivable. The gain was $25.3 million (net of securitization transaction costs
of $8.7 million) for the three months ended March 31, 2003 (on the sale of
$2.8 billion of credit card loan principal receivables for the three months
ended March 31, 2003), as compared to $19.0 million (net of securitization
transaction costs of $12.8 million) for the same period in 2002 (on the sale of
$2.2 billion of credit card loan principal receivables for the same period in
2002).
Interchange income is a fee paid by a merchant bank to the card-issuing bank
through the interchange network as compensation for risk, grace period, and
other operating costs. Such fees are set annually by MasterCard International
Inc. and Visa U.S.A. Inc. Interchange income increased $14.7 million to
$89.7 million for the three months ended March 31, 2003, as compared to the
same period in 2002. The increase in interchange income was primarily the
result of increases in cardholder sales volume.
Credit card fees were $126.8 million for the three months ended March 31, 2003,
as compared to $93.0 million for the same period in 2002. Credit card fees
include annual, late, overlimit, returned check, cash advance, express payment,
and other miscellaneous fees on credit card loans. The increase in credit card
fees for the three months ended March 31, 2003, was primarily the result of the
growth in the Corporation's outstanding loan receivables, the number of
accounts, and an increase in the average fee assessed related to the
implementation of a modified fee structure, which included higher late and
over-limit fees.
Other consumer loan fees were $26.1 million for the three months ended
March 31, 2003, as compared to $24.7 million for the same period in 2002. Other
consumer loan fees include annual, late, overlimit, returned check, check
transaction, express payment, and other miscellaneous fees earned on the
Corporation's other consumer loans. The increase was primarily the result of
the growth in the number of accounts and the number of fees assessed.
The majority of the Corporation's insurance income relates to fees received for
marketing credit related life and disability insurance and credit protection
products to its loan Customers. The Corporation recognizes insurance income
over the policy or contract period as earned. Insurance income was
$53.5 million for the three months ended March 31, 2003, as compared to
$45.8 million for the same period in 2002.
OTHER OPERATING EXPENSE
Total other operating expense increased 10.4% to $1.3 billion for the three
months ended March 31, 2003, as compared to $1.2 billion for the same period in
2002. 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
2.3 million new accounts during the three months ended March 31, 2003, compared
to 2.1 million new accounts for the same period in 2002. The Corporation added
80 new endorsements from organizations during the three months ended
March 31, 2003, compared to 93 new endorsements for the same period in 2002.
Salaries and employee benefits increased $47.5 million to $526.5 million for
the three months ended March 31, 2003, from the same period in 2002. The
increase is primarily the result of the release of restrictions on restricted
stock awards of $18.3 million and an increase of $15.6 million related to
higher employee benefit costs. At March 31, 2003, the Corporation had
approximately 25,800 full-time equivalent employees, as compared to 25,700
full-time equivalent employees at March 31, 2002.
Amortization of intangible assets increased $20.0 million to $96.6 million for
the three months ended March 31, 2003, as compared to the same period in 2002.
The increase for the three months ended March 31, 2003, was primarily the
result of the Wachovia and Alliance & Leicester plc credit card portfolio
acquisitions, which were acquired in the second and third quarters of 2002,
respectively.
Purchased services increased $27.3 million to $145.5 million for the three
months ended March 31, 2003, as compared to $118.2 million for the same period
in 2002. Advertising expense increased $17.2 million to $104.0 million for the
three months ended March 31, 2003, as compared to $86.8 million for the same
period in 2002. The increases in purchased services and advertising reflect the
Corporation's continued investment in attracting, servicing, and retaining
credit card and other consumer loan Customers.
Loan receivable fraud losses decreased to $34.1 million for the three months
ended March 31, 2003, as compared to $44.2 million for the same period in 2002.
The decrease in loan receivable fraud losses was primarily the result of an
increase in the number of employees dedicated to fraud detection and improved
fraud detection strategies.
Table 4 provides further detail regarding the Corporation's other operating
expenses.
TABLE 4: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
Purchased services................................ $ 145,516 $ 118,175
Advertising....................................... 104,032 86,805
Collection........................................ 16,600 12,273
Stationery and supplies........................... 9,871 10,792
Service bureau.................................... 18,638 17,077
Postage and delivery.............................. 102,584 109,885
Telephone usage................................... 21,917 22,435
Loan receivable fraud losses...................... 34,139 44,162
Amortization of intangible assets................. 96,635 76,628
Other............................................. 80,777 69,105
------------ ------------
Total other operating expense................... $ 630,709 $ 567,337
============ ============
INCOME TAXES
The Corporation recognized applicable income taxes of $244.3 million for the
three months ended March 31, 2003, as compared to $213.5 million for the same
period in 2002. These amounts represent an effective tax rate of 36.1% for the
three months ended March 31, 2003, and 36.6% for the same period in 2002. The
reduction in the effective tax rate was primarily driven by favorable
resolution of tax examination issues at the federal and state levels.
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,
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
normally 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. The Corporation considers these and other
factors in determining an appropriate reserve for possible credit losses.
DELINQUENCIES
The entire balance of an account is contractually delinquent if the minimum
payment is not received by the specified date on the Customer's billing
statement. Interest and fees continue to accrue on the Corporation's
delinquent loans. Delinquency as a percentage of the Corporation's loan
receivables was 3.88% at March 31, 2003, as compared with 4.36% at
December 31, 2002. The Corporation's delinquency as a percentage of managed
loans was 4.74% at March 31, 2003, as compared to 4.88% at December 31, 2002.
Table 5 presents a reconciliation of the Corporation's loan receivables
delinquency ratio to the managed loans delinquency ratio.
Loan delinquency on domestic credit card loan receivables was 3.83% at
March 31, 2003, as compared to 4.64% at December 31, 2002. Loan delinquency on
domestic other consumer loan receivables was 5.52% at March 31, 2003, as
compared to 6.19% at December 31, 2002. Loan delinquency on foreign loan
receivables was 2.38% at March 31, 2003, as compared to 2.01% at
December 31, 2002. The delinquency rate on the Corporation's foreign loan
receivables is typically lower than the delinquency rate on the Corporation's
domestic credit card loan receivables. The Corporation's domestic other
consumer loan receivables typically have a higher delinquency and charge-off
rate than the Corporation's domestic credit card loan receivables. As a
result, the Corporation generally charges higher interest rates on domestic
other consumer loan receivables.
TABLE 5: DELINQUENT LOANS
(dollars in thousands)
March 31, 2003 December 31, 2002
------------------- ------------------
(unaudited)
Loan receivables:
Loan receivables outstanding......... $ 27,425,271 $ 28,726,508
Loan receivables delinquent:
30 to 59 days...................... $ 343,236 1.25% $ 439,911 1.53%
60 to 89 days...................... 230,421 .84 273,103 .95
90 or more days.................... 489,949 1.79 538,589 1.88
------------ ----- ------------ -----
Total.......................... $ 1,063,606 3.88% $ 1,251,603 4.36%
============ ===== ============ =====
Loan receivables delinquent by
geographic area:
Domestic:
Credit card...................... $ 559,698 3.83% $ 722,988 4.64%
Other consumer................... 350,140 5.52 391,568 6.19
------------ ------------
Total domestic................. 909,838 4.34 1,114,556 5.09
Foreign............................ 153,768 2.38 137,047 2.01
------------ ------------
Total.......................... $ 1,063,606 3.88 $ 1,251,603 4.36
============ ============
Securitized loans:
Securitized loans outstanding........ $ 78,698,578 $ 78,531,334
Securitized loans delinquent:
30 to 59 days...................... $ 1,225,124 1.56% $ 1,374,779 1.75%
60 to 89 days...................... 825,712 1.05 844,811 1.08
90 or more days.................... 1,911,963 2.43 1,758,318 2.24
------------ ----- ------------ -----
Total.......................... $ 3,962,799 5.04% $ 3,977,908 5.07%
============ ===== ============ =====
Securitized loans delinquent by
geographic area:
Domestic:
Credit card...................... $ 3,261,003 5.12% $ 3,248,814 5.09%
Other consumer................... 377,783 6.66 401,469 7.07
------------ ------------
Total domestic................. 3,638,786 5.25 3,650,283 5.25
Foreign............................ 324,013 3.46 327,625 3.65
------------ ------------
Total.......................... $ 3,962,799 5.04 $ 3,977,908 5.07
============ ============
TABLE 5: DELINQUENT LOANS - CONTINUED
(dollars in thousands)
March 31, 2003 December 31, 2002
------------------- ------------------
(unaudited)
Managed loans:
Managed loans outstanding............ $106,123,849 $107,257,842
Managed loans delinquent:
30 to 59 days...................... $ 1,568,360 1.48% $ 1,814,690 1.69%
60 to 89 days...................... 1,056,133 1.00 1,117,914 1.04
90 or more days.................... 2,401,912 2.26 2,296,907 2.15
------------ ----- ------------ -----
Total.......................... $ 5,026,405 4.74% $ 5,229,511 4.88%
============ ===== ============ =====
Managed loans delinquent by
geographic area:
Domestic:
Credit card...................... $ 3,820,701 4.88% $ 3,971,802 5.00%
Other consumer................... 727,923 6.06 793,037 6.61
------------ ------------
Total domestic................. 4,548,624 5.04 4,764,839 5.21
Foreign............................ 477,781 3.02 464,672 2.94
------------ ------------
Total.......................... $ 5,026,405 4.74 $ 5,229,511 4.88
============ ============
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 $207.9 million and
$833.4 million of loan receivables and managed loans re-aged, respectively,
during the three months ended March 31, 2003, compared to $369.6 million and
$1.5 billion for the same period in 2002, respectively. Of those accounts that
were re-aged during the three months ended March 31, 2002, approximately 20.9%
returned to delinquency status and approximately 21.4% charged off by
March 31, 2003.
Table 6 presents a reconciliation of the Corporation's loan receivables re-aged
amounts to the managed re-aged amounts.
TABLE 6: RE-AGED AMOUNTS
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
Loan receivable re-aged amounts................... $ 207,855 $ 369,608
Securitized loan re-aged amounts................. 625,524 1,155,875
Managed loan re-aged amounts..................... 833,379 1,525,483
The decreases in loan receivables, securitized, and managed re-aged amounts
were primarily the result of several changes in re-age practices implemented by
the Corporation during 2002 and the first quarter of 2003, which reduced the
use of re-ages.
The Corporation may modify the terms of its credit card and other consumer loan
agreements with borrowers who have experienced financial difficulties by
offering them a renegotiated loan program, which includes either reducing their
interest rate or placing them on nonaccrual status.
These other nonperforming loans are presented in Table 8 for the Corporation's
loan receivables, securitized loans, and managed loans.
Other nonperforming loans as a percentage of the Corporation's loan receivables
were 2.38% at March 31, 2003, as compared to 2.49% at December 31, 2002. Other
nonperforming loans as a percentage of managed loans were 2.77% at March 31,
2003, as compared to 2.90% at December 31, 2002. The decreases are primarily
the result of a reduction in the number of renegotiated loan programs offered
to Customers.
Table 7 presents a reconciliation of the Corporation's other nonperforming loan
receivables information to the other nonperforming managed loans information.
TABLE 7: OTHER NONPERFORMING LOANS
(dollars in thousands)
March 31, December 31,
2003 2002
------------ ------------
Loan receivables: (unaudited)
Nonaccrual loans:
Domestic:
Credit card.................................... $ 34,327 $ 48,318
Other consumer................................. 2,198 2,481
------------ ------------
Total domestic............................... 36,525 50,799
Foreign.......................................... 7,656 6,733
------------ ------------
Total...................................... 44,181 57,532
Reduced-rate loans:
Domestic:
Credit card.................................... 387,075 429,122
Other consumer................................. 155,207 163,521
------------ ------------
Total domestic............................... 542,282 592,643
Foreign.......................................... 65,150 64,951
------------ ------------
Total...................................... 607,432 657,594
------------ ------------
Total other nonperforming loans................ $ 651,613 $ 715,126
============ ============
Other nonperforming loan receivables as a
percentage of ending loan receivables............ 2.38% 2.49%
TABLE 7: OTHER NONPERFORMING LOANS - CONTINUED
(dollars in thousands)
March 31, December 31,
2003 2002
------------ ------------
Securitized loans: (unaudited)
Nonaccrual loans:
Domestic:
Credit card.................................... $ 163,343 $ 215,605
Other consumer................................. 2,032 2,348
------------ ------------
Total domestic............................... 165,375 217,953
Foreign.......................................... 15,309 11,798
------------ ------------
Total...................................... 180,684 229,751
Reduced-rate loans:
Domestic:
Credit card.................................... 1,866,863 1,928,406
Other consumer................................. 150,391 158,254
------------ ------------
Total domestic............................... 2,017,254 2,086,660
Foreign.......................................... 90,432 80,172
------------ ------------
Total...................................... 2,107,686 2,166,832
------------ ------------
Total other nonperforming loans................ $ 2,288,370 $ 2,396,583
============ ============
Other nonperforming securitized loan
as a percentage of ending securitized loans...... 2.91% 3.05%
Managed loans:
Nonaccrual loans:
Domestic:
Credit card.................................... $ 197,670 $ 263,923
Other consumer................................. 4,230 4,829
------------ ------------
Total domestic............................... 201,900 268,752
Foreign.......................................... 22,965 18,531
------------ ------------
Total...................................... 224,865 287,283
Reduced-rate loans:
Domestic:
Credit card.................................... 2,253,938 2,357,528
Other consumer................................. 305,598 321,775
------------ ------------
Total domestic............................... 2,559,536 2,679,303
Foreign.......................................... 155,582 145,123
------------ ------------
Total...................................... 2,715,118 2,824,426
------------ ------------
Total other nonperforming loans................ $ 2,939,983 $ 3,111,709
============ ============
Other nonperforming managed loans
as a percentage of ending managed loans.......... 2.77% 2.90%
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. Uncollectible accrued interest and fees
are recognized by the Corporation through a reduction of the amount of interest
income and fee income recognized in the current period that the Corporation
does not expect to collect in subsequent periods by reducing the respective
income captions, loan receivables, and accrued income receivable. The
differences between the amounts of interest and fees the Corporation was
contractually entitled to and the amounts recognized as revenue were
$312.2 million and $245.3 million for the three months ended March 31, 2003 and
2002, respectively. Fraud losses are recognized through a charge to other
expense. 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 but not to exceed 180 days
contractually past due.
Net credit losses for the three months ended March 31, 2003, were
$350.2 million compared to $284.9 million for the same period in 2002. The
increase in net credit losses for the three months ended March 31, 2003,
reflects a weaker economy, the continuing seasoning of the Corporation's
accounts, an increase in average loan receivables, and an increase in
bankruptcies.
Net credit losses as a percentage of average loan receivables were 5.12% for
the three months ended March 31, 2003, compared to 4.76% for the same period in
2002. The Corporation's managed net credit losses as a percentage of average
managed loans for the three months ended March 31, 2003, were 5.47%, compared
to 5.00% for the same period in 2002. Domestic credit card net credit losses
as a percentage of average domestic credit card loan receivables were 4.81% for
the three months ended March 31, 2003, as compared to 4.80% for the same period
in 2002. Domestic other consumer net credit losses as a percentage of average
domestic other consumer loan receivables were 8.11% for the three months ended
March 31, 2003, as compared to 6.16% for the same period in 2002. In addition
to the weakening of general economic conditions, domestic other consumer net
credit losses reflect the higher credit risk associated with these products.
Foreign net credit losses as a percentage of average foreign loan receivables
were 2.96% for the three months ended March 31, 2003, as compared to 2.72% for
the same period in 2002. The lower level of net credit losses on the
Corporation's foreign loan receivables as compared to domestic loan receivables
also reflects the growth in the Corporation's foreign loan receivables and the
seasoning of those accounts as a higher percentage of newer, less seasoned
accounts results in a lower charge-off ratio compared to a more seasoned
portfolio.
Managed domestic credit card net credit losses as a percentage of average
managed domestic credit card loans were 5.43% for the three months ended
March 31, 2003, as compared to 4.93% for the same period in 2002. Managed
domestic other consumer net credit losses as a percentage of average managed
domestic other consumer loans were 8.67% for the three months ended March 31,
2003, as compared to 7.10% for the same period in 2002. Managed foreign net
credit losses as a percentage of average managed foreign loans were 3.26% for
the three months ended March 31, 2003, as compared to 3.20% for the same period
in 2002. The net credit loss ratio is calculated by dividing annualized net
credit losses, which exclude uncollectible accrued interest and fees and fraud
losses, for the period by average loan receivables, which include the billed
interest and fees for the corresponding period.
Table 8 presents a reconciliation of the Corporation's loan receivables net
credit losses ratio to the managed net credit losses ratio.
TABLE 8: NET CREDIT LOSSES RATIO
(dollars in thousands)
For the Three Months Ended March 31, 2003
(unaudited)
-----------------------------------------
Net Credit Average Loans Net Credit
Losses Outstanding Loss Ratio
---------- -------------- ----------
Loans receivables:
Domestic credit card.............. $ 172,081 $ 14,304,604 4.81%
Domestic other consumer........... 128,376 6,334,958 8.11
---------- --------------
Total domestic loan receivables..... 300,457 20,639,562 5.82
Foreign........................... 49,746 6,723,484 2.96
---------- --------------
Total loan receivables.......... $ 350,203 $ 27,363,046 5.12
========== ==============
Securitized loans:
Domestic credit card.............. $ 889,495 $ 63,921,788 5.57%
Domestic other consumer........... 132,070 5,686,618 9.29
---------- --------------
Total domestic securitized loans.... 1,021,565 69,608,406 5.87
Foreign........................... 78,730 9,061,332 3.48
---------- --------------
Total securitized loans......... $1,100,295 $ 78,669,738 5.59
========== ==============
Managed loans:
Domestic credit card.............. $1,061,576 $ 78,226,392 5.43%
Domestic other consumer........... 260,446 12,021,576 8.67
---------- --------------
Total domestic managed loans........ 1,322,022 90,247,968 5.86
Foreign........................... 128,476 15,784,816 3.26
---------- --------------
Total managed loans ................ $1,450,498 $ 106,032,784 5.47
========== ==============
TABLE 8: NET CREDIT LOSSES RATIO - CONTINUED
(dollars in thousands)
For the Three Months Ended March 31, 2002
(unaudited)
-----------------------------------------
Net Credit Average Loans Net Credit
Losses Outstanding Loss Ratio
---------- -------------- ----------
Loans receivables:
Domestic credit card............. $ 157,481 $ 13,119,425 4.80%
Domestic other consumer.......... 96,513 6,264,887 6.16
---------- --------------
Total domestic loan receivables.... 253,994 19,384,312 5.24
Foreign.......................... 30,940 4,549,493 2.72
---------- --------------
Total loan receivables......... $ 284,934 $ 23,933,805 4.76
========== ==============
Securitized loans:
Domestic credit card............. $ 747,643 $ 60,377,361 4.95%
Domestic other consumer.......... 116,144 5,709,825 8.14
---------- --------------
Total domestic securitized loans... 863,787 66,087,186 5.23
Foreign.......................... 55,728 6,274,616 3.55
---------- --------------
Total securitized loans........ $ 919,515 $ 72,361,802 5.08
========== ==============
Managed loans:
Domestic credit card............. $ 905,124 $ 73,496,786 4.93%
Domestic other consumer.......... 212,657 11,974,712 7.10
---------- --------------
Total domestic managed loans....... 1,117,781 85,471,498 5.23
Foreign.......................... 86,668 10,824,109 3.20
---------- --------------
Total managed loans............ $1,204,449 $ 96,295,607 5.00
========== ==============
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
The Corporation's reserve for possible credit losses increased to $1.2 billion
at March 31, 2003, as compared to $1.1 billion at December 31, 2002. The
provision for possible credit losses for the three months ended March 31, 2003,
was $378.9 million, compared to $359.4 million for the same period in 2002.
The increase in the reserve for possible credit losses and the related
provision for possible credit losses primarily reflects a weaker economy as
demonstrated by the increase in the Corporation's net credit losses, and an
increase in loan receivables.
The Corporation's projections of probable net credit losses are inherently
uncertain, and as a result the Corporation cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk characteristics
and composition of the Corporation's loan receivables, bankruptcy laws or
regulatory policies, and other factors could impact the Corporation's actual
and projected net credit losses and the related reserve for possible credit
losses.
The Corporation recorded acquired reserves for possible credit losses for loan
portfolio acquisitions of $13.0 million for the three months ended March 31,
2003, as compared to $.9 million for the same period in 2002.
Table 9 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 receivables 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 9: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
Reserve for possible credit losses, beginning of
period.......................................... $ 1,111,299 $ 833,423
Reserves acquired.............................. 12,951 937
Provision for possible credit losses:
Domestic..................................... 323,683 298,440
Foreign...................................... 55,194 60,953
------------ ------------
Total provision for possible credit
losses.................................. 378,877 359,393
Foreign currency translation................... (1,530) (633)
Credit losses:
Domestic:
Credit card................................ (183,357) (167,393)
Other consumer............................. (135,921) (101,000)
------------ ------------
Total domestic credit losses............. (319,278) (268,393)
Foreign...................................... (56,675) (34,983)
------------ ------------
Total credit losses...................... (375,953) (303,376)
Recoveries:
Domestic:
Credit card................................ 11,276 9,912
Other consumer............................. 7,545 4,487
------------ ------------
Total domestic recoveries................ 18,821 14,399
Foreign...................................... 6,929 4,043
------------ ------------
Total recoveries......................... 25,750 18,442
------------ ------------
Net credit losses.............................. (350,203) (284,934)
------------ ------------
Reserve for possible credit losses, end of period. $ 1,151,394 $ 908,186
============ ============
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
March 31, 2003, and December 31, 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. The risk-based capital
ratios, shown in Table 10, have been computed in accordance with regulatory
accounting practices. No conditions or events have occurred since March 31,
2003, that have changed the Corporation's classification as "adequately
capitalized" and the Bank's or MBNA Delaware's classification as "well-
capitalized."
TABLE 10: REGULATORY CAPITAL RATIOS
Well-
March 31, December 31, Minimum Capitalized
2003 2002 Requirements Requirements
------------- ------------ ------------ ------------
(unaudited)
MBNA Corporation
Tier 1.................. 16.81% 15.73% 4.00% (a)
Total................... 20.74 19.65 8.00 (a)
Leverage................ 18.54 18.55 4.00 (a)
MBNA America Bank, N.A.
Tier 1.................. 13.90 12.58 4.00 6.00%
Total................... 17.80 16.41 8.00 10.00
Leverage................ 15.99 15.81 4.00 5.00
MBNA America
(Delaware), N.A.
Tier 1.................. 27.37 28.06 4.00 6.00
Total................... 28.61 29.36 8.00 10.00
Leverage................ 26.76 23.21 4.00 5.00
(a) Not applicable for bank holding companies.
DIVIDEND LIMITATIONS
The payment of dividends in the future and the amount of such dividends, if
any, will be at the discretion of the Corporation's Board of Directors. The
payment of preferred and common stock dividends by the Corporation may be
limited by certain factors, including regulatory capital requirements, broad
enforcement powers of the federal bank regulatory agencies, and tangible net
worth maintenance requirements under the Corporation's revolving credit
facilities. The payment of common stock dividends may also be limited by the
terms of the 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 its common stock. In addition, if the Corporation defers interest
payments for consecutive periods covering 10 semiannual periods or 20
consecutive quarterly periods, depending on the series, on its guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures, the Corporation may not be permitted to declare or pay any
cash dividends on the Corporation's Common Stock, or pay any interest on debt
securities that have equal or lower priority than the junior subordinated
deferrable interest debentures. During the three months ended March 31, 2003,
the Corporation declared dividends on its preferred stock of $3.5 million and
on its common stock of $102.2 million.
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 profits. 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
March 31, 2003, the amount of undivided profits available for declaration and
payment of dividends from the Bank to the Corporation was $3.0 billion. 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 March 31, 2003.
If this facility had been drawn upon at March 31, 2003, the amount of retained
earnings available for declaration of dividends would have been limited to
$2.1 billion. Also, banking regulators have indicated that national banks
should generally pay dividends only out of current operating earnings. Payment
of dividends by the Bank to the Corporation, however, can be further limited by
federal bank regulatory agencies.
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 pricing and maturity
of investment securities, loans, deposits, securitizations, and other assets
and liabilities. Table 11 provides a summary of the Corporation's estimated
liquidity requirements at March 31, 2003.
TABLE 11: SUMMARY OF ESTIMATED LIQUIDITY REQUIREMENTS
(dollars in thousands) (unaudited)
Estimated Liquidity Requirements
at March 31, 2003
--------------------------------------
Within Within
1 Year 1-3 Years 3 Years
----------- ----------- ------------
Deposits.............................. $18,188,924 $ 9,407,507 $ 27,596,431
Short-term borrowings................. 1,198,424 - 1,198,424
Long-term debt and bank
notes (par value).................... 1,618,334 1,993,072 3,611,406
Securitized loans
(investor principal)................. 7,270,420 24,496,824 31,767,244
Minimum rental payments
under noncancelable
operating leases..................... 25,648 31,216 56,864
----------- ----------- ------------
Total estimated
liquidity requirements............. $28,301,750 $35,928,619 $ 64,230,369
=========== =========== ============
Over
3-5 Years 5 Years Total
----------- ----------- ------------
Deposits.............................. $ 3,974,666 $ 7,951 $ 31,579,048
Short-term borrowings................. - - 1,198,424
Long-term debt and bank
notes (par value).................... 2,738,802 3,165,127 9,515,335
Securitized loans
(investor principal)................. 29,253,387 16,138,055 77,158,686
Minimum rental payments
under noncancelable
operating leases..................... 9,134 79 66,077
----------- ----------- ------------
Total estimated
liquidity requirements............. $35,975,989 $19,311,212 $119,517,570
=========== =========== ============
The Corporation estimates that it will have $28.3 billion in liquidity
requirements within the next year. These requirements include $18.2 billion in
deposits and $7.3 billion related to certain securitization transactions that
will enter their scheduled amortization period.
Based on past 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. At March 31, 2003, the Corporation
funded 74.2% of its managed loans through securitization transactions. To
maintain an appropriate funding level, the Corporation expects to securitize
additional loan principal receivables during the remainder of 2003.
The consumer asset-backed securitization market in the United States exceeded
$1.5 trillion at March 31, 2003, with approximately $106 billion of asset-
backed securities issued during the three months ended March 31, 2003. An
additional $45 billion of consumer asset-backed securities were issued in
European markets during the three months ended March 31, 2003. 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 or to do so
at favorable pricing levels include the overall credit quality of the
Corporation's loans, the stability of the market for securitization
transactions, and the legal, regulatory, accounting, and tax environments
impacting securitization transactions. The Corporation does not believe
adverse outcomes from these events are likely to occur. If the Corporation
were unable to continue to securitize its loan receivables at current
levels, the Corporation would use its investment securities and money market
instruments in addition to alternative funding sources to fund increases in
loan principal 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, increases in the reserve for possible credit
losses and the provision for possible credit losses as more loans would remain
on the Corporation's consolidated statements of financial condition, and
restrictions on 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 statements of financial condition, the
Corporation would likely need to raise additional capital to support loan and
asset growth, and meet the regulatory capital requirements.
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
three months ended March 31, 2003, the Corporation issued 6.1 million common
shares upon the exercise of stock options and issuance of restricted stock, and
purchased 6.1 million common shares for $100.7 million. The Corporation
received $3.6 million in proceeds from the exercise of stock options for the
three months ended March 31, 2003.
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 issuances, and uses securitization of the Corporation's loan
receivables as a major funding alternative. In addition, further liquidity is
provided to the Corporation through committed credit facilities.
Total deposits at March 31, 2003, and December 31, 2002, were $31.6 billion and
$30.6 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 increased consumer demand for deposit products and
attractive pricing relative to other investment opportunities. The
Corporation's ratio of average receivables to average deposits was 87.91% for
the three months ended March 31, 2003, as compared to 87.87% for the same
period in 2002. The slight increase in the ratio of average loan receivables
to average deposits for the three months ended March 31, 2003, as compared to
the same period in 2002, is primarily the result of a larger increase of
average receivables than average deposits.
Table 12 provides the maturities of the Corporation's deposits at March 31,
2003.
TABLE 12: MATURITIES OF DEPOSITS AT MARCH 31, 2003
(dollars in thousands) (unaudited)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
One year or less.................... $ 14,941,642 $ 3,247,282 $ 18,188,924
Over one year through two years..... 3,555,024 2,141,794 5,696,818
Over two years through three years.. 1,987,657 1,723,032 3,710,689
Over three years through four years. 797,936 1,020,953 1,818,889
Over four years through five years.. 1,397,776 758,001 2,155,777
Over five years..................... 7,951 - 7,951
------------ ------------ ------------
Total deposits.................... $ 22,687,986 $ 8,891,062 $ 31,579,048
============ ============ ============
Direct deposits are deposits marketed to and received from individual Customers
without the use of a third-party intermediary. Other deposits are deposits
generally obtained through the use of a third-party intermediary. Included in
the Corporation's other deposits at March 31, 2003, and December 31, 2002, were
brokered deposits of $8.4 billion and $8.3 billion, representing 26.5% and
27.1% 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 March 31, 2003, 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
with the Corporation's direct deposits.
The Corporation also held $4.0 billion in investment securities and
$7.9 billion of money market instruments at March 31, 2003, compared to
$4.1 billion in investment securities and $5.3 billion in money market
instruments at December 31, 2002. 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 March 31, 2003,
$2.0 billion are anticipated to mature within 12 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
$3.6 billion at March 31, 2003, and $3.7 billion at December 31, 2002. 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 March 31, 2003, from
December 31, 2002, to provide liquidity to support portfolio acquisition
activity and anticipated loan growth. Also, during the three months ended
March 31, 2003, the Corporation increased its liquidity position in
anticipation of possible market disruptions due to uncertainty created by world
events and capital market conditions. Estimated maturities of the
Corporation's investment securities are presented in Table 13.
TABLE 13: SUMMARY OF INVESTMENT SECURITIES AT MARCH 31, 2003
(dollars in thousands) (unaudited)
Estimated Maturity
--------------------------------------------------
Within 1 1-5 6-10 Over
Year Years Years 10 Years Total
---------- ---------- ------- -------- -----------
AVAILABLE-FOR-SALE
U.S. Treasury and
other U.S. government
agencies obligations.... $1,231,770 $ 668,104 $ - $ - $ 1,899,874
State and political
subdivisions of the
United States........... 100,660 - - - 100,660
Asset-backed and other
securities.............. 711,478 864,987 22,470 1,630 1,600,565
---------- ---------- ------- -------- -----------
Total investment
securities available-
for-sale.............. $2,043,908 $1,533,091 $22,470 $ 1,630 $ 3,601,099
========== ========== ======= ======== ===========
HELD-TO-MATURITY
U.S. Treasury and other
U.S. government agencies
obligations............. $ - $ - $ - $383,652 $ 383,652
State and political
subdivisions of the
United States........... - 150 649 6,165 6,964
Asset-backed and other
securities.............. 1,000 1,000 - 9,627 11,627
---------- ---------- ------- -------- -----------
Total investment
securities held-to-
maturity.............. $ 1,000 $ 1,150 $ 649 $399,444 $ 402,243
========== ========== ======= ======== ===========
TABLE 13: SUMMARY OF INVESTMENT SECURITIES AT MARCH 31, 2003 - CONTINUED
(dollars in thousands) (unaudited)
Amortized Market
Cost Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,879,379 $1,899,874
State and political subdivisions
of the United States............. 100,660 100,660
Asset-backed and other securities. 1,590,817 1,600,565
---------- ----------
Total investment securities
available-for-sale............. $3,570,856 $3,601,099
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 383,652 $ 391,268
State and political subdivisions
of the United States............. 6,964 7,147
Asset-backed and other securities. 11,627 11,617
---------- ----------
Total investment securities
held-to-maturity............... $ 402,243 $ 410,032
========== ==========
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 estimated value of the interest-only strip
receivable and other-interest earning assets, 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 as a result of
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. In addition to on-balance-sheet activities,
interest rate risk includes the interest rate sensitivity of securitization
income from securitized loans and the impact of interest rate swap agreements
and foreign exchange swap agreements. The Corporation uses interest rate swap
agreements and foreign exchange swap agreements to change a portion of fixed-
rate funding sources to floating-rate funding sources to better match the rate
sensitivity of the Corporation's assets. 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. 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 likely
undertake to minimize the impact of adverse movements in interest rates. Based
on the simulation analysis at March 31, 2003, the Corporation could
experience a decrease in projected net income during the next 12 months of
approximately $57 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
$57 million in projected net income during the next 12 months.
These assumptions are inherently uncertain and, as a result, the analysis
cannot precisely predict the impact of higher interest rates on net income.
Actual results would differ from simulated results as a result of 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
March 31, 2003, the Corporation could experience a decrease in stockholders'
equity, net of tax, of approximately $135 million, as a result of a 10%
depreciation of the Corporation's unhedged capital exposure in foreign
subsidiaries to the U.S. dollar position.
ASSET SECURITIZATION
Asset securitization is the process whereby loan principal receivables are
converted into securities normally referred to as asset-backed securities. The
securitization of the Corporation's loan principal receivables is accomplished
through the public and private issuance of asset-backed securities and is
accounted for in accordance with Statement No. 140. Asset securitization
removes loan principal receivables from the consolidated statements of
financial condition through the transfer of loan principal receivables 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, while the Corporation retains the remaining undivided interest and
is entitled to specific 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. During a
securitization's revolving period, the Corporation agrees to sell the
additional principal receivables to the trusts until the trusts begin 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.
The undivided interests in the trusts 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 trusts
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 loans.
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 Corporation's statements of
financial condition. The trusts are administered by an independent trustee.
During the revolving period, which normally 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.
The Corporation maintains retained interests in its securitization
transactions, which are included in accounts receivable from securitization in
the Corporation's consolidated statements of financial condition. The investors
and providers of credit enhancement had a lien on a portion of these retained
interests of $1.1 billion and $1.2 billion at March 31, 2003, and December 31,
2002, respectively. 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.
IMPACT OF SECURITIZATION TRANSACTIONS ON THE CORPORATION'S RESULTS
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 presents the earnings on securitized loan principal
receivables in the same fashion as the Corporation's owned loans. Management,
equity and debt analysts, rating agencies, and others evaluate the
Corporation's 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 securitization transactions.
When adjusted for the effects of securitization, the Corporation's managed data
may be reconciled to its consolidated financial statements. This securitization
adjustment reclassifies interest income, interchange income, credit card and
other consumer loan fees, insurance income, 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.
Table 14 reconciles income statement data for the period to managed net
interest income, managed provision for possible credit losses, and managed
other operating income.
TABLE 14: RECONCILIATION OF INCOME STATEMENT DATA FOR THE PERIOD TO
MANAGED NET INTEREST INCOME, MANAGED PROVISION FOR POSSIBLE
CREDIT LOSSES, AND MANAGED OTHER OPERATING INCOME
(dollars in thousands)
For the
Three Months Ended
March 31,
2003 2002
------------ ------------
(unaudited)
NET INTEREST INCOME:
Net interest income................................ $ 555,596 $ 513,276
Securitization adjustments......................... 1,897,116 1,761,797
------------ ------------
Managed net interest income........................ $ 2,452,712 $ 2,275,073
============ ============
PROVISION FOR POSSIBLE CREDIT LOSSES:
Provision for possible credit losses............... $ 378,877 $ 359,393
Securitization adjustments......................... 1,100,295 919,515
------------ ------------
Managed provision for possible credit losses....... $ 1,479,172 $ 1,278,908
============ ============
OTHER OPERATING INCOME:
Other operating income............................. $ 1,788,009 $ 1,596,266
Securitization adjustments......................... (796,821) (842,282)
------------ ------------
Managed other operating income..................... $ 991,188 $ 753,984
============ ============
Managed net interest income was $2.5 billion for the three months ended
March 31, 2003, as compared to $2.3 billion for the same period in 2002. The
increase in managed net interest income for the three months ended March 31,
2003, was primarily a result of an increase in average managed interest-earning
assets of $12.0 billion for the three months ended March 31, 2003, combined
with a decrease in the rate paid on average managed interest-bearing
liabilities of 52 basis points for the three months ended March 31, 2003,
partially offset by a decrease in the yield earned on average managed interest
earning assets of 82 basis points. The increase in average managed interest-
earning assets is primarily the result of the increase in average managed
loans. The decrease in the yield earned on average managed interest-earning
assets was primarily the result of lower average promotional and other interest
rates offered to attract and retain Customers and to grow managed loans. The
decrease in the rate paid on average managed interest-bearing liabilities was a
result of actions by the FOMC throughout 2001 and in the fourth quarter of
2002, that impacted overall market interest rates.
The Corporation's managed net interest margin, on a fully taxable equivalent
basis, was 8.55% for the three months ended March 31, 2003, as compared to
8.84% for the same period in 2002. The managed net interest margin represents
managed net interest income on a fully taxable equivalent basis expressed as a
percentage of managed average total interest-earning assets. The 29 basis
point decrease in the managed net interest margin for the three months ended
March 31, 2003, was primarily the result of the yield earned on managed average
interest-earning assets decreasing more than the rate paid on managed average
interest-bearing liabilities combined with the increase in managed average
interest-earning assets. The net interest margin is reconciled to the managed
net interest margin in Table 15.
The managed provision for possible credit losses increased $200.3 million, or
15.7% during the three months ended March 31, 2003, as compared to the same
period in 2002. The increase in the managed provision for possible credit
losses was primarily the result of increases in the Corporation's managed net
credit losses and managed loans.
Managed other operating income was $991.2 million for the three months ended
March 31, 2003, as compared to $754.0 million for the same period in 2002. The
increase in managed other operating income was primarily the result of the
gains from securitization activity, including the changes in fair value of the
interest-only strip receivable combined with an increase in credit card fees
and other consumer loan fees, insurance, and interchange income.
TABLE 15: RECONCILIATION OF THE NET INTEREST MARGIN RATIO
TO THE MANAGED NET INTEREST MARGIN RATIO
(dollars in thousands)
For the three months ended
March 31, 2003
(unaudited)
Average Net Interest Net Interest
Earning Assets Income Margin Ratio
-------------- ------------ ------------
NET INTEREST MARGIN (a):
Investment securities and money
market instruments............... $ 10,262,295
Other interest-earning assets..... 3,800,002
Loan receivables (b).............. 27,363,046
--------------
Total........................... $ 41,425,343 $ 555,813 5.44%
==============
SECURITIZATION ADJUSTMENTS:
Investment securities and money
market instruments............... $ -
Other interest-earning assets..... (3,732,987)
Securitized loans................. 78,669,738
--------------
Total........................... $ 74,936,751 $ 1,897,116 10.27%
==============
MANAGED NET INTEREST MARGIN (a):
Investment securities and money
market instruments............... $ 10,262,295
Other interest-earning assets..... 67,015
Managed loans..................... 106,032,784
--------------
Total........................... $ 116,362,094 $ 2,452,929 8.55%
==============
TABLE 15: RECONCILIATION OF THE NET INTEREST MARGIN RATIO
TO THE MANAGED NET INTEREST MARGIN RATIO - CONTINUED
(dollars in thousands)
For the three months ended
March 31, 2002
(unaudited)
Average Net Interest Net Interest
Earning Assets Income Margin Ratio
-------------- ------------ ------------
NET INTEREST MARGIN (a):
Investment securities and money
market instruments............... $ 8,020,576
Other interest-earning assets..... 3,896,774
Loan receivables (b).............. 23,933,805
--------------
Total........................... $ 35,851,155 $ 513,533 5.81%
==============
SECURITIZATION ADJUSTMENTS:
Investment securities and money
market instruments .............. $ -
Other interest-earning assets..... (3,836,092)
Securitized loans................. 72,361,802
--------------
Total........................... $ 68,525,710 $ 1,761,797 10.43%
==============
MANAGED NET INTEREST MARGIN (a):
Investment securities and money
market instruments............... $ 8,020,576
Other interest-earning assets..... 60,682
Managed loans..................... 96,295,607
--------------
Total........................... $ 104,376,865 $ 2,275,330 8.84%
==============
(a) Net interest margin ratios are presented on a fully taxable equivalent
basis. The fully taxable equivalent adjustment for the three months ended
March 31, 2003, and 2002 was $217 and $257, respectively.
(b) Loan receivables include loans held for securitization and the loan
portfolio.
SECURITIZATION TRANSACTION ACTIVITY
During the three months ended March 31, 2003, the Corporation securitized
credit card loan principal receivables totaling $2.8 billion, including the
securitization of 500.0 million pounds sterling (approximately $790.0 million)
by MBNA Europe. The total amount of securitized loans was $78.7 billion or
74.2% of managed loans at March 31, 2003, compared to $78.5 billion or 73.2% at
December 31, 2002. The total amount of securitized domestic credit card loans
was 81.3% of managed domestic credit card loans at March 31, 2003, as compared
to 80.4% at December 31, 2002. Securitized domestic other consumer loans were
47.2% of managed domestic other consumer loans at March 31, 2003, as compared
to 47.3% at December 31, 2002. Securitized foreign loans were 59.2% of managed
foreign loans at March 31, 2003, as compared to 56.8% at December 31, 2002.
During the three months ended March 31, 2003, there was an increase of
$2.6 billion in the Corporation's loan receivables that occurred 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. The Corporation's loan portfolio is expected to increase an
additional $5.9 billion during 2003 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 and does not anticipate future
securitization activity.
Table 16 presents the Corporation's securitized loans distribution.
TABLE 16: SECURITIZED LOANS DISTRIBUTION
(dollars in thousands)
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
Securitized Loans
Domestic:
Credit card................................. $ 63,668,298 $ 63,886,876
Other consumer.............................. 5,675,671 5,677,908
------------ ------------
Total domestic securitized loans.......... 69,343,969 69,564,784
Foreign:
Credit card................................. 9,354,609 8,966,550
------------ ------------
Total securitized loans.......................... $ 78,698,578 $ 78,531,334
============ ============
Distribution of principal to investors may begin sooner 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 interest rate payable
to investors, contractual servicing fees, and principal credit losses during
the period) or certain other events occur.
Table 17 presents summarized yields for each trust for the three months ended
March 31, 2003. 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
falls below 0%, for a contractually specified period, generally a three-month
average, then the securitizations will begin to amortize earlier than their
scheduled contractual amortization date.
TABLE 17: 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.. $35,809,757 49 17.68% 9.88%
UK Receivables Trust.............. 3,631,071 8 19.76 11.53
Gloucester Credit Card Trust...... 2,010,573 8 19.89 9.64
MBNA Master Consumer Loan Trust... 5,560,278 3 (b) (b)
MBNA Triple A Master Trust........ 2,000,000 2 17.13 9.40
MBNA Credit Card Master Note
Trust (c)........................ 24,094,025 43 17.77 9.82
UK Receivables Trust II........... 3,552,982 5 18.02 10.92
Multiple Asset Note Trust......... 500,000 1 17.89 8.57
Yield in Excess of Minimum Yield (a)
------------------------------------
Series Range
Weighted --------------------
Average High Low
---------- --------- ---------
(unaudited)
MBNA Master Credit Card Trust II.. 7.80% 8.16% 4.52%
UK Receivables Trust.............. 8.23 9.18 5.96
Gloucester Credit Card Trust...... 10.25 10.86 9.78
MBNA Master Consumer Loan Trust... (b) (b) (b)
MBNA Triple A Master Trust........ 7.73 7.73 7.73
MBNA Credit Card Master Note
Trust (c)........................ 7.95 7.95 7.95
UK Receivables Trust II........... 7.10 7.20 7.04
Multiple Asset Note Trust......... 9.32 9.32 9.32
(a) The Yield in Excess of Minimum Yield represents the trust's average
annualized yield less its average minimum yield.
(b) The MBNA Master Consumer Loan Trust yield in excess of minimum yield does
not impact the distribution of principal to investors. Distribution to
investors for transactions in this trust may begin earlier than the
scheduled time if the credit enhancement amount falls below a
predetermined contractual level. As a result, its yields are excluded
from Table 17.
(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 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. On April 10, 2003 the court
approved the settlement.
Several U.S. merchants have filed class action suits against MasterCard
International Incorporated ("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 annual report on Form 10-K for the year ended
December 31, 2002.
Commencing in October 1996, several class action suits were brought by a number
of U.S. merchants against MasterCard International Inc. ("MasterCard") and Visa
U.S.A. Inc. ("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
for payment to accept their debit cards. The 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. The
plaintiffs allege that the plaintiff class has been forced to pay unlawfully
high prices for debit and credit card transactions as a result of the alleged
tying arrangements and monopolization practices. 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. In April 2003, MasterCard and Visa announced they had
agreed to settle the suits brought by the retailers, subject to execution of a
final settlement agreement and review and approval of the settlements by the
district court. MasterCard agreed to pay into a settlement fund approximately
$1 billion over ten years and Visa agreed to pay approximately $2 billion over
ten years. The associations also agreed to certain reductions in the
interchange rate for debit cards, and agreed to change their rules to allow
merchants who accept their credit cards for payment to not accept their debit
cards.
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, including
the settlement amounts described above. 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. Based on publicly
available information concerning the settlements, the Corporation does not
anticipate that the terms of the settlements as currently proposed will have a
significant effect on the Corporation or its banking subsidiaries.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of the Stockholders of MBNA Corporation was held on
May 6, 2003.
The stockholders elected the following nominees to the Corporation's Board of
Directors to serve for the coming year and until their successors are elected
and qualify. The following shows the separate tabulation of votes for each
nominee:
Number of Votes
-----------------------------
For Withheld
------------- --------------
James H. Berick, Esq.......................... 1,094,274,456 64,736,867
Charles M. Cawley............................. 1,126,420,616 32,590,707
Benjamin R. Civiletti, Esq.................... 1,093,962,050 65,049,273
William L. Jews............................... 1,094,415,546 64,595,777
Norma Lerner.................................. 1,125,970,078 33,041,245
Randolph D. Lerner, Esq....................... 1,126,034,924 32,976,399
Stuart L. Markowitz, M.D...................... 1,094,293,235 64,718,088
William B. Milstead........................... 1,102,785,280 56,226,043
Michael Rosenthal, Ph.D....................... 1,094,191,733 64,819,590
The Corporation had 1,277,671,875 shares entitled to vote.
The stockholders approved a stockholder proposal urging the Board of Directors
to adopt a policy that the cost of employee and director stock options be
recognized in the Corporation's income statement. The Board of Directors
opposed the proposal. There were 502,322,363 affirmative votes, 461,590,972
negative votes, and 24,051,621 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- -----------------------------------------------------
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
(unaudited)
99.1 Section 906 Chief Executive Officer Certification
99.2 Section 906 Chief Financial Officer Certification
b. Reports on Form 8-K
1. Report dated January 23, 2003, reporting MBNA Corporation's earnings
release for the fourth quarter of 2002.
2. Report dated January 31, 2003, reporting the net credit losses and loan
delinquency ratios for MBNA America Bank, N.A. for its loan receivables
and managed loans for January 2003.
3. Report dated February 4, 2003, reporting the securitization of
$200.0 million of credit card loan receivables by MBNA America Bank, N.A.
4. Report dated February 12, 2003, reporting the securitization of
$100.0 million of credit card loan receivables by MBNA America Bank, N.A.
5. Report dated February 20, 2003, reporting the securitization of
$200.0 million of credit card loan receivables by MBNA America Bank, N.A.
6. Report dated February 27, 2003, reporting the securitization of
$500.0 million of credit card loan receivables by MBNA America Bank, N.A.
7. Report dated February 28, 2003, reporting the net credit losses and loan
delinquency ratios for MBNA Corporation for its loan receivables
and managed loans for February 2003.
8. Report dated March 6, 2003, reporting the securitization of 500.0 million
pounds sterling of credit card loan receivables by MBNA Europe Bank
Limited.
9. Report dated March 26, 2003, reporting the securitization of $1.0 billion
of credit card loan receivables by MBNA America Bank, N.A.
10. Report dated March 31, 2003, reporting the net credit losses and loan
delinquency ratios for MBNA Corporation for its loan receivables
and managed loans for March 2003.
11. Report dated March 31, 2003, reporting that Vernon H.C. Wright has been
appointed as Chief Financial Officer of MBNA Corporation, succeeding
M. Scot Kaufman.
12. Report dated April 10, 2003, reporting the securitization of
$750.0 million of credit card loan receivables by MBNA America Bank, N.A.
13. Report dated April 23, 2003, reporting MBNA Corporation's earnings
release for the first quarter of 2003.
14. Report dated April 30, 2003, reporting the net credit losses and loan
delinquency ratios for MBNA Corporation for its loan receivables
and managed loans for April 2003.
15. Report dated May 7, 2003, reporting the securitization of
CAD$350.0 million of credit card loan receivables by MBNA Canada Bank.
16. Report dated May 8, 2003, reporting the securitization of
$175.0 million of credit card loan receivables by MBNA America Bank, N.A.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MBNA CORPORATION
Date: May 15, 2003 By: /s/ Vernon H.C. Wright
-------------------------------
Vernon H.C. Wright
Chief Financial Officer
Chief Executive Officer Certification
I, Charles M. Cawley, 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: May 15, 2003 /s/ Charles M. Cawley
-------------------------------
Charles M. Cawley
Chief Executive Officer
Chief Financial Officer Certification
I, Vernon H.C. Wright, 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: May 15, 2003 /s/ Vernon H.C. Wright
-------------------------------
Vernon H.C. Wright
Chief Financial Officer
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
For the Three months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 676,853 $ 583,454
Fixed charges.................................... 392,798 405,709
Interest capitalized during period, net of
amortization of previously capitalized interest. (3,377) (1,753)
------------ ------------
Earnings, for computation purposes............... $ 1,066,274 $ 987,410
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 392,046 $ 404,342
Portion of rents representative of the interest
factor.......................................... 752 1,367
------------ ------------
Fixed charges.................................... 392,798 405,709
Preferred stock dividend requirements............ 5,502 5,546
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 398,300 $ 411,255
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.68 2.40
For the Three months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 676,853 $ 583,454
Fixed charges.................................... 99,936 82,094
Interest capitalized during period, net of
amortization of previously capitalized interest. (3,382) (1,758)
------------ ------------
Earnings, for computation purposes............... $ 773,407 $ 663,790
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 99,184 $ 80,727
Portion of rents representative of the interest
factor.......................................... 752 1,367
------------ ------------
Fixed charges.................................... 99,936 82,094
Preferred stock dividend requirements............ 5,502 5,546
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 105,438 $ 87,640
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 7.34 7.57
The ratio of earnings to combined fixed charges and preferred stock dividend
requirements is computed by dividing (i) income before income taxes and fixed
charges less interest capitalized during such period, net of amortization of
previously capitalized interest, by (ii) fixed charges and preferred stock
dividend requirements. Fixed charges consist of interest, expensed or
capitalized, on borrowings (including or excluding deposits, as applicable),
and the portion of rental expense which is deemed representative of interest.
The preferred stock dividend requirements represent the pre-tax earnings which
would have been required to cover such dividend requirements on the
Corporation's Preferred Stock outstanding.
Exhibit 99.1
This certification is being furnished to the Securities and Exchange
Commission solely in connection with Section 1350 of Chapter 63 of title 18,
United States Code, "Failure of corporate officers to certify financial
reports", and is not being filed as part of MBNA Corporation's Form 10-Q for
the period ended March 31, 2003 accompanying this certification.
I, Charles M. Cawley, Chief Executive Officer of MBNA Corporation, certify
that MBNA Corporation's Form 10-Q for the period ended March 31, 2003, fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of MBNA Corporation.
Date: May 15, 2003 /s/ Charles M. Cawley
-------------------------------
Charles M. Cawley
Chief Executive Officer
Exhibit 99.2
This certification is being furnished to the Securities and Exchange
Commission solely in connection with Section 1350 of Chapter 63 of title 18,
United States Code, "Failure of corporate officers to certify financial
reports", and is not being filed as part of MBNA Corporation's Form 10-Q for
the period ended March 31, 2003 accompanying this certification.
I, Vernon H.C. Wright, Chief Financial Officer of MBNA Corporation, certify
that MBNA Corporation's Form 10-Q for the period ended March 31, 2003, fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of MBNA Corporation.
Date: May 15, 2003 By: /s/ Vernon H.C. Wright
-------------------------------
Vernon H.C. Wright
Chief Financial Officer
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