UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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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, DE 19884
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(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---------- ----------
Common Stock, $.01 Par Value -- 222,750,000 Shares
Outstanding as of June 30, 1996
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
June 30, 1996 (unaudited) and December 31, 1995
Consolidated Statements of Income - 3
For the Three and Six Months Ended June 30, 1996 and 1995
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Six Months Ended June 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 7
For the Six Months Ended June 30, 1996 and 1995 (unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Supplemental Financial Information 33
Part II - Other Information
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 35
Signature 39
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(dollars in thousands)
June 30, December 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
Cash and due from banks.......................... $ 296,909 $ 291,856
Interest-earning time deposits in other banks.... 557,569 448,611
Federal funds sold and securities purchased
under resale agreements......................... 35,000 125,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $1,295,205 and $911,877 at June 30,
1996 and December 31, 1995, respectively)..... 1,295,870 912,064
Held-to-maturity (market value of $901,134
and $1,188,101 at June 30, 1996 and
December 31, 1995, respectively).............. 909,122 1,183,727
Loans held for securitization.................... 2,811,305 3,168,427
Loans:
Credit card.................................... 4,298,466 4,090,553
Other consumer................................. 1,058,661 876,938
------------ ------------
Total loans.................................. 5,357,127 4,967,491
Reserve for possible credit losses............. (110,406) (104,886)
------------ ------------
Net loans.................................... 5,246,721 4,862,605
Premises and equipment, net...................... 927,182 816,277
Accrued income receivable........................ 84,171 93,636
Accounts receivable from securitizations......... 1,302,483 951,568
Prepaid expenses and deferred charges............ 160,092 139,901
Other assets..................................... 327,951 235,217
------------ ------------
Total assets................................. $ 13,954,375 $ 13,228,889
============ ============
<PAGE>
June 30, December 31,
1996 1995
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits.................................. $ 6,428,671 $ 6,147,599
Money market deposit accounts.................. 2,556,397 2,257,565
Noninterest-bearing demand deposits............ 186,875 169,571
Interest-bearing transaction accounts.......... 24,826 24,514
Savings accounts............................... 10,494 9,665
------------ ------------
Total deposits............................... 9,207,263 8,608,914
Short-term borrowings............................ 108,780 289,543
Long-term debt and bank notes.................... 2,754,901 2,657,600
Accrued interest payable......................... 94,268 93,400
Accrued expenses and other liabilities........... 419,832 314,374
------------ ------------
Total liabilities............................ 12,585,044 11,963,831
STOCKHOLDERS' EQUITY
Preferred stock($.01 par value, 20,000,000
shares authorized, 6,000,000 shares issued and
outstanding at June 30, 1996)................... 60 60
Common stock ($.01 par value, 700,000,000 shares
authorized, 222,750,000 shares issued and
outstanding at June 30, 1996)................... 2,228 2,228
Additional paid-in capital....................... 477,587 491,735
Retained earnings................................ 889,456 771,035
------------ ------------
Total stockholders' equity................... 1,369,331 1,265,058
------------ ------------
Total liabilities and stockholders' equity... $ 13,954,375 $ 13,228,889
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
(unaudited)
INTEREST INCOME
Loans........................... $ 201,742 $ 157,705 $ 380,721 $ 288,562
Investment securities:
Taxable....................... 30,219 29,667 59,778 58,228
Tax-exempt.................... 838 803 1,662 1,636
Time deposits in other banks.... 8,153 1,523 15,057 2,259
Federal funds sold and
securities purchased under
resale agreements.............. 2,073 1,237 2,816 2,660
Loans held for securitization... 78,789 98,664 184,083 175,397
---------- ---------- ----------- -----------
Total interest income........ 321,814 289,599 644,117 528,742
INTEREST EXPENSE
Deposits........................ 125,378 111,257 248,299 201,441
Short-term borrowings........... 1,859 5,432 4,660 6,801
Long-term debt and bank notes... 44,447 35,053 89,833 62,954
---------- ---------- ----------- -----------
Total interest expense....... 171,684 151,742 342,792 271,196
---------- ---------- ----------- -----------
NET INTEREST INCOME............. 150,130 137,857 301,325 257,546
Provision for possible credit
losses......................... 49,112 36,516 98,600 62,101
---------- ---------- ----------- -----------
Net interest income after
provision for possible credit
losses......................... 101,018 101,341 202,725 195,445
OTHER OPERATING INCOME
Interchange..................... 22,557 24,110 42,366 43,356
Merchant discount............... 1,875 1,749 4,184 3,940
Credit card fees................ 26,530 21,728 52,080 38,847
Loan servicing fees............. 381,807 273,771 718,871 519,391
Processing fees................. 3,520 5,880 8,384 12,152
Other........................... 7,772 5,364 15,724 12,147
---------- ---------- ----------- -----------
Total other operating income. $ 444,061 $ 332,602 $ 841,609 $ 629,833
<PAGE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.. $ 170,940 $ 133,070 $ 341,126 $ 259,252
Occupancy expense of premises... 15,674 9,810 30,377 19,699
Furniture and equipment expense. 23,283 19,924 45,260 38,384
Other........................... 164,123 143,308 303,789 266,925
---------- ---------- ----------- -----------
Total other operating
expense..................... 374,020 306,112 720,552 584,260
---------- ---------- ----------- -----------
Income before income taxes and
special marketing program...... 171,059 127,831 323,782 241,018
Special marketing program....... - - 54,331 -
---------- ---------- ----------- -----------
Income before income taxes...... 171,059 127,831 269,451 241,018
Applicable income taxes......... 67,739 50,996 106,702 95,458
Tax benefit from Customer-based
intangible assets.............. - - (32,793) -
---------- ---------- ----------- -----------
NET INCOME...................... $ 103,320 $ 76,835 $ 195,542 $ 145,560
========== ========== =========== ===========
EARNINGS PER COMMON SHARE....... $ .44 $ .34 $ .83 $ .64
Weighted average common shares
outstanding and common stock
equivalents (000).............. 230,039 228,111 229,968 227,257
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
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, 1995........... 6,000 222,750 $ 60 $ 2,228
Net income........................... - - - -
Cash dividends:
Common-$.32 per share.............. - - - -
Preferred-$.9375 per share......... - - - -
Exercise of stock options and other
awards.............................. - 1,343 - 13
Acquisition and retirement of common
stock............................... - (1,343) - (13)
Foreign currency translation, net of
tax (accumulated amount of ($92)
at June 30, 1996)................... - - - -
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of $459
at June 30, 1996)................... - - - -
--------- -------- --------- --------
BALANCE, JUNE 30, 1996............... 6,000 222,750 $ 60 $ 2,228
========= ======== ========= ========
BALANCE, DECEMBER 31, 1994........... - 222,750 $ - $ 2,228
Net income........................... - - - -
Cash dividends:
Common-$.28 per share.............. - - - -
Exercise of stock options and other
awards.............................. - 1,096 - 11
Acquisition and retirement of common
stock............................... - (1,096) - (11)
Foreign currency translation, net of
tax (accumulated amount of $690
at June 30, 1995)................... - - - -
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of $360
at June 30, 1995)................... - - - -
--------- -------- --------- --------
BALANCE, JUNE 30, 1995............... - 222,750 $ - $ 2,228
========= ======== ========= ========
<PAGE>
Additional Total
Paid-in Retained Stockholders'
Capital Earnings Equity
---------- ---------- -------------
BALANCE, DECEMBER 31, 1995........... $ 491,735 $ 771,035 $ 1,265,058
Net income........................... - 195,542 195,542
Cash dividends:
Common-$.32 per share.............. - (71,283) (71,283)
Preferred-$.9375 per share......... - (5,625) (5,625)
Exercise of stock options and other
awards.............................. 25,035 - 25,048
Acquisition and retirement of common
stock............................... (39,183) - (39,196)
Foreign currency translation, net of
tax (accumulated amount of ($92)
at June 30, 1996)................... - (483) (483)
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of $459
at June 30, 1996)................... - 270 270
---------- ---------- -------------
BALANCE, JUNE 30, 1996............... $ 477,587 $ 889,456 $ 1,369,331
========== ========== =============
BALANCE, DECEMBER 31, 1994........... $ 374,345 $ 543,005 $ 919,578
Net income........................... - 145,560 145,560
Cash dividends:
Common-$.28 per share.............. - (62,371) (62,371)
Exercise of stock options and other
awards.............................. 13,359 - 13,370
Acquisition and retirement of common
stock............................... (21,676) - (21,687)
Foreign currency translation, net of
tax (accumulated amount of $690
at June 30, 1995)................... - 447 447
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of $360
at June 30, 1995)................... - 1,192 1,192
---------- ---------- -------------
BALANCE, JUNE 30, 1995............... $ 366,028 $ 627,833 $ 996,089
========== ========== =============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
For the Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
(unaudited)
OPERATING ACTIVITIES
Net income......................................... $ 195,542 $ 145,560
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 98,600 62,101
Depreciation, amortization, and accretion....... 44,387 30,180
Provision for deferred income taxes............. (56,481) 11,806
Decrease (increase) in accrued income
receivable..................................... 9,465 (4,967)
Increase in accrued interest payable............ 868 23,720
Increase in other operating activities.......... (279,602) (156,107)
----------- -----------
Net cash provided by operating activities..... 12,779 112,293
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available-for-sale................................ 1,743,716 1,587,477
Proceeds from sale of investment securities
available-for-sale................................ - 25,000
Purchases of investment securities
available-for-sale................................ (2,118,815) (1,847,017)
Proceeds from maturities of investment securities
held-to-maturity ................................. 282,295 173,631
Purchases of investment securities
held-to-maturity.................................. (7,563) (9,405)
Net increase in money market instruments........... (18,958) (553,664)
Proceeds from securitization of loans.............. 4,327,562 2,790,568
Portfolio acquisitions............................. (119,265) -
Amortization of securitized loans.................. (583,334) (375,000)
Net loan originations.............................. (3,781,828) (3,965,018)
Net purchases of premises and equipment............ (147,465) (183,809)
----------- -----------
Net cash used for investing activities........ $ (423,655) $(2,357,237)
<PAGE>
For the Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts.............................. $ 317,277 $ 323,983
Net increase in time deposits...................... 281,072 1,099,051
Net (decrease) increase in short-term borrowings... (180,763) 82,679
Proceeds from issuance of long-term debt
and bank notes.................................... 155,290 790,959
Maturity of long-term debt and bank notes.......... (62,088) -
Proceeds from exercise of stock options
and other awards.................................. 15,886 8,206
Acquisition and retirement of common stock......... (39,196) (21,687)
Dividends paid..................................... (71,549) (57,916)
----------- -----------
Net cash provided by financing activities..... 415,929 2,225,275
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 5,053 (19,669)
Cash and cash equivalents at beginning of period... 291,856 158,564
----------- -----------
Cash and cash equivalents at end of period......... $ 296,909 $ 138,895
=========== ===========
SUPPLEMENTAL DISCLOSURE
Interest expense paid.............................. $ 342,056 $ 248,701
=========== ===========
Income taxes paid.................................. $ 96,132 $ 83,825
=========== ===========
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MBNA
Corporation ("the Corporation") have been prepared in accordance with generally
accepted accounting principles 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 generally
accepted accounting principles for complete consolidated financial statements.
For purposes of comparability, certain prior period amounts have been
reclassified. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1996, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. The notes to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended
December 31, 1995 should be read in conjunction with these consolidated
financial statements.
NOTE B: EARNINGS PER COMMON SHARE
Earnings per common share are computed using net income applicable to
common stock and the weighted average number of common shares outstanding
during the period after consideration of the dilutive effect of stock options.
For comparative purposes, earnings per common share and weighted average
common shares outstanding and common stock equivalents have been restated to
reflect the three-for-two split of the Corporation's Common Stock, effected in
the form of a dividend, paid February 16, 1996, to stockholders of record as of
February 2, 1996.
NOTE C: SPECIAL MARKETING PROGRAM
During the six months ended June 30, 1996, the Corporation charged $32.8
million net of tax ($54.3 million pre-tax) to earnings related to the launch of
the MBNA Platinum Plus Visa and Mastercard program. This item was recognized
by the Corporation during the three months ended March 31, 1996.
<PAGE>
NOTE D: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original
maturity of one year or more. During the six months ended June 30, 1996, the
Corporation, through MBNA International Bank Limited, a foreign bank subsidiary
in the United Kingdom, drew down the following advances from existing credit
facilities:
Par Value
---------
(dollars in thousands)
Revolving Credit Facility, priced at 22.5
basis points over either the three-month
or five-month Sterling London Interbank Offered
Rate (LIBOR), payable upon maturity, maturing
in 1998(60 million pounds sterling)................. $91,608
Bilateral Credit Facility, priced at 22.5
basis points over the six-month Sterling
LIBOR, payable semi-annually, maturing in 1997
(10 million pounds sterling)........................ 15,268
In addition, the Corporation issued $50 million of variable rate Senior Medium
Term Notes priced at 30 basis points over three month LIBOR, payable quarterly,
maturing in 2001.
NOTE E: TAX BENEFIT FROM CUSTOMER-BASED INTANGIBLE ASSETS
Net income for the six months ended June 30, 1996, includes a $32.8
million tax benefit. As previously described in the Corporation's annual
reports to stockholders, the Corporation acquired Customer-based intangible
assets in connection with its 1991 initial public offering. The Corporation
did not initially recognize, for financial statement purposes, any tax benefit
related to those assets because there were uncertainties concerning the tax
treatment of such assets. During the second quarter of 1993, the U.S. Supreme
Court in the "Newark Morning Ledger" case affirmed that Customer-based
intangible assets may be amortized for tax purposes and the Corporation
recognized $89.8 million of the tax benefit related to the Customer-based
intangible assets. During the first quarter of 1996, the Internal Revenue
Service completed an audit of the Corporation's 1991 and 1992 tax returns and
entered into a final agreement with the Corporation regarding the tax treatment
of the intangible assets. As a result, the Corporation recognized the
remaining amount of the tax benefit relating to the intangible assets in the
first quarter of $32.8 million.
NOTE F: CORPORATION'S CHARTER AMENDMENT
On April 22, 1996, the stockholders of the Corporation approved an
amendment to the Corporation's charter to increase the number of authorized
shares of Common Stock from 390 million shares to 700 million shares. This
amendment became effective May 3, 1996.
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to further the reader's understanding of the
consolidated financial condition and results of operations of MBNA Corporation
("the Corporation"). It should be read in conjunction with the consolidated
financial statements, notes, and tables included elsewhere in this report.
INTRODUCTION
MBNA Corporation, a bank holding company, is the parent company of MBNA
America Bank, N.A. ("the Bank"), a national bank. Through the Bank, the
Corporation is one of the world's largest bank credit card lenders and is the
leading issuer of affinity credit cards marketed primarily to members of
associations and Customers of financial institutions. In addition to its
credit card lending, the Corporation also makes other consumer loans and offers
various deposit products.
The Corporation generates interest and other income through finance
charges assessed on outstanding loan receivables, interchange income, merchant
discount fees, credit card fees, loan servicing fees, processing fees, and
interest earned on investment securities and money market instruments. The
Corporation's primary costs are the costs of funding its loan receivables and
investment securities, which include interest paid on deposits, short-term
borrowings, and long-term debt and bank notes; credit losses; royalties paid to
affinity groups and financial institutions; business development and operating
expenses; and income taxes.
On January 17, 1996, the Board of Directors approved a three-for-two split
of the Corporation's Common Stock effected in the form of a dividend. In
connection with this transaction, one additional share of common stock was
issued on February 16, 1996, for every two shares of common stock held by
stockholders of record as of the close of business on February 2, 1996.
Accordingly, all common share and per common share data have been restated to
reflect the stock split.
EARNINGS SUMMARY
Net income for the three and six months ended June 30, 1996 was $103.3
million and $195.5 million, or $.44 per common share and $.83 per common share,
increasing 34.5% and 34.3% from $76.8 million and $145.6 million or $.34 per
common share and $.64 per common share for the same periods in 1995,
respectively. Earnings per common share is computed using weighted average
common shares outstanding, including common stock equivalents, of 230.0 million
shares for the three and six months ended June 30, 1996 and 228.1 million and
227.3 million shares for the same periods in 1995, respectively.
<PAGE>
The overall growth in earnings was primarily attributable to the growth in
average managed loans outstanding. Average managed loans increased 35.2% and
37.5% to $29.1 billion and $28.0 billion for the three and six months ended
June 30, 1996, compared to $21.5 billion and $20.4 billion for the same periods
in 1995, respectively. Included in average managed loans are the Corporation's
loans held for securitization, loan portfolio, and securitized loans.
The Corporation continues to be an active participant in the asset
securitization market. Securitizations leave net income substantially the same
by converting interest income, interchange, and other fees in excess of
interest paid to Certificateholders; credit losses; and other trust expenses
into loan servicing fees, while reducing the Corporation's on-balance-sheet
assets. During the three and six months ended June 30, 1996, the Corporation
securitized approximately $2.6 billion and $4.3 billion of loan receivables
bringing the total amount of outstanding securitized loans to $22.4 billion as
of June 30, 1996.
Return on average total assets for the three and six months ended June 30,
1996, was 3.03% and 2.91%, compared to 2.69% and 2.76% for the same periods
during 1995, respectively. The higher returns are primarily a result of a
34.5% and 34.3% increase in net income. These increases in net income exceeded
the 19.6% and 27.2% increases in the Corporation's average total assets for the
three and six months ended June 30, 1996, respectively. Return on average
stockholders' equity for the three and six months ended June 30, 1996, was
32.13% and 31.02%, compared to 32.37% and 31.41% for the same periods in 1995,
respectively. The lower returns are primarily a result of an increase in
average stockholders' equity related to the issuance of $150.0 million of
7 1/2% Cumulative Preferred Stock, Series A, in November 1995 by the
Corporation which offset the increase in net income over the same periods.
NET INTEREST INCOME
Net interest income for the three and six months ended June 30, 1996, on a
fully taxable equivalent basis, was $150.6 million and $302.2 million,
respectively, compared to $138.3 million and $258.4 million for the same
periods in 1995. The increases in net interest income for the three and six
months ended June 30, 1996 are primarily a result of an increase in average
interest-earning assets of $1.3 billion and $2.0 billion, respectively,
partially offset by increases of $1.8 billion and $2.4 billion in average
interest-bearing liabilities for the same periods. The increase in interest-
earning assets during the three months ended June 30, 1996 was a result of
increases in average investments and money market instruments of $666.2 million
and average loan receivables of $623.8 million, while the increase for the six
months ended June 30, 1996 was due to an increase in average investments and
money market instruments of $587.1 million and average loan receivables of $1.4
billion, respectively. The increase in interest-bearing liabilities during
these periods resulted primarily from funding the increases in interest-earning
assets.
The net interest margin, on a fully taxable equivalent basis, was 5.52%
and 5.58% for the three and six months ended June 30, 1996, compared to 5.73%
and 5.85% for the same periods in 1995, respectively.
<PAGE>
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income earned on investment securities and money market
instruments, on a fully taxable equivalent basis, increased $8.1 million and
$14.5 million for the three and six months ended June 30, 1996, as compared to
the same periods in 1995, respectively. The increase is primarily the result
of an increase of $568.5 million and $477.3 million in average money market
instruments from the same period in 1995. The increases in average money
market instruments are the result of the timing of receipt of funds from asset
securitizations. Funds received from these securitizations are typically
invested in money market instruments and investment securities available-for-
sale until they are needed to fund loan growth. The increases in interest
income earned on investment securities and money market instruments were
partially offset by a decline of 24 basis points and 23 basis points in the
yields earned on the Corporation's investment securities and money market
instruments for the three and six months ended June 30, 1996, as compared to
the same periods in 1995, respectively.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$24.2 million and $100.8 million to $280.5 million and $564.8 million for the
three and six months ended June 30, 1996, as compared to the same periods in
1995, respectively. The increase is attributable to an increase in average
loan receivables of $623.8 million and $1.4 billion for the three and six
months ended June 30, 1996, compared to the same periods in 1995, respectively.
The yields earned on the Corporation's loan receivables increased by 17 basis
points and 6 basis points for the three and six months ended June 30, 1996 as
compared to the same periods in 1995, respectively.
At June 30, 1996, variable-rate credit cards and home equity loans were
43.6% of total managed loans, compared to 39.9% at December 31, 1995. These
variable-rate loans are indexed to the U.S. Prime Rate published in The Wall
Street Journal and generally reprice quarterly.
DEPOSITS
Total interest expense on deposits increased $14.1 million and $46.9
million to $125.4 million and $248.3 million for the three and six months ended
June 30, 1996, respectively, compared to the same periods in 1995. The
increase is primarily the result of an increase in average interest-bearing
deposits of $1.4 billion and $1.7 billion for the three and six months ended
June 30, 1996, respectively, as the Corporation continues to emphasize
marketing certificates of deposits and money market deposit accounts to fund
loan growth and diversify funding sources. The average rates paid on interest-
bearing deposits for the three and six months ended June 30, 1996 decreased 24
basis points and 2 basis points from 1995, respectively.
<PAGE>
BORROWED FUNDS
Interest expense on short-term borrowings decreased $3.6 million and $2.1
million to $1.9 million and $4.7 million for the three and six months ended
June 30, 1996, respectively, compared to the same periods in 1995. These
decreases are primarily the result of a $209.1 million and $49.2 million
decline in average short-term borrowings for the three and six months ended
June 30, 1996, respectively, as compared to the same periods in 1995. The
Corporation did not utilize these funding alternatives during 1996 as a result
of the timing of the securitizations.
Total interest expense on long-term debt and bank notes increased $9.4
million and $26.9 million to $44.4 million and $89.8 million for the three and
six months ended June 30, 1996, compared to the same periods in 1995,
respectively. The increase in interest expense reflects the issuance of
additional long-term debt and bank notes to fund loan growth, acquire premises
and equipment, and diversify funding sources. As a result, average long-term
debt and bank notes increased $620.3 million and $812.5 million to $2.8 billion
and $2.7 billion for the three and six months ended June 30, 1996 from $2.1
billion and $1.9 billion for the same periods in 1995, respectively.
<PAGE>
TABLE 1: STATEMENT OF AVERAGE BALANCES, YIELDS AND RATES, INCOME AND EXPENSE
(dollars in thousands; yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
June 30, 1996
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks...................................... $ 600,037 5.46% $ 8,153
Federal funds sold and securities purchased
under resale agreements.................... 155,758 5.35 2,073
------------ -----------
Total money market instruments............ 755,795 5.44 10,226
Investment securities(a):
Taxable..................................... 2,077,487 5.85 30,219
Tax-exempt(b)............................... 85,657 6.05 1,289
------------ -----------
Total investment securities............... 2,163,144 5.86 31,508
Loans held for securitization................. 2,264,506 13.99 78,789
Loans:
Credit card................................. 4,809,870 14.05 168,075
Other consumer.............................. 979,032 13.83 33,667
------------ -----------
Total loans............................... 5,788,902 14.02 201,742
------------ -----------
Total interest-earning assets........... 10,972,347 11.81 $ 322,265
Cash and due from banks....................... 317,623
Premises and equipment, net................... 901,957
Other assets.................................. 1,622,689
Reserve for possible credit losses............ (106,892)
------------
Total assets............................ $ 13,707,724
============
<PAGE>
For the Three Months Ended
June 30, 1996
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits(c)............................ $ 6,424,094 5.78% $ 92,283
Money market deposit accounts............... 2,516,701 5.23 32,723
Interest-bearing transaction accounts....... 22,961 4.50 257
Savings accounts............................ 10,374 4.46 115
------------ -----------
Total interest-bearing deposits........... 8,974,130 5.62 125,378
Borrowed funds:
Federal funds purchased and securities sold
under repurchase agreements................ 39,341 5.37 525
Other short-term borrowings................. 98,506 5.45 1,334
Long-term debt and bank notes(c)............ 2,763,801 6.47 44,447
------------ -----------
Total borrowed funds...................... 2,901,648 6.42 46,306
------------ -----------
Total interest-bearing liabilities...... 11,875,778 5.81 171,684
Demand deposits............................... 172,113
Other liabilities............................. 366,690
------------
Total liabilities....................... 12,414,581
Stockholders' equity.......................... 1,293,143
------------
Total liabilities and stockholders'
equity................................. $ 13,707,724
============ -----------
Net interest income..................... $ 150,581
===========
Net interest margin..................... 5.52
Interest rate spread.................... 6.00
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the three months
ended June 30, 1996 was $451.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
<PAGE>
For the Three Months Ended
June 30, 1995
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks...................................... $ 106,242 5.75% $ 1,523
Federal funds sold and securities purchased
under resale agreements.................... 81,033 6.12 1,237
------------ -----------
Total money market instruments............ 187,275 5.91 2,760
Investment securities(a):
Taxable..................................... 1,988,846 5.98 29,667
Tax-exempt(b)............................... 76,626 6.46 1,235
------------ -----------
Total investment securities............... 2,065,472 6.00 30,902
Loans held for securitization................. 2,867,121 13.80 98,664
Loans:
Credit card................................. 3,975,904 13.89 137,644
Other consumer.............................. 586,609 13.72 20,061
------------ -----------
Total loans............................... 4,562,513 13.86 157,705
------------ -----------
Total interest-earning assets........... 9,682,381 12.01 $ 290,031
Cash and due from banks....................... 176,396
Premises and equipment, net................... 651,301
Other assets.................................. 1,055,251
Reserve for possible credit losses............ (102,953)
------------
Total assets............................ $ 11,462,376
============
<PAGE>
For the Three Months Ended
June 30, 1995
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits(c)............................ $ 5,808,479 5.84% $ 84,531
Money market deposit accounts............... 1,775,112 5.96 26,394
Interest-bearing transaction accounts....... 17,246 5.26 226
Savings accounts............................ 8,164 5.21 106
------------ -----------
Total interest-bearing deposits........... 7,609,001 5.86 111,257
Borrowed funds:
Federal funds purchased and securities sold
under repurchase agreements................ 78,483 6.14 1,202
Other short-term borrowings................. 268,452 6.32 4,230
Long-term debt and bank notes(c)............ 2,143,479 6.56 35,053
------------ -----------
Total borrowed funds...................... 2,490,414 6.52 40,485
------------ -----------
Total interest-bearing liabilities...... 10,099,415 6.03 151,742
Demand deposits............................... 121,935
Other liabilities............................. 288,947
------------
Total liabilities....................... 10,510,297
Stockholders' equity.......................... 952,079
------------
Total liabilities and stockholders'
equity................................. $ 11,462,376
============ -----------
Net interest income..................... $ 138,289
===========
Net interest margin..................... 5.73
Interest rate spread.................... 5.98
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the three months
ended June 30, 1995 was $432.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
<PAGE>
For the Six Months Ended
June 30, 1996
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks...................................... $ 543,261 5.57% $ 15,057
Federal funds sold and securities purchased
under resale agreements.................... 104,764 5.41 2,816
------------ -----------
Total money market instruments............ 648,025 5.55 17,873
Investment securities(a):
Taxable..................................... 2,057,567 5.84 59,778
Tax-exempt(b)............................... 85,060 6.05 2,557
------------ -----------
Total investment securities............... 2,142,627 5.85 62,335
Loans held for securitization................. 2,639,403 14.03 184,083
Loans:
Credit card................................. 4,521,827 13.99 314,568
Other consumer.............................. 945,816 14.07 66,153
------------ -----------
Total loans............................... 5,467,643 14.00 380,721
------------ -----------
Total interest-earning assets........... 10,897,698 11.90 $ 645,012
Cash and due from banks....................... 321,119
Premises and equipment, net................... 873,603
Other assets.................................. 1,527,085
Reserve for possible credit losses............ (106,568)
------------
Total assets............................ $ 13,512,937
============
<PAGE>
For the Six Months Ended
June 30, 1996
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits(c)............................ $ 6,339,904 5.81% $ 183,136
Money market deposit accounts............... 2,437,076 5.32 64,425
Interest-bearing transaction accounts....... 22,290 4.59 509
Savings accounts............................ 10,043 4.59 229
------------ -----------
Total interest-bearing deposits........... 8,809,313 5.67 248,299
Borrowed funds:
Federal funds purchased and securities sold
under repurchase agreements................ 82,556 5.36 2,202
Other short-term borrowings................. 90,087 5.49 2,458
Long-term debt and bank notes(c)............ 2,745,751 6.58 89,833
------------ -----------
Total borrowed funds...................... 2,918,394 6.51 94,493
------------ -----------
Total interest-bearing liabilities...... 11,727,707 5.88 342,792
Demand deposits............................... 166,383
Other liabilities............................. 351,009
------------
Total liabilities....................... 12,245,099
Stockholders' equity.......................... 1,267,838
------------
Total liabilities and stockholders'
equity................................. $ 13,512,937
============ -----------
Net interest income..................... $ 302,220
===========
Net interest margin..................... 5.58
Interest rate spread.................... 6.02
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the six months
ended June 30, 1996 was $895.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
<PAGE>
For the Six Months Ended
June 30, 1995
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks...................................... $ 80,808 5.64% $ 2,259
Federal funds sold and securities purchased
under resale agreements.................... 89,956 5.96 2,660
------------ -----------
Total money market instruments............ 170,764 5.81 4,919
Investment securities(a):
Taxable..................................... 1,954,612 6.01 58,228
Tax-exempt(b)............................... 78,148 6.50 2,517
------------ -----------
Total investment securities............... 2,032,760 6.03 60,745
Loans held for securitization................. 2,539,100 13.93 175,397
Loans:
Credit card................................. 3,607,808 14.00 250,420
Other consumer.............................. 559,570 13.75 38,142
------------ -----------
Total loans............................... 4,167,378 13.96 288,562
------------ -----------
Total interest-earning assets........... 8,910,002 11.99 $ 529,623
Cash and due from banks....................... 172,629
Premises and equipment, net................... 612,470
Other assets.................................. 1,034,149
Reserve for possible credit losses............ (102,365)
------------
Total assets............................ $ 10,626,885
============
<PAGE>
For the Six Months Ended
June 30, 1995
--------------------------------
Average Yield/ Amount Paid
Amount Rate or Earned
------------ ------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits(c)............................ $ 5,410,739 5.64% $ 151,228
Money market deposit accounts............... 1,701,915 5.87 49,560
Interest-bearing transaction accounts....... 17,586 5.17 451
Savings accounts............................ 7,910 5.15 202
------------ -----------
Total interest-bearing deposits........... 7,138,150 5.69 201,441
Borrowed funds:
Federal funds purchased and securities sold
under repurchase agreements................ 57,334 6.14 1,745
Other short-term borrowings................. 164,462 6.20 5,056
Long-term debt and bank notes(c)............ 1,933,281 6.57 62,954
------------ -----------
Total borrowed funds...................... 2,155,077 6.53 69,755
------------ -----------
Total interest-bearing liabilities...... 9,293,227 5.88 271,196
Demand deposits............................... 117,858
Other liabilities............................. 281,355
------------
Total liabilities....................... 9,692,440
Stockholders' equity.......................... 934,445
------------
Total liabilities and stockholders'
equity................................. $ 10,626,885
============ -----------
Net interest income..................... $ 258,427
===========
Net interest margin..................... 5.85
Interest rate spread.................... 6.11
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the six months
ended June 30, 1995 was $881.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
<PAGE>
OTHER OPERATING INCOME
Total other operating income increased $111.5 million and $211.8 million
or 33.5% and 33.6% to $444.1 million and $841.6 million for the three and six
months ended June 30, 1996, from $332.6 million and $629.8 million for the same
periods in 1995, respectively. These increases are primarily attributable to a
39.5% and 38.4% increase in loan servicing fees, which grew $108.0 million and
$199.5 million to $381.8 million and $718.9 million for the three and six
months ended June 30, 1996, as compared to the same periods for 1995,
respectively. The increases in loan servicing fees are primarily the result of
a $7.0 billion and $6.3 billion, or 49.4% and 45.7% increase in average
securitized loans to $21.0 billion and $19.9 billion for the three and six
months ended June 30, 1996, respectively. Loan servicing fees, generated by
securitized loans, consist of interest income, interchange, and other fees in
excess of interest paid to Certificateholders; credit losses; and other trust
expenses. In addition, credit card fees increased $4.8 million and $13.2
million during the three and six months ended June 30, 1996, as compared to the
same periods for 1995, respectively, primarily resulting from increases in
overlimit and late fees in 1996.
OTHER OPERATING EXPENSE
Total other operating expense increased 22.2% and 23.3% to $374.0 million
and $720.6 million for the three and six months ended June 30, 1996 from $306.1
million and $584.3 million for the same periods in 1995, respectively. The
growth in other operating expense reflects the Corporation's continued
expansion of business development activities including regional marketing and
sales, account activation, Customer retention, and Customer service. These
activities are expected to enhance the ability of the Corporation to attract
and retain Customers. During the three and six months ended June 30, 1996, the
Corporation opened approximately 2.2 million and 4.0 million new accounts,
respectively. Table 2 presents the other expense component of other operating
expense.
<PAGE>
TABLE 2: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(unaudited)
Purchased services................. $ 43,929 $ 41,624 $ 81,206 $ 73,732
Advertising........................ 30,802 20,343 44,216 33,380
Collection......................... 6,333 5,018 12,619 9,825
Stationery and supplies............ 6,443 5,230 11,775 9,450
Service bureau..................... 5,052 4,928 9,862 9,330
Postage and delivery............... 28,267 26,699 53,234 51,550
Telephone usage.................... 11,050 8,986 20,805 17,344
Credit card fraud losses........... 12,107 10,348 23,111 20,468
Amortization of intangible assets.. 2,403 2,180 4,929 4,608
Computer software.................. 5,239 4,185 10,485 7,860
Other.............................. 12,498 13,767 31,547 29,378
--------- --------- --------- ---------
Total other expense.............. $ 164,123 $ 143,308 $ 303,789 $ 266,925
========= ========= ========= =========
SPECIAL MARKETING PROGRAM
During the six months ended June 30, 1996, the Corporation charged $32.8
million net of tax ($54.3 million pre-tax) to earnings related to the launch of
the MBNA Platinum Plus Visa and Mastercard program. This item was recognized
by the Corporation during the three months ended March 31, 1996.
TAX BENEFIT FROM CUSTOMER-BASED INTANGIBLE ASSETS
Net income for the six months ended June 30, 1996, includes a $32.8
million tax benefit. As previously described in the Corporation's annual
reports to stockholders, the Corporation acquired Customer-based intangible
assets in connection with its 1991 initial public offering. The Corporation
did not initially recognize, for financial statement purposes, any tax benefit
related to those assets because there were uncertainties concerning the tax
treatment of such assets. During the second quarter of 1993, the U.S. Supreme
Court in the "Newark Morning Ledger" case affirmed that Customer-based
intangible assets may be amortized for tax purposes and the Corporation
recognized $89.8 million of the tax benefit related to the Customer-based
intangible assets. During the first quarter of 1996, the Internal Revenue
Service completed an audit of the Corporation's 1991 and 1992 tax returns and
entered into a final agreement with the Corporation regarding the tax treatment
of the intangible assets. As a result, the Corporation recognized the
remaining amount of the tax benefit relating to the intangible assets in the
first quarter of $32.8 million.
<PAGE>
ASSET QUALITY
Delinquencies
An account is contractually delinquent if the minimum payment is not
received by the specified date on the Customer's statement. However, the
Corporation generally continues to accrue interest until the loan is charged
off. Delinquency as a percentage of the Corporation's loans was 3.31% at
June 30, 1996, compared with 3.11% at December 31, 1995. The Corporation's
loan delinquency has continued to increase from December 31, 1995 to a level
that the Corporation believes is more consistent with its long-term historical
delinquency rate. The Corporation believes that several factors, including
general economic conditions, increased consumer debt levels, and the seasoning
or increase in the average age of the Corporation's loan receivables,
contributed to the increase in delinquency. As new accounts season the
delinquency rate on these accounts generally rises then stabilizes. Table 3
presents the delinquency of the Corporation's loan portfolio, excluding loans
held for securitization.
TABLE 3: DELINQUENT LOANS
(dollars in thousands)
June 30, 1996 December 31, 1995
----------------- -----------------
(unaudited)
Loan portfolio..................... $ 5,357,127 $ 4,967,491
Loans delinquent:
30 to 59 days.................... $ 72,911 1.36% $ 65,651 1.32%
60 to 89 days.................... 33,272 .62 30,162 .61
90 or more days.................. 71,195 1.33 58,894 1.18
----------- ---- ----------- ----
Total.......................... $ 177,378 3.31% $ 154,707 3.11%
=========== ==== =========== ====
Net Credit Losses
The Corporation's policy is generally to charge off accounts when they
become 180 days contractually past due. After being charged off, the loans are
referred to the Corporation's recovery department. Net credit losses for the
three and six months ended June 30, 1996 for the Corporation's loan portfolio
were $45.7 million and $93.1 million, compared to $34.9 million and $59.5
million for the same periods in 1995, respectively. Net credit losses as a
percentage of average loan receivables were 2.27% and 2.30% for the three and
six months ended June 30, 1996, compared to 1.88% and 1.78% for the same
periods last year, respectively. For the full year ended December 31, 1995,
net credit losses were 1.91% of average loan receivables.
<PAGE>
Reserve and Provision for Possible Credit Losses
The loan portfolio is regularly reviewed to determine an appropriate range
for the reserve for possible credit losses based upon the impact of economic
conditions on the borrowers' ability to repay, past collection experience, the
risk characteristics of the portfolio, and other factors that deserve current
recognition. A provision is charged to operating expense to maintain the
reserve level within this range. The reserve for possible credit losses,
however, does not include an allocation for credit risk related to securitized
loans, which is absorbed directly by the related trusts under their respective
contractual agreements, thus reducing loan servicing fees rather than the
reserve for possible credit losses. The provision for possible credit losses
for the three and six months ended June 30, 1996 was $49.1 million and $98.6
million compared to $36.5 million and $62.1 million for the same periods in
1995, respectively. The increase in the Corporation's provision for possible
credit losses primarily reflects the increase in the Corporation's net credit
losses. Table 4 presents the change to the Corporation's reserve for possible
credit losses.
TABLE 4: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(unaudited)
Reserve balance, beginning
of period..................... $ 106,904 $ 102,488 $ 104,886 $ 101,519
Reserves acquired............ 26 - 26 -
Provision charged
to operating expense........ 49,112 36,516 98,600 62,101
Foreign currency translation. 82 (48) 10 28
Credit losses................ (62,338) (44,504) (121,446) (78,178)
Recoveries................... 16,620 9,649 28,330 18,631
---------- ---------- ---------- ----------
Net credit losses.......... (45,718) (34,855) (93,116) (59,547)
---------- ---------- ---------- ----------
Reserve balance, end of period. $ 110,406 $ 104,101 $ 110,406 $ 104,101
========== ========== ========== ==========
<PAGE>
LIQUIDITY
The objective of liquidity management is to diversify the sources of funds
available to meet the Corporation's operating requirements. Also, as part of
the liquidity management process, the Corporation anticipates the level of
funds required for future periods and regularly reviews funding alternatives
based on its asset and liability mix. These requirements include funding new
loans, deposit withdrawals, long-term debt and bank note maturities and the
portion of loans previously securitized that need to be refinanced as the
underlying securitizations amortize. Funding is provided from a variety of
sources, including deposits, debt issuance, and securitizations. The
Corporation also borrows in the short-term and interbank funding markets.
Deposits generated by the Bank are a major source of funds for the
Corporation. Total deposits at June 30, 1996 and December 31, 1995 were $9.2
billion and $8.6 billion, respectively. The Corporation continues to focus on
increasing its direct deposits primarily as a result of offering competitive
rates on money market deposit accounts and certificates of deposits. Table 5
presents the maturities of the Corporation's deposits as of June 30, 1996.
TABLE 5: MATURITIES OF DEPOSITS AT JUNE 30, 1996
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
----------- ----------- -----------
(unaudited)
Three months or less.................... $ 3,597,931 $ 559,887 $ 4,157,818
Over three months through twelve months. 1,417,632 431,524 1,849,156
Over one year through five years........ 1,672,973 1,509,924 3,182,897
Over five years......................... 9,389 8,003 17,392
----------- ----------- -----------
Total deposits........................ $ 6,697,925 $ 2,509,338 $ 9,207,263
=========== =========== ===========
The Corporation also holds investment securities, which are generally
AAA-rated securities, of $2.2 billion at June 30, 1996, most of which can be
used as collateral under repurchase agreements. Also, the Corporation had
$592.6 million of money market instruments at June 30, 1996. Of the $2.2
billion in investment securities, $1.3 billion were classified as available-for-
sale. These investment securities, in addition to the money market
instruments, provide increased liquidity and flexibility to support the
Corporation's anticipated growth and funding needs.
Estimated maturities (including the impact of estimated prepayments) of
the Corporation's investment securities portfolio are presented in table 6.
<PAGE>
TABLE 6: SUMMARY OF INVESTMENT SECURITIES AT JUNE 30, 1996
(dollars in thousands)
Estimated Maturity
-------------------------------------------
Within 1 After
Year 1-5 Years 5-10 Years 10 Years
--------- --------- ---------- ---------
(unaudited)
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 436,752 $ - $ - $ -
State and political subdivisions
of the United States............. 60,943 23,886 - -
Asset-backed and other securities. 30,011 654,979 89,299 -
--------- --------- ---------- ---------
Total investment securities
available-for-sale............. $ 527,706 $ 678,865 $ 89,299 $ -
========= ========= ========== =========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 417,880 $ 326,397 $ - $ 38,064
State and political subdivisions
of the United States............. - - - 437
Asset-backed and other securities. 59,181 56,746 1,000 9,417
--------- --------- ---------- ---------
Total investment securities
held-to-maturity............... $ 477,061 $ 383,143 $ 1,000 $ 47,918
========= ========= ========== =========
Book Market
Value Value
----------- -----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 436,752 $ 436,752
State and political subdivisions
of the United States............. 84,829 84,829
Asset-backed and other securities. 774,289 774,289
----------- -----------
Total investment securities
available-for-sale............. $ 1,295,870 $ 1,295,870
=========== ===========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 782,341 $ 774,732
State and political subdivisions
of the United States............. 437 371
Asset-backed and other securities. 126,344 126,031
----------- -----------
Total investment securities
held-to-maturity............... $ 909,122 $ 901,134
=========== ===========
<PAGE>
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank is also subject to
similar capital requirements adopted by the Office of the Comptroller of the
Currency. Under these requirements, the regulatory agencies have set minimum
thresholds for Tier 1 capital, Total capital, and Leverage ratios. At June 30,
1996, both the Corporation's and the Bank's capital exceeded all minimum
regulatory requirements, and the Bank was "well capitalized" as defined in the
regulations issued pursuant to the FDIC Improvement Act of 1991. Both the
Corporation's and the Bank's risk-based capital ratios, shown in table 7, have
been computed in accordance with regulatory accounting policies.
TABLE 7: REGULATORY CAPITAL RATIOS
June 30, 1996
----------------------------------------
MBNA MBNA America Minimum
Corporation Bank, N.A. Requirements
----------- ------------ ------------
(unaudited)
Tier 1............................ 11.24% 9.01% 4.00%
Total............................. 13.79 11.82 8.00
Leverage.......................... 9.94 7.85 3.00
During the three and six months ended June 30, 1996, the Corporation
declared dividends on its preferred and common stock of $38.5 million and $76.9
million, respectively. The payment of preferred and common stock dividends by
the Corporation may be limited by certain factors including regulatory capital
requirements, broad enforcement powers of the federal bank regulatory agencies,
and tangible net worth maintenance requirements under the Corporation's
revolving credit facilities.
The primary source of funds for payment of preferred and common stock
dividends by the Corporation is dividends received from the Bank. The amount
of dividends that a bank may declare in any year is subject to certain
regulatory restrictions. Generally, dividends declared in a given year by a
national bank are limited to its net profit, as defined by regulatory agencies,
for that year, combined with its retained net income for the preceding two
years. Also, a bank may not declare dividends if such declaration would leave
the bank inadequately capitalized. Therefore, the ability of the Bank to
declare dividends will depend on its future net income and capital
requirements. At June 30, 1996, the amount of retained earnings available for
declaration of dividends from the Bank to the Corporation was $417.5 million.
Payment of dividends by the Bank to the Corporation, however, may be limited by
federal bank regulatory agencies.
The Bank's payment of dividends to the Corporation may also be limited by
a tangible net worth requirement under the Bank's revolving credit facility.
This facility was not drawn upon as of June 30, 1996. If this facility were
drawn upon as of June 30, 1996, the amount of retained earnings available for
declaration of dividends would have been limited to $209.3 million.
<PAGE>
SECURITIZATION
Securitization of the Bank's loan receivables continues to be another
major funding alternative for the Corporation. This is accomplished primarily
through the public and private issuance of asset-backed securities. As loan
receivables are securitized, the Corporation's on-balance sheet funding needs
are reduced by the amount of loans securitized.
Securitization involves the sale, generally to a trust, of a group of loan
receivables. These loan receivables arise from accounts whose ownership is
retained by the Bank. In addition to selling the existing loan receivables,
rights to new loan receivables, including most fees generated by and payments
made from these accounts, are sold. Certificates representing undivided
interests in the trust are issued. The Investor Certificates are sold by the
trust to investors, generally through a public offering. Interest is paid to
the Investor Certificateholder during the life of the transaction. The Seller
Certificate is retained by the Bank. The Bank continues to service the
accounts and receives a servicing fee for doing so.
During the revolving period, which generally ranges from 24 to 108 months,
no principal payments are made to the Investor Certificateholders. Payments
received on the accounts are used to pay interest to the Investor
Certificateholders and to purchase new loan receivables generated by the
accounts, so that the principal dollar amount of the Investor Certificate
remains unchanged. Once the revolving period ends, principal payments are
allocated for distribution to the Investor Certificateholders according to the
terms of the transaction. As principal payments are allocated to the Investor
Certificateholders, the Bank's loan receivables increase by the amount of the
principal allocation.
During the three and six months ended June 30, 1996, the Bank securitized
loan receivables totaling $2.6 billion and $4.3 billion respectively, through
both public and private markets. These securitizations bring the total amount
of outstanding securitized loans to $22.4 billion or 73.3% of managed loans as
of June 30, 1996. Amortization of previously securitized loan receivables
totaled $416.7 million and $583.3 million for the three and six months ended
June 30, 1996. During the amortization period, new charges and cash advances
are for the account of the Bank, which increases the Corporation's on-balance-
sheet assets. An additional $1.2 billion of previously securitized loans will
amortize into the Bank's loan portfolio during the remainder of 1996.
Distribution of principal to the Investor Certificateholders may begin
sooner if the average annualized yield (generally including interest income,
interchange, and other fees) for three consecutive months drops below a minimum
yield (generally equal to the sum of the certificate rate payable to investors,
contractual servicing fees, and principal credit losses during the period) or
certain other events occur.
Table 8 compares the average annualized yield for the three-month period
ended June 30, 1996, to the minimum yield for each transaction. The yield for
each of the transactions is presented on a cash basis and includes various
credit card or other fees as specified in the securitization agreements.
<PAGE>
TABLE 8: YIELDS ON SECURITIZED TRANSACTIONS(a)
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust 91-1(b).................. 19.14% 14.23% 4.91%
MasterTrust 92-1..................... 18.00 13.49 4.51
MasterTrust 92-2..................... 18.00 12.44 5.56
MasterTrust 92-3..................... 18.00 12.13 5.87
MasterTrust 93-1..................... 18.00 12.08 5.92
MasterTrust 93-2(b).................. 20.25 12.40 7.85
MasterTrust 93-3..................... 18.00 11.64 6.36
MasterTrust 93-4..................... 18.00 12.03 5.97
MasterTrust 94-1..................... 18.00 11.93 6.07
MasterTrust 94-2..................... 18.00 11.99 6.01
MasterTrust II 94-A.................. 16.93 11.83 5.10
MasterTrust II 94-B.................. 16.93 11.81 5.12
MasterTrust II 94-C.................. 16.93 11.92 5.01
MasterTrust II 94-D.................. 16.93 11.82 5.11
MasterTrust II 94-E.................. 16.93 11.79 5.14
Gold Reserve......................... 18.43 12.88 5.55
MasterTrust II 95-A.................. 16.93 11.93 5.00
MasterTrust II 95-B.................. 16.93 11.81 5.12
MasterTrust II 95-C.................. 16.93 11.87 5.06
MasterTrust II 95-D.................. 16.93 11.73 5.20
MasterTrust II 95-E.................. 16.93 11.88 5.05
Cards No. 1.......................... 18.88 11.34 7.54
MasterTrust II 95-F.................. 16.93 12.65 4.28
MasterTrust II 95-G.................. 16.93 11.87 5.06
MasterTrust II 95-H.................. 16.93 11.72 5.21
MasterTrust II 95-I.................. 16.93 11.81 5.12
MasterTrust II 95-J.................. 16.93 11.89 5.04
MasterTrust II 96-A.................. 16.93 11.85 5.08
MasterTrust II 96-B.................. 16.97 12.60 4.37
MasterTrust II 96-C.................. 17.03 12.49 4.54
(a) MasterTrust II 96-D issued on May 1, 1996, MasterTrust II 96-E issued on
May 21, 1996, Cards No. 2 issued on June 20, 1996, and MasterTrust II 96-F
issued on June 25, 1996 are excluded from the yields presented above as a
result of their recency.
(b) Represents a maturing transaction that has entered its scheduled controlled
amortization period.
Securitizations do not have a material impact on earnings reported for
each period. Due to the relatively short average life of loans, no gain or
loss is recorded at the time of sale. Rather, loan servicing fees (interest
income, interchange, and other fees in excess of interest paid to
Certificateholders; credit losses; and other trust expenses) are recognized
monthly over the life of the transaction when earned. The monthly pattern of
recording loan servicing fees is similar to the revenue recognition that the
Bank would have experienced if the loans had not been securitized.
<PAGE>
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (Statement No. 125),
which provides new accounting and reporting standards for sales,
securitization, and servicing of receivables and other financial assets and
extinguishments of liabilities. As required, the Corporation will adopt
Statement No. 125 for transactions occurring after December 31, 1996 and is
presently evaluating the impact Statement No. 125 will have on the
Corporation's consolidated financial statements.
<PAGE>
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(unaudited)
The following supplemental information illustrates the effects of
securitizations on selected line items of the Corporation's consolidated
statements of income and financial condition. This information is used to
evaluate the generation of revenue, as well as the impact that securitizations
have on the Corporation's consolidated financial statements.
IMPACT OF SECURITIZATIONS ON INCOME BEFORE INCOME TAXES AND SPECIAL MARKETING
PROGRAM
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
Consolidated Statements of
Income (As Reported)
Net interest income........... $ 150,130 $ 137,857 $ 301,325 $ 257,546
Provision for possible credit
losses....................... 49,112 36,516 98,600 62,101
Other operating income........ 444,061 332,602 841,609 629,833
Other operating expense....... 374,020 306,112 720,552 584,260
---------- ---------- ----------- -----------
Income before income taxes and
special marketing program..... $ 171,059 $ 127,831 $ 323,782 $ 241,018
========== ========== =========== ===========
Adjustments for Securitizations
(Supplemental)
Net interest income........... $ 459,202 $ 298,050 $ 874,326 $ 565,998
Provision for possible credit
losses....................... 205,638 107,072 379,434 209,770
Other operating income........ (253,564) (190,978) (494,892) (356,228)
Other operating expense....... - - - -
---------- ---------- ----------- -----------
Income before income taxes and
special marketing program.... $ - $ - $ - $ -
========== ========== =========== ===========
Managed Income Statements
(Supplemental)
Net interest income........... $ 609,332 $ 435,907 $ 1,175,651 $ 823,544
Provision for possible credit
losses....................... 254,750 143,588 478,034 271,871
Other operating income........ 190,497 141,624 346,717 273,605
Other operating expense....... 374,020 306,112 720,552 584,260
---------- ---------- ----------- -----------
Income before income taxes and
special marketing program.... $ 171,059 $ 127,831 $ 323,782 $ 241,018
========== ========== =========== ===========
<PAGE>
MANAGED ASSET DATA
(dollars in thousands)
June 30, 1996 December 31, 1995
----------------- -----------------
AT PERIOD END:
Loans held for securitization......... $ 2,811,305 $ 3,168,427
Loan portfolio........................ 5,357,127 4,967,491
Securitized loans..................... 22,396,267 18,575,786
----------------- -----------------
Total managed loans................. $ 30,564,699 $ 26,711,704
================= =================
Total managed interest-earning
assets............................. $ 33,362,260 $ 29,381,106
================= =================
Total managed assets................ $ 36,350,642 $ 31,804,675
================= =================
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
AVERAGE:
Loans held for
securitization......... $ 2,264,506 $ 2,867,121 $ 2,639,403 $ 2,539,100
Loan portfolio.......... 5,788,902 4,562,513 5,467,643 4,167,378
Securitized loans....... 21,029,887 14,078,956 19,939,966 13,688,700
------------ ------------ ------------ ------------
Total managed loans... $ 29,083,295 $ 21,508,590 $ 28,047,012 $ 20,395,178
============ ============ ============ ============
Total managed
interest-earning
assets............... $ 32,002,234 $ 23,761,337 $ 30,837,664 $ 22,598,702
============ ============ ============ ============
Total managed assets.. $ 34,737,611 $ 25,541,332 $ 33,452,903 $ 24,315,585
============ ============ ============ ============
MANAGED RATIOS:
Net interest margin
(on an FTE basis)..... 7.66% 7.37% 7.67% 7.36%
Delinquency............ 3.87 3.23
Net credit losses...... 3.46 2.64 3.37 2.64
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, MBNA America Bank, N. A. ("Bank") was a defendant in
five purported class action suits alleging that it improperly collected late
and/or other fees under various state laws. After the United States Supreme
Court ruled on June 3, 1996 in a similar case involving another national bank
that such fees were permissible under the National Bank Act, each suit against
the Bank was, or is in the process of being, formally terminated. Copeland v.
MBNA: on June 10, 1996, the United States Supreme Court refused to hear an
appeal from a decision of the Colorado Supreme Court favorable to the Bank.
Thompson v. MBNA: on June 17, 1996, the United States Circuit Court for the
Third Circuit approved the cardholder's dismissal of her appeal from a decision
favorable to the Bank. McCormick v. MBNA: on June 26, 1996, the United States
District Court for the District of New Jersey approved the cardholders'
dismissal of their lawsuit. Newman v. MBNA: on July 22,1996, the United
States District Court for the District of New Jersey approved the cardholder's
dismissal of his lawsuit. Cooperman v. MBNA: on July 25, 1996, a stipulation
and order of dismissal was submitted for approval to Superior Court for the
State of California for the County of Los Angeles.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
<PAGE>
Exhibit 11: Computation of Earnings Per Common Share
(dollars in thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(unaudited)
PRIMARY
Average common shares outstanding... 222,757 222,759 222,760 222,759
Net effect of dilutive stock
options--based on the treasury
stock method using average
market price....................... 7,282 5,352 7,208 4,498
--------- --------- --------- ---------
Total............................. 230,039 228,111 229,968 227,257
========= ========= ========= =========
Net income.......................... $ 103,320 $ 76,835 $ 195,542 $ 145,560
Less: preferred stock dividend
requirements....................... 2,812 - 5,625 -
--------- --------- --------- ---------
Net income applicable to common
stock..... ........................ $ 100,508 $ 76,835 $ 189,917 $ 145,560
========= ========= ========= =========
Per common share amount............. $ .44 $ .34 $ .83 $ .64
========= ========= ========= =========
FULLY DILUTED
Average common shares outstanding... 222,757 222,759 222,760 222,759
Net effect of dilutive stock
options--based on the treasury
stock method using the higher of
ending or average market prices.... 7,282 5,784 7,539 5,784
--------- --------- --------- ---------
Total............................. 230,039 228,543 230,299 228,543
========= ========= ========= =========
Net income.......................... $ 103,320 $ 76,835 $ 195,542 $ 145,560
Less: preferred stock dividend
requirements....................... 2,812 - 5,625 -
--------- --------- --------- ---------
Net income applicable to common
stock..... ........................ $ 100,508 $ 76,835 $ 189,917 $ 145,560
========= ========= ========= =========
Per common share amount............. $ .44 $ .34 $ .82 $ .64
========= ========= ========= =========
<PAGE>
Earnings per common share is based on the weighted average number of
common shares outstanding during the period after consideration of the dilutive
effect of common stock options. Primary earnings per common share assumes the
maximum dilutive effect of common stock equivalents, using average market
prices. Fully diluted earnings per common share assumes the maximum dilutive
effect of common stock equivalents, using the higher of ending or average
market prices.
To the extent stock options are exercised or restricted shares are awarded
from time to time under the Corporation's 1991 Long-Term Incentive Plan, the
Board of Directors has approved the purchase on the open market or in privately
negotiated transactions of the number of shares issued.
b. Reports on Form 8-K
1. Report dated April 18, 1996, reporting MBNA Corporation's earnings
release for the first quarter of 1996.
2. Report dated April 30, 1996, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for April 1996.
3. Report dated May 1, 1996, reporting the securitization of
approximately $1.0 billion of credit card receivables by MBNA America
Bank, N.A.
4. Report dated May 21, 1996, reporting the securitization of
approximately $750.0 million of credit card receivables by MBNA America
Bank, N.A.
5. Report dated May 31, 1996, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for May 1996.
6. Report dated June 20, 1996, reporting the securitization of
approximately 250.0 million pounds sterling of credit card receivables by
MBNA International Bank Limited.
7. Report dated June 30, 1996, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for June 1996.
8. Report dated July 11, 1996, reporting MBNA Corporation's earnings
release for the second quarter of 1996.
9. Report dated July 17, 1996, reporting the securitization of
approximately $500.0 million of credit card receivables by MBNA America
Bank, N.A.
10. Report dated July 31, 1996, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for July 1996.
<PAGE>
11. Report dated August 14, 1996, reporting the securitization of
approximately $1.2 billion of credit card receivables by MBNA America
Bank, N.A.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBNA CORPORATION
Date: August 14, 1996 By: /s/ M. Scot Kaufman
----------------------------
M. Scot Kaufman
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MBNA
CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 296,909
<INT-BEARING-DEPOSITS> 557,569
<FED-FUNDS-SOLD> 35,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,295,870
<INVESTMENTS-CARRYING> 909,122
<INVESTMENTS-MARKET> 901,134
<LOANS> 8,168,432<F1>
<ALLOWANCE> 110,406
<TOTAL-ASSETS> 13,954,375
<DEPOSITS> 9,207,263
<SHORT-TERM> 108,780
<LIABILITIES-OTHER> 514,100
<LONG-TERM> 2,754,901
0
60
<COMMON> 2,228
<OTHER-SE> 1,367,043
<TOTAL-LIABILITIES-AND-EQUITY> 13,954,375
<INTEREST-LOAN> 564,804<F1>
<INTEREST-INVEST> 61,440
<INTEREST-OTHER> 17,873
<INTEREST-TOTAL> 644,117
<INTEREST-DEPOSIT> 248,299
<INTEREST-EXPENSE> 342,792
<INTEREST-INCOME-NET> 301,325
<LOAN-LOSSES> 98,600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 720,552
<INCOME-PRETAX> 269,451
<INCOME-PRE-EXTRAORDINARY> 269,451
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195,542<F2>
<EPS-PRIMARY> .83
<EPS-DILUTED> .82
<YIELD-ACTUAL> 11.90<F3>
<LOANS-NON> 0
<LOANS-PAST> 71,195<F4>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 104,886
<CHARGE-OFFS> 121,446
<RECOVERIES> 28,330
<ALLOWANCE-CLOSE> 110,406
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes Loans Held for Securitization.
<F2>Net income for the six months ended June 30, 1996, includes
a $32.8 million tax benefit related to deductions for the amortization
of Customer-based intangible assets acquired in connection with the
1991 intial public offering of the Corporation's Common Stock, and a
charge of $32.8 million net of tax ($54.3 million pre-tax) related to
the launch of the MBNA Platinum Plus Visa and MaseterCard program.
<F3>On a fully taxable equivalent basis.
<F4>Excludes Loans Held for Securitization.
</FN>
</TABLE>
