45
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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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
--------------------- ------------------------
Commission file number 1-10683
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MBNA Corporation
- -------------------------------------------------------------------------------
(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
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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 -- 501,187,500 Shares
Outstanding as of September 30, 1997
MBNA CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
September 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Income - 3
For the Three and Nine Months Ended September 30, 1997 and 1996
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Nine Months Ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - 7
For the Nine Months Ended September 30, 1997 and 1996 (unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Supplemental Financial Information 37
Part II - Other Information
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 40
Signature 45
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(dollars in thousands)
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
ASSETS
Cash and due from banks.......................... $ 307,728 $ 225,063
Interest-earning time deposits in other banks.... 728,577 621,614
Federal funds sold and securities purchased
under resale agreements......................... 475,000 255,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $2,344,851 and $1,718,643 at
September 30, 1997 and December 31, 1996,
respectively)................................. 2,346,792 1,719,730
Held-to-maturity (market value of $455,457
and $592,208 at September 30, 1997 and
December 31, 1996, respectively).............. 460,378 598,320
Loans held for securitization.................... 2,168,388 2,469,974
Loans:
Credit card.................................... 5,656,280 5,722,299
Other consumer................................. 2,161,073 1,936,779
------------- -------------
Total loans.................................. 7,817,353 7,659,078
Reserve for possible credit losses............. (160,898) (118,427)
------------- -------------
Net loans.................................... 7,656,455 7,540,651
Premises and equipment, net...................... 1,431,033 1,047,183
Accrued income receivable........................ 115,161 98,160
Accounts receivable from securitizations......... 3,714,983 1,777,323
Prepaid expenses and deferred charges............ 196,643 204,139
Other assets..................................... 660,271 478,185
------------- -------------
Total assets................................. $ 20,261,409 $ 17,035,342
============= =============
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
LIABILITIES
Deposits:
Time deposits.................................. $ 9,130,785 $ 7,159,440
Money market deposit accounts.................. 3,020,912 2,719,545
Noninterest-bearing demand deposits............ 300,513 233,885
Interest-bearing transaction accounts.......... 23,658 27,995
Savings accounts............................... 11,529 10,821
------------- -------------
Total deposits............................... 12,487,397 10,151,686
Short-term borrowings............................ 29,146 693,387
Long-term debt and bank notes.................... 5,011,349 3,950,358
Accrued interest payable......................... 137,682 107,187
Accrued expenses and other liabilities........... 729,327 428,416
------------- -------------
Total liabilities............................ 18,394,901 15,331,034
STOCKHOLDERS' EQUITY
Preferred stock($.01 par value, 20,000,000
shares authorized, 8,573,882 and 12,000,000
shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively)....... 86 120
Common stock ($.01 par value, 700,000,000 shares
authorized, 501,187,500 shares issued and
outstanding at September 30, 1997 and
December 31, 1996, respectively)................ 5,012 5,012
Additional paid-in capital....................... 466,367 602,231
Retained earnings................................ 1,395,043 1,096,945
------------- -------------
Total stockholders' equity................... 1,866,508 1,704,308
------------- -------------
Total liabilities and stockholders' equity... $ 20,261,409 $ 17,035,342
============= =============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
(unaudited)
INTEREST INCOME
Loans........................... $ 269,084 $ 229,479 $ 772,390 $ 610,200
Investment securities:
Taxable....................... 37,232 30,510 103,198 90,288
Tax-exempt.................... 875 815 2,582 2,477
Time deposits in other banks.... 10,739 5,939 32,343 20,996
Federal funds sold and
securities purchased under
resale agreements.............. 6,706 3,188 16,105 6,004
Loans held for securitization... 112,588 81,889 351,162 265,972
---------- ---------- ----------- -----------
Total interest income........ 437,224 351,820 1,277,780 995,937
INTEREST EXPENSE
Deposits........................ 183,341 132,958 500,177 381,257
Short-term borrowings........... 1,716 7,654 18,767 12,314
Long-term debt and bank notes... 78,718 50,303 219,864 140,136
---------- ---------- ----------- -----------
Total interest expense....... 263,775 190,915 738,808 533,707
---------- ---------- ----------- -----------
NET INTEREST INCOME............. 173,449 160,905 538,972 462,230
Provision for possible credit
losses......................... 60,403 35,273 206,171 133,873
---------- ---------- ----------- -----------
Net interest income after
provision for possible credit
losses......................... 113,046 125,632 332,801 328,357
OTHER OPERATING INCOME
Interchange..................... 28,068 24,001 83,296 66,367
Credit card fees................ 17,315 26,617 76,012 78,697
Securitization income........... 627,749 410,857 1,823,402 1,129,728
Other........................... 18,907 10,873 46,783 39,165
---------- ---------- ----------- -----------
Total other operating income. $ 692,039 $ 472,348 $ 2,029,493 $ 1,313,957
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.. $ 257,971 $ 195,558 $ 735,848 $ 536,684
Occupancy expense of premises... 21,587 18,010 60,784 48,387
Furniture and equipment expense. 39,882 24,497 109,239 69,757
Other........................... 204,102 145,473 742,850 449,262
---------- ---------- ----------- -----------
Total other operating
expense..................... 523,542 383,538 1,648,721 1,104,090
---------- ---------- ----------- -----------
Income before income taxes and
special marketing program...... 281,543 214,442 713,573 538,224
Special marketing program....... - - - 54,331
---------- ---------- ----------- -----------
Income before income taxes...... 281,543 214,442 713,573 483,893
Applicable income taxes......... 109,717 84,919 279,372 191,621
Tax benefit from Customer-based
intangible assets.............. - - - (32,793)
---------- ---------- ----------- -----------
NET INCOME...................... $ 171,826 $ 129,523 $ 434,201 $ 325,065
========== ========== =========== ===========
EARNINGS PER COMMON SHARE....... $ .32 $ .24 $ .80 $ .61
Weighted average common shares
outstanding and common stock
equivalents (000).............. 528,310 518,234 526,183 517,698
==============================================================================
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, 1996........... 12,000 501,188 $ 120 $ 5,012
Net income........................... - - - -
Cash dividends:
Common-$.24 per share.............. - - - -
Preferred.......................... - - - -
Exercise of stock options and other
awards.............................. - 4,271 - 43
Acquisition and retirement of common
stock............................... - (4,271) - (43)
Acquisition and retirement of
preferred stock..................... (3,426) - (34) -
Foreign currency translation, net of
tax (accumulated amount of $ 1,354
at September 30, 1997).............. - - - -
Net unrealized gains on investment
securities available-for-sale and
other financial instruments, net
of tax (accumulated amount of
$7,268 at September 30, 1997)....... - - - -
--------- -------- --------- --------
BALANCE, SEPTEMBER 30, 1997.......... 8,574 501,188 $ 86 $ 5,012
========= ======== ========= ========
BALANCE, DECEMBER 31, 1995........... 6,000 501,188 $ 60 $ 5,012
Net income........................... - - - -
Cash dividends:
Common-$.21 per share.............. - - - -
Preferred.......................... - - - -
Exercise of stock options and other
awards.............................. - 3,440 - 34
Acquisition and retirement of common
stock............................... - (3,440) - (34)
Issuance of preferred stock, net of
issuance costs...................... 6,000 - 60 -
Foreign currency translation, net of
tax (accumulated amount of $271
at September 30, 1996).............. - - - -
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of
$691 at September 30, 1996)......... - - - -
--------- -------- --------- --------
BALANCE, SEPTEMBER 30, 1996.......... 12,000 501,188 $ 120 $ 5,012
========= ======== ========= ========
Additional Total
Paid-in Retained Stockholders'
Capital Earnings Equity
---------- ----------- -------------
BALANCE, DECEMBER 31, 1996........... $ 602,231 $ 1,096,945 $ 1,704,308
Net income........................... - 434,201 434,201
Cash dividends:
Common-$.24 per share.............. - (120,294) (120,294)
Preferred.......................... - (12,665) (12,665)
Exercise of stock options and other
awards.............................. 50,566 - 50,609
Acquisition and retirement of common
stock............................... (100,811) - (100,854)
Acquisition and retirement of
preferred stock..................... (85,619) (3,133) (88,786)
Foreign currency translation, net of
tax (accumulated amount of $1,354
at September 30, 1997).............. - (6,556) (6,556)
Net unrealized gains on investment
securities available-for-sale and
other financial instruments, net
of tax (accumulated amount of
$7,268 at September 30, 1997)....... - 6,545 6,545
---------- ----------- -------------
BALANCE, SEPTEMBER 30, 1997.......... $ 466,367 $ 1,395,043 $ 1,866,508
========== =========== =============
BALANCE, DECEMBER 31, 1995........... $ 488,951 $ 771,035 $ 1,265,058
Net income........................... - 325,065 325,065
Cash dividends:
Common-$.21 per share.............. - (106,935) (106,935)
Preferred.......................... - (8,671) (8,671)
Exercise of stock options and other
awards.............................. 29,168 - 29,202
Acquisition and retirement of common
stock............................... (45,211) - (45,245)
Issuance of preferred stock, net of
issuance costs...................... 146,147 - 146,207
Foreign currency translation, net of
tax (accumulated amount of $271
at September 30, 1996).............. - (120) (120)
Net unrealized gains on investment
securities available-for-sale, net
of tax (accumulated amount of
$691 at September 30, 1996)......... - 502 502
---------- ----------- -------------
BALANCE, SEPTEMBER 30, 1996.......... $ 619,055 $ 980,876 $ 1,605,063
========== =========== =============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
For the Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
(unaudited)
OPERATING ACTIVITIES
Net income......................................... $ 434,201 $ 325,065
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for possible credit losses............ 206,171 133,873
Depreciation, amortization, and accretion....... 102,011 68,689
Provision (benefit) for deferred income taxes... 12,935 (51,427)
Increase in accrued income receivable........... (17,001) (7,424)
Increase in accounts receivable from
securitizations................................ (1,937,660) (553,380)
Increase in accrued interest payable............ 30,495 16,805
Decrease in other operating activities.......... 281,666 28,092
----------- -----------
Net cash used in operating activities......... (887,182) (39,707)
INVESTING ACTIVITIES
Net increase in money market instruments........... (326,963) (183,687)
Proceeds from maturities of investment securities
available-for-sale................................ 5,939,431 2,979,329
Purchases of investment securities
available-for-sale................................ (6,536,585) (3,387,066)
Proceeds from maturities of investment securities
held-to-maturity ................................. 177,778 315,851
Purchases of investment securities
held-to-maturity.................................. (40,002) (7,563)
Proceeds from securitization of loans.............. 9,679,866 8,001,753
Portfolio acquisitions............................. (1,118,744) (1,263,460)
Amortization of securitized loans.................. (2,074,885) (1,108,334)
Net loan originations.............................. (6,694,463) (6,902,517)
Net purchases of premises and equipment............ (475,972) (216,175)
----------- -----------
Net cash used in investing activities......... $(1,470,539) $(1,771,869)
For the Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
(unaudited)
FINANCING ACTIVITIES
Net increase in time deposits...................... $ 1,971,345 $ 615,319
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts.............................. 364,366 425,315
Net (decrease) increase in short-term borrowings... (664,241) 118,717
Proceeds from issuance of long-term debt
and bank notes.................................... 1,288,667 812,341
Maturity of long-term debt and bank notes.......... (261,425) (93,192)
Proceeds from issuance of preferred stock.......... - 146,207
Acquisition and retirement of preferred stock...... (52,483) -
Proceeds from exercise of stock options
and other awards.................................. 24,839 17,878
Acquisition and retirement of common stock......... (100,854) (45,245)
Dividends paid..................................... (129,828) (110,007)
----------- -----------
Net cash provided by financing activities..... 2,440,386 1,887,333
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS.............. 82,665 75,757
Cash and cash equivalents at beginning of period... 225,063 291,856
----------- -----------
Cash and cash equivalents at end of period......... $ 307,728 $ 367,613
=========== ===========
SUPPLEMENTAL DISCLOSURE
Interest expense paid.............................. $ 707,527 $ 516,756
=========== ===========
Income taxes paid.................................. $ 133,136 $ 164,956
=========== ===========
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MBNA
Corporation ("the Corporation") have been prepared in accordance with generally
accepted accounting principles 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 nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. The notes to the consolidated
financial statements contained in the Annual Report on Form 10-K for the year
ended December 31, 1996 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.
On July 15, 1997, the Board of Directors approved a three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend. In connection
with this transaction, one additional share of common stock was issued on
October 1, 1997, for every two common shares held by stockholders of record as
of the close of business on September 15, 1997. Accordingly, all common share
and per common share data have been restated to reflect the stock split.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (Statement No. 128), was issued. This statement, effective
for financial statements issued for periods ending after December 15, 1997,
specifies the computation, presentation, and disclosure requirements for
earnings per share. Statement No. 128 replaces primary and fully diluted
earnings per share, under Accounting Principles Board Opinion No. 15, "Earnings
per Share," with basic and diluted earnings per share, respectively. The
adoption of Statement No. 128 will not have a material impact on the
Corporation's consolidated earnings per share for the periods ended
September 30, 1997 and 1996.
NOTE C: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more. During the nine months ended September 30, 1997, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
Floating-Rate Senior Medium-Term Notes, priced
between 30 basis points and 47 basis points over
the three-month London Interbank Offered Rate
(LIBOR), payable quarterly, maturing in varying
amounts from 1999 through 2002..................... $317,500
Fixed-Rate Senior Medium-Term Notes, with interest
rates varying from 6.875% to 7.125%, payable
semiannually, maturing in varying amounts from
2002 through 2004.................................. 165,000
Floating-Rate Medium-Term Bank Notes, priced
between 15 basis points and 30 basis points over
the three-month LIBOR, payable quarterly, maturing
in varying amounts from 2000 through 2004.......... 412,000
Fixed-Rate Syndicated Credit Facility, with an
interest rate of 7.645%, payable quarterly,
maturing in 2001 (75 million pounds sterling)...... 121,823
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures, series B, with an
interest rate equal to 80 basis points above
the three-month LIBOR, maturing in 2027............ 280,000
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures, series C, with an
interest rate of 8.25%, maturing in 2027........... 36,303
The Corporation, through MBNA Capital B and MBNA Capital C, each a statutory
business trust created under the laws of the State of Delaware, issued
guaranteed preferred beneficial interests in Corporation's junior subordinated
deferrable interest debentures, series B and series C, respectively, as shown
above.
The Corporation owns all the common securities of the trusts. The junior
subordinated deferrable interest debentures are the sole assets of the trusts,
and the payments under the junior subordinated deferrable interest debentures
are the sole revenues of the trusts. The obligations of the Corporation, under
the relevant indenture, trust agreement, and guarantee, in the aggregate,
constitute a full and unconditional guarantee by the Corporation of all trust
obligations under the guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures issued by the
trust.
NOTE D: PREFERRED STOCK
During the nine months ended September 30, 1997, the Corporation, through MBNA
Capital C, issued 1.5 million shares of 8.25% Trust Originated Preferred
Securities (guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures, series C) in exchange for 1.5
million shares of 7 1/2% Cumulative Preferred Stock, Series A. The value of
the shares exchanged was $36.3 million. After the exchange, the Corporation
has 4.5 million shares of 7 1/2% Cumulative Preferred Stock, Series A,
outstanding at September 30, 1997.
The Corporation also repurchased 2.0 million shares of Adjustable Rate
Cumulative Preferred Stock, Series B during the nine months ended
September 30, 1997 for $52.5 million. There are 4.0 million shares of
Adjustable Rate Cumulative Preferred Stock, Series B, outstanding at
September 30, 1997.
On October 14, 1997, the Board of Directors declared a quarterly dividend of
$.46875 per share on the 7 1/2% Cumulative Preferred Stock, Series A and a
quarterly dividend of $.39320 per share on the Adjustable Rate Cumulative
Preferred Stock, Series B. The preferred stock dividends are payable
January 15, 1998 to stockholders of record as of December 31, 1997.
Previously, the Board of Directors declared quarterly dividends on the
7 1/2% Cumulative Preferred Stock, Series A of $.46875 per share on July 15,
1997, April 21, 1997, and January 14, 1997, respectively.
In addition, the Board of Directors declared quarterly dividends on the
Adjustable Rate Cumulative Preferred Stock, Series B of $.41610 per share,
$.43622 per share, and $.40990 per share on July 15, 1997, April 21, 1997, and
January 14, 1997, respectively.
NOTE E: ASSET SECURITIZATION
On January 1, 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (Statement No. 125), effective for all
transactions occurring after December 31, 1996. Under Statement No. 125, gains
are now recognized at the time of initial sale and each subsequent sale of loan
receivables in a securitization. As a result, the Corporation now recognizes
the gain from securitized loans in securitization income on the Corporation's
consolidated statements of income and the related receivable in accounts
receivable from securitization on the consolidated statements of financial
condition at the time of sale. Securitization income also includes the
additional earnings from the Corporation's securitized loans previously
reported as loan servicing fees. Previously, the Corporation recognized this
income over the life of the securitization. As a result of the adoption of
Statement No. 125, securitization income increased $74.9 million and $319.3
million for the three and nine months ended September 30, 1997, respectively.
These increases are not representative of future periods. Any future gains that
will be recognized by the Corporation in accordance with Statement No. 125 will
be dependent upon the timing and the amount of future securitizations. The
increases in securitization income from the adoption of Statement No. 125 were
primarily invested in additional business development efforts and therefore had
no material impact on consolidated net income. In accordance with Statement
No. 125, prior years have not been restated.
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, credit card fees,
securitization income, and interest earned on investment securities and money
market instruments. The Corporation's primary costs are the costs of funding
its loan receivables and investment securities, which include interest paid on
deposits, short-term borrowings, and long-term debt and bank notes; credit
losses; royalties paid to affinity groups and financial institutions; business
development and operating expenses; and income taxes.
On July 15, 1997, the Board of Directors approved a three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend, issued on
October 1, 1997, to stockholders of record as of September 15, 1997.
Accordingly, all common share and per common share data have been restated to
reflect this stock split.
EARNINGS SUMMARY
Net income for the three and nine months ended September 30, 1997 was $171.8
million and $434.2 million, or $.32 per common share and $.80 per common
share, increasing 32.7% and 33.6% from $129.5 million and $325.1 million or
$.24 per common share and $.61 per common share for the same periods in 1996.
Earnings per common share is computed using net income applicable to common
stock and weighted average common shares outstanding, including common stock
equivalents.
The overall growth in earnings was primarily attributable to the growth in
managed loans outstanding. Total managed loans at September 30, 1997 were
$46.2 billion, a $11.5 billion increase from September 30, 1996, and a $7.6
billion increase since December 31, 1996. The Corporation's average managed
loans increased 37.0% and 41.6% to $44.5 billion and $41.8 billion for the
three and nine months ended September 30, 1997, compared to $32.5 billion and
$29.5 billion for the same periods in 1996, respectively. Included in managed
loans are the Corporation's loans held for securitization, loan portfolio, and
securitized loans.
The Corporation continues to be an active participant in the asset
securitization market. Securitization converts interest income, interchange,
and other fees in excess of interest paid to Certificateholders; credit
losses; and other trust expenses into securitization income, while reducing
the Corporation's on-balance-sheet assets. During the three and nine months
ended September 30, 1997, the Corporation securitized approximately $4.6
billion and $9.7 billion of loan receivables, bringing the total amount of
outstanding securitized loans to $36.2 billion as of September 30, 1997.
Return on average total assets for the three and nine months ended
September 30, 1997, was 3.48% and 3.12%, compared to 3.44% and 3.10% for the
same periods during 1996, respectively. The increases in the return on
average total assets for the three and nine months ended September 30, 1997
are a result of the 32.7% and 33.6% increases in net income, which exceeded
the 30.9% and 33.0% increases in the Corporation's average total assets for
the same periods. The Corporation's return on average stockholders' equity
for the three and nine months ended September 30, 1997 was 38.27% and 33.84%,
compared to 37.26% and 33.24% for the same periods in 1996, respectively. The
higher returns for the three and nine months ended September 30, 1997 are
primarily a result of the increases in net income which also exceeded the
28.8% and 31.3% increases in average stockholders' equity.
NET INTEREST INCOME
Net interest income for the three and nine months ended September 30, 1997, on
a fully taxable equivalent basis, was $173.9 million and $540.4 million,
compared to $161.3 million and $463.6 million for the same periods in 1996,
respectively. The increase in net interest income for the three and nine
months ended September 30, 1997 is primarily a result of an increase in
average interest-earning assets of $2.5 billion and $3.0 billion,
respectively, partially offset by a decline of 61 basis points and 43 basis
points in the net interest margin and an increase of $3.8 billion in average
interest-bearing liabilities for both periods. The increase in interest-
earning assets during the three and nine months ended September 30, 1997 was a
result of increases in average investment securities and money market
instruments of $1.0 billion and $855.9 million and increases in average loan
receivables of $1.5 billion and $2.1 billion, respectively. The increase in
interest-bearing liabilities during these periods resulted primarily from
funding the increases in interest-earning assets and accounts receivable from
securitizations, which is included in other assets.
The net interest margin, on a fully taxable equivalent basis, was 4.78% and
5.08% for the three and nine months ended September 30, 1997, compared to
5.39% and 5.51% for the same periods in 1996, respectively. The declines in
the net interest margin for 1997 are primarily a result of the increases in
average interest-bearing liabilities that were partially used to fund the
growth in accounts receivable from securitizations, which is included in other
assets.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income on investment securities and money market instruments, on a
fully taxable equivalent basis, increased $15.1 million and $34.5 million for
the three and nine months ended September 30, 1997, as compared to the same
periods in 1996, respectively. The increase for the three and nine months ended
September 30, 1997 is primarily a result of an increase of $1.0 billion and
$855.9 million in average investment securities and money market instruments
when compared to the same periods in 1996, respectively. The increases 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 yield on investment securities and money market
instruments increased 1 basis point for the three months ended September 30,
1997, and decreased 8 basis points for the nine months ended September 30,
1997, as compared to the same periods in 1996.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased $70.3
million and $247.4 million to $381.7 million and $1.1 billion for the three and
nine months ended September 30, 1997, compared to the same periods in 1996,
respectively. The increase is primarily attributable to an increase in average
loan receivables of $1.5 billion and $2.1 billion to $10.6 billion and $10.5
billion for the three and nine months ended September 30, 1997 combined with
increases in the yields earned on the Corporation's average loan receivables of
67 basis points and 36 basis points for the same periods in 1996, respectively.
At September 30, 1997, variable-rate credit card and home equity loans were
23.6% of total managed loans, compared to 42.1% at December 31, 1996. These
variable-rate loans are indexed to the U.S. Prime Rate published in The Wall
Street Journal and generally reprice quarterly. The decline in variable-rate
loans was primarily the result of the Corporation repricing outstanding loan
balances from variable rate to fixed rate.
DEPOSITS
Total interest expense on deposits increased $50.4 million and $118.9 million
to $183.3 million and $500.2 million for the three and nine months ended
September 30, 1997, compared to the same periods in 1996, respectively. The
increase is the result of an increase in average interest-bearing deposits of
$2.6 billion and $2.1 billion for the three and nine months ended September 30,
1997, respectively, as the Corporation continues to emphasize marketing
certificates of deposit and money market deposit accounts to fund loan growth
and diversify funding sources. Also, the rates paid on average interest-
bearing deposits increased 44 basis points and 36 basis points from the three
and nine months ended September 30, 1996, respectively.
BORROWED FUNDS
Interest expense on short-term borrowings decreased $5.9 million to $1.7
million for the three months ended September 30, 1997 and increased $6.5
million to $18.8 million for the nine months ended September 30, 1997, compared
to the same periods in 1996. The fluctuations are primarily a result of a
decrease in average short-term borrowings of $438.2 million for the three
months ended September 30, 1997 and an increase in average short-term
borrowings of $130.9 million for the nine months ended September 30, 1997.
These fluctuations reflect a changing need by the Corporation for the
utilization of the short-term bank note program and other short-term borrowings
to meet short-term funding requirements.
Total interest expense on long-term debt and bank notes increased $28.4 million
and $79.7 million to $78.7 million and $219.9 million for the three and nine
months ended September 30, 1997, compared to the same periods in 1996,
respectively. The increase in interest expense reflects the issuance of
additional long-term debt and bank notes to diversify funding sources, to fund
loan growth, to acquire premises and equipment, and for other general corporate
purposes. As a result of the issuance of long-term debt and bank notes, average
long-term debt and bank notes increased $1.6 billion for both the three and
nine months ended September 30, 1997 compared to the same periods in 1996,
respectively. Also, the rates paid on average long-term debt and bank notes
increased 12 basis points and 5 basis points for the three and nine months
ended September 30, 1997, compared to the same period in 1996, respectively.
TABLE 1: STATEMENT OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands; yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
September 30, 1997
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks..................................... $ 723,545 5.89% $ 10,739
Federal funds sold and securities
purchased under resale agreements......... 475,869 5.59 6,706
------------ ----------
Total money market instruments........... 1,199,414 5.77 17,445
Investment securities (a):
Taxable.................................... 2,583,498 5.72 37,232
Tax-exempt(b).............................. 89,962 5.94 1,346
------------ ----------
Total investment securities.............. 2,673,460 5.72 38,578
Loans held for securitization................ 3,074,863 14.53 112,588
Loans:
Credit card................................ 5,226,340 14.21 187,191
Other consumer............................. 2,264,840 14.35 81,893
------------ ----------
Total loans.............................. 7,491,180 14.25 269,084
------------ ----------
Total interest-earning assets.......... 14,438,917 12.03 $ 437,695
Cash and due from banks....................... 519,291
Premises and equipment, net................... 1,361,877
Other assets.................................. 3,444,209
Reserve for possible credit losses............ (157,762)
------------
Total assets........................... $ 19,606,532
============
For the Three Months Ended
September 30, 1997
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits (c).......................... $ 8,858,776 6.39% $ 142,578
Money market deposit accounts.............. 2,958,170 5.40 40,294
Interest-bearing transaction accounts...... 27,223 4.77 327
Savings accounts........................... 11,739 4.80 142
------------ ----------
Total interest-bearing deposits.......... 11,855,908 6.14 183,341
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.......... 14,000 5.61 198
Other short-term borrowings................ 105,313 5.72 1,518
Long-term debt and bank notes (c).......... 4,751,882 6.57 78,718
------------ ----------
Total borrowed funds..................... 4,871,195 6.55 80,434
------------ ----------
Total interest-bearing liabilities..... 16,727,103 6.26 263,775
Demand deposits............................... 375,319
Other liabilities............................. 722,745
------------
Total liabilities...................... 17,825,167
Stockholders' equity.......................... 1,781,365
------------
Total liabilities and stockholders'
equity................................ $ 19,606,532
============ ----------
Net interest income.................... $ 173,920
==========
Net interest margin.................... 4.78
Interest rate spread................... 5.77
(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 September 30, 1997 was $471.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Three Months Ended
September 30, 1996
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks..................................... $ 426,079 5.55% $ 5,939
Federal funds sold and securities
purchased under resale agreements......... 237,685 5.34 3,188
------------ ----------
Total money market instruments........... 663,764 5.47 9,127
Investment securities (a):
Taxable.................................... 2,093,007 5.80 30,510
Tax-exempt(b).............................. 84,653 5.89 1,254
------------ ----------
Total investment securities.............. 2,177,660 5.80 31,764
Loans held for securitization................ 2,398,970 13.58 81,889
Loans:
Credit card................................ 5,144,692 13.58 175,673
Other consumer............................. 1,523,954 14.05 53,806
------------ ----------
Total loans.............................. 6,668,646 13.69 229,479
------------ ----------
Total interest-earning assets.......... 11,909,040 11.77 $ 352,259
Cash and due from banks....................... 357,367
Premises and equipment, net................... 957,243
Other assets.................................. 1,868,905
Reserve for possible credit losses............ (112,553)
------------
Total assets........................... $ 14,980,002
============
For the Three Months Ended
September 30, 1996
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits (c).......................... $ 6,640,622 5.87% $ 97,968
Money market deposit accounts.............. 2,604,694 5.29 34,608
Interest-bearing transaction accounts...... 23,288 4.56 267
Savings accounts........................... 10,264 4.46 115
------------ ----------
Total interest-bearing deposits.......... 9,278,868 5.70 132,958
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.......... 76,761 5.45 1,052
Other short-term borrowings................ 480,704 5.46 6,602
Long-term debt and bank notes (c).......... 3,102,276 6.45 50,303
------------ ----------
Total borrowed funds..................... 3,659,741 6.30 57,957
------------ ----------
Total interest-bearing liabilities..... 12,938,609 5.87 190,915
Demand deposits............................... 199,508
Other liabilities............................. 459,094
------------
Total liabilities...................... 13,597,211
Stockholders' equity.......................... 1,382,791
------------
Total liabilities and stockholders'
equity................................ $ 14,980,002
============ ----------
Net interest income.................... $ 161,344
==========
Net interest margin.................... 5.39
Interest rate spread................... 5.90
(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 basis adjustment for the three months ended
September 30, 1996 was $439.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Nine Months Ended
September 30, 1997
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks..................................... $ 761,750 5.68% $ 32,343
Federal funds sold and securities
purchased under resale agreements......... 388,692 5.54 16,105
------------ ----------
Total money market instruments........... 1,150,442 5.63 48,448
Investment securities (a):
Taxable.................................... 2,424,416 5.69 103,198
Tax-exempt(b).............................. 88,707 5.99 3,972
------------ ----------
Total investment securities.............. 2,513,123 5.70 107,170
Loans held for securitization................ 3,262,886 14.39 351,162
Loans:
Credit card................................ 5,215,837 14.08 549,380
Other consumer............................. 2,067,399 14.42 223,010
------------ ----------
Total loans.............................. 7,283,236 14.18 772,390
------------ ----------
Total interest-earning assets.......... 14,209,687 12.04 $1,279,170
Cash and due from banks....................... 471,442
Premises and equipment, net................... 1,214,633
Other assets.................................. 2,872,334
Reserve for possible credit losses............ (136,628)
------------
Total assets........................... $ 18,631,468
============
For the Nine Months Ended
September 30, 1997
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits (c).......................... $ 8,182,098 6.27% $ 383,607
Money market deposit accounts.............. 2,848,908 5.41 115,228
Interest-bearing transaction accounts...... 26,927 4.68 943
Savings accounts........................... 11,422 4.67 399
------------ ----------
Total interest-bearing deposits.......... 11,069,355 6.04 500,177
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.......... 22,080 5.60 924
Other short-term borrowings................ 410,713 5.81 17,843
Long-term debt and bank notes (c).......... 4,465,785 6.58 219,864
------------ ----------
Total borrowed funds..................... 4,898,578 6.51 238,631
------------ ----------
Total interest-bearing liabilities..... 15,967,933 6.19 738,808
Demand deposits............................... 328,206
Other liabilities............................. 620,017
------------
Total liabilities...................... 16,916,156
Stockholders' equity.......................... 1,715,312
------------
Total liabilities and stockholders'
equity................................ $ 18,631,468
============ ----------
Net interest income.................... $ 540,362
==========
Net interest margin.................... 5.08
Interest rate spread................... 5.85
(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 basis adjustment for the nine months ended
September 30, 1997 was $1,390.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Nine Months Ended
September 30, 1996
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks..................................... $ 503,915 5.57% $ 20,996
Federal funds sold and securities
purchased under resale agreements......... 149,394 5.37 6,004
------------ ----------
Total money market instruments........... 653,309 5.52 27,000
Investment securities (a):
Taxable.................................... 2,069,467 5.83 90,288
Tax-exempt(b).............................. 84,924 5.99 3,811
------------ ----------
Total investment securities.............. 2,154,391 5.83 94,099
Loans held for securitization................ 2,558,674 13.89 265,972
Loans:
Credit card................................ 4,730,964 13.84 490,241
Other consumer............................. 1,139,935 14.06 119,959
------------ ----------
Total loans.............................. 5,870,899 13.88 610,200
------------ ----------
Total interest-earning assets.......... 11,237,273 11.85 $ 997,271
Cash and due from banks....................... 333,289
Premises and equipment, net................... 901,687
Other assets.................................. 1,641,856
Reserve for possible credit losses............ (108,577)
------------
Total assets........................... $ 14,005,528
============
For the Nine Months Ended
September 30, 1996
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits (c).......................... $ 6,440,875 5.83% $ 281,104
Money market deposit accounts.............. 2,493,357 5.31 99,033
Interest-bearing transaction accounts...... 22,625 4.58 776
Savings accounts........................... 10,117 4.54 344
------------ ----------
Total interest-bearing deposits.......... 8,966,974 5.68 381,257
Borrowed funds:
Federal funds purchased and securities
sold under repurchase agreements.......... 80,610 5.39 3,254
Other short-term borrowings................ 221,244 5.47 9,060
Long-term debt and bank notes (c).......... 2,865,460 6.53 140,136
------------ ----------
Total borrowed funds..................... 3,167,314 6.43 152,450
------------ ----------
Total interest-bearing liabilities..... 12,134,288 5.88 533,707
Demand deposits............................... 177,505
Other liabilities............................. 387,300
------------
Total liabilities...................... 12,699,093
Stockholders' equity.......................... 1,306,435
------------
Total liabilities and stockholders'
equity................................ $ 14,005,528
============ ----------
Net interest income.................... $ 463,564
==========
Net interest margin.................... 5.51
Interest rate spread................... 5.97
(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 basis adjustment for the nine months ended
September 30, 1996 was $1,334.
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
OTHER OPERATING INCOME
Total other operating income increased 46.5% and 54.5% to $692.0 million and
$2.0 billion for the three and nine months ended September 30, 1997, from
$472.3 million and $1.3 billion for the same periods in 1996, respectively.
This increase is primarily attributable to a 52.8% and 61.4% increase in
securitization income, which grew to $627.7 million and $1.8 billion for the
three and nine months ended September 30, 1997, as compared to the same periods
for 1996, respectively. The increase in securitization income is primarily the
result of the adoption of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (Statement No. 125) by the Corporation, combined with a $10.5
billion and $10.2 billion, or 45.0% and 48.2%, increase in average securitized
loans to $33.9 billion and $31.3 billion for the three and nine months ended
September 30, 1997, compared to the same periods in 1996, respectively.
Securitization income includes the gains recognized by the Corporation in
accordance with Statement No. 125, in addition to the contractually specified
loan servicing fees recognized by the Corporation for the servicing of
previously securitized loans. Interchange income also increased $4.1 million
and $16.9 million for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996, as the Corporation's
sales volume increased.
On January 1, 1997, the Corporation adopted Statement No. 125, effective for
all transactions occurring after December 31, 1996. Under Statement No. 125,
gains are now recognized at the time of initial sale and each subsequent sale
of loan receivables in a securitization. As a result, the Corporation now
recognizes the gain from securitized loans in securitization income on the
Corporation's consolidated statements of income and the related receivable in
accounts receivable from securitization on the consolidated statements of
financial condition at the time of sale. Securitization income also includes
the additional earnings from the Corporation's securitized loans previously
reported as loan servicing fees. Previously, the Corporation recognized this
income over the life of the securitization. As a result of the adoption of
Statement No. 125, securitization income increased $74.9 million and $319.3
million for the three and nine months ended September 30, 1997, respectively.
These increases are not representative of future periods. Any future gains that
will be recognized by the Corporation in accordance with Statement No. 125 will
be dependent upon the timing and the amount of future securitizations. The
increases in securitization income from the adoption of Statement No. 125 were
primarily invested in additional business development efforts and therefore had
no material impact on consolidated net income. In accordance with Statement
No. 125, prior years have not been restated.
OTHER OPERATING EXPENSE
Total other operating expense increased 36.5% and 49.3% to $523.5 million and
$1.6 billion for the three and nine months ended September 30, 1997, from
$383.5 million and $1.1 billion for the same periods in 1996, respectively.
The growth in other operating expense reflects the Corporation's continued
investment in business development to enhance the ability of the Corporation to
attract and retain Customers. The Corporation added approximately 7.2 million
new accounts during the nine months ended September 30, 1997. The increase in
other operating expense also resulted from the Corporation investing the
increase in securitization income from the adoption of Statement No. 125 in
additional business development efforts. Table 2 presents the other expense
component of other operating expense.
TABLE 2: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(unaudited)
Purchased services................ $ 63,728 $ 32,220 $ 213,049 $ 113,426
Advertising....................... 22,303 21,226 109,503 65,442
Collection........................ 7,832 5,235 20,998 17,854
Stationery and supplies........... 7,317 6,346 22,812 18,121
Service bureau.................... 9,324 7,163 23,366 17,025
Postage and delivery.............. 38,622 21,755 142,408 74,989
Telephone usage................... 14,297 12,999 42,835 33,804
Credit card fraud losses.......... 16,161 12,032 47,282 35,143
Amortization of intangible assets. 7,904 3,633 22,033 8,562
Computer software................. 9,147 5,507 27,289 15,992
Other............................. 7,467 17,357 71,275 48,904
--------- --------- --------- ---------
Total other expense............. $ 204,102 $ 145,473 $ 742,850 $ 449,262
========= ========= ========= =========
SPECIAL MARKETING PROGRAM
During the nine months ended September 30, 1996, the Corporation charged $32.8
million net of tax ($54.3 million pretax) to earnings related to the launch of
the MBNA Platinum Plus MasterCard and Visa program. This item was recognized by
the Corporation during the three months ended March 31, 1996.
INCOME TAXES
Applicable income taxes were $109.7 million and $279.4 million for the three
and nine months ended September 30, 1997, compared to $84.9 million and $191.6
million for the three and nine months ended September 30, 1996, respectively,
excluding the effect of the tax benefit from Customer-based intangible assets.
Net income for the nine months ended September 30, 1996, includes a $32.8
million tax benefit related to the recognition of tax deductions for the
amortization of Customer-based intangible assets acquired in connection with
the Corporation's 1991 initial public offering. The initial public offering
resulted in certain Customer-based intangible assets being recorded for income
tax purposes only, creating future tax deductions relating to these intangible
assets. The Corporation did not initially recognize, for financial statement
purposes, any tax benefit related to 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 tax benefit relating to the intangible
assets, $32.8 million, during the three month period ended March 31, 1996.
ASSET QUALITY
The Corporation's asset quality at any time reflects, among other factors, the
quality of the Corporation's credit card and other consumer loans, the general
economic conditions, the success of the Corporation's collection efforts, and
the average seasoning of the Corporation's accounts. As new accounts season,
the delinquency rate on these accounts generally rises and then stabilizes.
Delinquencies
An account is contractually delinquent if the minimum payment is not received
by the specified date on the Customer's statement. However, the Corporation
generally continues to accrue interest until the loan is either paid or charged
off. Delinquency as a percentage of the Corporation's loan portfolio was 3.40%
at September 30, 1997, compared with 3.59% at December 31, 1996. Table 3
presents the stages of delinquency of the Corporation's loan portfolio,
excluding loans held for securitization. The Corporation's managed delinquency,
as a percentage of managed loans, was 4.44% at September 30, 1997, compared
with 4.28% at December 31, 1996.
TABLE 3: DELINQUENT LOANS
(dollars in thousands)
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
Loan portfolio..................... $ 7,817,353 $ 7,659,078
Loans delinquent:
30 to 59 days.................... $ 104,442 1.34% $ 114,382 1.49%
60 to 89 days.................... 51,902 .66 52,857 .69
90 or more days.................. 109,730 1.40 107,679 1.41
----------- ----- ----------- -----
Total.......................... $ 266,074 3.40% $ 274,918 3.59%
=========== ===== =========== =====
Net Credit Losses
Net credit losses for the three and nine months ended September 30, 1997 were
$53.3 million and $170.7 million, compared to $35.2 million and $128.3 million
for the same periods in 1996, respectively. Net credit losses do not include
credit losses from securitized loans, which are charged to the related trusts,
in accordance with their respective contractual agreements. The increase in
net credit losses for the three and nine months ended September 30, 1997,
reflects increases in the Corporation's outstanding loans, the general
economic conditions, and the seasoning of the Corporation's accounts, offset
by sales of charged-off receivables.
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. From time to time, the Corporation sells
previously charged-off receivables. The proceeds received by the Corporation
from these sales are recorded as recoveries and thus reduce net credit losses.
Net credit losses as a percentage of average loan receivables were 2.02% and
2.16% for the three and nine months ended September 30, 1997, respectively,
compared to 1.55% and 2.03% for the same periods last year. For the full year
ended December 31, 1996, net credit losses were 1.98% of average loan
receivables.
The Corporation's managed credit losses as a percentage of average managed
loans for the three and nine months ended September 30, 1997 were 4.07% and
3.93%, respectively, compared to 3.38% and 3.37% for the same periods last
year. For the full year ended December 31, 1996, managed credit losses were
3.35% of average managed loans.
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 securitization income rather than the
reserve for possible credit losses. The provision for possible credit losses
for the three and nine months ended September 30, 1997 was $60.4 million and
$206.2 million compared to $35.3 million and $133.9 million for the same
periods in 1996, respectively. Table 4 presents the change in the Corporation's
reserve for possible credit losses.
TABLE 4: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(unaudited)
Reserve balance, beginning
of period...................... $ 151,719 $ 110,406 $ 118,427 $ 104,886
Reserves acquired............. 2,231 7,293 7,257 7,319
Provision for possible
credit losses................ 60,403 35,273 206,171 133,873
Foreign currency translation.. (144) 40 (274) 50
Credit losses................. (88,098) (68,419) (265,722) (189,865)
Recoveries.................... 34,787 33,195 95,039 61,525
--------- --------- --------- ---------
Net credit losses........... (53,311) (35,224) (170,683) (128,340)
--------- --------- --------- ---------
Reserve balance, end of period.. $ 160,898 $ 117,788 $ 160,898 $ 117,788
========= ========= ========= =========
CAPITAL ADEQUACY
The Corporation and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possible additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off balance-sheet items as calculated under regulatory
accounting practices. The Corporation's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Corporation
and Bank to maintain minimum amounts and ratios (set forth in Table 5) of
Tier 1 and Total Capital to risk weighted assets and of Tier 1 Capital to
average assets (Leverage ratio). These guidelines provide for a minimum
leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest regulatory rating. As of September 30, 1997, the
Corporation and the Bank exceeded all capital requirements to which they are
subject, and the Bank was "well capitalized" under the regulatory framework for
prompt corrective action. Both the Corporation's and the Bank's risk-based
capital ratios, shown in Table 5, have been computed in accordance with
regulatory accounting practices.
TABLE 5: REGULATORY CAPITAL RATIOS
September 30, 1997
----------------------------------------------
Minimum Well-Capitalized
Ratios Requirements Requirements
---------- ------------ ----------------
MBNA Corporation (unaudited)
Tier 1........................ 9.17% 4.00% N/A
Total......................... 11.48 8.00 N/A
Leverage...................... 10.94 3.00 N/A
MBNA America Bank, N.A.
Tier 1........................ 8.74% 4.00% 6.00%
Total......................... 10.22 8.00 10.00
Leverage...................... 10.54 3.00 5.00
During the three and nine months ended September 30, 1997, the Corporation
declared dividends on its preferred and common stock of $43.9 million and
$133.0 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. In addition, if the Corporation
defers interest payments for consecutive periods covering five years on the
guaranteed preferred beneficial interests in Corporation's junior subordinated
deferrable interest debentures, the Corporation may not be permitted to declare
or pay any cash dividends on the Corporation's capital stock or interest on
debt securities that have equal or lower priority over claims as the junior
subordinated deferrable interest debentures.
The primary source of funds for payment of preferred and common stock dividends
by the Corporation is dividends received from the Bank. The amount of
dividends that a bank may declare in any year is also 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 September 30, 1997, the amount of retained earnings available
for declaration of dividends from the Bank to the Corporation was $478.0
million. Payment of dividends by the Bank to the Corporation, however, may be
even further limited by federal bank regulatory agencies.
The Bank's payment of dividends to the Corporation may also be limited by a
tangible net worth requirement under the Bank's revolving credit facility.
This facility was not drawn upon as of September 30, 1997.
On October 14, 1997, the Board of Directors declared a quarterly dividend of
$.08 per common share, payable January 1, 1998 to stockholders of record as of
December 15, 1997. Also, on October 14, 1997 the Board of Directors declared a
quarterly dividend of $.46875 per share on the 7 1/2% Cumulative Preferred
Stock, Series A and a quarterly dividend of $.39320 per share on the Adjustable
Rate Cumulative Preferred Stock, Series B. The preferred stock dividends are
payable January 15, 1998 to stockholders of record as of December 31, 1997.
LIQUIDITY
Liquidity management is the process by which the Corporation manages its access
to various funding sources to meet its current and future operating needs.
These needs change as loans grow, deposits mature, and payments on obligations
are made. Because the characteristics of the Corporation's assets and
liabilities change, liquidity management is a dynamic process, affected by
changes in the relationship between short-term and long-term interest rates.
To facilitate liquidity management, the Corporation uses a variety of funding
sources to establish a maturity pattern that provides a prudent mixture of
short and long-term funds. Funding sources are available to the Corporation
through deposits, debt issuance, and equity programs.
Deposits generated by the Bank are a major source of funds for the Corporation.
Total deposits at September 30, 1997 and December 31, 1996 were $12.5 billion
and $10.2 billion, respectively. The increase in deposits is primarily the
result of the Corporation's continued emphasis on marketing certificates of
deposit and offering competitive rates. Table 6 presents the maturities of the
Corporation's deposits as of September 30, 1997.
TABLE 6: MATURITIES OF DEPOSITS AT SEPTEMBER 30, 1997
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
----------- ----------- -----------
(unaudited)
Three months or less(a)................. $ 4,285,500 $ 642,316 $ 4,927,816
Over three months through twelve months. 2,470,486 636,453 3,106,939
Over one year through five years........ 2,668,460 1,778,414 4,446,874
Over five years......................... 5,768 - 5,768
----------- ----------- -----------
Total deposits........................ $ 9,430,214 $ 3,057,183 $12,487,397
=========== =========== ===========
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts of
$3.4 billion.
Funding sources are also available to the Corporation through debt programs
established by the Corporation and the Bank. During the nine months ended
September 30, 1997, the Corporation issued $317.5 million of floating-rate
senior medium-term notes, $165.0 million of fixed-rate senior medium-term
notes, and $412.0 million of floating-rate medium-term bank notes. In
addition, the Corporation, through MBNA International, drew 75.0 million
pounds sterling (approximately $121.8 million) from its fixed-rate syndicated
credit facility. In January 1997, the Corporation issued $280.0 million of
guaranteed preferred beneficial interests in Corporation's junior subordinated
deferrable interest debentures. These securities qualify as regulatory
capital for the Corporation. The proceeds from the debt issuances were used
for general corporate purposes.
At September 30, 1997, the Corporation, through MBNA International, had
utilized 18.0 million pounds sterling (approximately $29.1 million) from its
existing 300.0 million pounds sterling multi-currency committed syndicated
revolving credit facility. These borrowings, which are included as part of
short-term borrowings in the consolidated statements of financial condition,
matured in October 1997.
The Corporation also held $2.8 billion in investment securities and $1.2
billion of money market instruments at September 30, 1997, compared with $2.3
billion in investment securities and $876.6 million of money market instruments
at December 31, 1996. The investment securities primarily consisted of high-
quality, AAA-rated securities, most of which can be used as collateral under
repurchase agreements. Of the $2.8 billion in investment securities at
September 30, 1997, $1.4 billion is anticipated to mature within 12 months.
The Corporation increased its investment securities available-for-sale
portfolio, which consists primarily of short-term and variable-rate securities,
to $2.3 billion at September 30, 1997. These investment securities, along with
the money market instruments, provide increased liquidity and flexibility to
support the Corporation's funding requirements. Estimated maturities (including
the impact of estimated prepayments) of the Corporation's investment securities
portfolio are presented in Table 7.
TABLE 7: SUMMARY OF INVESTMENT SECURITIES AT SEPTEMBER 30, 1997
(dollars in thousands)
Estimated Maturity
--------------------------------------------
Within 1 Over
Year 1-5 Years 6-10 Years 10 Years
---------- ---------- ---------- --------
(unaudited)
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 967,758 $ 276,062 $ - $ -
State and political subdivisions
of the United States............. 83,980 6,538 - -
Asset-backed and other securities. 144,502 805,545 58,233 4,174
---------- ---------- ---------- --------
Total investment securities
available-for-sale............. $1,196,240 $1,088,145 $ 58,233 $ 4,174
========== ========== ========== ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 175,922 $ 135,893 $ - $ 78,470
State and political subdivisions
of the United States............. - - - 1,615
Asset-backed and other securities. 16,944 34,617 - 16,917
---------- ---------- ---------- --------
Total investment securities
held-to-maturity............... $ 192,866 $ 170,510 $ - $ 97,002
========== ========== ========== ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,243,820 $1,243,820
State and political subdivisions
of the United States............. 90,518 90,518
Asset-backed and other securities. 1,012,454 1,012,454
---------- ----------
Total investment securities
available-for-sale............. $2,346,792 $2,346,792
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 390,285 $ 385,875
State and political subdivisions
of the United States............. 1,615 1,235
Asset-backed and other securities. 68,478 68,347
---------- ----------
Total investment securities
held-to-maturity............... $ 460,378 $ 455,457
========== ==========
SECURITIZATION
Securitization of the Bank's loan receivables continues to be a 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 pool of loan
receivables. These loan receivables arise from accounts whose ownership is
retained by the Bank. In addition to selling the existing loan receivables,
rights to new loan receivables, including most fees generated by and payments
made from these accounts, are sold. Certificates representing undivided
interests in the trust are issued. The Investor Certificates are sold by the
trust to investors, generally through a public offering, while the Seller
Certificate is retained by the Bank. Interest is paid to the Investor
Certificateholders during the life of the transaction. 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 168 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 on balance sheet loan receivables increase by
the amount of any new purchases or cash advance activity on the accounts.
During the nine months ended September 30, 1997, the Bank securitized loan
receivables totaling $9.7 billion, through both public and private markets.
Amortization of previously securitized loan receivables totaled $2.1 billion
for the nine month period ended September 30, 1997. This securitization
activity brings the total amount of outstanding securitized loans to $36.2
billion or 78.4% of managed loans as of September 30, 1997, compared to $28.5
billion or 73.8% of managed loans at December 31, 1996. An additional $1.6
billion of previously securitized loans is scheduled to amortize into the
Bank's loan portfolio during the remainder of 1997.
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 September 30, 1997, 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.
TABLE 8: YIELDS ON SECURITIZED TRANSACTIONS (a)
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust 92-1(b).................. 23.17% 15.36% 7.81%
MasterTrust 92-2(b).................. 21.50 13.87 7.63
MasterTrust 92-3(b).................. 20.24 13.49 6.75
MasterTrust 93-1(b).................. 18.40 12.95 5.45
MasterTrust 93-3..................... 18.40 12.25 6.15
MasterTrust 93-4..................... 18.40 12.90 5.50
MasterTrust 94-1..................... 18.40 12.80 5.60
MasterTrust 94-2..................... 18.40 12.86 5.54
MasterTrust II 94-A.................. 17.48 12.86 4.62
MasterTrust II 94-B.................. 17.48 12.84 4.64
MasterTrust II 94-C.................. 17.48 12.94 4.54
MasterTrust II 94-D(b)............... 17.48 12.90 4.58
MasterTrust II 94-E.................. 17.48 12.83 4.65
Gold Reserve......................... 19.17 15.00 4.17
MasterTrust II 95-A.................. 17.48 12.96 4.52
MasterTrust II 95-B.................. 17.48 12.84 4.64
MasterTrust II 95-C.................. 17.48 12.89 4.59
MasterTrust II 95-D.................. 17.48 12.76 4.72
MasterTrust II 95-E.................. 17.48 12.90 4.58
Cards No. 1.......................... 20.05 12.10 7.95
MasterTrust II 95-F.................. 17.48 13.44 4.04
MasterTrust II 95-G.................. 17.48 12.90 4.58
MasterTrust II 95-H.................. 17.48 12.75 4.73
MasterTrust II 95-I.................. 17.48 12.84 4.64
MasterTrust II 95-J.................. 17.48 12.91 4.57
MasterTrust II 96-A.................. 17.48 12.88 4.60
MasterTrust II 96-B.................. 17.48 12.95 4.53
MasterTrust II 96-C.................. 17.48 12.82 4.66
MasterTrust II 96-D.................. 17.48 12.83 4.65
Cards No. 2.......................... 20.05 11.85 8.20
MasterTrust II 96-E.................. 17.48 12.85 4.63
MasterTrust II 96-F.................. 17.45 12.75 4.70
MasterTrust II 96-G.................. 17.48 12.88 4.60
MasterTrust II 96-H.................. 17.51 12.89 4.62
MasterTrust II 96-I.................. 17.51 12.91 4.60
MasterTrust II 96-J.................. 17.48 12.84 4.64
MasterTrust II 96-K.................. 17.48 12.83 4.65
MasterTrust II 96-L.................. 17.51 12.83 4.68
MasterTrust II 96-M.................. 17.51 12.94 4.57
Three Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
Cards No. 3.......................... 20.05% 11.94% 8.11%
MasterTrust II 97-A.................. 17.51 12.74 4.77
MasterTrust II 97-B.................. 17.48 12.88 4.60
MasterTrust II 97-C.................. 17.48 12.81 4.67
MasterTrust II 97-D.................. 17.40 13.20 4.20
MasterTrust II 97-E.................. 17.51 12.85 4.66
MasterTrust II 97-F.................. 17.35 13.23 4.12
MasterTrust II 97-G.................. 17.35 13.34 4.01
(a) Cards No. 4 issued on July 24, 1997, MasterTrust II 97-H issued on
August 6, 1997, MasterTrust II 97-I issued on August 26, 1997,
MasterTrust II 97-J issued on September 10, 1997, and Consumer Loan
MasterTrust 97-1 issued September 24, 1997 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.
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(unaudited)
The following supplemental financial information presents selected managed
asset data and managed ratios pertaining to the Corporation. This information
is used to evaluate the Corporation's financial condition as well as the impact
securitizations have on the Corporation's managed assets.
MANAGED ASSET DATA
(dollars in thousands)
September 30, 1997 December 31, 1996
------------------ -----------------
AT PERIOD END:
Loans held for securitization....... $ 2,168,388 $ 2,469,974
Loan portfolio...................... 7,817,353 7,659,078
Securitized loans................... 36,230,744 28,494,481
------------------ -----------------
Total managed loans............... $ 46,216,485 $ 38,623,533
================== =================
Total managed interest-earning
assets........................... $ 50,227,232 $ 41,818,197
================== =================
Total managed assets.............. $ 56,492,153 $ 45,529,823
================== =================
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
AVERAGE:
Loans held for
securitization......... $ 3,074,863 $ 2,398,970 $ 3,262,886 $ 2,558,674
Loan portfolio.......... 7,491,180 6,668,646 7,283,236 5,870,899
Securitized loans....... 33,910,575 23,392,536 31,276,734 21,099,223
------------ ------------ ------------ ------------
Total managed loans... $ 44,476,618 $ 32,460,152 $ 41,822,856 $ 29,528,796
============ ============ ============ ============
Total managed
interest-earning
assets............... $ 48,349,492 $ 35,301,576 $ 45,486,421 $ 32,336,496
============ ============ ============ ============
Total managed assets.. $ 53,517,107 $ 38,372,538 $ 49,908,202 $ 35,104,751
============ ============ ============ ============
MANAGED RATIOS:
Net interest margin
(on an FTE basis)..... 7.47% 7.50% 7.47% 7.61%
Delinquency............ 4.44 4.00
Net credit losses...... 4.07 3.38 3.93 3.37
PART II-OTHER INFORMATION
ITEM 5: OTHER INFORMATION
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time the Corporation may make forward-looking statements
concerning the Corporation's future performance. Such statements are subject
to risks and uncertainties that may cause the Corporation's actual performance
to differ materially from that set forth in such forward-looking statements.
Factors which could cause the Corporation's actual financial and other results
to differ materially from those projected by the Corporation in forward-
looking statements include, but are not limited to the following:
Competition
The Corporation's business is highly competitive. Strategies used by the
Corporation's competitors include targeted marketing, low introductory rates on
new accounts and balance transfers, discounts on products or services, and
other special marketing programs. Competition from other lenders could affect
the Corporation's loans outstanding, Customer retention, and the rates and fees
charged on the Corporation's loans.
Economic Conditions
The Corporation's business is affected by general economic conditions beyond
the Corporation's control, including employment levels, consumer confidence,
and interest rates. A recession or slowdown in the economy may cause an
increase in delinquencies and credit losses and reduce new account growth and
charge volume.
Delinquencies and Credit Losses
An increase in delinquencies and credit losses could affect the Corporation's
financial performance. Delinquencies and credit losses are influenced by a
number of factors, including the quality of the Corporation's credit card and
other consumer loans, the general economic conditions, the success of the
Corporation's collection efforts, and the average seasoning of the
Corporation's accounts.
Interest Rate Increases
An increase in interest rates could increase the Corporation's cost of funds
and reduce the net interest margin. The Corporation's ability to manage the
risk of interest rate increases is dependent on its overall product and funding
mix and its ability to successfully reprice outstanding loans.
Availability of Funding and Securitization
Changes in the amount, type, and cost of funding available to the Corporation
could affect the Corporation's performance. A major funding alternative for the
Corporation is the securitization of credit card and other consumer loans.
Difficulties or delays in securitizing loans or changes in the current legal,
regulatory, accounting, and tax environment governing securitizations could
adversely affect the Corporation.
Customer Behavior
The acceptance and use of credit card and other consumer loan products for
consumer spending has increased significantly in recent years. The
Corporation's performance could be affected by changes in such acceptance and
use, and overall consumer spending.
New Products and Services
The Corporation's performance could be affected by difficulties or delays in
the development of new products or services, including products or services
beyond credit card and other consumer loans. These may include failure of
Customers to accept these products or services when planned, losses associated
with the testing of new products or services, or financial, legal or other
difficulties that may arise in the course of such implementation. In addition,
the Corporation could face competition with new products or services, which may
affect the success of such products or services.
Growth
The growth of the Corporation's existing business and the development of new
products and services will be dependent upon the ability of the Corporation to
continue to develop the necessary operations, systems, and technology; hire
qualified people; and obtain funding for significant capital investments.
Legal and Regulatory
The banking and consumer credit industry is subject to extensive regulation.
Changes in the laws and regulations and in policies applied by banking or other
regulators affecting banking and consumer credit could impact the Corporation's
performance. For example, in recent years Congress has considered legislation
which would have had the effect of limiting the interest rate that could be
charged on credit card accounts. In addition, the Corporation could incur
unanticipated litigation or compliance costs.
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
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
27 Financial Data Schedule
Exhibit 11: Computation of Earnings Per Common Share
(dollars in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(unaudited)
PRIMARY
Average common shares outstanding.. 501,208 501,197 501,219 501,205
Net effect of dilutive stock
options--based on the treasury
stock method using average
market price...................... 27,102 17,037 24,964 16,493
--------- --------- --------- ---------
Total............................ 528,310 518,234 526,183 517,698
========= ========= ========= =========
Net income......................... $ 171,826 $ 129,523 $ 434,201 $ 325,065
Less: preferred stock dividend
requirements...................... 3,820 3,046 15,798 8,671
--------- --------- --------- ---------
Net income applicable to common
stock............................. $ 168,006 $ 126,477 $ 418,403 $ 316,394
========= ========= ========= =========
Per common share amount............ $ .32 $ .24 $ .80 $ .61
========= ========= ========= =========
FULLY DILUTED
Average common shares outstanding.. 501,208 501,197 501,219 501,205
Net effect of dilutive stock
options--based on the treasury
stock method using the higher of
ending or average market prices... 27,102 19,756 27,102 19,756
--------- --------- --------- ---------
Total............................ 528,310 520,953 528,321 520,961
========= ========= ========= =========
Net income......................... $ 171,826 $ 129,523 $ 434,201 $ 325,065
Less: preferred stock dividend
requirements...................... 3,820 3,046 15,798 8,671
--------- --------- --------- ---------
Net income applicable to common
stock............................. $ 168,006 $ 126,477 $ 418,403 $ 316,394
========= ========= ========= =========
Per common share amount............ $ .32 $ .24 $ .79 $ .61
========= ========= ========= =========
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 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 shares issued.
Exhibit 12: Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
(dollars in thousands)
For the Nine Months Ended
September 30,
-------------------------
1997 1996(b)
------------ -----------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 713,573 $ 483,893
Fixed charges.................................... 750,133 544,141
Interest capitalized during period, net of
amortization of previously capitalized interest. (2,997) (2,032)
------------ -----------
Earnings, for computation purposes............... $ 1,460,709 $ 1,026,002
============ ===========
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 741,936 $ 535,815
Portion of rents representative of the interest
factor.......................................... 8,197 8,326
------------ -----------
Fixed charges 750,133 544,141
Preferred stock dividend requirements (a)........ 25,962 14,356
Fixed charges and preferred stock dividend ------------ -----------
requirements, including interest on deposits,
for computation purposes........................ $ 776,095 $ 558,497
============ ===========
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 1.88 1.84
For the Nine Months Ended
September 30,
-------------------------
1997 1996(b)
------------ -----------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 713,573 $ 483,893
Fixed charges.................................... 249,956 162,884
Interest capitalized during period, net of
amortization of previously capitalized interest. (3,013) (2,048)
------------ -----------
Earnings, for computation purposes............... $ 960,516 $ 644,729
============ ===========
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 241,759 $ 154,558
Portion of rents representative of the interest
factor.......................................... 8,197 8,326
------------ -----------
Fixed charges 249,956 162,884
Preferred stock dividend requirements (a)........ 25,962 14,356
Fixed charges and preferred stock dividend ------------ -----------
requirements, excluding interest on deposits,
for computation purposes........................ $ 275,918 $ 177,240
============ ===========
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 3.48 3.64
(a) Preferred stock dividend requirements are adjusted to represent a pretax
earnings equivalent.
(b) Income before income taxes for the year ended September 30, 1996, includes
a charge of $54.3 million related to the launch of the MBNA Platinum Plus
MasterCard and Visa program. Without the charge, the ratio of earnings to
combined fixed charges and preferred stock dividend requirements,
including and excluding interest on deposits, would have been 1.93 and
3.94, respectively.
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 expense on
borrowings, including capitalized interest (including or excluding deposits,
as the case may be), and the portion of rental expense which is deemed
representative of interest. The preferred stock dividend requirements
represent the pretax earnings which would have been required to cover such
dividend requirements on the Corporation's preferred stock outstanding.
b. Reports on Form 8-K
1. Report dated July 15, 1997, reporting MBNA Corporation's earnings
release for the second quarter of 1997.
2. Report dated July 24, 1997, reporting the securitization of
250.0 million pounds sterling of credit card receivables by MBNA
International Bank Limited.
3. Report dated July 31, 1997, 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 1997.
4. Report dated August 26, 1997, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
5. Report dated August 31, 1997, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for August 1997.
6. Report dated September 10, 1997, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
7. Report dated September 30, 1997, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for September 1997.
8. Report dated October 14, 1997, reporting MBNA Corporation's earnings
release for the third quarter of 1997.
9. Report dated October 22, 1997, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
10. Report dated October 31, 1997, reporting the net credit losses and loan
delinquencies for MBNA America Bank, N.A., for its net loan portfolio and
managed loan portfolio for October 1997.
11. Report dated November 6, 1997, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBNA CORPORATION
Date: November 14, 1997 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 SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 307,728
<INT-BEARING-DEPOSITS> 728,577
<FED-FUNDS-SOLD> 475,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,346,792
<INVESTMENTS-CARRYING> 460,378
<INVESTMENTS-MARKET> 455,457
<LOANS> 9,985,741<F1>
<ALLOWANCE> 160,898
<TOTAL-ASSETS> 20,261,409
<DEPOSITS> 12,487,397
<SHORT-TERM> 29,146
<LIABILITIES-OTHER> 867,009
<LONG-TERM> 5,011,349
0
86
<COMMON> 5,012
<OTHER-SE> 1,861,410
<TOTAL-LIABILITIES-AND-EQUITY> 20,261,409
<INTEREST-LOAN> 1,123,552<F1>
<INTEREST-INVEST> 105,780
<INTEREST-OTHER> 48,448
<INTEREST-TOTAL> 1,277,780
<INTEREST-DEPOSIT> 500,177
<INTEREST-EXPENSE> 738,808
<INTEREST-INCOME-NET> 538,972
<LOAN-LOSSES> 206,171
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,648,721
<INCOME-PRETAX> 713,573
<INCOME-PRE-EXTRAORDINARY> 713,573
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,201
<EPS-PRIMARY> .80<F2>
<EPS-DILUTED> .79<F2>
<YIELD-ACTUAL> 12.04<F3>
<LOANS-NON> 0
<LOANS-PAST> 109,730<F4>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 118,427
<CHARGE-OFFS> 265,722
<RECOVERIES> 95,039
<ALLOWANCE-CLOSE> 160,898
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes Loans Held for Securitization.
<F2>EPS-Primary and EPS-Diluted have been restated to reflect the
three-for-two split of the Corporation's Common Stock effected in the
form of a dividend, issued October 1, 1997, to stockholders of record
as of the close of business on September 15, 1997.
<F3>On a fully taxable equivalent basis.
<F4>Excludes Loans Held for Securitization.
</FN>
</TABLE>
