6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-------------------------------------------------
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
---------------------------------------------------------
MBNA Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1713008
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wilmington, DE 19884-0141
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(800) 362-6255
- -------------------------------------------------------------------------------
(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 -- 801,781,250 Shares
Outstanding as of March 31, 1999
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
March 31, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Income - 3
For the Three Months Ended March 31, 1999 and 1998
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Three Months Ended March 31, 1999 and 1998
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Three Months Ended March 31, 1999 and 1998
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations (unaudited)
Supplemental Financial Information (unaudited) 39
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
Signature 47
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 285,396 $ 382,882
Interest-earning time deposits in other banks..... 1,308,933 2,831,215
Federal funds sold and securities purchased
under resale agreements.......................... 855,000 730,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $1,901,666 and $1,666,123 at
March 31, 1999 and December 31, 1998,
respectively).................................. 1,900,911 1,663,704
Held-to-maturity (market value of $249,431
and $211,473 at March 31, 1999 and
December 31, 1998, respectively)............... 258,469 216,020
Loans held for securitization..................... 5,422,954 1,692,268
Loans:
Credit card..................................... 8,002,288 8,975,051
Other consumer.................................. 2,256,314 2,801,048
------------ ------------
Total loans................................... 10,258,602 11,776,099
Reserve for possible credit losses.............. (303,717) (216,911)
------------ ------------
Net loans..................................... 9,954,885 11,559,188
Premises and equipment, net....................... 1,620,749 1,617,596
Accrued income receivable......................... 152,877 193,019
Accounts receivable from securitizations.......... 3,779,353 3,595,556
Prepaid expenses and deferred charges............. 242,496 237,587
Other assets...................................... 1,739,665 1,087,225
------------ ------------
Total assets.................................. $ 27,521,688 $ 25,806,260
============ ============
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 11,399,152 $ 10,745,062
Money market deposit accounts................... 4,311,255 4,125,523
Noninterest-bearing demand deposits............. 488,974 462,266
Interest-bearing transaction accounts........... 41,723 35,399
Savings accounts................................ 80,109 38,790
------------ ------------
Total deposits................................ 16,321,213 15,407,040
Short-term borrowings............................. 543,360 1,231,195
Long-term debt and bank notes..................... 5,948,700 5,939,025
Accrued interest payable.......................... 157,995 153,201
Accrued expenses and other liabilities............ 915,338 684,764
------------ ------------
Total liabilities............................. 23,886,606 23,415,225
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at March 31, 1999 and
December 31, 1998)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 801,781,250 shares and
751,795,674 shares issued and outstanding at
March 31, 1999 and December 31, 1998,
respectively).................................... 8,018 7,518
Additional paid-in capital........................ 1,397,467 271,050
Retained earnings................................. 2,238,711 2,112,374
Accumulated other comprehensive income............ (9,200) 7
------------ ------------
Total stockholders' equity.................... 3,635,082 2,391,035
------------ ------------
Total liabilities and stockholders' equity.... $ 27,521,688 $ 25,806,260
============ ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
INTEREST INCOME
Loans............................................... $ 381,827 $ 292,236
Investment securities:
Taxable........................................... 24,321 32,013
Tax-exempt........................................ 877 786
Time deposits in other banks........................ 40,549 23,347
Federal funds sold and securities purchased
under resale agreements............................ 18,221 7,175
Loans held for securitization....................... 75,553 110,096
------------ ------------
Total interest income........................... 541,348 465,653
INTEREST EXPENSE
Deposits............................................ 213,704 195,661
Short-term borrowings............................... 9,506 4,024
Long-term debt and bank notes....................... 91,357 90,395
------------ ------------
Total interest expense.......................... 314,567 290,080
------------ ------------
NET INTEREST INCOME................................. 226,781 175,573
Provision for possible credit losses................ 84,464 88,598
------------ ------------
Net interest income after provision for
possible credit losses............................. 142,317 86,975
OTHER OPERATING INCOME
Interchange......................................... 39,792 30,572
Credit card fees.................................... 38,608 32,537
Securitization income............................... 802,603 617,365
Insurance........................................... 9,416 16,090
Other............................................... 13,311 2,946
------------ ------------
Total other operating income.................... $ 903,730 $ 699,510
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits...................... $ 290,839 $ 246,562
Occupancy expense of premises....................... 30,926 26,476
Furniture and equipment expense..................... 44,590 44,107
Other............................................... 379,218 227,990
------------ ------------
Total other operating expense................... 745,573 545,135
------------ ------------
Income before income taxes.......................... 300,474 241,350
Applicable income taxes............................. 114,481 91,954
------------ ------------
NET INCOME.......................................... $ 185,993 $ 149,396
============ ============
EARNINGS PER COMMON SHARE........................... $ .23 $ .19
EARNINGS PER COMMON SHARE-ASSUMING DILUTION......... .22 .18
===============================================================================
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, 1998. 8,574 751,796 $ 86 $ 7,518
Comprehensive income:
Net income............... - - - -
Other comprehensive
income, net of tax...... - - - -
Comprehensive income.......
Cash dividends:
Common-$.07 per share.... - - - -
Preferred................ - - - -
Exercise of stock options
and other awards.......... - 3,260 - 33
Issuance of common stock,
net of issuance costs..... - 50,000 - 500
Acquisition and retirement
of common stock........... - (3,275) - (33)
----------- ---------- ---------- ----------
BALANCE, MARCH 31, 1999.... 8,574 801,781 $ 86 $ 8,018
=========== ========== ========== ==========
BALANCE, DECEMBER 31, 1997. 8,574 751,781 $ 86 $ 7,518
Comprehensive income:
Net income............... - - - -
Other comprehensive
income, net of tax...... - - - -
Comprehensive income.......
Cash dividends:
Common-$.06 per share.... - - - -
Preferred................ - - - -
Exercise of stock options
and other awards.......... - 5,116 - 51
Acquisition and retirement
of common stock........... - (5,116) - (51)
---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1998.... 8,574 751,781 $ 86 $ 7,518
========== ========== ========== ==========
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 1998. $ 271,050 $2,112,374 $ 7 $ 2,391,035
Comprehensive income:
Net income............... - 185,993 - 185,993
Other comprehensive
income, net of tax...... - - (9,207) (9,207)
------------
Comprehensive income....... 176,786
------------
Cash dividends:
Common-$.07 per share.... - (56,140) - (56,140)
Preferred................ - (3,516) - (3,516)
Exercise of stock options
and other awards.......... 38,753 - - 38,786
Issuance of common stock,
net of issuance costs..... 1,173,586 - - 1,174,086
Acquisition and retirement
of common stock........... (85,922) - - (85,955)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 1999.... $1,397,467 $2,238,711 $ (9,200) $ 3,635,082
========== ========== ============= ============
BALANCE, DECEMBER 31, 1997. $ 421,871 $1,530,868 $ 9,707 $ 1,970,050
Comprehensive income:
Net income............... - 149,396 - 149,396
Other comprehensive
income, net of tax...... - - (3,318) (3,318)
------------
Comprehensive income....... 146,078
------------
Cash dividends:
Common-$.06 per share.... - (45,120) - (45,120)
Preferred................ - (3,622) - (3,622)
Exercise of stock options
and other awards.......... 48,423 - - 48,474
Acquisition and retirement
of common stock........... (110,572) - - (110,623)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 1998.... $ 359,722 $1,631,522 $ 6,389 $ 2,005,237
========== ========== ============= ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 185,993 $ 149,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 84,464 88,598
Depreciation, amortization, and accretion....... 85,487 53,503
Benefit for deferred income taxes............... (3,675) (1,623)
Decrease in accrued income receivable........... 40,142 27,307
Increase in accounts receivable from
securitizations................................ (183,797) (211,407)
Increase in accrued interest payable............ 4,794 6,319
Decrease in other operating activities.......... 142,862 2,464
------------ ------------
Net cash provided by operating activities..... 356,270 114,557
INVESTING ACTIVITIES
Net decrease (increase) in money market
instruments....................................... 1,397,282 (509,130)
Proceeds from maturities of investment securities
available-for-sale............................... 270,039 1,192,773
Purchases of investment securities
available-for-sale............................... (506,463) (1,054,883)
Proceeds from maturities of investment securities
held-to-maturity ................................ 9,343 23,809
Purchases of investment securities
held-to-maturity................................. (30,001) (12,782)
Proceeds from securitization of loans............. 1,242,787 1,163,293
Proceeds from sale of loan portfolios............. 2,927 -
Acquisition of credit card business of
PNC Bank, N.A.................................... (3,191,786) -
Loan portfolio acquisitions....................... (611,327) (178,247)
Amortization of securitized loans................. (894,695) (395,833)
Net loan originations............................. 619,107 (595,918)
Net purchases of premises and equipment........... (54,747) (91,306)
------------ ------------
Net cash used in investing activities......... $ (1,747,534) $ (458,224)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase (decrease) in time deposits.......... $ 654,090 $ (187,217)
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts............................. 260,083 262,113
Net decrease in short-term borrowings............. (687,835) (25,453)
Proceeds from issuance of long-term debt
and bank notes................................... 13,861 456,701
Maturity of long-term debt and bank notes......... (932) (26,267)
Proceeds from exercise of stock options
and other awards................................. 15,032 20,819
Acquisition and retirement of common stock........ (85,955) (110,623)
Proceeds from issuance of common stock............ 1,174,086 -
Dividends paid.................................... (48,652) (43,840)
------------ ------------
Net cash provided by financing activities..... 1,293,778 346,233
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.. (97,486) 2,566
Cash and cash equivalents at beginning of period.. 382,882 263,064
------------ ------------
Cash and cash equivalents at end of period........ $ 285,396 $ 265,630
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 308,527 $ 284,477
============ ============
Income taxes paid................................. $ 51,666 $ 53,979
============ ============
==============================================================================
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 months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. The notes to the consolidated financial statements
contained in the Annual Report on Form 10-K for the year ended December 31,
1998 should be read in conjunction with these consolidated financial
statements.
NOTE B: PREFERRED STOCK
The Corporation's Board of Directors declared the following quarterly dividends
for the Corporation's Series A and Series B Preferred Stock:
Series A Series B
--------------------- ---------------------
Dividend Per Dividend Per
Dividend Preferred Dividend Preferred
Declaration Date Payment Date Rate Share Rate Share
- ---------------- ----------------- -------- ------------ -------- ------------
January 15, 1999 April 15, 1999 7.50% $ .46875 5.50% $ .3438
April 13, 1999 July 15, 1999 7.50 .46875 5.55 .3468
NOTE C: COMMON STOCK
In January 1999, the Corporation issued 50 million shares of common stock. The
Corporation used the net proceeds from this offering, approximately $1.2
billion, to complete the purchase of the credit card business of PNC Bank, N.A.
("PNC"), and for other general corporate purposes.
On April 13, 1999 the Corporation's Board of Directors declared a quarterly
cash dividend of $.07 per common share, payable July 1, 1999 to stockholders of
record as of June 16, 1999.
NOTE D: CREDIT CARD BUSINESS ACQUISITION
On March 29, 1999, MBNA America Bank, N.A. ("the Bank"), a wholly owned
subsidiary of the Corporation, completed the previously announced acquisition
of the credit card business of PNC, for approximately $3.2 billion. The
acquisition, announced in December 1998, included $2.7 billion of credit card
receivables. The Bank funded the acquisition from the proceeds of the issuance
of shares of common stock by MBNA Corporation in January 1999, from
securitization of credit card receivables, and from the proceeds of maturing
money market instruments.
NOTE E: EARNINGS PER COMMON SHARE
Earnings per common share ("basic") is computed using net income applicable to
common stock and weighted average common shares outstanding during the period.
Earnings per common share-assuming dilution ("diluted") is computed using net
income applicable to common stock and weighted average common shares
outstanding during the period after consideration of the potential dilutive
effect of common stock equivalents, based on the treasury stock method using an
average market price for the period. The Corporation's common stock
equivalents are solely related to employee stock options. The Corporation does
not have any other common stock equivalents. For comparative purposes,
earnings per common share (basic and diluted) and weighted average common
shares outstanding and common stock equivalents reflect the three-for-two stock
split of the Corporation's Common Stock, effected in the form of a dividend,
issued October 1, 1998, to shareholders of record as of September 15, 1998.
Computation of Earnings Per Common Share
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
BASIC
Net income......................................... $ 185,993 $ 149,396
Less: preferred stock dividend requirements........ 3,516 3,622
------------ ------------
Net income applicable to common stock.............. $ 182,477 $ 145,774
============ ============
Weighted average common shares outstanding (000)... 798,538 751,871
============ ============
Earnings per common share.......................... $ .23 $ .19
============ ============
DILUTED
Net income......................................... $ 185,993 $ 149,396
Less: preferred stock dividend requirements........ 3,516 3,622
------------ ------------
Net income applicable to common stock.............. $ 182,477 $ 145,774
============ ============
Weighted average common shares outstanding (000)... 798,538 751,871
Net effect of dilutive stock options-based on the
treasury stock method using average market
price (000)....................................... 36,349 40,376
------------ ------------
Weighted average common shares outstanding and
common stock equivalents (000).................... 834,887 792,247
============ ============
Earnings per common share-assuming dilution........ $ .22 $ .18
============ ============
To the extent stock options are exercised or restricted shares are awarded from
time to time under the Corporation's Long Term Incentive Plans, the Board of
Directors has approved the purchase, on the open market or in privately
negotiated transactions, of the number of common shares issued.
NOTE F: INTANGIBLE ASSETS
Intangible assets, including the value of acquired Customer accounts and
goodwill, are amortized over the periods the Corporation receives a benefit,
not exceeding fifteen years. The Corporation amortizes its intangible assets
generally using the straight-line method or may use an accelerated method in
order to better match the expected future cash flows from the use of the asset.
Intangible assets, which are included in other assets, had a net book value of
$1.3 billion and $671.4 million at March 31, 1999 and December 31, 1998,
respectively. The Corporation had accumulated amortization related to its
intangible assets of $171.3 million at March 31, 1999 and $144.1 million at
December 31, 1998, respectively.
The Corporation periodically reviews the carrying value of its intangible
assets for impairment. The intangible assets are carried at the lower of net
book value or fair value, with the fair value determined by discounting the
expected future cash flows from the use of the asset, using an appropriate
discount rate. The Corporation performs this valuation based on the size and
nature of the intangible asset. For intangible assets that are not considered
material, the Corporation performs this calculation by grouping the assets by
year of acquisition.
NOTE G: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more. During the three months ended March 31, 1999, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
Fixed-Rate Medium-Term Deposit Notes, with an
interest rate of 5.875%, payable semiannually,
maturing in 2001 (approximately CAD$21.1 million).... $ 13,904
NOTE H: COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the three months ended
March 31, 1999 and 1998 are as follows:
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
Net income......................................... $ 185,993 $ 149,396
Other comprehensive income:
Foreign currency translation..................... (7,963) 3,701
Net unrealized gains (losses) on investment
securities available-for-sale and other
financial instruments........................... 1,207 (2,444)
Minimum benefit plan liability adjustment........ (2,451) (4,575)
------------ ------------
Other comprehensive income......................... (9,207) (3,318)
------------ ------------
Comprehensive income............................... $ 176,786 $ 146,078
============ ============
The components of accumulated other comprehensive income, net of tax, at
March 31, 1999 and December 31, 1998 are as follows:
March 31, December 31,
1999 1998
------------ ------------
Foreign currency translation....................... $ (5,541) $ 2,422
Net unrealized gains on investment securities
available-for-sale and other financial
instruments....................................... 3,367 2,160
Minimum benefit plan liability adjustment.......... (7,026) (4,575)
------------ ------------
Accumulated other comprehensive income............. $ (9,200) $ 7
============ ============
NOTE I: SEGMENT REPORTING
The Corporation derives its income primarily from credit card loans, other
consumer loans, and insurance products. The credit card and other consumer loan
products have similar economic characteristics and, therefore, have been
aggregated into one operating segment. The Corporation's insurance products
have also been aggregated into the one operating segment due to immateriality.
The Corporation allocates resources on a managed basis and financial
information provided to management reflects the Corporation on a managed basis.
Therefore, an adjustment is required to reconcile the managed financial
information to the Corporation's reported financial information shown in its
consolidated financial statements. This adjustment reclassifies securitization
income into interest income, interchange, other fees, insurance income,
interest paid to investors, credit losses, and other trust expenses. The
managed results also include the impact of Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities."
For the Three Months Ended
March 31, 1999
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 2,133,593 $ (1,592,245) $ 541,348
Interest expense.................. 901,674 (587,107) 314,567
------------ -------------- ------------
Net interest income............... 1,231,919 (1,005,138) 226,781
Provision for possible credit
losses........................... 647,952 (563,488) 84,464
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 583,967 (441,650) 142,317
Other operating income............ 462,080 441,650 903,730
Other operating expense........... 745,573 - 745,573
------------ -------------- ------------
Income before income taxes........ 300,474 - 300,474
Applicable income taxes........... 114,481 - 114,481
------------ -------------- ------------
Net income........................ $ 185,993 $ - $ 185,993
============ ============== ============
Loans............................. $ 62,143,960 $ (46,462,404) $ 15,681,556
For the Three Months Ended
March 31, 1998
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 1,816,546 $ (1,350,893) $ 465,653
Interest expense.................. 833,416 (543,336) 290,080
------------ -------------- ------------
Net interest income............... 983,130 (807,557) 175,573
Provision for possible credit
losses........................... 535,378 (446,780) 88,598
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 447,752 (360,777) 86,975
Other operating income............ 338,733 360,777 699,510
Other operating expense........... 545,135 - 545,135
------------ -------------- ------------
Income before income taxes........ 241,350 - 241,350
Applicable income taxes........... 91,954 - 91,954
------------ -------------- ------------
Net income........................ $ 149,396 $ - $ 149,396
============ ============== ============
Loans............................. $ 50,191,645 $ (39,117,821) $ 11,073,824
NOTE J: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement No. 133"), was
issued. Statement No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is effective for
financial statements issued for all quarters of fiscal years beginning after
June 15, 1999. Based on the Corporation's current level of derivative and
hedging activities, the adoption of Statement No. 133 will not have a material
impact on the Corporation's consolidated financial statements.
In February 1999, the Federal Financial Institutions Examination Council
published a revised policy statement on the classification of consumer loans.
The revised policy established uniform guidelines for charge-off of loans to
delinquent, bankrupt, and deceased borrowers, for charge-off of fraudulent
accounts, and for re-aging, extending, deferring or rewriting delinquent
accounts. The guidelines must be implemented by June 30, 1999, unless
programming resources are required, in which case they must be implemented by
December 31, 2000. The Corporation will accelerate charge-off of some
delinquent loans when it implements the guidelines by December 31, 2000, but
does not expect implementation to have a material effect on the Corporation's
consolidated financial statements.
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited)
This discussion is intended to further the reader's understanding of the
consolidated financial 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 located in Wilmington, Delaware, is
the parent company of MBNA America Bank, N.A. ("the Bank"), a national bank.
The Bank has two wholly owned foreign bank subsidiaries, MBNA International
Bank Limited ("MBNA Europe") located in the United Kingdom and MBNA Canada Bank
("MBNA Canada") located in Canada. Through the Bank, the Corporation is the
world's largest independent credit card lender 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 insurance and
deposit products.
The Corporation generates interest and other income through finance charges
assessed on outstanding loan receivables, interchange income, credit card and
other fees, securitization income, insurance 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
and money market instruments, 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.
EARNINGS SUMMARY
Net income for the three months ended March 31, 1999 increased 24.5% to $186.0
million or $.22 per common share, from $149.4 million or $.18 per common share
for the same period in 1998. Earnings per common share amounts are presented
assuming dilution.
The overall growth in earnings was primarily attributable to the growth in the
Corporation's managed loans outstanding. The Corporation's average managed
loans increased 18.9% to $59.1 billion for the three months ended March 31,
1999, compared to $49.7 billion for the same period in 1998. Total managed
loans at March 31, 1999 were $62.1 billion, a $12.0 billion increase from
March 31, 1998, and a $2.5 billion increase since December 31, 1998. The
increase in managed loans includes $2.7 billion of credit card loans acquired
from PNC Bank, N.A ("PNC") during the three months ended March 31, 1999.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization is the sale of loans to
investors, generally through a trust, that converts interest income,
interchange, other fees, and insurance income in excess of interest paid to
investors; credit losses; and other trust expenses into securitization income,
while reducing the Corporation's on-balance-sheet assets. During the three
months ended March 31, 1999, the Corporation securitized approximately
$1.3 billion of loan receivables, bringing the total amount of outstanding
securitized loans to $46.5 billion at March 31, 1999.
Return on average total assets was 2.81% for both the three months ended
March 31, 1999 and 1998. The Corporation's return on average stockholders'
equity for the three months ended March 31, 1999 was 21.69%, compared to
31.19% for the same period in 1998. The lower return on average stockholders'
equity is primarily a result of the increase in average stockholders' equity,
from the issuance of 50 million shares of common stock in January 1999.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1999, on a fully
taxable equivalent basis, was $227.3 million, compared to $176.0 million for
the same period in 1998. The increase in net interest income for the three
months ended March 31, 1999 is primarily a result of an increase in average
interest-earning assets of $4.1 billion, combined with a decline of 53 basis
points in the rate paid on average interest-bearing liabilities, as compared
to the same period in 1998. The increase in net interest income is offset by
an increase in average interest-bearing liabilities of $3.4 billion, in
addition to a decline in the yield earned on average interest-earning assets
of 88 basis points, as compared to the same period in 1998. The increase in
average interest-earning assets for the three months ended March 31, 1999 is a
result of an increase in average loan receivables of $1.8 billion and an
increase in average money market instruments of $2.6 billion, as compared to
the same period in 1998. The increase in average interest-bearing liabilities
during this period resulted primarily from funding the increases in average
interest-earning assets and accounts receivable from securitization.
The net interest margin, on a fully taxable equivalent basis, was 4.61% for
the three months ended March 31, 1999, as compared to 4.49% for the same
period in 1998.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income on investment securities, on a fully taxable equivalent basis,
decreased $7.6 million, to $25.7 million for the three months ended March 31,
1999, as compared to the same period in 1998. The decrease for the three
months ended March 31, 1999 is the result of a decrease in average investment
securities of $380.5 million, in addition to a decrease in the yield earned on
average investment securities of 44 basis points, as compared to the same
period in 1998.
Interest income on money market instruments increased $28.2 million to $58.8
million, for the three months ended March 31, 1999, as compared to the same
period in 1998. The increase for the three months ended March 31, 1999 is
primarily a result of an increase of $2.6 billion in average money market
instruments offset by a decrease of 85 basis points in the yield earned, as
compared to the same period in 1998.
The increase in average money market instruments is primarily a result of the
timing of receipt of funds from asset securitizations, deposits, net loan
payments, long-term debt and bank notes, and maturities of investment
securities. Funds received from these sources are invested in short-term,
liquid money market instruments and investment securities available-for-sale
until the funds are needed for loan growth and other liquidity needs. In
addition, average money market instruments were also higher during the three
months ended March 31, 1999, as a result of the investment of the net proceeds
from the issuance of common stock by the Corporation in January 1999, until
used to complete the acquisition of the credit card business of PNC, and for
other general corporate purposes.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$55.0 million to $457.4 million for the three months ended March 31, 1999, as
compared to the same period in 1998. The increase is primarily attributable to
an increase in average loan receivables of $1.8 billion for the three months
ended March 31, 1999, as compared to the same period in 1998. The yield earned
by the Corporation on loan receivables declined 24 basis points to 13.95% for
the three months ended March 31, 1999, as compared to the same period in 1998.
Table 1 presents the Corporation's period-end loan receivables distribution by
loan type, excluding securitized loans. Loan receivables increased 16.4% to
$15.7 billion at March 31, 1999, compared to $13.5 billion at December 31,
1998. The increase in loan receivables was primarily the result of the
acquisition of the credit card business of PNC, which included $2.7 billion of
credit card receivables. In addition, during the three months ended March 31,
1999, the Bank securitized credit card loan receivables totaling $1.3 billion,
while $894.7 million of previously securitized loans amortized back into the
Corporation's loan portfolio.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
March 31, December 31,
1999 1998
------------- -------------
(unaudited)
Loans held for securitization:
Domestic:
Credit card.............................. $ 3,536,983 $ 1,135,004
Other consumer........................... 856,685 114,747
------------- -------------
Total domestic loans held for
securitization........................ 4,393,668 1,249,751
Foreign.................................... 1,029,286 442,517
------------- -------------
Total loans held for securitization.... 5,422,954 1,692,268
Loan portfolio:
Domestic:
Credit card.............................. 7,179,370 7,981,106
Other consumer........................... 2,239,150 2,748,511
------------- -------------
Total domestic loan portfolio.......... 9,418,520 10,729,617
Foreign.................................... 840,082 1,046,482
------------- -------------
Total loan portfolio................... 10,258,602 11,776,099
------------- -------------
Total loan receivables................. $ 15,681,556 $ 13,468,367
============= =============
DEPOSITS
Total interest expense on deposits was $213.7 million for the three months
ended March 31, 1999, compared to $195.7 million for the same period in 1998.
The increase in interest expense of $18.0 million for the three months ended
March 31, 1999 is the result of an increase in average interest-bearing
deposits of $2.5 billion, offset by a 54 basis point decline in the rate paid
on interest-bearing deposits, as compared with the same period in 1998.
The increase in average interest-bearing deposits for the three months ended
March 31, 1999 was a result of the Corporation's continued emphasis on
marketing certificates of deposit and money market deposit accounts to fund
loan growth and diversify funding sources. In addition, average foreign
interest-bearing deposits increased $31.6 million for the three months ended
March 31, 1999, as compared to the same period in 1998, to provide funding of
the Bank's foreign subsidiaries' loan growth.
BORROWED FUNDS
Interest expense on short-term borrowings was $9.5 million for the three months
ended March 31, 1999, as compared to $4.0 million for the same period in 1998.
The increase is primarily the result of an increase in average short-term
borrowings of $500.2 million from 1998, offset by a 197 basis point decline in
the rate paid on average short-term borrowings. The increase in average short-
term borrowings for the three months ended March 31, 1999 was to provide
funding for the Corporation's domestic and foreign loan growth.
Total interest expense on long-term debt and bank notes for the three months
ended March 31, 1999 increased to $91.4 million as compared to $90.4 million
for the same period in 1998. Interest expense increased as a result of average
long-term debt and bank notes increasing $377.6 million to $5.9 billion at
March 31, 1999 compared to $5.6 billion at March 31, 1998, offset by a 35 basis
point decrease in the rate paid in average long-term debt and bank notes.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three months ended March 31,
1999 and 1998, respectively.
TABLE 2: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 3,317 3.55% $ 29
Foreign................................... 3,220,469 5.10 40,520
------------ ----------
Total interest-earning time deposits
in other banks....................... 3,223,786 5.10 40,549
Federal funds sold and securities purchased
under resale agreements.................... 1,531,744 4.82 18,221
Investment securities(a):
Taxable................................... 1,824,265 5.41 24,321
Tax-exempt(b)............................. 92,071 5.94 1,349
------------ ----------
Total investment securities........... 1,916,336 5.43 25,670
Loans held for securitization:
Domestic.................................. 1,521,555 14.27 53,521
Foreign................................... 606,905 14.72 22,032
------------ ----------
Total loans held for securitization... 2,128,460 14.40 75,553
Loans:
Domestic:
Credit card............................. 7,651,805 13.82 260,814
Other consumer.......................... 2,481,037 14.04 85,922
------------ ----------
Total domestic loans.................. 10,132,842 13.88 346,736
Foreign................................... 1,037,932 13.71 35,091
------------ ----------
Total loans........................... 11,170,774 13.86 381,827
------------ ----------
Total interest-earning assets......... 19,971,100 11.00 $ 541,820
Cash and due from banks....................... 489,045
Premises and equipment, net................... 1,619,461
Other assets.................................. 4,966,166
Reserve for possible credit losses............ (226,592)
------------
Total assets.......................... $ 26,819,180
============
(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 March 31, 1999 was $472.
For the Three Months Ended
March 31, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 10,367,082 5.97% $ 152,570
Money market deposit accounts........... 4,199,028 4.87 50,468
Interest-bearing transaction accounts... 36,074 4.15 369
Savings accounts........................ 56,691 4.37 611
------------ ----------
Total domestic interest-bearing
deposits............................. 14,658,875 5.64 204,018
Foreign:
Time deposits........................... 662,120 5.93 9,686
------------ ----------
Total interest-bearing deposits....... 15,320,995 5.66 213,704
Borrowed funds:
Short-term borrowings:
Domestic................................ 505,829 5.39 6,720
Foreign................................. 217,896 5.19 2,786
------------ ----------
Total short-term borrowings........... 723,725 5.33 9,506
Long-term debt and bank notes:
Domestic(c)............................. 5,653,913 6.16 85,901
Foreign................................. 292,200 7.57 5,456
------------ ----------
Total long-term debt and bank notes... 5,946,113 6.23 91,357
------------ ----------
Total borrowed funds.................. 6,669,838 6.13 100,863
------------ ----------
Total interest-bearing liabilities.... 21,990,833 5.80 314,567
Demand deposits............................... 513,228
Other liabilities............................. 838,076
------------
Total liabilities..................... 23,342,137
Stockholders' equity.......................... 3,477,043
------------
Total liabilities and stockholders'
equity............................... $ 26,819,180
============ ----------
Net interest income................... $ 227,253
==========
Net interest margin................... 4.61
Interest rate spread.................. 5.20
(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
March 31, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 22,088 5.01% $ 273
Foreign................................... 1,570,361 5.96 23,074
------------ ----------
Total interest-earning time deposits
in other banks....................... 1,592,449 5.95 23,347
Federal funds sold and securities purchased
under resale agreements.................... 521,344 5.58 7,175
Investment securities(a):
Taxable................................... 2,211,116 5.87 32,013
Tax-exempt(b)............................. 85,730 5.72 1,209
------------ ----------
Total investment securities........... 2,296,846 5.87 33,222
Loans held for securitization:
Domestic.................................. 2,425,443 14.36 85,908
Foreign................................... 644,492 15.22 24,188
------------ ----------
Total loans held for securitization... 3,069,935 14.54 110,096
Loans:
Domestic:
Credit card............................. 5,670,233 14.03 196,191
Other consumer.......................... 2,117,000 14.17 73,979
------------ ----------
Total domestic loans.................. 7,787,233 14.07 270,170
Foreign................................... 643,050 13.92 22,066
------------ ----------
Total loans........................... 8,430,283 14.06 292,236
------------ ----------
Total interest-earning assets......... 15,910,857 11.88 $ 466,076
Cash and due from banks....................... 504,035
Premises and equipment, net................... 1,613,810
Other assets.................................. 3,731,188
Reserve for possible credit losses............ (168,646)
------------
Total assets.......................... $ 21,591,244
============
(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 March 31, 1998 was $423.
For the Three Months Ended
March 31, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 8,916,450 6.36% $ 139,806
Money market deposit accounts........... 3,210,032 5.55 43,945
Interest-bearing transaction accounts... 31,630 4.82 376
Savings accounts........................ 10,869 4.78 128
------------ ----------
Total domestic interest-bearing
deposits............................. 12,168,981 6.14 184,255
Foreign:
Time deposits........................... 630,552 7.34 11,406
------------ ----------
Total interest-bearing deposits....... 12,799,533 6.20 195,661
Borrowed funds:
Short-term borrowings:
Domestic................................ 27,063 5.54 370
Foreign................................. 196,415 7.54 3,654
------------ ----------
Total short-term borrowings........... 223,478 7.30 4,024
Long-term debt and bank notes:
Domestic (c)............................ 5,346,657 6.56 86,434
Foreign................................. 221,882 7.24 3,961
------------ ----------
Total long-term debt and bank notes... 5,568,539 6.58 90,395
------------ ----------
Total borrowed funds.................. 5,792,017 6.61 94,419
------------ ----------
Total interest-bearing liabilities.... 18,591,550 6.33 290,080
Demand deposits............................... 385,046
Other liabilities............................. 671,981
------------
Total liabilities..................... 19,648,577
Stockholders' equity.......................... 1,942,667
------------
Total liabilities and stockholders'
equity............................... $ 21,591,244
============ ----------
Net interest income................... $ 175,996
==========
Net interest margin................... 4.49
Interest rate spread.................. 5.55
(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 29.2% to $903.7 million for the three
months ended March 31, 1999, from $699.5 million for the same period in 1998.
The increase in other operating income is primarily attributable to a $185.2
million or 30.0% increase in securitization income, which grew to $802.6
million for the three months ended March 31, 1999, as compared to the same
period in 1998. The increase in securitization income is primarily attributable
to the growth in average securitized loans of $7.6 billion or 19.9%, in
addition to a decline in the average rate paid to investors of the
Corporation's securitized loans. Also, during the three months ended March 31,
1999, the Corporation increased the fees charged to its credit card and other
consumer loan customers. As a result, loan servicing fees related to
securitized loans, credit card fees, and other income increased as compared to
the same period in 1998.
OTHER OPERATING EXPENSE
Total other operating expense increased 36.8% to $745.6 million from $545.1
million for the three months ended March 31, 1999, as compared to the same
period in 1998. The increases in purchased services, advertising, postage and
delivery, and telephone usage for the three months ended March 31, 1999, as
compared to the same period in 1998, reflect additional business development
activities by the Corporation. For the three months ended March 31, 1999, the
Corporation added 5.2 million new accounts, of which 2.8 million new accounts
were acquired from PNC, as compared to 1.7 million new accounts for the same
period in 1998. The Corporation added 81 new endorsements from organizations,
including 35 in the United Kingdom and Canada, during the three months ended
March 31, 1999. Table 3 provides further detail regarding the Corporation's
other operating expenses.
TABLE 3: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
Purchased services................................ $ 87,206 $ 55,517
Advertising....................................... 60,425 22,164
Collection........................................ 9,903 6,709
Stationery and supplies........................... 9,700 7,237
Service bureau.................................... 10,332 7,066
Postage and delivery.............................. 76,645 45,168
Telephone usage................................... 19,777 13,055
Credit card fraud losses.......................... 22,637 20,426
Amortization of intangible assets................. 27,151 10,332
Computer software................................. 15,757 11,384
Other............................................. 39,685 28,932
------------ ------------
Total other operating expense................... $ 379,218 $ 227,990
============ ============
Amortization of intangible assets increased $16.8 million to $27.2 million as a
result of portfolio acquisitions during 1998. In addition, the Corporation
expects amortization expense related to intangible assets to increase in future
quarters as a result of the acquisition of the credit card business of PNC.
YEAR 2000 Readiness Disclosure
Project Overview
Like most major financial institutions, the Corporation is highly dependent
upon technology to deliver products and services to its Customers. Credit card
transactions and authorizations require a variety of voice and data networks
and service providers to operate successfully. Sophisticated computer and
telecommunication systems enable the Corporation to process these transactions
and service customer accounts. Many computer applications have been written
using two digits rather than four to define the applicable year, and therefore
may not recognize a date using "00" as the Year 2000. Computer applications may
not be able to properly process transactions with dates in the year 2000 or
thereafter.
The Corporation began its Year 2000 Project ("the Project") to address this
issue in 1994. The Project is organized into six major components: Application
Software, Infrastructure, Business Unit, Telecommunication, Desktop
Infrastructure, and Readiness Testing. The Application Software component
includes all internally developed and purchased software used to perform
specific business functions. This portion of the Project encompasses nearly all
mission critical applications, including systems that service and support
loans, deposits, customer service activities, and financial systems. The
Infrastructure component includes the computer hardware and associated system's
software upon which Application Software is run and includes mainframe and
distributed system platforms. The Business Unit component encompasses
internally developed or acquired application software that is managed outside
the technology area. It also includes all vendor supplied services and non-
technology equipment, such as building operation and security systems. The
Telecommunication component incorporates all voice and data networking and
switching components; voice response technology; and local, long distance, and
international telecommunication services. The Desktop Infrastructure component
addresses local area network and desktop computing environments and includes
all hardware and software components. The Readiness Testing component is the
final comprehensive integrated test of Application Software and Infrastructure
in a fully Year 2000 compliant environment. This will include interfaces with
major vendors such as MasterCard International and Visa International.
The Corporation has substantially completed the Application Software,
Infrastructure, Business Unit, Telecommunication, and Desktop Infrastructure
components of the Project. This includes the assessment, renovation, validation
and implementation phases. Assessment activities will continue throughout 1999
to minimize overall risk. During 1999, the Corporation will complete
implementation of any newly purchased software, perform interoperability
testing, and finalize contingency plans.
Project Readiness
Application Software and Infrastructure, the most substantial components of the
Project, are complete and have been implemented into production, with the
exception of a small number of purchased software packages. Application
Software is extensively tested for Year 2000 readiness prior to placing it into
production. The Corporation expects that updates to the remaining purchased
software packages will be implemented by June 30, 1999.
Business Unit efforts, which primarily involve work with third-party vendors,
are estimated to be substantially complete. Vendors have been contacted
regarding their progress and regular meetings and site visits have been, and
will continue to be, held with critical vendors to evaluate their progress.
Remediation of Business Unit applications is planned and on track to be
completed by June 30, 1999. The Corporation does not have significant Year 2000
exposure from non-technology equipment.
Internal telecommunication hardware and software upgrades are substantially
complete. The Corporation is actively participating in various
telecommunication forums to monitor telecommunication service provider
readiness and to establish interoperability testing standards.
The Desktop Infrastructure efforts are substantially completed.
A stand-alone test environment has been constructed to perform extensive final
readiness testing. The stand-alone test environment is separate from the
Corporation's production systems and thus reduces the risk that testing will
disrupt the Corporation's operations. This environment includes a voice and
data network as well as mainframe, distributed, and desktop computers. All
critical applications will be fully tested in a Year 2000 compliant environment
as a final assurance step. Testing within the readiness environment began in
March 1999. The Corporation has successfully completed a test of the
December 31, 1999 to January 1, 2000 rollover, along with other significant
dates. In addition to testing the transition to the new century, other key
testing dates include September 9, 1999, year-end 2000, and the Year 2000 leap
year. This environment will be maintained throughout 1999 in order to allow
testing of significant system changes and newly acquired software.
The Corporation relies on various third parties to perform processing services
and to supply critical system applications. Critical third-party provided
software applications are being tested regardless of vendor statements of
fitness to ensure Year 2000 compliance. Regular meetings and site visits are
being held with MasterCard International, Visa International, and other
critical third party service providers to evaluate and monitor their project
status.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Corporation's consolidated
financial position. The estimated total cost of the Project is expected to be
approximately $40 million. Costs incurred and expensed through March 31, 1999
were approximately $24 million. The majority of the remaining cost is
associated with conducting the readiness testing, preparing contingency plans,
and staffing a transition team for early 2000.
Risks
Because the Corporation's business is highly reliant on various types of
computer technologies, disruptions caused by Year 2000 failures have the
potential to have a material impact on the Corporation's operations, liquidity,
and financial condition. Due primarily to the general uncertainty of the Year
2000 readiness of some third-party providers, at this time the Corporation
cannot with substantial certainty determine whether or not the consequences of
Year 2000 failures will have a material impact on the Corporation's results of
operations, liquidity or financial condition. Based on the current project
status and extensive testing completed and planned, the Corporation expects
that any internal Year 2000 system failure will be handled in the normal course
of business and will not have a significant impact on the Corporation. It is
more likely that any impact will result from a third-party that the Corporation
conducts business with directly or indirectly. A likely worst case scenario
would involve major disruption of the telecommunications network, a major
disruption in the supply of electrical power, failure of one or more of the
primary financial switching networks or, in the United Kingdom, failure of the
primary data servicing provider. Revenues could be negatively impacted if Year
2000 failures prevent the Corporation or other entities from processing
customer transactions and cause customers to curtail credit card spending for a
period of time.
Contingency Plans
The Corporation has a standing contingency plan that addresses various types of
business interruptions. This plan is tested and updated on a regular basis. The
Corporation has developed and will continue to refine contingency plans to
address possible negative impacts specific to the Year 2000 problem. Plans are
complete and in place for critical third-party software applications which are
not currently Year 2000 compliant. At this time it is not expected that these
plans will need to be implemented. Contingency plans for critical third-party
providers are in varying stages of development. These plans are expected to be
completed by June 30, 1999. The Corporation also maintains a standing
contingency plan to address liquidity and capital needs. A plan specific to
Year 2000 implications has been completed. This plan will continue to be
modified as necessary based on identified or perceived market risks. These
plans will continue to be updated throughout 1999 as additional information
becomes available regarding specific identified risks.
Safe Harbor for Forward-Looking Statements
The above disclosure on Year 2000 issues includes forward-looking statements
concerning the Corporation's future operations, expenses and financial
performance. Such statements are subject to risks and uncertainties that may
cause the Corporation's actual operations and performance to differ materially
from those set forth in such forward-looking statements. Factors which could
cause the Corporation's actual results to differ materially from those
projected by the Corporation include, but are not limited to, the following:
failure of third parties providing software, telecommunications, data networks,
and other products or services to the Corporation to become Year 2000
compliant; insufficient staff and other technical resources; unexpected
difficulties in implementing system enhancements; disruptions in the overall
consumer credit market due to Year 2000 problems; and disruptions in capital
markets due to Year 2000 problems.
INCOME TAXES
Applicable income taxes increased $22.5 million to $114.5 million for the three
months ended March 31, 1999, compared to $92.0 million for the same period in
1998.
LOAN QUALITY
The Corporation's loan 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 seasoning of the Corporation's loans. As new loans season, the delinquency
rate on these loans 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 3.90%
at March 31, 1999, compared to 3.86% at December 31, 1998. The Corporation's
managed delinquency, as a percentage of managed loans, was 4.65% at March 31,
1999, as compared to 4.62% at December 31, 1998.
Table 4 presents the stages of delinquency of the Corporation's loan portfolio,
excluding loans held for securitization.
TABLE 4: DELINQUENT LOANS
(dollars in thousands)
March 31, 1999 December 31, 1998
------------------ ------------------
(unaudited)
Loan portfolio....................... $ 10,258,602 $ 11,776,099
Loans delinquent:
30 to 59 days...................... $ 138,856 1.35% $ 166,352 1.41%
60 to 89 days...................... 78,272 .76 93,699 .80
90 or more days.................... 183,381 1.79 194,472 1.65
------------ ---- ------------ ----
Total............................ $ 400,509 3.90% $ 454,523 3.86%
============ ==== ============ ====
Loans delinquent by geographic area:
Domestic........................... $ 374,114 3.97% $ 424,324 3.95%
Foreign............................ 26,395 3.14 30,199 2.89
The Corporation may modify the terms of its credit card and other consumer
loan agreements with borrowers who have experienced financial difficulties, by
either reducing their interest rate or placing them on nonaccrual status.
These other nonperforming loans, excluding loans held for securitization, are
presented in the following table.
TABLE 5: OTHER NONPERFORMING LOANS
(dollars in thousands)
March 31, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Nonaccrual loans..................... $ 2,654 $ 3,182
Reduced-rate loans................... 136,847 157,737
------------------ -----------------
Total other nonperforming loans.... $ 139,501 $ 160,919
================== =================
Other nonperforming loans as a % of
ending loan portfolio.............. 1.36% 1.37%
The Corporation's total managed other nonperforming loans as a percentage of
ending managed loans was 2.17% at March 31, 1999, as compared to 2.01% at
December 31, 1998.
NET CREDIT LOSSES
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. The Corporation sells certain charged-off
receivables and records the proceeds received from these sales as recoveries,
thereby reducing net credit losses.
Net credit losses for the three months ended March 31, 1999 were $80.6
million, compared to $73.9 million for the same period in 1998. 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 months ended
March 31, 1999, reflects an increase in the Corporation's outstanding loan
receivables, the general economic conditions, and the seasoning of the
Corporation's accounts, offset by recoveries from the sale of charged-off
receivables. Annualized net credit losses as a percentage of average loan
receivables were 2.42% for the three months ended March 31, 1999, as compared
to 2.57% for the same period in 1998. The Corporation's annualized managed
credit losses as a percentage of average managed loans for the three months
ended March 31, 1999 were 4.36%, as compared to 4.19% for the same period in
1998.
Reserve and Provision for Possible Credit Losses
The loan portfolio is regularly reviewed to determine an appropriate 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. A provision is charged to
operating expense to maintain the reserve at an appropriate level. Table 6
presents an analysis of the Corporation's reserve for possible credit losses.
The provision for possible credit losses for the three months ended March 31,
1999, decreased 4.7% to $84.5 million compared to $88.6 million for the three
months ended March 31, 1998. In addition, the Corporation records acquired
reserves for current period loan portfolio acquisitions. During the three
months ended March 31, 1999, the Corporation recorded $83.3 million of reserves
acquired in connection with the credit card business of PNC and other loan
portfolios.
The reserve for possible credit losses is a general allowance applicable to the
Corporation's loan portfolio and does not include an allocation for credit risk
related to securitized loans. Losses on securitized loans are absorbed directly
by the related trusts under their respective contractual agreements, and reduce
securitization income rather than the reserve for possible credit losses.
TABLE 6: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
Reserve for possible credit losses, beginning of
period............................................ $ 216,911 $ 162,476
Reserves acquired................................ 83,260 997
Provision for possible credit losses............. 84,464 88,598
Foreign currency translation..................... (366) 89
Credit losses:
Domestic:
Credit card.................................. (87,565) (85,862)
Other consumer............................... (31,282) (20,188)
------------ ------------
Total domestic credit losses............... (118,847) (106,050)
Foreign........................................ (8,207) (4,225)
------------ ------------
Total credit losses........................ (127,054) (110,275)
Recoveries:
Domestic:
Credit card.................................. 38,397 32,996
Other consumer............................... 5,935 2,335
------------ ------------
Total domestic recoveries.................. 44,332 35,331
Foreign........................................ 2,170 1,081
------------ ------------
Total recoveries........................... 46,502 36,412
------------ ------------
Net credit losses................................ (80,552) (73,863)
------------ ------------
Reserve for possible credit losses, end of period.. $ 303,717 $ 178,297
============ ============
In February 1999, the Federal Financial Institutions Examination Council
published a revised policy statement on the classification of consumer loans.
The revised policy established uniform guidelines for charge-off of loans to
delinquent, bankrupt, and deceased borrowers, for charge-off of fraudulent
accounts, and for re-aging, extending, deferring or rewriting delinquent
accounts. The guidelines must be implemented by June 30, 1999, unless
programming resources are required, in which case they must be implemented by
December 31, 2000. The Corporation will accelerate charge-off of some
delinquent loans when it implements the guidelines by December 31, 2000, but
does not expect implementation to have a material effect on the Corporation's
consolidated financial statements.
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank is also subject to
similar capital requirements adopted by the Office of the Comptroller of the
Currency. In March 1998, the Corporation began offering other consumer loans
through MBNA America Bank (Delaware) ("the State Bank"), a wholly owned state
bank subsidiary organized under Delaware law. The State Bank is subject to
capital requirements adopted by the Federal Deposit Insurance Corporation.
Under these requirements, the federal bank regulatory agencies have established
quantitative measures to ensure that minimum thresholds for Tier 1 Capital,
Total Capital, and Leverage ratios are maintained. Failure to meet these
minimum capital requirements can initiate certain mandatory- and possible
additional discretionary-actions by the federal bank regulators, that, if
undertaken, could have a direct material effect on the Corporation's, the
Bank's, and the State Bank's financial statements. Under the capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation, the Bank, and the State 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, the Bank's, and the State Bank's capital amounts and
classification are also subject to qualitative judgments by the federal bank
regulators about components, risk weightings, and other factors. At March 31,
1999, the Corporation's, the Bank's, and the State Bank's capital exceeded all
minimum regulatory requirements to which they are subject, and the Bank and the
State Bank were "well-capitalized" as defined under the federal bank regulatory
guidelines. The risk-based capital ratios, shown in Table 7, have been
computed in accordance with regulatory accounting practices. The assets of the
State Bank are not material, and therefore, its ratios have not been presented.
TABLE 7: REGULATORY CAPITAL RATIOS
March 31, 1999
-------------------------------------------
Minimum Well-Capitalized
Ratios Requirements Requirements
---------- ------------- ----------------
(unaudited)
MBNA Corporation
Tier 1............................ 14.89% 4.00% (a)
Total............................. 17.41 8.00 (a)
Leverage.......................... 14.91 4.00 (a)
MBNA America Bank, N.A.
Tier 1............................ 10.51% 4.00% 6.00%
Total............................. 13.17 8.00 10.00
Leverage.......................... 10.90 4.00 5.00
(a) Not applicable for bank holding companies.
In January 1999, the Corporation issued 50 million shares of common stock,
raising approximately $1.2 billion of capital. The Corporation contributed
$300.0 million of the net proceeds from this offering to the Bank in order to
complete the acquisition of the credit card business of PNC. The Corporation
used the remaining portion for other general corporate purposes.
During the three months ended March 31, 1999, the Corporation declared
dividends on its preferred and common stock of $59.7 million. The payment of
dividends in the future and the amount of such dividends, if any, will be at
the discretion of the Corporation's Board of Directors. The payment of
preferred and common stock dividends by the Corporation may be limited by
certain factors, including regulatory capital requirements, broad enforcement
powers of the federal bank regulatory agencies, and tangible net worth
maintenance requirements under the Corporation's revolving credit facilities.
The payment of common stock dividends may also be limited by the terms of the
outstanding preferred stock. If the Corporation has not paid scheduled
dividends on the preferred stock, or declared the dividends and set aside funds
for payment, the Corporation may not declare or pay any cash dividends on the
common stock. In addition, if the Corporation defers interest payments for
consecutive periods covering 10 semiannual periods or 20 consecutive quarterly
periods, depending on the series, on its guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
the Corporation may not be permitted to declare or pay any cash dividends on
the Corporation's capital stock or interest on debt securities that have equal
or lower priority than the junior subordinated deferrable interest debentures.
The Corporation is a legal entity separate and distinct from its banking and
other subsidiaries. Therefore, the primary source of funds for payment of
preferred and common stock dividends by the Corporation is dividends received
from the Bank. The amount of dividends that a bank may declare in any year is
subject to certain regulatory restrictions. Generally, dividends declared in a
given year by a national bank are limited to its net profit, as defined by
regulatory agencies, for that year, combined with its retained net income for
the preceding two years, less any required transfers to surplus or to a fund
for the retirement of any preferred stock. In addition, a national bank may
not pay any dividends in an amount greater than its undivided profit. Under
current regulatory practice, national banks may pay dividends only out of
current operating earnings. Also, a bank may not declare dividends if such
declaration would leave the bank inadequately capitalized. Therefore, the
ability of the Bank to declare dividends will depend on its future net income
and capital requirements. At March 31, 1999, the amount of retained earnings
available for declaration and payment of dividends from the Bank to the
Corporation was $1.2 billion. Payment of dividends by the Bank to the
Corporation, however, can be further limited by federal bank regulatory
agencies.
The Bank's payment of dividends to the Corporation may also be limited by a
tangible net worth requirement under the Bank's revolving credit facility.
This facility was not drawn upon as of March 31, 1999. If this facility had
been drawn upon as of March 31, 1999, the amount of retained earnings available
for declaration of dividends would have been limited to $403.9 million.
On April 13, 1999, the Corporation's Board of Directors declared a quarterly
dividend of $.07 per common share, payable July 1, 1999 to shareholders of
record as of June 16, 1999. Also, on April 13, 1999 the Corporation's Board of
Directors declared a quarterly dividend of $.46875 per share on the 7 1/2%
Cumulative Preferred Stock, Series A, and a quarterly dividend of $.3468 per
share on the Adjustable Rate Cumulative Preferred Stock, Series B. The
preferred stock dividends are payable July 15, 1999 to stockholders of record
as of June 30, 1999.
LIQUIDITY AND RATE SENSITIVITY
The Corporation seeks to maintain prudent levels of liquidity, interest rate
risk, and foreign currency exchange rate risk.
Liquidity Management
Liquidity management is the process by which the Corporation manages the use
and availability of various funding sources to meet its current and future
operating needs. These needs change as loans grow, 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 the pricing and maturity of loans, deposits, and other
assets and liabilities. This process is also 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. The Corporation obtains funds through deposits and
debt issuance, and uses securitization of the Corporation's loan receivables as
a major funding alternative.
Total deposits at March 31, 1999 and December 31, 1998 were $16.3 billion and
$15.4 billion, respectively. Included in total deposits at March 31, 1999 are
$881.2 million of foreign time deposits, all maturing within one year. Table 8
presents the maturities of the Corporation's deposits at
March 31, 1999.
TABLE 8: MATURITIES OF DEPOSITS AT MARCH 31, 1999
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
----------- ----------- -----------
(unaudited)
Three months or less(a)................. $ 6,103,917 $ 1,132,368 $ 7,236,285
Over three months through twelve months. 3,128,028 964,760 4,092,788
Over one year through five years........ 2,609,539 2,376,226 4,985,765
Over five years......................... 6,375 - 6,375
----------- ----------- -----------
Total deposits........................ $11,847,859 $ 4,473,354 $16,321,213
=========== =========== ===========
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts of
$4.9 billion.
During the three months ended March 31, 1999, the Corporation issued CAD$21.1
million (approximately $13.9 million) of fixed-rate medium-term deposit notes.
These borrowings are included in long-term debt and bank notes in the
consolidated statements of financial condition.
The Corporation also held $2.2 billion in investment securities and $2.2
billion of money market instruments at March 31, 1999, compared with $1.9
billion in investment securities and $3.6 billion of money market instruments
at December 31, 1998. The Corporation partially funded the acquisition of the
credit card business of PNC from the proceeds of maturing money market
instruments. The Corporation's investment securities primarily consist of high-
quality, AAA-rated securities, most of which can be used as collateral under
repurchase agreements. Of the $2.2 billion in investment securities at March
31, 1999, $738.1 million is anticipated to mature within twelve months. The
Corporation's investment securities available-for-sale portfolio, which
consists primarily of short-term and variable-rate securities, was $1.9 billion
at March 31, 1999, compared to $1.7 billion at December 31, 1998. 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 9.
TABLE 9: SUMMARY OF INVESTMENT SECURITIES AT MARCH 31, 1999
(dollars in thousands) (unaudited)
Estimated Maturity
--------------------------------------------
Within 1 Over
Year 1-5 Years 6-10 Years 10 Years
---------- ---------- ---------- --------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 251,063 $ 482,605 $ - $ -
State and political subdivisions
of the United States............. 90,303 1,012 - -
Asset-backed and other securities. 377,600 630,804 65,881 1,643
---------- ---------- ---------- --------
Total investment securities
available-for-sale............. $ 718,966 $1,114,421 $ 65,881 $ 1,643
========== ========== ========== ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 19,034 $ - $ - $185,172
State and political subdivisions
of the United States............. 106 10 207 5,666
Asset-backed and other securities. - 12,893 - 35,381
---------- ---------- ---------- --------
Total investment securities
held-to-maturity............... $ 19,140 $ 12,903 $ 207 $226,219
========== ========== ========== ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 733,668 $ 733,668
State and political subdivisions
of the United States............. 91,315 91,315
Asset-backed and other securities. 1,075,928 1,075,928
---------- ----------
Total investment securities
available-for-sale............. $1,900,911 $1,900,911
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 204,206 $ 195,042
State and political subdivisions
of the United States............. 5,989 6,119
Asset-backed and other securities. 48,274 48,270
---------- ----------
Total investment securities
held-to-maturity............... $ 258,469 $ 249,431
========== ==========
Interest Rate Sensitivity
Interest rate sensitivity refers to the change in earnings resulting from
fluctuations in interest rates, variability in spread relationships, and the
differences in repricing intervals between assets and liabilities. The
management of interest rate sensitivity attempts to maximize earnings by
minimizing any negative impacts of changing market rates, asset and liability
mix, and prepayment trends.
In addition to on-balance-sheet activities, interest rate risk includes the
interest rate sensitivity of securitization income from securitized loans and
the impact of off-balance-sheet financial instruments. Off-balance-sheet
financial instruments include interest rate swap agreements. The Corporation
uses interest rate swap agreements to change fixed-rate funding sources to
floating-rate funding sources to better match the rate sensitivity of the
Corporation's assets. The Corporation analyzes its level of interest rate risk
using several analytical techniques, which reflect the impact of on-balance-
sheet and off-balance-sheet financial instruments.
An analytical technique that the Corporation uses to measure interest rate risk
is simulation analysis. The Corporation's simulation analysis uses key
assumptions which include cash flows and maturities of interest rate sensitive
instruments; changes in market conditions; loan volumes and pricing; consumer
preferences; fixed-rate credit card repricings as part of the Corporation's
normal planned business strategy; and management's capital plans. Also
included in the analysis are various actions which the Corporation would
undertake to minimize the impact of adverse movements in interest rates. The
Corporation has the contractual right to reprice fixed-rate credit card loans
at any time by giving notice to the Customer. Accordingly, a key assumption in
the simulation analysis is the repricing of fixed-rate credit card loans in
response to an upward movement in interest rates, with a lag of approximately
45 days between interest rate movements and fixed-rate credit card loan
repricings. The Corporation has repriced its fixed-rate credit card loans on
numerous occasions in the past, and expects to continue to do so in the future
in response to changes in interest rates, market conditions, or other factors.
Based on the simulation analysis at March 31, 1999, the Corporation could
experience a decrease in projected net income during the next twelve months of
approximately $29 million, if interest rates at the time the simulation
analysis was performed increased 100 basis points over twelve months.
The assumptions used in the simulation analysis are inherently uncertain and,
as a result, the analysis cannot precisely predict the impact of higher
interest rates on net income. Actual results would differ from simulated
results due to timing, magnitude, and frequency of interest rate changes,
changes in market conditions, and management strategies to offset its potential
exposure, among other factors.
Foreign Currency Exchange Rate Sensitivity
Foreign currency exchange rate risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange
rates. The Corporation's foreign currency exchange rate risk is primarily
limited to the unhedged position of the Corporation's net investment in its
foreign subsidiaries. The Corporation uses forward exchange contracts and
foreign exchange swap agreements to reduce its exposure to foreign currency
exchange rate risk. Management reviews the foreign currency exchange rate risk
of the Corporation on a routine basis. During this review, management
regularly reviews the net impact to stockholders' equity under various foreign
exchange rate scenarios. At March 31, 1999, the Corporation would expect a
decrease in stockholders' equity, net of tax, of approximately $25 million as a
result of a 10% depreciation of the Corporation's unhedged foreign exposure to
the U.S. dollar position.
The Corporation does not have any other off-balance-sheet financial
instruments.
ASSET SECURITIZATION
Asset securitization of loan receivables 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.
Asset securitization involves the sale, generally to a trust, of a pool of loan
receivables. The Corporation continues to own the accounts, which generate the
loan receivables. In addition, the Corporation also sells the rights to new
loan receivables, including most fees generated by and payments received from
these accounts. The trust sells undivided interests in the trust to investors,
while the Corporation retains the remaining undivided interest. The Corporation
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, the
trust makes no principal payments to the investors. Instead, the trust uses
principal payments received on the accounts to purchase new loan receivables
generated by these accounts, in accordance with the terms of the transaction,
so that the principal dollar amount of the investor's undivided interest
remains unchanged. Once the revolving period ends, the trust distributes
principal payments to investors according to the terms of the transaction.
When the trust allocates principal payments to the investors, the Corporation's
loan receivables increase by the amount of any new purchases or cash advance
activity on the accounts.
During the three months ended March 31, 1999, the Bank securitized credit card
loan receivables totaling $1.3 billion, while $894.7 million of previously
securitized loans amortized back into the Corporation's loan portfolio. The
total amount of outstanding securitized loans was $46.5 billion or 74.8% of
managed loans at March 31, 1999, compared to $46.2 billion or 77.4% at
December 31, 1998. An additional $5.6 billion of previously securitized loans
is scheduled to amortize during the remainder of 1999. The amortization
amounts are based upon estimated amortization periods which are subject to
change.
Distribution of principal to investors 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 coupon rate payable to investors, contractual servicing
fees, and principal credit losses during the period) or certain other events
occur. Table 10 compares the average annualized yield for the three month
period ended March 31, 1999, 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 10: YIELDS ON SECURITIZED TRANSACTIONS (a)
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust 93-4(b).................. 23.65% 13.50% 10.15%
MasterTrust 94-1(b).................. 21.48 12.82 8.66
MasterTrust 94-2(b).................. 20.65 12.66 7.99
MasterTrust II 94-A.................. 18.40 12.25 6.15
MasterTrust II 94-B.................. 18.40 12.23 6.17
MasterTrust II 94-C.................. 18.40 12.34 6.06
MasterTrust II 94-E.................. 18.40 12.40 6.00
MasterTrust II 95-A.................. 18.40 12.34 6.06
MasterTrust II 95-B.................. 18.40 12.22 6.18
MasterTrust II 95-C.................. 18.40 12.27 6.13
MasterTrust II 95-D.................. 18.40 12.14 6.26
MasterTrust II 95-E.................. 18.40 12.28 6.12
Cards No. 1.......................... 21.47 11.34 10.13
MasterTrust II 95-F.................. 18.40 13.60 4.80
MasterTrust II 95-G.................. 18.40 12.27 6.13
MasterTrust II 95-I.................. 18.40 12.22 6.18
MasterTrust II 95-J.................. 18.40 12.29 6.11
MasterTrust II 96-A.................. 18.40 12.26 6.14
MasterTrust II 96-B.................. 18.40 12.33 6.07
MasterTrust II 96-C.................. 18.40 12.20 6.20
MasterTrust II 96-D.................. 18.40 12.20 6.20
Cards No. 2.......................... 21.47 11.39 10.08
MasterTrust II 96-E.................. 18.40 12.23 6.17
MasterTrust II 96-F.................. 18.40 12.26 6.14
MasterTrust II 96-G.................. 18.40 12.25 6.15
MasterTrust II 96-H.................. 18.42 12.33 6.09
MasterTrust II 96-I.................. 18.42 12.30 6.12
MasterTrust II 96-J.................. 18.40 12.21 6.19
MasterTrust II 96-K.................. 18.40 12.20 6.20
MasterTrust II 96-L.................. 18.42 12.27 6.15
MasterTrust II 96-M.................. 18.42 12.38 6.04
Cards No. 3.......................... 21.47 11.36 10.11
MasterTrust II 97-A.................. 18.42 12.18 6.24
MasterTrust II 97-B.................. 18.40 12.25 6.15
MasterTrust II 97-C.................. 18.40 12.18 6.22
MasterTrust II 97-D.................. 18.42 12.32 6.10
MasterTrust II 97-E.................. 18.42 12.21 6.21
MasterTrust II 97-F.................. 18.40 12.12 6.28
MasterTrust II 97-G.................. 18.40 12.22 6.18
Cards No. 4.......................... 21.47 11.61 9.86
MasterTrust II 97-H.................. 18.42 12.45 5.97
MasterTrust II 97-I.................. 18.40 12.17 6.23
MasterTrust II 97-J.................. 18.40 12.19 6.21
MasterTrust II 97-K.................. 18.40 12.20 6.20
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust II 97-L.................. 18.42% 12.25% 6.17%
MasterTrust II 97-M.................. 18.42 12.23 6.19
MasterTrust II 97-N.................. 18.42 12.30 6.12
MasterTrust II 97-O.................. 18.40 12.24 6.16
Consumer Loan MasterTrust 97-1(c).... 18.24 13.68 4.56
MasterTrust II 98-A.................. 18.40 12.17 6.23
Cards No. 5.......................... 21.47 12.41 9.06
MasterTrust II 98-B.................. 18.42 12.25 6.17
MasterTrust II 98-C.................. 18.40 12.21 6.19
MasterTrust II 98-D.................. 18.40 12.13 6.27
MasterTrust II 98-E.................. 18.42 12.36 6.06
MasterTrust II 98-F.................. 18.42 12.41 6.01
MasterTrust II 98-G.................. 18.40 12.23 6.17
MasterTrust II 98-H.................. 18.40 12.36 6.04
MasterTrust II 98-I.................. 18.40 12.34 6.06
Cards No. 6.......................... 21.47 11.86 9.61
MasterTrust II 98-J.................. 18.40 12.39 6.01
MasterTrust II 98-K.................. 18.40 12.34 6.06
MasterTrust II 98-L.................. 18.27 12.52 5.75
Cards No. 7.......................... 21.10 12.65 8.45
Gloucester Credit Card Trust 98-1.... 14.48 8.71 5.77
UK 98-A.............................. 18.46 12.30 6.16
(a) MasterTrust II 99-A issued on March 25, 1999 and MasterTrust II 99-B
issued on March 26, 1999 are excluded from the yields presented above
as a result of their recency.
(b) Represents a transaction that has entered its scheduled controlled
amortization period.
(c) Yields are provided for informational purposes only. Distribution to
Investors may begin sooner if the credit enhancement amount falls
below a predetermined contractual level.
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)
March 31, 1999 December 31, 1998
--------------- -----------------
AT PERIOD END:
Loans held for securitization.......... $ 5,422,954 $ 1,692,268
Loan portfolio......................... 10,258,602 11,776,099
Securitized loans...................... 46,462,404 46,172,739
--------------- -----------------
Total managed loans.................. $ 62,143,960 $ 59,641,106
=============== =================
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
--------------- -----------------
AVERAGE FOR THE PERIOD:
Loans held for securitization.......... $ 2,128,460 $ 3,069,935
Loan portfolio......................... 11,170,774 8,430,283
Securitized loans...................... 45,777,689 38,191,753
--------------- -----------------
Total managed loans.................. $ 59,076,923 $ 49,691,971
=============== =================
MANAGED RATIOS:
Delinquency............................ 4.65% 4.66%
Net credit losses...................... 4.36 4.19
Net interest margin (on an FTE basis).. 7.60 7.37
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of the Stockholders of MBNA Corporation was held on
April 26, 1999.
The stockholders elected the following nominees to the Corporation's Board of
Directors to serve for the coming year and until their successors are elected
and qualify. The following shows the separate tabulation of votes for each
nominee:
Number of Votes
-----------------------------
For Withheld
------------- --------------
Alfred Lerner.................................. 705,471,501 13,609,781
Charles M. Cawley.............................. 705,228,018 13,853,264
James H. Berick, Esq........................... 700,997,167 18,084,115
Benjamin R. Civiletti, Esq..................... 700,999,336 18,081,946
Randolph D. Lerner, Esq........................ 709,036,433 10,044,849
Stuart L. Markowitz, M.D....................... 709,421,618 9,659,664
Michael Rosenthal, Ph.D........................ 709,395,808 9,685,474
The shareholders approved an amendment to the 1997 Long Term Incentive Plan
(the "Plan"). The amendment to the Plan authorizes, subject to certain
exceptions and additional limitations, grants of stock options and restricted
shares for an indefinite number of shares of common stock, so long as
immediately after the grants the sum of the number of outstanding stock options
and restricted shares does not exceed 10% of fully diluted shares outstanding
as defined in the amendment to the plan. There were 430,238,546 affirmative
votes, 192,468,589 negative votes, and 2,539,132 abstentions.
The shareholders did not approve a proposal that greater efforts be made to
ensure that women and persons from minority racial groups are included among
those considered for nomination to the Board of Directors of MBNA Corporation.
There were 105,483,883 affirmative votes, 512,362,284 negative votes, and
7,400,091 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- ----------------------
10.1 1997 Long Term Incentive Plan, as amended
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
27 Financial Data Schedule
Exhibit 10.1: 1997 Long Term Incentive Plan, as amended
1. Establishment
MBNA Corporation (the "Corporation") hereby establishes the 1997 LONG TERM
INCENTIVE PLAN (the "Plan"). The Plan permits the grant of stock options and
restricted share awards for shares of the Corporation's Common Stock ("Common
Stock").
2. Administration
The Plan shall be administered by the Board of Directors of the
Corporation or a committee ("Committee") of the Board of Directors. All
references herein to "Committee" shall mean the Board of Directors if no
committee of the Board of Directors is appointed or otherwise authorized to act
on a particular matter. The Committee shall have all power and authority
necessary to administer the Plan, including but not limited to the power to
select persons to participate in the Plan, determine the terms of grants made
under the Plan, interpret the Plan and adopt such policies for carrying out the
Plan as it may deem appropriate. The decisions of the Committee on all matters
relating to the Plan shall be conclusive.
3. Shares Available for the Plan; Limitations
(a) Shares of Common Stock may be issued by the Corporation pursuant to
incentive or nonqualified stock options or restricted share awards granted
under the Plan.
(b) On any given date, the maximum number of shares of Common Stock with
respect to which option and restricted share awards may be made pursuant to the
Plan shall be equal to the number of shares of Common Stock which, when added
to the number of shares of Common Stock subject to outstanding option and
restricted share awards immediately prior to the grant, equals 10% of "fully
diluted shares outstanding" immediately after the grant. "Fully diluted shares
outstanding" for purposes of the Plan shall mean all issued and outstanding
shares of Common Stock, including restricted shares, and shares of Common Stock
subject to all outstanding options. If the Corporation has outstanding
securities convertible into or exercisable for shares of Common Stock, the
shares of Common Stock into which the securities may be converted or for which
the securities may be exercised shall also be included in "fully diluted shares
outstanding."
(c) In addition to the limitation in Section 3(b), the maximum number of
restricted shares which may be granted in any calendar year beginning in 1999
is 2,000,000.
(d) For purposes of the formula and limitation in Sections 3(b) and 3(c),
restricted shares shall not include restricted shares issued in lieu of payment
of cash bonuses under the Corporation's Senior Executive Performance Plan or
other annual bonus plans.
(e) In addition to the limitation in Section 3(b), the maximum number of
shares of Common Stock with respect to which incentive stock options may be
granted from April 26, 1999 through the remaining term of the Plan is
10,000,000.
(f) The maximum number of shares of Common Stock with respect to which
options may be granted pursuant to the Plan in any calendar year to any one
participant is 2,250,000.
(g) In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, share exchange, consolidation,
substantial distribution of assets, or any other change in the corporate
structure or shares of the Corporation, the maximum numbers of shares provided
in Sections 3(b), 3(c), 3(e) and 3(f), but not Section 5(e), and the kinds of
shares under the Plan shall be appropriately adjusted.
4. Participation
Participation in the Plan is limited to officers, directors, key
employees, consultants and advisors of the Corporation and its subsidiaries
selected by the Committee. Only officers and key employees of the Corporation
and its subsidiaries are eligible to receive incentive stock options.
5. Stock Options
(a) The Committee may from time to time grant to participants non-
qualified stock options or incentive stock options.
(b) The price per share payable upon the exercise of each option shall not
be less than 100% of the fair market value of a share of Common Stock on the
date the option is granted.
(c) The Committee shall determine all terms and conditions of options,
including but not limited to the period for exercise, the expiration date and
any conditions to exercise. The Committee may amend or modify the terms of any
outstanding option grant except that the Committee may not reprice any
outstanding option grant.
(d) Options may be exercised in any manner approved by the Committee. If
authorized by the Committee, a participant may deliver Common Stock, including
shares acquired upon exercise of the option, to pay the exercise price or
withholding taxes in connection with exercise of an option.
(e) Each person who becomes a nonemployee director of the Corporation
shall be granted an option to purchase 5,000 shares of Common Stock on the date
the person becomes a director and each person who is a nonemployee director on
January 2 of each year beginning in 1998 shall be granted an option to purchase
5,000 shares of Common Stock on that date or the next day the New York Stock
Exchange is open for trading. The exercise price shall be the closing price of
the Common Stock on the New York Stock Exchange on the grant date. All
nonemployee director's options are exercisable immediately following the
effective date of the grant, shall have a term of ten years, and shall expire
90 days after the grantee is no longer a director.
6. Restricted Share Awards
The Committee may from time to time make restricted share awards of shares
of Common Stock to participants in such amounts and on such terms as it
determines. Each award of shares shall specify the restrictions on the shares.
The Committee may waive or modify any restriction.
7. Amendment and Termination of the Plan
The Plan may be amended or terminated at any time by the Board of
Directors. The Board of Directors may condition any amendment of the Plan on
approval by the stockholders of the Corporation. No further grants may be made
under the Plan after December 31, 2006.
Exhibit 12: Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 300,474 $ 241,350
Fixed charges.................................... 317,607 294,803
Interest capitalized during period, net of
amortization of previously capitalized interest. (534) (2,165)
------------ ------------
Earnings, for computation purposes............... $ 617,547 $ 533,988
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 315,202 $ 292,313
Portion of rents representative of the interest
factor.......................................... 2,405 2,490
------------ ------------
Fixed charges.................................... 317,607 294,803
Preferred stock dividend requirements............ 5,680 5,852
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 323,287 $ 300,655
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 1.91 1.78
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 300,474 $ 241,350
Fixed charges.................................... 103,903 99,142
Interest capitalized during period, net of
amortization of previously capitalized interest. (539) (2,170)
------------ ------------
Earnings, for computation purposes............... $ 403,838 $ 338,322
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 101,498 $ 96,652
Portion of rents representative of the interest
factor.......................................... 2,405 2,490
------------ ------------
Fixed charges.................................... 103,903 99,142
Preferred stock dividend requirements............ 5,680 5,852
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 109,583 $ 104,994
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 3.69 3.22
The ratio of earnings to combined fixed charges and preferred stock dividend
requirements is computed by dividing (i) income before income taxes and fixed
charges less interest capitalized during such period, net of amortization of
previously capitalized interest, by (ii) fixed charges and preferred stock
dividend requirements. Fixed charges consist of interest, expensed or
capitalized, on borrowings (including or excluding deposits, as applicable)
and the portion of rental expense which is deemed representative of interest.
The preferred stock dividend requirements represent the 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 January 4, 1999, reporting MBNA Corporation's earnings
release for the fourth quarter of 1998.
2. Report dated January 4, 1999, providing the underwriting agreement
which supplements the prospectus included in the Registration Statement
on Form S-3, previously filed by MBNA Corporation, in connection with
the issuance and sale of 50,000,000 shares of Common Stock.
3. Report dated January 7, 1999, reporting MBNA Corporation's financial
highlights for the fourth quarter of 1998.
4. Report dated January 31, 1999, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for January 1999.
5. Report dated February 28, 1999, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for February 1999.
6. Report dated March 25, 1999, reporting the securitization of
$500.0 million of credit card receivables by MBNA America Bank, N.A.
7. Report dated March 26, 1999, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
8. Report dated March 29, 1999, reporting the completion of the acquisition
of the credit card business of PNC Bank, N.A.
9. Report dated March 31, 1999, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for March 1999.
10. Report dated April 13, 1999, reporting MBNA Corporation's earnings
release for the first quarter of 1999.
11. Report dated April 30, 1999, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for April 1999.
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: May 17, 1999 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 THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 285,396
<INT-BEARING-DEPOSITS> 1,308,933
<FED-FUNDS-SOLD> 855,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,900,911
<INVESTMENTS-CARRYING> 258,469
<INVESTMENTS-MARKET> 249,431
<LOANS> 15,681,556<F1>
<ALLOWANCE> 303,717
<TOTAL-ASSETS> 27,521,688
<DEPOSITS> 16,321,213
<SHORT-TERM> 543,360
<LIABILITIES-OTHER> 1,073,333
<LONG-TERM> 5,948,700
0
86
<COMMON> 8,018
<OTHER-SE> 3,626,978
<TOTAL-LIABILITIES-AND-EQUITY> 27,521,688
<INTEREST-LOAN> 457,380<F1>
<INTEREST-INVEST> 25,198
<INTEREST-OTHER> 58,770
<INTEREST-TOTAL> 541,348
<INTEREST-DEPOSIT> 213,704
<INTEREST-EXPENSE> 314,567
<INTEREST-INCOME-NET> 226,781
<LOAN-LOSSES> 84,464
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 745,573
<INCOME-PRETAX> 300,474
<INCOME-PRE-EXTRAORDINARY> 300,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 185,993
<EPS-PRIMARY> .23<F2>
<EPS-DILUTED> .22<F2>
<YIELD-ACTUAL> 11.00<F3>
<LOANS-NON> 2,654<F4>
<LOANS-PAST> 183,381<F4>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 136,847<F4>
<ALLOWANCE-OPEN> 216,911
<CHARGE-OFFS> 127,054
<RECOVERIES> 46,502
<ALLOWANCE-CLOSE> 303,717
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Includes loans held for securitization.
<F2> EPS-Primary and EPS-Diluted reflects the three-for-two
split of the Corporation's Common Stock effected in the
form of a dividend, issued October 1, 1998, to stockholders of
record as of the close of business on September 15, 1998.
<F3> On a fully taxable equivalent basis.
<F4> Excludes loans held for securitization.
</FN>
</TABLE>
