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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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)
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MARYLAND 52-1713008
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 NORTH KING STREET
WILMINGTON, DE 19884-0141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 362-6255
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
6 7/8% Senior Notes due October 1, 1999 New York Stock Exchange
7 1/2% Cumulative Preferred Stock, Series A New York Stock Exchange
Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange
MBNA Capital A 8.278% Capital Securities, Series A, New York Stock Exchange
guaranteed by MBNA Corporation to the extent
described therein
MBNA Capital B Floating Rate Capital Securities, New York Stock Exchange
Series B, guaranteed by MBNA Corporation to the
extent described therein
MBNA Capital C 8.25% Trust Originated Preferred New York Stock Exchange
Securities, Series C, guaranteed by MBNA Corporation
to the extent described therein
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 10, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant calculated by
reference to the closing price of the Registrant's Common Stock as reported on
the New York Stock Exchange was $17,569,928,840. As of March 10, 1999, there
were outstanding 801,781,250 shares of Common Stock, par value $.01 per share,
which stock is the only class of Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated by reference into Parts I, II and IV.
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held April 26, 1999 are incorporated by reference into Part
III.
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MBNA CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 9
ITEM 3. Legal Proceedings........................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......... 10
Executive Officers of the Registrant........................ 10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters....................................... 12
ITEM 6. Selected Financial Data..................................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
ITEM 7A Quantitative and Qualitative Disclosures about Market
Risk...................................................... 13
ITEM 8. Financial Statements and Supplementary Data................. 13
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 13
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 13
ITEM 11. Executive Compensation...................................... 13
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 13
ITEM 13. Certain Relationships and Related Transactions.............. 13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 14
Signatures............................................................. 18
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PART I
ITEM 1. BUSINESS
OVERVIEW
MBNA Corporation (the "Corporation"), a registered bank holding company,
was incorporated under the laws of Maryland on December 6, 1990. It is the
parent company of MBNA America Bank, N.A. (the "Bank"), a national bank
organized in January 1991 as the successor to a national bank formed in 1982.
The Bank has two wholly owned foreign bank subsidiaries, MBNA International
Bank Limited ("MBNA International") formed in 1993 and located in the United
Kingdom and MBNA Canada Bank ("MBNA Canada") formed in 1997. Through the Bank,
MBNA International and MBNA Canada, 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.
PRODUCTS
Credit Cards
The Corporation offers two general types of credit cards, premium and
standard, issued under either the MasterCard(R) or Visa(R) name.* The
Corporation markets standard and premium cards to new Customers and it markets
premium cards to qualifying standard card Customers. Premium cards include Gold
and Platinum Plus cards. Premium card usage and average account balances are
generally higher than those of standard card Customers.
Other Consumer Loans
The Corporation's other consumer loan products include unsecured lines of
credit accessed by check and unsecured installment loans. These products are
used by Customers primarily for large purchases or consolidation of other
consumer debt. The Bank markets these products to customers of retailers, to the
Bank's existing credit card Customers and to others.
The Corporation also offers home equity loans through MBNA America Bank
(Delaware), a state bank, and airplane loans to individuals through MBNA
Consumer Services, Inc.
Deposits
The Corporation offers money market deposit accounts and certificates of
deposit through the Bank. Money market deposit accounts provide Customers with
liquidity and convenience of service, as well as insurance up to $100,000 per
depositor by the Federal Deposit Insurance Corporation ("FDIC"). Certificates of
deposit are traditional fixed term investments with maturities that typically
range from six to sixty months. They are also insured by the FDIC up to
$100,000. Deposit products are offered to members of the Corporation's endorsing
associations, to existing credit card Customers and to others.
Insurance
The Corporation offers credit insurance to credit card Customers of the
Bank, MBNA International and MBNA Canada. It also offers automobile insurance
and life insurance through the Bank to Customers. In July 1998, the Corporation
suspended marketing new automobile insurance policies and later terminated its
agreement with TIG, its insurance underwriter. In December 1998, the Corporation
signed a letter of intent with American International Group, Inc. ("AIG") to
underwrite automobile, homeowners, and personal umbrella insurance products for
the Corporation's Customers. The Corporation and AIG expect to begin marketing
AIG automobile insurance to the Corporation's Customers during 1999.
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* MasterCard(R) is a federally registered servicemark of MasterCard
International Inc.; Visa(R) is a federally registered servicemark of Visa
U.S.A., Inc.
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MARKETING
The Corporation directs its marketing efforts primarily to members of
endorsing groups, to customers of financial institutions, and to targeted lists
of people with a strong common interest. The Corporation is the recognized
leader in affinity marketing, with endorsements from thousands of membership
organizations and financial institutions.
Credit cards issued to affinity group members or financial institution
customers usually carry custom graphics and the name and logo of the endorsing
organization. The Corporation develops a customized marketing program for each
endorsing organization or financial institution. In addition to servicing the
credit cards, the Corporation offers economic incentives to the endorsing groups
and financial institutions.
The Corporation's affinity marketing approach includes created personal
interest and regional affinity programs for people with strong common interests
but without a specific group affiliation. Personal interest programs are offered
to people with common interests through purchased targeted lists. Regional
programs include state and city series cards that bear images of regional or
local scenes.
The Corporation also offers co-branded cards through relationships with
commercial firms, including professional sports teams. These programs typically
include incentives to Customers to purchase services or merchandise from the
co-branding firm.
The Corporation primarily uses direct mail, telemarketing, person-to-person
and internet marketing to market its credit cards and other products. Thousands
of different marketing campaigns are developed each year, generating millions of
direct mail pieces designed to add accounts and stimulate use. The Corporation
customizes its marketing approach for each program. The Corporation's in-house
advertising agency designs custom graphics for credit cards and prepares direct
mail programs and advertisements. The Corporation conducts internet marketing
through a combination of banner, e-mail and search engine advertisements. In
addition, the Corporation's marketing activities include efforts to retain
profitable accounts and programs designed to activate new accounts and stimulate
usage of existing accounts, primarily through balance transfer programs.
The Corporation conducts marketing activities in the United States through
MBNA Marketing Systems, Inc., a subsidiary of the Bank. The Corporation markets
credit cards and other consumer loans in the United Kingdom through MBNA
International and in Canada through MBNA Canada.
MBNA Marketing Systems, Inc. has regional centers in Maine, Ohio, Texas,
Maryland, Florida and California and sales offices in New York City, Chicago and
Atlanta. MBNA International has its headquarters in Chester, England and sales
and marketing offices in London, England, Dublin, Ireland and Edinburgh,
Scotland. MBNA Canada has its headquarters in Gloucester, Ontario and a sales
and marketing office in Montreal, Quebec. These regional centers and sales
offices assist the Corporation to obtain endorsements, increase its familiarity
with local markets, better understand the needs and motivations of Customers and
keep in close touch with what competitors are doing.
MBNA Marketing Systems, Inc. has 13 telemarketing facilities in 9 states.
As of December 31, 1998, it employed approximately 3,300 people in
telemarketing, the majority of whom worked part time. The telemarketing
organization generates new accounts by calling prospects obtained from
membership lists of endorsing organizations and other prospects lists.
CREDIT
The Corporation makes credit decisions by combining sophisticated
technology and predictive models with the insight of a credit analyst. Approved
credit applications are reviewed individually by a credit analyst, who assigns a
credit line based on a review of the potential Customer's financial history and
capacity to repay. Less than half of the credit applications received by the
Corporation in 1998 were approved. Credit analysts review credit reports
obtained through an independent credit reporting agency, and use a delinquency
probability model to assist them in reaching a credit decision for each
applicant. Credit analysts also review and verify other information, such as
employment and income, when necessary to make a credit decision.
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Further levels of review are automatically triggered, depending upon the level
of risk indicated by the delinquency probability model and a combination of
other factors indicative of credit quality. Credit lines for existing Customers
are regularly reviewed for credit line increases, and when appropriate,
reductions in credit lines. The Corporation's Loan Review Department
independently reviews selected applications to ensure quality and consistency.
The Corporation's losses have been consistently below the Visa and MasterCard
industry average.
RISK CONTROL
The Corporation manages risk at the Customer level through sophisticated
analytical techniques combined with regular judgmental review. Transactions are
evaluated at the point of sale, where risk levels are balanced with
profitability and Customer satisfaction. Additionally, Customers showing signs
of financial stress are periodically reviewed, a process which includes an
examination of the Customer's credit file and in many cases a phone call for
clarification of the situation.
A balanced approach is also used when stimulating portfolio growth. Risk
levels are measured through statistical models that incorporate payment
behavior, employment information, and transaction activity. Credit bureau scores
and attributes are obtained and combined with internal information to allow the
Corporation to increase credit lines and promote account usage while minimizing
additional risk.
The Corporation utilizes technology, including a neural network and expert
systems, to detect and prevent fraud at its earliest stages. It also employs
authorization strategies to control fraud losses.
COLLECTION (CUSTOMER ASSISTANCE)
The Corporation's collection (Customer Assistance) philosophy, based on a
persistent yet professional approach, is to work with each past due Customer at
an early stage of delinquency. The Corporation employs several computerized
systems to assist in the collection of past due accounts. Initially, the
Predictive Management System analyzes each Customer's purchase and repayment
habits, and selects accounts for initial contact with the objective of
contacting the highest risk accounts first. Subsequently, the accounts selected
are queued to the Corporation's proprietary Collection Tracking and Analysis
system (CTA) and Outbound Call Management System (OCMS). OCMS sorts accounts by
a number of factors, including time zone, degree of delinquency and dollar
amount due. OCMS automatically dials delinquent accounts in order of priority.
Representatives are automatically linked to the Customer's account information
and voice line when a contact is established. Customers who are experiencing
significant financial problems and may consider filing for bankruptcy are
referred to a specialized group of people who have been educated on effective
alternatives to bankruptcy, including debt counseling.
CTA is used to work accounts continually, by market sector, at each stage
of delinquency through the 180-day past due level. As an account enters the
180-day delinquency level, it is classified as a potential charge-off. Accounts
failing to make a payment during the 180-day cycle are written off. Managers may
defer charge-off of an account for another month, pending continued payment
activity or other special circumstances. Senior manager approval is required on
all exceptions to charge-off.
A Customer account may be reaged to remove existing delinquency. Generally,
to qualify for reaging, the account must have been open for at least one year
and cannot have been reaged during the preceding 365 days. The Customer must
have made payments equal to a total of three minimum payments in the last 90
days, including one full minimum payment during the last 30 days. All account
reages are approved by a manager. Collection reages are reviewed by the Loan
Review Department.
Once an account has been charged-off, it may be sold to a third party
vendor or retained by the Corporation for collection. The Corporation has
entered into contracts for the sale of these accounts which provide pricing
which is comparable to amounts which were realized from previous charge-off
collection efforts, after the deduction of the costs of collection.
In February 1999, the Federal Financial Institutions Examinations Council
published a revised policy statement on the classification of consumer loans.
The revised policy establishes uniform guidelines for
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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, but does not expect
implementation to have a material effect on the Corporation's consolidated
financial statements.
OPERATIONS
Account processing services performed by MBNA Hallmark Information
Services, Inc. ("Information Services"), a wholly-owned subsidiary of the Bank,
include data processing, payment processing, statement rendering, card
production and network services. Information Services' data network provides an
interface to MasterCard and Visa for performing authorizations and settlement
funds transfers. Most data processing and network functions are performed at
Information Services' facilities in Dallas, Texas, and Newark, Delaware.
Information Services generates and mails to Customers monthly statements
summarizing account activity and processes Customer payments.
TECHNOLOGY
The Corporation uses sophisticated systems and technology in all aspects of
its business operations to enhance Customer service and improve efficiency.
These systems include marketing databases, advanced telecommunications networks
to support Customer service and telemarketing, a credit decisioning system which
processes credit card applications with on-line credit bureaus to support
credit, neural networks to identify and prevent fraud, and selective statement
insertion for customizing communications with Customers. These systems enable
the Corporation to implement customized marketing and service strategies for
endorsed organizations. The Corporation relies primarily on internal development
of technology solutions to ensure the flexibility, quality and responsiveness of
computer and telecommunication systems needed in its business. For a discussion
of Year 2000 compliance, see "Year 2000 Readiness Disclosure" on pages 31
through 33 of the 1998 Annual Report to Stockholders, which is incorporated
herein by reference.
TERMS AND CONDITIONS
Each Customer and the Corporation enter into an agreement which governs the
terms and conditions of the Customer's account. The Corporation reserves the
right to add or change any terms, conditions, services or features of its
accounts at any time, including increasing or decreasing periodic finance
charges, other charges or minimum payment terms. The agreement with each
Customer provides that the Corporation may apply such changes, when applicable,
to current outstanding balances as well as to future transactions. The Customer
can avoid a rate increase by notice to the Corporation and by not using the
account.
A Customer may use an account for purchases and cash advances. Monthly
periodic finance charges are calculated by multiplying the applicable average
daily balances on the account by the applicable daily periodic rates and by the
number of days in the billing cycle.
Finance charges are calculated on purchases from the date of the purchase
or the first day of the billing cycle in which the purchase posts to the
account, whichever is later, and with respect to credit card accounts are not
assessed in most circumstances on new purchases if all balances shown in the
previous billing statement are paid in full by the payment due date, which is
generally 1 day before the next billing date. Finance charges on credit card
accounts are not assessed in most circumstances on previous purchases if all
balances shown on the two previous billing statements are paid by their
respective due dates. Finance charges on cash advances are calculated from the
date of the transaction.
Credit card Customers are required to make a minimum monthly payment equal
to the greater of $15 or 2% of the outstanding balance on the account. With
respect to certain consumer loan products, Customers are required to make a
minimum monthly payment sufficient to repay the account balance over a set term.
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The Corporation offers fixed and variable rates on accounts and also offers
temporary promotional rates. Variable rates are offered at a percentage rate
tied to the U.S. prime rate published in The Wall Street Journal and are
adjusted, if applicable, quarterly.
The Corporation assesses an annual fee on some Customer accounts. Annual
fees, when assessed, are generally waived for the first year on new accounts and
thereafter may be waived or rebated. The Corporation assesses cash advance
transaction, certain purchase, late, overlimit and returned check fees on
Customer accounts in accordance with agreements with Customers.
REGULATORY MATTERS
General
As a bank holding company, the Corporation is subject to regulation under
the Bank Holding Company Act of 1956 (the "BHCA") and to the BHCA's examination
and reporting requirements. Under the BHCA, bank holding companies may not
directly or indirectly acquire the ownership or control of more than five
percent of the voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). In addition, bank holding
companies generally are prohibited under the BHCA from engaging in non-banking
activities, subject to certain exceptions.
The earnings of the Bank and the Corporation are affected by general
economic conditions, monetary policies and the actions of various regulatory
authorities, including the Federal Reserve Board, the Federal Deposit Insurance
Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the
"OCC"). In addition, there are numerous governmental requirements and
regulations which affect the activities of the Corporation.
The Bank is subject to supervision and examination by the OCC, the Bank's
primary regulator. The Bank is insured by, and therefore also is subject to the
regulations of, the FDIC, and is also subject to requirements and restrictions
under federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
MBNA International is subject to regulation and supervision by the Bank of
England, the Federal Reserve Board and the OCC. MBNA America Bank (Delaware) is
subject to regulation and supervision by the State Bank Commissioner of Delaware
and the FDIC. MBNA Canada is subject to regulations and supervision by the
Office of Superintendent of Financial Institutions, the Canadian Deposit
Insurance Corporation, the Federal Reserve Board and the OCC.
Dividends
The principal source of funds to the Corporation to pay dividends, interest
and principal on debt securities and to meet other obligations is dividends from
the Bank. The Bank is subject to limitations on the dividends it may pay to the
Corporation. The Corporation may also be subject to limitations on the payment
of dividends to stockholders. See "Capital Adequacy and Dividend Limitations" on
pages 35 and 36 of the 1998 Annual Report to Stockholders, which is incorporated
herein by reference. In addition, both the Corporation and the Bank are subject
to various regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of a bank or bank
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof. The OCC and the Federal Reserve Board
have each indicated that banking organizations should generally pay dividends
only out of current operating earnings.
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Borrowings by the Corporation
There are various legal restrictions on the extent to which the Corporation
may borrow or otherwise obtain credit from, or engage in certain other
transactions with, the Bank. In general, these restrictions require that any
such extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of the Corporation or its non-bank
subsidiaries, to 10 percent of the Bank's capital stock and surplus, and as to
the Corporation and all such non-bank subsidiaries in the aggregate, to 20
percent of the Bank's capital stock and surplus.
Extensions of credit and other transactions between the Bank and the
Corporation must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the Bank
as those prevailing at the time for comparable transactions with non-affiliated
companies.
Capital Requirements
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank is subject to similar
capital requirements adopted by the OCC. The guidelines require a minimum ratio
of total capital to risk-weighted assets (including certain off-balance sheet
items, such as interest rate swaps) of 8%. At least half of the total capital
may be comprised of common stockholders' equity, non-cumulative perpetual
preferred stock and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 risk-based capital").
The remainder ("Total risk-based capital") may consist of mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock
and a limited amount of reserves for possible credit losses. In addition, the
Federal Reserve Board has adopted a minimum leverage ratio (Tier 1 risk-based
capital to average total assets less goodwill and certain other intangible
assets) of 3% for bank holding companies that meet certain specified criteria,
including that they have the agency's highest supervisory rating. Under the
guidelines, holding companies that do not satisfy the criteria for the lowest
requirement and holding companies undertaking expansion programs must maintain a
leverage ratio at least 100 basis points to 200 basis points higher than the 3%
minimum ratio. See "Table 9: Regulatory Capital Ratios" on page 35 of the 1998
Annual Report to Stockholders, which is incorporated herein by reference.
Holding companies and banks may be subject to higher risk-based and leverage
capital ratios depending on other specific factors, such as interest rate risk,
concentrations of credit risk, and the conduct of non-traditional activities.
Corporation Support of Bank
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's stockholders and, if any such
assessment is not paid, to sell the stock to make good the deficiency. Under
Federal Reserve Board policy, the Corporation is expected to act as a source of
financial strength to the Bank and to commit resources to support it. Any
capital loans by the Corporation to the Bank are subordinate in right of payment
to deposits and to certain other indebtedness of the Bank.
FDICIA and FDIC Insurance
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provided increased funding for the Bank Insurance Fund ("BIF") of the
FDIC and provided for expanded regulation of banks and bank holding companies.
The regulation includes expanded federal banking agency examinations and
increased powers of federal banking agencies to take corrective action to
resolve the problems of insured depository institutions with capital
deficiencies. These powers vary depending on which of several levels of
capitalization a particular institution meets.
FDIC regulations adopted under FDICIA prohibit a bank from accepting
brokered deposits unless (i) it is well capitalized or (ii) it is adequately
capitalized and receives a waiver from the FDIC. A bank that is adequately
capitalized and that accepts brokered deposits under a waiver from the FDIC may
not pay an interest rate on any deposit in excess of 75 basis points over
certain prevailing market rates; there are no such restrictions on a bank that
is well capitalized. As of December 31, 1998 the Bank met the FDIC's definition
of
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a well capitalized institution for purposes of accepting brokered deposits. For
the purposes of the brokered deposit rules, a bank is defined to be "well
capitalized" if it maintains a ratio of Tier 1 risk-based capital to
risk-adjusted assets of at least 6%, a ratio of total risk-based capital to
risk-weighted assets of at least 10% and a leverage ratio of at least 5% and is
not subject to any order, direction or written agreement to maintain specific
capital levels. Under the regulatory definition of brokered deposits, as of
December 31, 1998, the Bank had brokered deposits of $3.4 billion.
The Bank is subject to FDIC deposit insurance assessments for the BIF. Each
financial institution is assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- and further assigned
to one of three subgroups within a capital group, on the basis of supervisory
evaluations by the institution's primary federal and, if applicable, state
supervisors and other information relevant to the institution's financial
condition and the risk posed to the applicable insurance fund. The assessment
rate applicable to the Bank in the future will depend in part upon the risk
assessment classification assigned to the Bank by the FDIC and in part on the
BIF assessment schedule adopted by the FDIC. FDIC regulations currently provide
that premiums related to deposits assessed by the BIF are to be assessed at a
rate of between 0 cents and 27 cents per $100 of deposits.
The Deposit Insurance Funds Act of 1996 ("DIFA") also separated, effective
January 1, 1997, the Financing Corporation ("FICO") assessment to service the
interest on its bond obligations from the BIF and the Savings Association
Insurance Fund ("SAIF") assessments. The amount assessed on individual
institutions by the FICO will be in addition to the amount, if any, paid for
deposit insurance according to the FDIC's risk-related assessment rate
schedules. FICO assessment rates may be adjusted quarterly to reflect a change
in assessment base for the BIF. By law, the FICO rate on BIF-assessable deposits
must be one-fifth the rate on SAIF-assessable deposits until the insurance funds
are merged or until January 1, 2000, whichever occurs first.
Regulation of the Credit Card and Other Consumer Lending Businesses
The relationship between the Corporation and its Customers is extensively
regulated by federal and state consumer protection laws. The Truth in Lending
Act requires consumer lenders to make certain disclosures along with their
applications (for credit card accounts) and solicitations, upon opening an
account and with each periodic statement. The Act also imposes certain
substantive requirements and restrictions on lenders and provides Customers with
certain rights to dispute unauthorized charges and to have their billing errors
corrected promptly. Customers are also given the right to have their payments
promptly credited to their accounts.
The Equal Credit Opportunity Act prohibits lenders from discriminating in
extending credit on certain criteria such as an applicant's sex, race and
marital status. In order to protect borrowers from such discrimination, the Act
requires that lenders disclose the reasons they took adverse action against an
applicant or a Customer.
The Fair Credit Reporting Act generally regulates credit reporting
agencies, but also imposes some duties on lenders as users of consumer credit
reports. For instance, the Act prohibits the use of a consumer credit report by
a lender except in connection with a proposed business transaction with the
consumer. The Act also requires that lenders notify consumers when the lenders
take adverse action based upon information obtained from credit reporting
agencies.
The federal regulators are authorized to impose penalties for violations of
these statutes and, in certain cases, to order the Corporation to pay
restitution to injured Customers. Customers may bring actions for damages for
certain violations. In addition, a Customer may be entitled to assert a
violation of these consumer protection laws by way of set-off against the
Customer's obligation to pay the outstanding loan balance.
The National Bank Act, which governs the activities of national banks,
authorizes national banks to use various alternative interest rates when they
make loans, including the highest interest rate authorized for state chartered
lenders located in the state where the national bank is located. This ability to
"export" rates, as provided for in the Act, is relied upon by the Bank to charge
Customers the interest rates and fees permitted
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by Delaware law regardless of an inconsistent law of the state in which the
Customer is located, thereby facilitating the Bank's nationwide lending
activities.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state, generally
without regard to whether the transaction is prohibited under state law. In
addition, effective June 1, 1997, national and state banks with different home
states were permitted to merge across state lines, with approval of the
appropriate federal banking agency, unless the home state of a participating
bank passed legislation prior to this date expressly prohibiting interstate bank
mergers.
Insurance
Section 92 of the National Bank Act authorizes the Bank to engage in the
business of insurance as an agency from a place of less than 5,000 people. In
order to conduct an agency business the Bank must obtain licensing approval in
each state in which it intends to operate and is subject to state regulation on
agency and agent licensing, disclosure requirements, policy delivery and other
matters. State requirements which are so burdensome or onerous as to
significantly impair the exercise by a national bank of the powers granted to it
under Section 92 are preempted. There are differences among federal and state
regulators as to the extent of federal preemption of state insurance agency
regulation which have not been resolved.
COMPETITION
The Corporation's business is highly competitive. The Corporation competes
with numerous banks with national, regional and local operations in domestic and
international markets and with non-bank competitors who issue credit and charge
cards and make other consumer loans. Strategies used by the Corporation's
competitors include targeted marketing, low introductory rates, no annual fee
credit cards, balance transfers and discounts on products and services. The
Corporation also uses these strategies and, in addition, relies on its strategy
of marketing to people with a strong common interest and its superior Customer
service to compete with its competitors.
EMPLOYEES
As of December 31, 1998, the Corporation had approximately 19,000
employees.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time the Corporation may make forward-looking statements
concerning the Corporation's future performance. Such statements are subject to
risks and uncertainties that may cause the Corporation's actual performance to
differ materially from that set forth in such forward-looking statements.
Factors which could cause the Corporation's actual financial and other results
to differ materially from those projected by the Corporation in forward-looking
statements include, but are not limited to the following:
Competition
The Corporation's business is highly competitive. Competition from other
lenders could affect the Corporation's loans outstanding, Customer retention,
and the rates and fees charged on the Corporation's loans.
Economic Conditions
The Corporation's business is affected by general economic conditions
beyond the Corporation's control, including employment levels, consumer
confidence, and interest rates. A recession or slowdown in the economy may cause
an increase in delinquencies and credit losses and reduce new account growth and
charge volume.
8
<PAGE> 11
Delinquencies and Credit Losses
An increase in delinquencies and credit losses could affect the
Corporation's financial performance. Delinquencies and credit losses are
influenced by a number of factors, including the quality of the Corporation's
credit card and other consumer loans, general economic conditions, the success
of the Corporation's collection efforts, and the average seasoning of the
Corporation's accounts.
Interest Rate Increases
An increase in interest rates could increase the Corporation's cost of
funds and reduce the net interest margin. The Corporation's ability to manage
the risk of interest rate increases is dependent on its overall product and
funding mix and its ability to successfully reprice outstanding loans.
Availability of Funding and Securitization
Changes in the amount, type, and cost of funding available to the
Corporation could affect the Corporation's performance. A major funding
alternative for the Corporation is the securitization of credit card and other
consumer loans. Difficulties or delays in securitizing loans or changes in the
current legal, regulatory, accounting, and tax environment governing
securitizations could adversely affect the Corporation.
Customer Behavior
The acceptance and use of credit card and other consumer loan products for
consumer spending has increased significantly in recent years. The Corporation's
performance could be affected by changes in such acceptance and use, and overall
consumer spending.
New Products and Services
The Corporation's performance could be affected by difficulties or delays
in the development of new products or services, including products or services
beyond credit card and other consumer loans. These may include failure of
Customers to accept these products or services when planned, losses associated
with the testing of new products or services, or financial, legal or other
difficulties that may arise in the course of such implementation. In addition,
the Corporation could face competition with new products or services, which may
affect the success of such products or services.
Growth
The growth of the Corporation's existing business and the development of
new products and services will be dependent upon the ability of the Corporation
to continue to develop the necessary operations, systems, and technology; hire
qualified people; and obtain funding for significant capital investments.
Legal and Regulatory
The banking and consumer credit industry is subject to extensive
regulation. Changes in the laws and regulations and in policies applied by
banking or other regulators affecting banking, consumer credit or other matters
could impact the Corporation's performance. For example, in recent years
Congress has considered legislation which would have had the effect of limiting
the interest rate that could be charged on credit card accounts. In addition,
the Corporation could incur unanticipated litigation or compliance costs.
ITEM 2. PROPERTIES
The Corporation has approximately 3,000,000 square feet of administrative
offices and credit card facilities in five office complexes that it owns in
Delaware. The majority of these facilities were designed and built expressly for
the Corporation's credit card operations. These complexes include space for
future expansion.
9
<PAGE> 12
MBNA Information Services conducts its processing from an approximately
557,000 square foot facility that the Corporation owns in Dallas, Texas as well
as from approximately 300,000 square feet of office space at the Corporation's
facilities in Newark, Delaware.
MBNA Marketing Systems, Inc. has regional offices in Camden and Belfast,
Maine, Cleveland, Ohio, Dallas, Texas (part of Information Services' facility),
Boca Raton, Florida and Hunt Valley, Maryland. These facilities are owned by the
Corporation.
MBNA Marketing Systems, Inc. has a leased regional office in San Francisco
and leased sales offices in New York City and Chicago. The leases are for
10-year terms and contain renewal options which, if exercised, would extend the
leases up to five additional years in New York City and San Francisco and 10
additional years in Chicago. Marketing Systems leases telesales facilities in
Delaware, Georgia, Maine, Maryland, New Hampshire, Ohio and Pennsylvania.
MBNA International's credit card operations are located in approximately
252,000 square feet of space in Chester, England. It is constructing additional
expansion space in Chester. It maintains a sales office in London, England and
Edinburgh, Scotland. MBNA International conducts operations in Ireland from an
office in Dublin, Ireland.
MBNA Canada's credit card operations are located in approximately 55,000
square feet of leased office space in Gloucester and Montreal, Quebec.
ITEM 3. LEGAL PROCEEDINGS
In May 1996, Andrew B. Spark filed a lawsuit against the Corporation, the
Bank and certain of its officers and its subsidiary MBNA Marketing Systems, Inc.
The case is pending in the United States District Court for the District of
Delaware. This suit is a purported class action. The plaintiff alleges that the
Bank's advertising of its cash promotional annual percentage rate program was
fraudulent and deceptive. The plaintiff seeks unspecified damages including
actual, treble and punitive damages and attorneys' fees for an alleged breach of
contract, violation of the Delaware Deceptive Trade Practices Act and violation
of the federal Racketeer Influenced and Corrupt Organizations Act. In February
1998, a class was certified by the District Court. In October 1998, Gerald D.
Broder filed a lawsuit against the Corporation and the Bank in the Supreme Court
of the State of New York, County of New York. This suit is a purported class
action. The plaintiff alleges that the Bank's advertising of its cash
promotional annual percentage rate program was fraudulent and deceptive. The
plaintiff seeks unspecified damages including actual, treble and punitive
damages and attorneys' fees for an alleged breach of contract, common law fraud
and violation of New York consumer protection statutes. The Corporation believes
that its advertising practices were and are proper under applicable federal and
state law and intends to defend these actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders of the Corporation.
------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Corporation's executive officers is set forth
below.
Alfred Lerner (65) has been Chief Executive Officer of MBNA Corporation and
Chairman of its Board of Directors since January 1991 and a director of the Bank
since December 1991. Mr. Lerner served as Chairman of the Board and Chief
Executive Officer of MNC Financial, Inc. ("MNC Financial") from September 1990
to July 1991 and as Chairman of the Board from July 1991 to October 1993. He
also served as Chairman of the Board of Equitable Bancorporation from July 1983
until it merged with MNC Financial in January 1990. He has been Chairman of The
Town and Country Trust since August 1993 and was Chief Executive Officer from
August 1993 until October 1997. He has been Chairman and owner of the Cleveland
Browns since October 1998. A graduate of Columbia University and Vice Chairman
of its Board of Trustees,
10
<PAGE> 13
Mr. Lerner also is president of the Cleveland Clinic Foundation and a member of
its Board of Trustees. He is also a trustee of Case Western Reserve University
and a member of the Board of Directors of the Marine Corps Law Enforcement
Foundation.
Charles M. Cawley (58) has been President and a director of the Corporation
and Chairman and Chief Executive Officer of the Bank since January 1991. He has
more than 33 years of management experience in the financial services industry
and was the senior operating executive that formed the Bank in 1982. He has
served as Chief Executive Officer of the Bank since 1990, and as President since
1985. He has been a director of the Bank since 1982. He serves on the boards of
Georgetown University, the University of Delaware, the Eisenhower Exchange
Fellowships, the American Architectural Foundation, and the Marine Corps Law
Enforcement Foundation. He is Chairman of the Board of the Grand Opera House in
Wilmington, Delaware.
John R. Cochran III (47) oversees all business development and marketing
activities, including sales, marketing, advertising, regional marketing,
telemarketing, and group administration. He is also responsible for Customer
Satisfaction. He has been a Senior Executive Vice President of the Corporation
and an Executive Vice Chairman of the Bank since November 1998. He has served as
the Chief Marketing Officer since April 1991. He has 26 years of management
experience in the financial services industry and was a member of the management
team that established the Bank in 1982. He has been a director of the Bank since
1986.
Bruce L. Hammonds (50) oversees credit, loss prevention, consumer finance
and technology services. He has been a Senior Executive Vice President of the
Corporation and an Executive Vice Chairman of the Bank since November 1998. He
has served as the Chief Operating Officer since 1990. He has 29 years of
management experience in consumer lending and was a member of the management
team that established the Bank in 1982. He has been a director of the Bank since
1986.
M. Scot Kaufman (49) oversees accounting, finance, and treasury activities.
He has been an Executive Vice President and Treasurer of the Corporation since
January 1991 and Chief Accounting Officer since July 1991. He has been Chief
Financial Officer of the Corporation since July 1992. He has served as Senior
Vice Chairman of the Bank since April 1997 and as its Chief Financial Officer
since 1985. He has 28 years of experience in the financial services industry and
has been with the Corporation since 1985. He has been a director of the Bank
since 1986.
Lance L. Weaver (44) oversees corporate affairs, law, government relations,
compensation and benefits, and real estate. He also oversees Administrative
Services, including corporate insurance, facility management, security,
transportation, and purchasing activities. He has been an Executive Vice
President of the Corporation since April 1994. He has served as Senior Vice
Chairman of the Bank since July 1997 and served as Chief Administrative Officer
of the Bank since February 1993. He has 24 years of experience in consumer
lending and administration and has been with the Corporation since 1991. He has
been a director of the Bank since February 1993.
Ronald W. Davies (57) oversees MBNA Hallmark Information Services, which
provides the Corporation with telecommunications, production operations,
information systems, and systems operations and development. He has been an
Executive Vice President of the Corporation since October 1991. He has served as
Senior Vice Chairman of the Bank since December 1997 and Chief Technology
Officer of the Bank since April 1991. He has served as Chairman and Chief
Executive Officer of MBNA Hallmark Information Services, Inc. since August 1991.
He has 34 years of experience in information systems and technology management
and has been with the Corporation since 1991. He has been a director of the Bank
since April 1991.
Gregg Bacchieri (43) oversees all credit and loss prevention efforts. He
has been an Executive Vice President of the Corporation since July 1997 and
Senior Vice Chairman of the Bank since November 1998. He has 20 years of
management experience in retail lending and was a member of the management team
that established the Bank in 1982. He has been a director of the Bank since July
1997.
Richard K. Struthers (43) oversees international, insurance, deposit,
travel and business card activities. He has been an Executive Vice President of
the Corporation since April 1997. He has served as Senior Vice Chairman of the
Bank since December 1997. He has 21 years of experience in consumer lending and
was
11
<PAGE> 14
a member of the management team that established the Bank in 1982. He has been a
director of the Bank since January 1997.
Kenneth F. Boehl (44) joined the Corporation in 1988 and serves as the
Chief Control Officer and is responsible for risk management and personnel
activities. He has been an Executive Vice President of the Corporation and Vice
Chairman of the Bank since July 1997. He has been the Senior Control Officer of
the Bank since April 1992. He has 23 years of experience in financial
management. He has been a director of the Bank since July 1997.
Jules J. Bonavolonta (58) oversees special operations, facility management,
security, transportation and purchasing activities. He has been an Executive
Vice President of the Corporation and Vice Chairman of the Bank since October
1997. Prior to joining the Corporation, he served as President of Universal
Network, Inc., a security consulting firm, from August 1995 to March 1997. He
was director of corporate security for Consolidated Edison of New York from
January 1991 to August 1992 and for Republic National Bank of New York from
August 1992 to July 1995. He had a 23 year career with the Federal Bureau of
Investigation which included extensive experience in domestic and international
investigations, including as Chief of the Organized Crime and Narcotics
Division. He joined the Corporation in March 1997 and has been a director of the
Bank since October 1997.
John W. Scheflen (52) is responsible for corporate affairs, corporate
insurance, government affairs, law and real estate acquisition. He has been an
Executive Vice President, General Counsel and Secretary of the Corporation and
Secretary and Cashier of the Bank since March 1992. He has been a Vice Chairman
and Director of the Bank since September 1998. Prior to joining the Corporation
he was a partner with Venable, Baetjer and Howard from 1984 to March 1992. He
has 24 years of experience in law and has been with the Corporation since 1992.
David W. Spartin (41) oversees investor relations, media relations,
communications, community education initiatives, business analysis, and
administration. He has been an Executive Vice President of the Corporation since
April 1997 and has served as Vice Chairman of the Bank since March 1997. He has
20 years of experience in the financial services industry and has been with the
Corporation since 1991. He has been a director of the Bank since March 1997.
Michael G. Rhodes (33) oversees Customer Satisfaction. He has been an
Executive Vice President of the Corporation and a Vice Chairman and Director of
the Bank since August 1998. Prior to joining the Corporation in 1994, he was an
associate at Duff & Phelps Capital Markets from July 1993 to April 1994 and was
an engineer at Failure Analysis Associates from August 1987 to July 1991. He is
Mr. Cawley's son-in-law.
Vernon H. C. Wright (56) oversees foreign and domestic treasury activities,
including securitization, investments and funding, and corporate finance
activities. He has been an Executive Vice President and Chief Corporate Finance
Officer of the Corporation and Chief Corporate Finance Officer of the Bank since
July 1992. He has been Vice Chairman of the Bank since September 1995. He has
more than 30 years of experience in retail and commercial lending and has been
with the Corporation since 1991. He has been a director of the Bank since
November 1992.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
"Common Stock Price Range and Dividends" on page 74 and "Capital Adequacy
and Dividend Limitations" on pages 35 and 36 of the 1998 Annual Report to
Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Ten-Year Statistical Summary" on pages 22 and 23 of the 1998 Annual Report
to Stockholders is incorporated herein by reference.
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<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 25 through 42 of the 1998 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"Interest Rate Sensitivity" and "Foreign Currency Exchange Rate
Sensitivity" on pages 39 and 40 of the 1998 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Independent Auditors", the Consolidated Financial Statements
and Notes to the Consolidated Financial Statements, and the "Summary of
Consolidated Quarterly Financial Information" on pages 45 through 72 of the 1998
Annual Report to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" on pages 4 and 5 in the Definitive Proxy Statement
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
"Election of Directors" on pages 4 and 5, "Executive Compensation" on pages
6 through 9 and "Compensation Committee Interlocks and Insider Participation" on
page 11 in the Definitive Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Management and Certain Beneficial Owners" on pages 2
and 3 in the Definitive Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships" on page 11 in the Definitive Proxy Statement are incorporated
herein by reference.
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<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. The following consolidated financial statements of MBNA Corporation and
subsidiaries are incorporated herein by reference from the pages designated in
the 1998 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors.............................. 45
Consolidated Statements of Financial Condition, December 31,
1998 and 1997............................................. 46
Consolidated Statements of Income for the years ended
December 31,
1998, 1997 and 1996....................................... 47
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31,
1998, 1997 and 1996....................................... 48
Consolidated Statements of Cash Flows for the years ended
December 31,
1998, 1997 and 1996....................................... 49
Notes to the Consolidated Financial Statements.............. 50-71
</TABLE>
2. Financial Statement Schedules
No Financial Statement Schedules are required to be filed.
3. Exhibits:
The following exhibits are incorporated by reference or filed herewith.
References to the 1990 Form S-1 are to the Registrant's Registration Statement
on Form S-1 effective January 22, 1991, Registration No. 33-38125. References to
the 1997 Form S-4 are to Amendment No. 1 of the Registrant's Registration
Statement on Form S-4, Registration No. 333-21181, filed on February 25, 1997.
References to the 1991 Form 10-K, the 1992 Form 10-K, the 1993 Form 10-K, the
1994 Form 10-K, the 1995 Form 10-K, the 1996 Form 10-K and the 1997 Form 10-K
are to the Registrant's Annual Reports on Form 10-K for the years ended December
31, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively.
<TABLE>
<S> <C>
Exhibit 3.1 Articles of Incorporation, as amended and supplemented
(incorporated by reference to Exhibit 3.1 of Form 10-Q for
the quarter ended March 31, 1998).
Exhibit 3.2 By-laws, as amended (incorporated by reference to Exhibit
3.2 of 1997 Form 10-K).
Exhibit 4.1* Senior Indenture dated as of September 29, 1992, between the
Registrant and Bankers Trust Company, as Trustee.
Exhibit 4.2* Subordinated Indenture, dated as of November 24, 1992,
between the Registrant and Harris Trust and Savings Bank, as
Trustee.
Exhibit 4.3* Fiscal and Paying Agency Agreement, dated September 21,
1992, between MBNA America Bank, N.A. and Harris Trust and
Savings Bank, as Fiscal and Paying Agent, for the 7.25%
Subordinated Notes due 2002.
Exhibit 4.4* Issuing and Paying Agency Agreement dated as of December 10,
1991, and amended as of August 11, 1993, December 21, 1994
and May 6, 1996 between MBNA America Bank, N.A. and First
Trust of New York, National Association.
Exhibit 4.5 Junior Subordinated Indenture between the Registrant and The
Bank of New York, as Debenture Trustee (incorporated by
reference to Exhibit 4(c) of 1997 Form S-4).
Exhibit 4.6 Amended and Restated Trust Agreement, dated as of December
18, 1996, between the Registrant and The Bank of New York
(incorporated by reference to Exhibit 4.6 of 1996 Form
10-K).
</TABLE>
14
<PAGE> 17
<TABLE>
<S> <C>
Exhibit 4.7 Guarantee Agreement, dated as of December 18, 1996, between the Registrant and The Bank of New
York (incorporated by reference to Exhibit 4.7 of 1996 Form 10-K).
Exhibit 4.8 Amended and Restated Trust Agreement, dated as of January 23, 1997, between the Registrant and
The Bank of New York (incorporated by reference to Exhibit 4.8 of 1996 Form 10-K).
Exhibit 4.9 Guarantee Agreement, dated as of January 23, 1997, between the Registrant and The Bank of New
York (incorporated by reference to Exhibit 4.9 of 1996 Form 10-K).
Exhibit 4.10 Amended and Restated Trust Agreement, dated as of February 24, 1997, between the Registrant and
The Bank of New York (incorporated by reference to Exhibit 4(e)(4) of the 1997 Form S-4).
Exhibit 4.11 Guarantee Agreement, dated as of March 31, 1997 between the Registrant and The Bank of New York
(incorporated by reference to Exhibit 4.11 of 1997 Form 10-K).
Exhibit 10.1 Tax Sharing and Indemnity Agreement with MNC Financial (incorporated by reference to Exhibit 10.2
of 1990 Form S-1).
Exhibit 10.2 License Agreement with MasterCard (incorporated by reference to Exhibit 10.3 of 1990 Form S-1).
Exhibit 10.3 License Agreement with VISA (incorporated by reference to Exhibit 10.4 of 1990 Form S-1).
Exhibit 10.4 Share Purchase Agreement with Alfred Lerner (including Registration Rights Agreement)
(incorporated by reference to Exhibit 10.10 of 1990 Form S-1).
Exhibit 10.5 Amended and Restated Competitive Advance and Revolving Credit Facility Agreement, dated as of
January 15, 1997, among MBNA America Bank, N.A., certain lenders and Chase Manhattan Bank, as
Agent (incorporated by reference to Exhibit 10.5 of 1996 Form 10-K).
Exhibit 10.6 Fifth Amendment dated March 1, 1999 and Fourth Amendment dated March 27, 1998 to the Credit
Agreement dated as of April 13, 1994, between the Registrant and Bank of America National Trust
and Savings Association (the Third Amendment dated February 27, 1997 and the Second Amendment
dated April 10, 1996 are incorporated by reference to Exhibit 10.6 of 1996 Form 10-K, the First
Amendment dated April 7, 1995 is incorporated by reference to Exhibit 10.6 of 1995 Form 10-K and
the original agreement is incorporated by reference to Exhibit 10.7 of 1994 Form 10-K).
Exhibit 10.7 Amendment dated September 30, 1998 to the Credit Agreement, dated as of October 5, 1994, between
Registrant and The Bank of New York (the Amendment dated October 2, 1996 and amendment dated June
28, 1996 are incorporated by reference to Exhibit 10.7 of 1996 Form 10-K, the Amendment dated
October 4, 1995 is incorporated by reference to Exhibit 10.7 of 1995 Form 10-K and the original
Agreement is incorporated by reference to Exhibit 10.8 of 1994 Form 10-K).
Exhibit 10.8** 1991 Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 of Form 10-Q
for the quarter ended March 31, 1997 and Exhibit 10.8 of 1995 Form 10-K), and forms of Stock
Option Agreements (1993 agreement incorporated by reference to Exhibit 10.12 of 1993 Form 10-K
and 1995 agreements incorporated by reference to Exhibit 10.8 of 1995 Form 10-K).
Exhibit 10.9** 1997 Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of Form 10-Q
for the quarter ended March 31, 1998) and form of Stock Option Grant (incorporated by reference
to Exhibit 10.9 of 1997 Form 10-K).
Exhibit 10.10** Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.9 of 1995 Form 10-K).
Exhibit 10.11** MBNA Corporation Supplemental Executive Retirement Plan, as amended and restated.
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C>
Exhibit 10.12** Assumed Deferred Compensation Plans (1989 Deferred
Compensation Plan incorporated by reference to Exhibit 10.12
of 1991 Form 10-K and 1988 Deferred Compensation Plan
incorporated by reference to Exhibit 10.14 of 1993 Form
10-K).
Exhibit 10.13** MBNA Corporation Senior Executive Performance Plan
(incorporated by reference to Exhibit 10.2 of Form 10-Q for
the quarter ended March 31, 1997).
Exhibit 10.14** Form of Split Dollar Agreement (incorporated by reference to
Exhibit 10.18 of 1992 Form 10-K).
Exhibit 10.15** Deferred Compensation Plan and form of Agreement, as amended
and restated effective April 1, 1995 (incorporated by
reference to Exhibit 10.16 of 1994 Form 10-K).
Exhibit 10.16 Amended and Restated Multicurrency Revolving Credit Facility
Agreement dated as of October 11, 1996, among MBNA
International Bank Limited, certain lenders and The First
National Bank of Chicago, as Agent (incorporated by
reference to Exhibit 10.16 of 1997 Form 10-K).
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements.
Exhibit 13 1998 Annual Report to Stockholders.
Exhibit 21 Subsidiaries of the Corporation.
Exhibit 23 Consent of Independent Auditors.
Exhibit 27 Financial Data Schedule.
</TABLE>
- ---------------
* The Registrant agrees to furnish a copy to the Securities and Exchange
Commission on request.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
4. REPORTS ON FORM 8-K
1. Report dated October 7, 1998, reporting MBNA Corporation's earnings
release for the third quarter of 1998.
2. Report dated October 22, 1998, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank,
N.A.
3. Report dated October 29, 1998, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank,
N.A.
4. Report dated October 31, 1998, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for October 1998.
5. Report dated November 30, 1998, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for November 1998.
6. Report dated December 17, 1998, reporting the securitization of
250.0 million pounds sterling of credit card receivables by MBNA
International Bank Limited.
7. Report dated December 23, 1998, reporting the execution of a
definitive agreement with PNC Bank, National Association to acquire
PNC National Bank.
8. Report dated December 31, 1998, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for December 1998.
9. Report dated January 4, 1999, reporting MBNA Corporation's earnings
release for the fourth quarter of 1998.
16
<PAGE> 19
10. 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.
11. Report dated January 7, 1999, reporting MBNA Corporation's
financial highlights for the fourth quarter of 1998.
12. 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.
13. 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.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MBNA CORPORATION
By: /s/ ALFRED LERNER
--------------------------------------
Alfred Lerner
Chairman and Chief Executive Officer
March 19, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALFRED LERNER Chairman, Chief Executive Officer March 19, 1999
- --------------------------------------------------- and Director (principal
Alfred Lerner executive officer)
/s/ CHARLES M. CAWLEY President and Director March 19, 1999
- ---------------------------------------------------
Charles M. Cawley
/s/ M. SCOT KAUFMAN Executive Vice President and March 19, 1999
- --------------------------------------------------- Treasurer (principal financial
M. Scot Kaufman and accounting officer)
/s/ JAMES H. BERICK Director March 19, 1999
- ---------------------------------------------------
James H. Berick, Esq
/s/ BENJAMIN R. CIVILETTI Director March 19, 1999
- ---------------------------------------------------
Benjamin R. Civiletti, Esq
/s/ RANDOLPH D. LERNER Director March 19, 1999
- ---------------------------------------------------
Randolph D. Lerner, Esq
/s/ STUART L. MARKOWITZ Director March 19, 1999
- ---------------------------------------------------
Stuart L. Markowitz, M.D.
/s/ MICHAEL ROSENTHAL Director March 19, 1999
- ---------------------------------------------------
Michael Rosenthal, Ph.D.
</TABLE>
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<PAGE> 21
EXHIBIT INDEX
The following exhibits are filed with the MBNA Corporation annual report on
Form 10-K for the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
10.6 Fifth Amendment dated March 1, 1999 and Fourth Amendment
dated March 27, 1998 to the Credit Agreement dated as of
April 13, 1994, between the Registrant and Bank of America
National Trust and Savings Association (the Third Amendment
dated February 27, 1997 and the Second Amendment dated April
10, 1996 are incorporated by reference to Exhibit 10.6 of
1996 Form 10-K, the First Amendment dated April 7, 1995 is
incorporated by reference to Exhibit 10.6 of 1995 Form 10-K
and the original agreement is incorporated by reference to
Exhibit 10.7 of 1994 Form 10-K).............................
10.7 Amendment dated September 30, 1998 to the Credit Agreement,
dated as of October 5, 1994, between Registrant and The Bank
of New York (the Amendment dated October 2, 1996 and
amendment dated June 28, 1996 are incorporated by reference
to Exhibit 10.7 of 1996 Form 10-K, the Amendment dated
October 4, 1995 incorporated by reference to Exhibit 10.7 of
1995 Form 10-K and the original Agreement is incorporated by
reference to Exhibit 10.8 of 1994 Form 10-K)................
10.11 MBNA Corporation Supplemental Executive Retirement Plan, as
amended and restated........................................
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements...................
13 1998 Annual Report to Stockholders..........................
21 Subsidiaries of the Corporation.............................
23 Consent of Independent Auditors.............................
27 Financial Data Schedule.....................................
</TABLE>
<PAGE> 22
[LOGO] PRINTED ON RECYCLED PAPER
<PAGE> 1
EXHIBIT 10.6
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
March 27, 1998 is entered into by and between MBNA Corporation, a Maryland
corporation (the "Company") and Bank of America National Trust and Savings
Association (the "Bank").
RECITALS
A. The Company and the Bank are parties to a Credit Agreement dated as
of April 13, 1994 and amended by a First Amendment to Credit Agreement dated as
of April 7, 1995, a Second Amendment to Credit Agreement dated as of April 10,
1996, and a Third Amendment to Credit Agreement dated as of February 27, 1997,
in each case between the Company and the Bank (as in effect as of the opening
of business on the date of this Amendment, the "Credit Agreement") pursuant to
which the Bank has extended a credit facility to the Company.
B. The Company and the Bank, prior to March 2, 1998, agreed to certain
amendments of the Credit Agreement.
C. This Amendment evidences such prior agreement to amend the Credit
Agreement as set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement. From and after the Effective Date of
this Amendment:
(a) Section 1.01 of the Credit Agreement is amended by amending
the definition of "Termination Date" in its entirety to provide:
"TERMINATION DATE" MEANS THE EARLIER TO OCCUR OF
(a) MARCH 1, 1999 (OR THE LATER DATE AGREED TO BETWEEN THE BANK
AND THE COMPANY AS SPECIFIED IN SECTION 2.01(b)); AND
(b) THE DATE ON WHICH THE COMMITMENT SHALL TERMINATE IN ACCORDANCE
WITH THE PROVISIONS OF THIS AGREEMENT.
(b) Section 2.09(b) of the Credit Agreement is amended by deleting
"0.1000%" in the second line of the subsection and replacing it with "0.1250%".
(c) The first seven lines of Section 5.05 of the Credit Agreement
is amended to provide as follows:
5.05 LITIGATION. EXCEPT AS DISCLOSED WITHIN THE COMPANY'S MOST
RECENT ANNUAL REPORT ON FORM 10K, OR IN ANY SUBSEQUENT REPORTS OF
THE COMPANY ON FORM 10-Q OR 8-K, DATED PRIOR TO THE DATE OF THIS
AGREEMENT OR ANY SUBSEQUENT AMENDMENTS HERETO, TO THE BEST
KNOWLEDGE OF THE COMPANY THERE ARE NO ACTIONS, SUITS, PROCEEDINGS,
CLAIMS OR DISPUTES PENDING, OR THREATENED OR CONTEMPLATED, AT LAW,
IN EQUITY, IN ARBITRATION OR BEFORE ANY
1
<PAGE> 2
GOVERNMENTAL AUTHORITY, AGAINST THE COMPANY, OR ITS SUBSIDIARIES OR
ANY OF THEIR RESPECTIVE PROPERTIES WHICH:
3. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any Governmental Authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of the Company,
enforceable against it in accordance with its respective terms, without
defense, counterclaim or offset.
(c) After giving effect to this Amendment all representations and
warranties of the Company contained in the Credit Agreement are true and
correct in all material respects.
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the Bank
or any other Person.
4. Effective Date. This Amendment will become effective as of March 2,
1998 (the "Effective Date"), provided that on or before March 27, 1998 the Bank
has received from the Company a duly executed original (or, if elected by the
Bank, an executed facsimile copy) of this Amendment.
5. Reservation of Rights. The Company acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment
shall be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit
of the parties hereto and thereto and their respective successors and assigns.
No third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Company
shall bind
2
<PAGE> 3
the Company with the same force and effect as the delivery of a hard copy
original. Any failure by the Bank to receive the hard copy executed original
of such document shall not diminish the binding effect of receipt of the
facsimile transmitted executed original of such document which hard copy page
was not received by the Bank.
(e) This Amendment may not be amended except in accordance with
the provisions of Section 9.01(a) of the Credit Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
MBNA CORPORATION BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: By:
----------------- -----------------------------
Name: Vernon H.C. Wright Name: Kurt A. Cardoza
Title: Executive Vice President Title: Director
4
<PAGE> 5
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
March 1, 1999 (the "Effective Date"), is entered into by and between MBNA
Corporation, a Maryland corporation (the "Company") and Bank of America
National Trust and Savings Association (the "Bank").
RECITALS
A. The Company and the Bank are parties to a Credit Agreement dated as
of April 13, 1994 and amended by a First Amendment to Credit Agreement dated as
of April 7, 1995, a Second Amendment to Credit Agreement dated as of April 10,
1996, a Third Amendment to Credit Agreement dated as of February 27, 1997, and
a Fourth Amendment to Credit Agreement dated as of March 27, 1998, in each case
between the Company and the Bank (as in effect as of the opening of business on
the date of this Amendment, the "Credit Agreement") pursuant to which the Bank
has extended a credit facility to the Company.
B. The Company and the Bank have agreed to certain amendments to the
Credit Agreement.
C. This Amendment evidences such agreement to amend the Credit
Agreement as set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement. From and after the Effective Date
of this Amendment:
(a) Section 1.01 of the Credit Agreement is amended by amending
the definition of "Termination Date" to read in its entirety as follows:
"'Termination Date' means the earlier to occur of
(a) February 29, 2000 (or the later date agreed to between
the Bank and the Company as specified in Section 2.01(b)); and
(b) the date on which the Commitment shall terminate in
accordance with the provisions of this Agreement."
(b) Section 5.10(a) of the Credit Agreement is amended by deleting
"December 31, 1993" therefrom and replacing it with "December 31, 1997".
(c) A new Section 5.12, reading in its entirety as follows, is
added to the Credit Agreement:
"5.12 Year 2000 Preparedness. The Company and its Subsidiaries
have developed and budgeted for a comprehensive program to address
on a timely basis the 'Year 2000 problem' (that is, the inability
of computers, as well as embedded microchips in non-computing
devices, to perform properly date-sensitive functions with respect
to certain dates prior to and after December 31, 1999). The
Company and its Subsidiaries have
5
<PAGE> 6
implemented that program substantially in accordance with its
timetable and budget and reasonably anticipate that the Year 2000
problem, including costs of remediation, testing and contingency
plans, will not have a Material Adverse Effect."
(d) Section 6.01 of the Credit Agreement is amended to read in its
entirety as follows:
"6.01 Financial Statements. The Company shall deliver to the Bank:
(a) upon the request of the Bank (which the Bank shall not
make unless such Annual Report is not generally publicly available
by electronic means) and as soon as available, but not later than
120 days after the end of each fiscal year, a copy of the Annual
Report on Form 10-K of the Company for such fiscal year;
(b) upon the request of the Bank (which the Bank shall not
make unless such Quarterly Report is not generally publicly
available by electronic means) and as soon as available, but not
later than 60 days after the end of each of the first three fiscal
quarters of each year, a copy of the Quarterly Report on Form 10-Q
of the Company for such fiscal quarter;
(c) as soon as available, but not later than 60 days after
the end of each of the first three fiscal quarters of each year,
and 120 days after the end of each fiscal year:
(i) a copy of the Parent Company Only Financial
Statements on Form FR Y-9LP of the Company for the fiscal
quarter then ended; and
(ii) a copy of the Consolidated Financial Statements
on Form FR Y-9C of the Company for the fiscal year then ended;
in such case certified by an appropriate Responsible Officer as
being the complete and correct copies of the statements on such
forms filed by the Company with the FRB (in the case of subsection
(c) of this Section 6.01)."
3. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any Governmental Authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of the Company,
enforceable against it in accordance with its terms, without defense,
counterclaim or offset.
(c) After giving effect to this Amendment, all representations and
warranties of the Company contained in the Credit Agreement are true and
correct in all material respects.
6
<PAGE> 7
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the Bank
or any other Person.
4. Effectiveness. This Amendment will become effective when the Bank
has received from the Company a duly executed original (or, if elected by the
Bank, an executed facsimile copy) of this Amendment together with such
resolutions and certifications of incumbency as the Bank may reasonably
request.
5. Reservation of Rights. The Company acknowledges and agrees that
the execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment
shall be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. No third
party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Company
shall bind the Company with the same force and effect as the delivery of a hard
copy original. Any failure by the Bank to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document.
(e) This Amendment may not be amended except in accordance with
the provisions of Section 9.01(a) of the Credit Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
MBNA CORPORATION BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: By:
-------------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
----------------------------- -----------------------------
8
<PAGE> 1
EXHIBIT 10.7
AMENDMENT
AMENDMENT (this "Amendment") dated as of September 30, 1998 between
MBNA CORPORATION, a Maryland corporation (the "Company"), and THE BANK OF NEW
YORK, a New York corporation (the "Bank").
W I T N E S S E T H:
WHEREAS, the Company and the Bank are parties to a certain Credit
Agreement dated as of October 5, 1994, as amended October 5, 1994, as of
October 4, 1995, as of June 28, 1996, as of October 2, 1996, as of October 1,
1997 and as of March 9, 1998 (the "Credit Agreement"); and
WHEREAS, the Company and the Bank desire to amend the Credit Agreement
in certain respects;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. All capitalized terms used herein shall have the
meanings assigned to such terms in the Credit Agreement.
2. As used in the Credit Agreement, each reference to
the Credit Agreement shall mean the Credit Agreement as amended by this
Amendment and as the same may from time to time be further amended,
supplemented or otherwise modified.
3. The definition of "Termination Date" in Section 1.01
of the Credit Agreement is hereby amended in its entirety to read as follows:
"'Termination Date' shall mean the earlier to occur
of:
(a) September 29, 1999 (or any later date agreed
to between the Bank and the Company as specified in Section
2.01(b)); and
(b) the date on which the Commitment shall
terminate in accordance with the provisions of this
Agreement."
<PAGE> 2
2
4. The Company represents and warrants to the Bank as
follows:
(a) The Company has all requisite power and
authority to execute and deliver this Amendment and to incur the
obligations provided for in this Amendment and in the Credit Agreement
as amended by this Amendment (the "Amended Credit Agreement"), which
execution, delivery and incurrence have been duly authorized by all
necessary and proper action. Except for the consents and approvals
previously delivered to the Bank, no consent or approval or the taking
of any other action (including, without limitation, of or by
shareholders or of or by any governmental department, commission,
board, bureau, instrumentality or agency) is required as a condition
to the execution, delivery, performance, validity or enforceability of
this Amendment or the Amended Credit Agreement.
(b) This Amendment has been duly executed and
delivered by the Company. Each of this Amendment and the Amended
Credit Agreement constitutes the valid and legally binding obligation
of the Company, enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
rights of creditors generally or by equitable principles relating to
enforceability.
(c) The execution, delivery and performance by
the Company of this Amendment and of the Amended Credit Agreement do
not (i) violate any provision of the Company's Organization Documents,
(ii) violate any order, decree or judgment, or any provision of any
statute, rule or regulation, (iii) violate or conflict with, result in
a breach of or constitute (with notice or lapse of time or both) a
default under any Contractual Obligation to which the Company is a
party, or (iv) result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any property or
asset of the Company.
(d) All of the representations and warranties set
forth in the Amended Credit Agreement are true and correct in all
material respects on and as of the date hereof as if made on the date
hereof.
(e) As of the date hereof, there exists no
Default or Event of Default which has occurred and is continuing.
5. Simultaneously with the execution and delivery of
this Amendment, the Company will execute and deliver to the Bank (a) a
certificate of the Secretary or an Assistant Secretary of the Company (the
"Certificate") which states that attached thereto or set forth therein is a
true and correct copy of all action taken by the Company (which action has not
been modified, amended or rescinded and is in full force and effect) to
authorize the execution, delivery and performance by the Company of this
Amendment (including, without limitation, the extension of the Termination Date
effected by this Amendment) and the performance of the
<PAGE> 3
3
Amended Credit Agreement and (b) a favorable written opinion of John W.
Scheflen, General Counsel of the Company, dated the date of this Amendment and
in the form of Annex 1 attached to this Amendment (the "Opinion").
6. The amendments of the Credit Agreement set forth in
this Amendment are limited precisely as written, and, except as expressly
amended by this Amendment, nothing contained in this Amendment shall be deemed
(a) to be a waiver, amendment, modification or other change of any term,
condition or provision of the Credit Agreement (or a consent to any such
waiver, amendment, modification or other change), (b) to prejudice any right or
rights which the Bank may have under the Credit Agreement, or (c) to entitle
the Company to a waiver, amendment, modification or other change of any term,
condition or provision of the Credit Agreement (or a consent to any such
waiver, amendment, modification or other change), or to a consent, in similar
or different circumstances.
7. Except as expressly amended by this Amendment, the
terms and provisions of the Credit Agreement shall remain in full force and
effect.
8. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
9. This Amendment may be executed in two or more
counterparts, each of which shall constitute but one instrument, and shall be
effective as of September 30, 1998 when copies hereof, which, when taken
together, bear the signatures of each of the parties hereto, shall be delivered
to the Bank, together with the Certificate and the Opinion.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers as of the date first written
above.
MBNA CORPORATION
By:
-------------------------------
Name:
------------------------
Title:
------------------------
THE BANK OF NEW YORK
By:
-------------------------------
Name:
------------------------
Title:
------------------------
<PAGE> 1
EXHIBIT 10.11
MBNA CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(As Amended and Restated)
<PAGE> 2
ARTICLE I
Title and Effective Date
1.01 This Plan shall be known as the MBNA Corporation
Supplemental Executive Retirement Plan (hereinafter referred to as the "Plan).
1.02 The Plan was adopted by the Board of Directors effective
January 29, 1991, and was subsequently amended. As restated, the Plan includes
all amendments through November 12, 1996.
<PAGE> 3
ARTICLE II
Definitions
As used herein, the following words and phrases shall have the
meanings specified below unless a different meaning is clearly required by the
context.
2.01 The term "Attained Age" shall mean the age of a Member as of
his or her last birthday, except to the extent provided in Section 4.01.
2.02 The term "Average Monthly Earnings" shall mean the highest
average base salary paid to the Member for any twelve (12) consecutive month
period during the seventy-two (72) month period immediately preceding the
termination of the Member's employment. For this purpose, employment with MNC
Financial, Inc. ("MNC") or any of its subsidiaries at any time shall be
examined to determine if average base salary paid by MNC produces the highest
average. If so, it shall be included in determining Average Monthly Earnings.
Annual salary for purposes of determining Average Monthly Earnings shall be
limited as set forth in the benefit schedules attached to the Plan as from time
to time amended."
2.03 The term "Beneficiary" or "Contingent Beneficiary" shall
mean any person, persons, trust or estate of a Member entitled to receive any
benefits under this Plan.
2.04 The term "Board of Directors" shall mean the Board of
Directors of the Corporation.
2.05 The term "Cause" shall mean the occurrence of one of the
following:
(a) A conviction of the Member of (i) a felony or (ii)
any lesser crime or offense than a felony involving the property of the
Employer, provided that such lesser crime or offense causes demonstrable and
serious injury to the Employer, monetarily or otherwise.
(b) The willful engaging by the Member in conduct
which has caused demonstrable and serious injury to the Employer, monetary or
otherwise, as evidenced by a determination in a binding and final judgment,
order or decree of a court or administrative
2
<PAGE> 4
================================================================================
agency of competent jurisdiction, in effect after exhaustion or lapse of all
rights of appeal, in an action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(c) Willful gross neglect of his duties, gross
dereliction of duty or other grave misconduct by the Member and failure to cure
such situation within thirty (30) days after receipt of notice thereof from the
Chief Executive Officer of the Employer. If the Member who receives such a
notice is the Chief Executive Officer of the Employer, it shall be received
from the Board of Directors as authorized by not less than two-thirds (2/3) of
all of the members thereof. For purposes of this Plan, no act, or failure to
act, by a Member shall be deemed "willful" unless done, or omitted to be done,
not in good faith and without reasonable belief that his action or omission was
in the best interest of the Employer. Notwithstanding the foregoing, a Member
shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to the Member a copy of a resolution duly adopted by
the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board of Directors at a meeting of the Board of Directors
called and held for such purpose (after reasonable notice to the Member and an
opportunity for the Member, together with Member's counsel, to be heard before
the Board of Directors), finding that in the good faith opinion of the Board of
Directors the Member is guilty of conduct set forth above in clauses (a), (b),
or (c) of this Subsection 2.05 and specifying the particulars thereof in
detail.
2.06 Change of Control shall mean the occurrence of either (i),
(ii) or (iii), as hereinafter set forth:
(i) a change of a nature that would be required to be
reported in response to item 6(3) of Schedule 14A of Regulation 14A, or any
successor provisions thereto, promulgated under the Securities Exchange Act of
l934 ("Exchange Act"); provided that, without limitation, a Change of Control
shall be deemed to have occurred if any "person" or "group" (as those terms are
used in Sections l3(d) and l4(d), respectively, of the Exchange Act), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation, or a corporation owned, directly or indirectly, by the
stockholders of the Corporation in substantially
3
<PAGE> 5
the same proportions as their ownership of stock of the Corporation, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Corporation representing
forty percent (40%) or more of the combined voting power of the Corporation's
then outstanding securities; or
(ii) during any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the board of
Directors and any new director (other than a director designated by a person
who has entered into an agreement with the Corporation to effect a transaction
described in clauses (i) or (iii) of this Subsection) whose election by the
Board of Directors or nomination for election by the Corporation's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(iii) the shareholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation, other
than a merger or consolidation which would result in the voting securities of
the Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) at least eighty percent (80%) of the combined voting
power of the voting securities of the Corporation or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Corporation approve a plan of complete liquidation of the Corporation or
an agreement for the sale or disposition by the Corporation of all or
substantially all the Corporation's assets.
2.07 The term "Committee" shall mean the committee appointed by
the Board of Directors to administer the Plan.
2.08 The term "Competition" shall be deemed to apply if a Member
who is no longer employed by the Corporation obtains a position as director,
trustee, officer or employee, or acts as a consultant or advisor to, or
acquires an ownership interest in excess of five percent (5%) in,
4
<PAGE> 6
any corporation, partnership, firm or other business entity that engages in any
business which competes with the business of the Corporation.
2.09 "Corporation" shall mean MBNA Corporation, and any
successor.
2.10 The term "Death Benefit" shall mean any benefit paid to a
Beneficiary or Contingent Beneficiary as provided under Article V of the Plan.
2.11 The term "Disability Retirement Date" shall mean the first
day of the month immediately following the date a Disabled Member retires due
to Disability.
2.12 The term "Disability" or "Disabled" shall mean eligibility
for disability benefits under the terms of the Employer's Long-Term Disability
Plan in effect at the time the Member becomes disabled.
2.13 The term "Employer" shall mean the Corporation, its
successors and assigns, MBNA America Bank, N.A., any other subsidiary or
affiliated organizations authorized by the Board of Directors of the
Corporation to participate in this Plan with respect to their Members, and,
subject to the provisions of Article IX, any organization into which the
Employer may be merged or consolidated or to which all or substantially all of
its assets may be transferred.
2.14 Good Reason shall mean the occurrence of one of the
following events:
(a) Without the express written consent of the
Executive, the assignment of the Executive to any duties materially
inconsistent with the Executive's positions, duties, responsibilities and
status with the Corporation and its subsidiaries immediately prior to the
occurrence of a Change of Control, or a material change in the Executive's
titles, offices or reporting responsibilities as in effect immediately prior to
such Change of Control, or any removal of the Executive from or any failure to
re-elect the Executive to any of such positions, except in connection with the
termination of the Executive's employment for Cause, death, Disability,
Retirement or by the Executive for other than Good Reason, which situation is
not remedied within thirty (30) days after receipt by the Corporation of
written notice by the Executive:
5
<PAGE> 7
(b) Without the express written consent of the
Executive, a reduction in the Executive's total compensation (including base
salary, bonus, and incentive compensation) in effect immediately prior to such
Change of Control which is not remedied within thirty (30) days after receipt
by the Corporation of written notice by the Executive;
(c) Without the express written consent of the
Executive, the Employer requires the Executive to be based anywhere other than
(i) his office location immediately preceding the occurrence of a Change of
Control, or (ii) one of the Corporation's principal executive offices, provided
that such office is located within fifty (50) miles of the location specified
in the preceding clause (i) except for required travel on the Employer's
business to an extent substantially consistent with the business travel
obligations of the Executive immediately preceding the occurrence of the Change
of Control;
(d) Without the express written consent of the
Executive, the failure by the Employer to continue in effect any benefit or
compensation plan, stock ownership plan, stock purchase plan, stock option
plan, life insurance plan, health-and-accident plan or disability plan in which
the Executive is participating at the time of a Change of Control (or plans
providing substantially similar benefits), the taking of any action by the
Employer which would adversely affect the participation in or materially reduce
the benefits under any of such plans either in terms of the amount of benefits
provided or the level of the Executive's participation relative to other
participants or deprive the Executive of material fringe benefit enjoyed by the
Executive at the time of the Change of Control, or the failure by the Employer
to provide the number of paid vacation days to which the Executive was then
entitled in accordance with the Employer's normal vacation policy in effect
immediately prior to said Change of Control, which is not remedied within
thirty (30) days after receipt by the Employer of written notice by the
Executive;
(e) A breach by the Employer of any provision of the
Plan not embraced within the foregoing clauses (a), (b), (c) and (d) of this
Section which is not remedied within thirty (30) days after receipt by the
Employer of written notice from the Executive.
6
<PAGE> 8
(f) The liquidation, dissolution, consolidation or
merger of the Employer or transfer of all or a significant portion of its
assets, unless a successor or successors (by merger, consolidation or
otherwise) to which all or a significant portion of its assets have been
transferred assumes all duties and obligations of the Employer under this
Agreement.
(g) In the event a breach embraced within the
foregoing clauses (a), (b), (c), (d), or (e) of this Section 2.l4 is cured
within the thirty (30) day period specified in such clauses, any subsequent
breach of any provision embraced within the clauses of this Section 2.l4 shall
immediately be deemed to constitute Good Reason and there shall be no provision
for a thirty (30) day remedial period.
2.15 The term "Member" shall mean an employee who is part of a
select group of management and has become a Member as provided in Article III
hereof.
2.16 The term "Monthly Retirement Income" shall mean a monthly
income due a Retired Member which shall commence as of his Retirement Date, or
the commencement of benefit payments under Article V or Article VI hereof, and
continue for the period provided herein.
2.17 The term "Plan" shall mean the MBNA Corporation Supplemental
Executive Retirement Plan.
2.18 The term "Primary Social Security" shall mean the estimated
Primary Insurance Amount (payable monthly) available to a Member at an age as
provided herein under the Social Security law in effect at the Member's
Retirement Date.
2.19 The term "Qualified Plan" shall mean the MBNA Corporation
Pension Plan or any successor plan thereto.
2.20 The term "Retired Member" shall mean any Member of the Plan
who has terminated employment with the Employer for any reason other than
Cause, death or Disability and who is eligible to receive a Monthly Retirement
Income under this Plan.
7
<PAGE> 9
2.21 The term "Retirement Date" shall mean, subject to the
provisions of Section 4.02, the first day of the month coinciding with or
immediately following the month the Member, who is eligible to receive a
Monthly Retirement Income under this Plan, terminates employment with the
Employer for any reason other than Cause, death or Disability.
8
<PAGE> 10
ARTICLE III
Membership in the Plan
3.01 Eligibility for membership in this Plan shall be determined
by the Committee in its sole discretion. The Committee shall also have the
right to remove a Member from the Plan at any time in its sole discretion and
for any reason; provided, however, that a person who has been a Member for a
period of five (5) or more years may not be removed from the Plan.
Notwithstanding the foregoing, a member whose employment is terminated for
Cause shall be removed from the Plan and immediately shall forfeit all rights
and entitlements under the Plan. For purposes of this provision, a person who
has been at any time a Member of the MNC Financial, Inc. Supplemental Early
Retirement Plan shall have those years of membership counted towards the five
years used in determining whether a Member may be removed.
3.02 If a Retired Member is eligible to receive benefits under
this Plan, such benefits shall terminate in their entirety and the Retired
Member shall no longer be eligible to receive any benefits under the Plan if:
(a) the Retired Member engages in Competition with the
Employer unless (i) the Member has received written consent to engage in
Competition from the Board of Directors, (ii) the Member's employment was
terminated without Cause after a Change of Control, or (iii) the Member
terminated employment for Good Reason after a Change of Control;
(b) at any time following the Member's termination of
employment, the Retired Member is convicted of a felony or for any lesser crime
or offense than a felony involving the property of an Employer, provided that
such lesser crime or offense causes demonstrable and serious injury to the
Employer, monetarily or otherwise.
3.03 The payment of benefits to the Member or his Beneficiary
under this Plan is conditioned upon the continuous employment of the Member by
the Employer (including period of disability and authorized leaves of absence)
from the date of the Member's participation in the plan until the Member's
Retirement Date (not taking into account any delay in the Member's
9
<PAGE> 11
Retirement Date beyond his termination of employment pursuant to Section 4.02),
Disability or death, whichever first occurs.
10
<PAGE> 12
ARTICLE IV
Monthly Retirement Income
4.01 When a Member terminates his employment with the Employer
for any reason other than Cause, death or Disability, he shall be entitled to
receive a Monthly Retirement Income under this Plan, provided that a Member who
voluntarily terminates employment with the Corporation other than for Good
Reason without giving at least l2 months written notice of termination to the
Corporation shall not be entitled to receive any benefit under this Plan except
as otherwise determined by the Board of Directors. The amount of a Member's
Monthly Retirement Income shall be a percentage of his Average Monthly
Earnings, determined in accordance with the applicable benefits schedule
attached hereto, reduced by the amounts set forth in Sections 4.01(a), 4.01(b)
and 4.01(c), below; provided, however, if within two (2) years beginning as of
the date of a Change of Control a Member ceases to perform services for the
Employer because his service with the Employer is terminated either (i) by the
Employer without Cause or (ii) by the Employee with Good Reason, the Member's
Attained Age Upon Termination, for purposes of determining the Member's Monthly
Retirement Income under the schedule contained in this Section 4.01, shall be
increased by the lesser of (i) three (3) years or (ii) the number of years (if
any) by which sixty (60) exceeds the Member's actual attained age at the time
he ceases to perform services for the Employer. The applicable benefits
schedule shall be determined for each participant by the Board of Directors.
No participant in SERP I, SERP II or SERP III may receive any Monthly
Retirement Income benefit under this Section 4.01 if the participant's Attained
Age Upon Termination is less than 60, unless otherwise approved by the
Compensation Committee (other than a participant whose consent to the amendment
adding this requirement to the Plan is required, and who has not so consented).
(a) One hundred percent (100%) of his Primary Social
Security benefit payable for his age on the Retirement Date, but no less than
age sixty-two (62), under the Social
11
<PAGE> 13
Security law in effect on his Retirement Date, but said reduction shall not
begin until the Member attains age sixty-two (62).
(b) One hundred percent (100%) of his monthly income
calculated in the form of a straight life annuity under the Qualified Plan as
of his Retirement Date.
(c) One hundred percent (100%) of benefits received
from the qualified pension plans of any previous employers. Such amounts shall
be actuarially determined as a life annuity payable in equal monthly
installments, regardless of the actual form of payment.
4.02 The basic form of Monthly Retirement Income (to which the
formula indicated in Section 4.01 applies) shall be a monthly income commencing
on the later of the Member's attainment of age sixty (60) or the Member's
Retirement Date and shall continue for his life; provided, however, if the
Member's actual age at the time he terminates employment is less than the
Attained Age Upon Termination used for purposes of calculating his Monthly
Retirement Income pursuant to the first paragraph of Section 4.01, his
Retirement Date shall not occur until he has attained the age used to calculate
his Monthly Retirement Income.
12
<PAGE> 14
ARTICLE V
Death Benefits
5.01 In the event of the death of a Member (other than a Retired
Member or a Disabled Member), the Member's Beneficiary shall be entitled to
receive a Death Benefit in the form of a Monthly Retirement Income. The Death
Benefit shall be equal to one hundred percent (l00%) of the Member's Average
Monthly Earnings for the first ten years and fifty percent (50%) of the
Member's Average Monthly Earnings thereafter, if applicable. The Death Benefit
shall be payable monthly to the Member's Beneficiary for one hundred twenty
(l20) consecutive months or until the Member would have attained age sixty
(60), whichever is longer, commencing on the first day of the month subsequent
to the Member's death; provided, however, that if the Beneficiary is the
Member's surviving spouse, then after the expiration of the benefit provided
above, the Beneficiary shall be entitled to receive a Monthly Retirement Income
payable for life equal to 50% of the Member's Average Monthly Earnings.
5.02 In the event of the death of a Retired Member or a Disabled
Member who is receiving a Monthly Retirement Income under this Plan, benefits
shall continue to be paid to the Member's surviving spouse on the same payment
schedule and in an amount equal to one hundred percent (l00%) of the Monthly
Retirement Income Benefit until the tenth anniversary of the Member's
retirement or Disability and thereafter equal to fifty percent (50%) of the
Monthly Retirement Income Benefit that would have been payable to the Member
while he was living had there been no reductions pursuant to Sections 4.0l(a),
4.0l(b) and 4.0l(c) hereof; provided, however, that the monthly Retirement
Income benefit payable to the Member as determined by Section 4.0l above, shall
be reduced by:
(a) One hundred percent (l00%) of the Social Security
survivor income monthly benefit payable to the Member's surviving spouse (not
including benefits for minor children), and
13
<PAGE> 15
(b) One hundred percent (l00%) of the monthly income
payable to the Member's surviving spouse under the standard joint and survivor
annuity benefit from the Qualified Plan. Such an amount shall be offset
without regard to whether the Member elected the standard joint and survivor
annuity benefit as his form of payment for benefits from the Qualified Plan.
Benefits payable under Section 5.02 shall be paid for the
life of the surviving spouse.
14
<PAGE> 16
ARTICLE VI
Disability Benefits
6.01 If a Member is determined to be Disabled, the Disabled
Member shall be entitled to receive a Monthly Retirement Income for his life
equal, until age 65, to l00% of the Member's Average Monthly Earnings and,
thereafter, to 80% of the Member's Average Monthly Earnings, reduced by
Sections 6.0l(a), 6.0l(b), 6.0l(c), 6.0l(d) and 6.01(e).
(a) Until the Disabled Member attains age sixty-five
(65), one hundred percent (100%) of his monthly Long-Term Disability Benefit,
as defined below, said reduction shall occur even if the Member does not
actually purchase said benefit. The Long-Term Disability Benefit shall be the
total of the benefit under the Employer's Long-Term Disability Plan and Social
Security Act disability payments.
(b) One hundred percent of any disability benefits
actually received by the Disabled Member pursuant to any disability income
policy or plan under which the Disabled Member is insured if obtained and
maintained by the Corporation and for which the Corporation pays all premiums.
(c) Then, upon the later of the Disabled Member
attaining age sixty-five (65) or when Long-Term Disability Benefits paid to the
Disabled Member cease (or would have ceased, as the case may be), one hundred
percent (100%) of the primary Social Security Benefits payable to the Member
under the Social Security law in effect at the time benefits cease (or would
have ceased, as the case may be). This offset shall occur without regard to
whether the Member actually receives said benefits.
(d) One hundred percent (100%) of his monthly income
calculated in the form of a straight life annuity under the Qualified Plan as
of his Disability Retirement Date to the extent benefits are actually received.
15
<PAGE> 17
(e) One hundred percent (100%) of benefits received
from the qualified pension plans of any previous employers. Such amounts shall
be actuarially determined as a life annuity payable in equal monthly
installments, regardless of the actual form of payment.
16
<PAGE> 18
ARTICLE VII
Plan Administration
7.01 The Board of Directors shall appoint a Committee to
administer the Plan and keep records of individual Member benefits.
7.02 The Committee shall have the authority to interpret the
Plan, to adopt and review rules relating to the Plan and to make any other
determination for the administration of the Plan, subject to the terms of the
Plan.
7.03 The Committee may employ such counsel, accountants,
actuaries and other agents as it shall deem advisable. The Employer shall pay
the fees and costs of such counsel, accountants, actuaries and other agents and
any other expenses incurred by the Committee in the administration of the Plan.
17
<PAGE> 19
ARTICLE VIII
Named Fiduciary and Claims Procedure
8.01 The Named Fiduciary of the Plan for purposes of the claims
procedure is the Committee.
(a) The business address and telephone number of the
Named Fiduciary is:
The Pension and 401(K) Plan Committee
c/o Mr. John W. Scheflen
MBNA America Bank, N.A.
Wilmington, Delaware 19884-0616
Telephone: (302) 432-1100_
(b) The Employer shall have the right to change the
Named Fiduciary of the Plan. The Employer shall give the Members written
notice of any change of the Named Fiduciary or any change in the address and
telephone number of the Named Fiduciary.
8.02 Benefits shall be paid in accordance with the provisions of
this Plan. The Member, his Beneficiary or Contingent Beneficiary (hereinafter
collectively referred to as the "Claimant") shall make a written request for
the benefits provided under this Plan. This written claim shall be mailed or
delivered to the Named Fiduciary by registered mail.
8.03 If the claim is denied, either totally or partially, notice
of the decision shall be sent by registered mail to the Claimant within a
reasonable time period. This time period shall not exceed ninety (90) days
after the receipt of the claim by the Named Fiduciary. The notice shall set
forth the following information:
(a) The specific reasons for the denial,
(b) the specific reference to pertinent Plan visions
on which the denial is based,
(c) a description of any additional material or
information necessary for the Claimant to perfect the claim and an explanation
of why such material or information is necessary, and
18
<PAGE> 20
(d) appropriate information and explanation of the
claims procedure under this Plan to permit the Claimant to submit his claim for
review.
8.04 The claims procedure under this Plan shall allow the
Claimant a reasonable opportunity to appeal a denied claim and to get a full
and fair review of that decision from the Board of Directors.
(a) The Claimant shall exercise his right of appeal by
submitting a written request for a review of the denied claim to the Named
Fiduciary. This written request for review must be submitted to the Named
Fiduciary within sixty (60) days after receipt by the Claimant of the written
notice of denial.
(b) The Claimant shall the following rights under this
appeal procedure:
(1) to request a review by the Committee
upon written application to the Named
Fiduciary,
(2) to review pertinent documents with
regard to the Plan,
(3) to submit issues and comments in
writing,
(4) to request an extension of time to make
a written submission of issues and comments, and
(5) to request that a hearing be held before
the Board of Directors to consider Claimant's Appeal.
8.05 The decision on the review of the denied claim shall
promptly be provided by the Committee --
(a) within forty-five (45) days after the receipt of
the request for review if no hearing is held, or
(b) within ninety (90) days after the receipt of the
request for review if an extension of time is necessary in order to hold a
hearing.
(1) If an extension of time is necessary in
order to hold a hearing, the Committee shall give the Claimant written notice
of the extension of time. This notice shall be given prior to any extension.
19
<PAGE> 21
(2) The written notice of extension shall
indicate that an extension of time will occur in order to hold a hearing on
Claimant's appeal. The notice shall also specify the place, date and time of
that hearing and the Claimant's opportunity to participate in the hearing. It
may also include any other information the Committee believes may be important
or useful to the Claimant in connection with the appeal.
8.06 The decision to hold a hearing to consider the Claimant's
appeal of the denied claim shall be within the sole discretion of the
Committee, whether or not the Claimant requests such a hearing.
8.07 The Committee's decision on review shall be made in writing
and provided to the Claimant within the specified time periods. This written
decision on review shall contain the following information:
(a) the decision(s)
(b) the reasons for the decision(s) and
(c) specific references to the provisions of the Plan
on which the decision(s) is/are based.
All of this information shall be written in a manner calculated to be
understood by the Claimant.
20
<PAGE> 22
ARTICLE IX
Miscellaneous
9.01 Nothing contained in this Plan shall be deemed to give any
Member or employee the right to be retained in the service of the Employer or
to interfere with the right of the Employer to discharge any Member or employee
at any time regardless of the effect which such discharge shall have upon him
as a Member of the Plan.
9.02 The rights of the Member, the Beneficiary of the Member, or
any other person claiming through the Member under this Plan, shall be solely
those of an unsecured general creditor of the Employer.
9.03 The Plan does not involve a reduction in salary for the
Member or the foregoing of an increase in future salary by the Member.
9.04 A Retired Member shall not be considered an employee for any
purposes under the law.
9.05 If no Beneficiary or Contingent Beneficiary has been
designated or survives a Member, any amounts to be paid to the Member's
Beneficiary shall be paid to the Member's surviving spouse, or if there is no
surviving spouse, then in equal proportions to the Member's surviving children.
If the Member is not survived by a spouse or children, then such amounts shall
be paid to the estate of the Member.
9.06 Except insofar as this provision may be contrary to
applicable law, no sale, transfer, alienation, assignment, pledge,
collateralization or attachment of any benefits under this Plan shall be valid
or recognized by the Committee.
9.07 The Employer reserves the right at any time and from time to
time, by action of its Board of Directors to terminate, modify or amend, in
whole or in part, any or all of the provisions of the Plan, including
specifically the right to make any such amendments effective retroactively,
provided that no such action shall (i) reduce the benefits of any Disabled or
Retired Member or his Beneficiary or Contingent Beneficiary or (ii) adversely
affect any Member who
21
<PAGE> 23
has been a Member for a period of five (5) or more years. In addition, the
Employer may amend or modify any provision of this Plan as to any particular
Member by Agreement with such Member, provided that such Agreement is in
writing, is executed by both the Employer and the Member, and is filed with the
Plan records. The provisions of any amendment or modification made by
Agreement between a Member and the Employer shall apply only to the Member so
agreeing and no other.
9.08 The Employer shall not merge into, be acquired by, or
consolidate with any other Employer unless and until such other Employer agrees
to assume all rights and obligations set forth in this Plan.
9.09 A Member shall have the right to change his designated
Beneficiary or Contingent Beneficiary by notifying the Committee of such in
writing. Such change shall become effective upon written acknowledgment of
same by the Committee. Any payments made by the Employer to a Beneficiary or
Contingent Beneficiary in good faith and under the terms of the Plan shall
fully discharge the Employer from all further obligations with respect to such
payments.
9.10 This Plan shall be binding upon and inure to the benefit of
the Employer, its successors and assigns and each Member and his heirs,
executors, administrators and legal representatives.
9.11 This Plan shall be governed by the laws of Maryland without
regard to the principles of conflict of laws.
9.12 Any benefits that are paid under this Plan shall be subject
to any applicable payroll or other taxes required to be withheld by law.
9.13 Any words herein used in the masculine shall be read and
construed in the feminine where they would so apply. Words in the singular
shall be read and construed as though used in the plural in all cases where
they would so apply.
22
<PAGE> 24
BENEFITS SCHEDULES
SERP I
<TABLE>
<CAPTION>
Attained Age Upon
Termination Percentage
----------------------- ----------
<S> <C> <C>
Less than 50 0%
50 30%
51 35%
52 40%
53 45%
54 50%
55 55%
56 60%
57 65%
58 70%
59 75%
60 80%
61 80%
62 80%
63 80%
64 80%
65 80%
More than 65 80%
</TABLE>
The annual salary of a Member for purposes of determining
the Member's retirement benefits under SERP I (but not disability or survivor
benefits) shall not exceed $2,000,000, except as otherwise provided by the
Board of Directors. This limitation will be reviewed periodically by the Board
of Directors.
23
<PAGE> 25
BENEFITS SCHEDULES
SERP II
<TABLE>
<CAPTION>
Attained Age Upon
Termination Percentage
----------------------- ----------
<S> <C> <C>
Less than 55 0%
55 30%
56 36%
57 42%
58 48%
59 54%
60 60%
61 64%
62 68%
63 72%
64 76%
65 80%
More than 65 80%
</TABLE>
The annual salary of a Member for purposes of determining
the Member's benefits under SERP II, including retirement, disability and
survivor benefits, shall not exceed $600,000. This limitation will be reviewed
periodically by the Board of Directors.
24
<PAGE> 26
BENEFITS SCHEDULES
SERP III
<TABLE>
<CAPTION>
Attained Age Upon
Termination Percentage
----------------------- ----------
<S> <C> <C>
Less than 55 0%
55 20%
56 24%
57 28%
58 32%
59 36%
60 40%
61 44%
62 48%
63 52%
64 56%
65 60%
More than 65 60%
</TABLE>
The annual salary of a Member for purposes of determining the Member's benefits
under SERP III, including retirement, disability and survivor benefits, shall
not exceed $300,000. This limitation will be reviewed periodically by the Board
of Directors.
25
<PAGE> 1
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997
---------------- ----------------
INCLUDING INTEREST ON DEPOSITS
<S> <C> <C>
Earnings:
Income before income taxes................................................. $ 1,254,065 $ 1,022,108
Fixed charges.............................................................. 1,238,596 1,035,069
Interest capitalized during period, net of
amortization of previously capitalized interest.......................... (5,400) (4,967)
---------------- ----------------
Earnings, for computation purposes......................................... $ 2,487,261 $ 2,052,210
================ ================
Fixed Charges and Preferred Stock Dividend Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes,
expensed or capitalized................................................... $ 1,229,503 $ 1,023,765
Portion of rents representative of the interest factor..................... 9,093 11,304
---------------- ----------------
Fixed charges.............................................................. 1,238,596 1,035,069
Preferred stock dividend requirements (a).................................. 23,089 32,065
---------------- ----------------
Fixed charges and preferred stock dividend requirements,
including interest on deposits, for computation purposes.................. $ 1,261,685 $ 1,067,134
================ ================
Ratio of earnings to combined fixed charges and preferred stock dividend
requirements, including interest on deposits ............................ 1.97 1.92
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes................................................. $ 1,254,065 $ 1,022,108
Fixed charges.............................................................. 422,492 341,149
Interest capitalized during period net of
amortization of previously capitalized interest.......................... (5,421) (4,988)
---------------- ----------------
Earnings, for computation purposes......................................... $ 1,671,136 $ 1,358,269
================ ================
Fixed Charges and Preferred Stock Dividend Requirements:
Interest on short-term borrowings,
and long-term debt and bank notes,
expensed or capitalized.................................................. $ 413,399 $ 329,845
Portion of rents representative of the interest factor..................... 9,093 11,304
---------------- ----------------
Fixed charges.............................................................. 422,492 341,149
Preferred stock dividend requirements (a).................................. 23,089 32,065
---------------- ----------------
Fixed charges and preferred stock dividend requirements,
excluding interest on deposits, for computation purposes................. $ 445,581 $ 373,214
================ ================
Ratio of earnings to combined fixed charges and preferred stock dividend
requirements, excluding interest on deposits............................ 3.75 3.64
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
INCLUDING INTEREST ON DEPOSITS
<S> <C> <C> <C>
Earnings:
Income before income taxes................................................. $ 731,294 $ 584,601 $ 441,101
Fixed charges.............................................................. 755,884 609,742 316,647
Interest capitalized during period, net of
amortization of previously capitalized interest.......................... (2,370) (3,409) (683)
--------------- ---------------- ---------------
Earnings, for computation purposes......................................... $ 1,484,808 $ 1,190,934 $ 757,065
=============== ================ ===============
Fixed Charges and Preferred Stock Dividend Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes,
expensed or capitalized................................................... $ 746,008 $ 600,047 $ 308,242
Portion of rents representative of the interest factor..................... 9,876 9,695 8,405
--------------- ---------------- ---------------
Fixed charges.............................................................. 755,884 609,742 316,647
Preferred stock dividend requirements (a).................................. 23,269 2,432 -
--------------- ---------------- ---------------
Fixed charges and preferred stock dividend requirements,
including interest on deposits, for computation purposes.................. $ 779,153 $ 612,174 $ 316,647
=============== ================ ===============
Ratio of earnings to combined fixed charges and preferred stock dividend
requirements, including interest on deposits............................. 1.91 1.95 2.39
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes................................................. $ 731,294 $ 584,601 $ 441,101
Fixed charges.............................................................. 227,999 171,585 94,495
Interest capitalized during period net of
amortization of previously capitalized interest.......................... (2,391) (3,430) -
--------------- ---------------- ---------------
Earnings, for computation purposes......................................... $ 956,902 $ 752,756 $ 535,596
=============== ================ ===============
Fixed Charges and Preferred Stock Dividend Requirements:
Interest on short-term borrowings,
and long-term debt and bank notes,
expensed or capitalized.................................................. $ 218,123 $ 161,890 $ 86,090
Portion of rents representative of the interest factor..................... 9,876 9,695 8,405
--------------- ---------------- ---------------
Fixed charges.............................................................. 227,999 171,585 94,495
Preferred stock dividend requirements (a).................................. 23,269 2,432 -
--------------- ---------------- ---------------
Fixed charges and preferred stock dividend requirements,
excluding interest on deposits, for computation purposes................. $ 251,268 $ 174,017 $ 94,495
=============== ================ ===============
Ratio of earnings to combined fixed charges and preferred stock dividend
requirements, excluding interest on deposits............................. 3.81 4.33 5.67
</TABLE>
(a) Preferred stock dividend requirements are adjusted to represent a pretax
earnings equivalent.
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. The Corporation did not have any preferred stock
outstanding during the periods prior to 1995 presented above and accordingly
there were no preferred stock dividend requirements during such periods.
<PAGE> 1
[CREDIT CARD COLLAGE]
SUCCESS IS GETTING THE RIGHT CUSTOMERS... AND KEEPING THEM.
1998 ANNUAL REPORT
<PAGE> 2
<TABLE>
<CAPTION>
CONTENTS
- --------
<S> <C>
2 TEN-YEAR SUMMARY
3 FINANCIAL HIGHLIGHTS
4 1998 HIGHLIGHTS
5 TO OUR STOCKHOLDERS
6 WHAT WE DO/WHERE WE ARE TODAY
7 MBNA'S BUSINESSES
10 GETTING THE RIGHT CUSTOMERS
13 A TYPICAL MBNA CUSTOMER
14 KEEPING THE RIGHT CUSTOMERS
16 SERVING CUSTOMERS EFFICIENTLY THROUGH INDUSTRY-LEADING TECHNOLOGY
17 FUNDING
18 MBNA EDUCATION FOUNDATION
20 MBNA INTERNATIONAL MAP
21 FINANCIALS
75 SENIOR EXECUTIVES
76 DIRECTORS AND OFFICERS
</TABLE>
<PAGE> 3
MBNA IS A COMPANY OF PEOPLE COMMITTED TO:
- --------------------------------------------------------------------------------
Providing the Customer with the finest products backed by consistently
top-quality service.
-
Delivering these products and services efficiently, thus ensuring
fair prices to the Customer and a sound investment for the stockholder.
-
Treating the Customer as we expect to be
treated--putting the Customer first every day--and meaning it.
-
Being leaders in innovation, quality, efficiency, and Customer
satisfaction. Being known for doing the little things and the big things well.
-
Expecting and accepting from ourselves nothing short of the best.
Remembering that each of us, the people of MBNA, makes the unassailable
difference.
- --------------------------------------------------------------------------------
Getting the right Customers and keeping them is the foundation of our business.
It demands a single-minded commitment to Customer satisfaction. Meeting this
commitment requires tough standards, good people, and constant attention to the
importance of each individual Customer. It means having an attitude. Introduced
during the summer of 1986, the precepts above express our attitude. They are
displayed throughout the company, and each person carries a copy. These words
have been reviewed every year since they were written and have never been
changed. They are simple and straightforward, and we mean every single word.
<PAGE> 4
[PEOPLE TALKING]
THINK OF YOURSELF AS A CUSTOMER.
COMPLACENCY IS DEVASTATING.
IT'S YOUR ATTITUDE, NOT YOUR APTITUDE,
THAT DETERMINES YOUR ALTITUDE.
<PAGE> 5
[CREDIT CARD COLLAGE]
TEN-YEAR SUMMARY
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
1989 .14
1990 .17
1991 .20
1992 .23
1993 .27
1994 .35
1995 .46
1996 .59
1997 .76
1998 .97
NET INCOME
(MILLIONS)
1989 104.1
1990 129.0
1991 149.2
1992 172.7
1993 207.8
1994 266.6
1995 353.1
1996 474.5
1997 622.5
1998 776.3
MANAGED LOANS (ENDING)
(BILLIONS)
1989 5.7
1990 7.4
1991 8.8
1992 9.9
1993 12.4
1994 18.7
1995 26.7
1996 38.6
1997 49.4
1998 59.6
SALES AND CASH
ADVANCE VOLUME
(BILLIONS)
1989 9.1
1990 11.5
1991 12.9
1992 14.5
1993 17.9
1994 25.1
1995 34.3
1996 48.7
1997 66.4
1998 83.0
SUCCESS IS NEVER FINAL.
2
<PAGE> 6
[CREDIT CARD COLLAGE]
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE DATA FOR THE YEAR (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings................................... $ 1.01 $ .80 $ .61 $ .47 $ .35
Earnings--assuming dilution................ .97 .76 .59 .46 .35
Dividends (b).............................. .24 .21 .19 .17 .14
Book value................................. 2.90 2.34 1.87 1.48 1.22
RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average total assets............. 3.38% 3.25% 3.26% 3.09% 3.16%
Return on average stockholders' equity..... 36.91 35.56 34.46 35.51 32.70
Stockholders' equity to total assets....... 9.27 9.25 10.00 9.56 9.51
FINANCIAL STATEMENT DATA FOR THE YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income........................ $ 742,339 $ 692,390 $ 640,477 $ 544,226 $ 532,108
Other operating income..................... 3,228,969 2,812,879 1,895,923 1,424,618 1,013,580
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 776,266 622,500 474,495 353,099 266,593
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits................................... 15,407,040 12,913,213 10,151,686 8,608,914 6,632,489
Stockholders' equity....................... 2,391,035 1,970,050 1,704,308 1,265,058 919,578
MANAGED LOAN DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Managed loans at year end.................. $ 59,641,106 $ 49,379,860 $ 38,623,533 $ 26,711,704 $ 18,743,864
Sales and cash advance volume.............. 82,968,874 66,399,425 48,666,129 34,272,909 25,078,918
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, per common share data have been restated to
reflect the three-for-two split of the Corporation's Common Stock,
effected in the form of a dividend, issued October 1, 1998, to
stockholders of record as of September 15, 1998.
(b) On January 4, 1999, the Board of Directors approved an increase of 16.7%
in the quarterly dividend to $.07 per common share.
3
<PAGE> 7
[PEOPLE TALKING]
1998 HIGHLIGHTS
Increased earnings per share 27.6%, the eighth straight year of EPS growth
since becoming a public company and the fifth consecutive year of EPS
growth exceeding 25%.
[ ]
Grew managed loans $10.3 billion, or 21% from 1997, to $59.6 billion--four times
the industry's overall growth rate.
[ ]
Added 9.3 million new accounts, leading the industry for the fourth consecutive
year.
[ ]
Maintained superior credit quality with charge-offs at 4.31% for the year, well
below the published industry average of more than 6%.
[ ]
Acquired endorsements of 475 new groups, including the American College
of Dentists, Earthlink, Canadian Football League, Canadian Nurses Association,
Discovery Communications, Canadian Association of Retired Persons, Dublin
Business School (Ireland), Royal College of Physicians (U.K.), Miami Heat,
Manchester United Football Club (U.K.), and the
University of Hawaii.
[ ]
Extended exclusive endorsement agreements with more than 700 organizations,
including Penn State University, National Wildlife Association, Michigan State
University, American Society of Mechanical Engineers, NASCAR, Chicago Bulls,
American College of Surgeons, Detroit Red Wings, L.L.Bean, and the National
Education Association.
[ ]
Continued expansion of MBNA International to 3.4 million Customers with $4.9
billion in loan balances, up 75% from 1997. Completed the first full year
of operations in Canada with more than $400 million in loan balances
and 126 group endorsements.
PICTURED LEFT TO RIGHT: MBNA AMERICA EXECUTIVE GROUP MEMBERS M. SCOT KAUFMAN,
JOHN R. COCHRAN III, BRUCE L. HAMMONDS, AND LANCE L. WEAVER.
[PHOTO]
4
<PAGE> 8
TO OUR STOCKHOLDERS
This report presents MBNA's full-year results for 1998. Earnings increased 24.7%
to $776.3 million--bringing to 32 the number of consecutive quarters of
consistent earnings growth averaging 25%. Loans outstanding grew to $59.6
billion, a $10.3 billion increase over year-end 1997. This 21% growth rate was
four times the overall rate of the industry. We also added 9.3 million new
accounts. The characteristics of new cardholders are consistent with the
superior quality of the company's existing Customers. The typical new Customer
has a $60,000 average annual household income, has been employed for 10 years,
owns a home, and has a 14-year history of paying bills promptly. Loan losses
continue to be significantly lower than published industry levels. In 1998, our
managed loan losses were 4.31%, compared to an industry average of more than 6%.
[PHOTO]
Al Lerner and Charlie Cawley
MBNA is in the lending money business--we do this primarily by lending millions
of people money through credit cards. It is a simple business that has been
around for a long time. Simple to understand--very difficult to execute well. We
are successful because of the commitment of the people who work at MBNA. We are
a company of 19,000 people working together to achieve common objectives. This
year was a particularly challenging one. As it sometimes does, revolving debt
growth in the United States slowed--consumer lending has a long history of being
a cyclical business. In this environment, MBNA quadrupled the industry's growth
rate and, at the same time, invested heavily in future growth opportunities.
These investments are possible because we continue to improve the way we
execute. This improvement is the direct result of the efforts and the attitude
of the people of MBNA. We all have an attitude--satisfy the Customer.
This year we strengthened all of MBNA's businesses. We continued to grow the
U.S. credit card business, accelerated expansion internationally, introduced new
consumer finance products, and invested in a growing insurance operation. As it
has during recent years, this annual report focuses on what we do and how we
strengthened the company for the future during 1998.
We hope you enjoy it.
/s/ AL LERNER /s/ CHARLIE CAWLEY
Think of yourself as a Customer.
Complacency is devastating.
Success is never final.
MBNA COMMON STOCK
PRICE PERFORMANCE
[GRAPH]
5
<PAGE> 9
[CREDIT CARD AND AUTHORIZATION TERMINAL]
The difference between good and great is just a little extra effort.
WHAT WE DO/WHERE WE ARE TODAY
MBNA Corporation is a bank holding company comprised of three banks: MBNA
America Bank, N.A., a national bank based in the United States, MBNA
International Bank Limited, a fully chartered bank in the United Kingdom, and
MBNA Canada Bank, a fully chartered bank in Canada. Like other banks, we take
deposits and make loans. MBNA Customers have more than $15 billion on deposit in
money market and certificate of deposit accounts with an average balance of
$26,000. We also lend to Customers through a variety of loan products. But that
is where the similarity to traditional banks ends. MBNA has no bank branches, no
commercial loans, and only a small number of checking accounts--we specialize in
lending people money through credit cards. It is a very attractive business--and
we like it.
During 1998, MBNA expanded its market share of U.S. credit card loans and
increased overall managed loans by $10.3 billion to $59.6 billion. This 21%
increase was four times the overall growth rate of the U.S. credit card
industry. The addition of 11.3 million new Customers and 475 new endorsements
from organizations strengthened future growth opportunities. Additionally,
MBNA's other businesses continued to grow. In 1998, MBNA began marketing in
Canada and expanded its consumer finance and insurance operations. Today, nearly
4,600 organizations endorse MBNA products to their members, and the company's
products are used by 35 million Customers worldwide.
MBNA has achieved consistent, profitable growth in each of the eight years since
its initial public offering and in each of the 17 years since being established
in 1982. These results are achieved through an unswerving commitment to MBNA's
primary strategy. Simply stated, success is getting the right Customers and
keeping them. The right Customer is someone who borrows from us and pays us back
on time. This is achieved by focusing on the quality of each individual
Customer. That is how we market and how we lend. This fundamental strategy
guides us in all the company's businesses.
ON THE GRAPH AT RIGHT, THE LINE REPRESENTS MBNA'S GROWTH IN MANAGED LOANS, WHILE
THE BARS INDICATE THE GROWTH IN NET INCOME. MBNA HAS REPORTED INCREASED EARNINGS
IN EACH OF THE 32 QUARTERS THAT IT HAS BEEN A PUBLICLY TRADED COMPANY.
[GRAPH]
6
<PAGE> 10
MBNA'S BUSINESSES
CREDIT CARD LENDING
MBNA is the largest independent credit card lender in the world with a 12%
market share of credit card loans in the United States. MBNA's annual growth
rate of 31% over the last three years has been three times the industry's
average. In the United States, Customers used MBNA credit cards 530 million
times during 1998, spending more than $70 billion. U.S. credit card loans
increased to nearly $50 billion. This growth is the result of a unique marketing
strategy--affinity marketing--and a very stringent underwriting process that
ensures the company selects the best Customers from a group of high-quality
applicants. These strategies result in loan losses that have remained
consistently lower than industry averages. MBNA's commitment to the United
States credit card business is very strong.
DURING 1998, MBNA
INCREASED ITS MARKET
SHARE OF CREDIT CARD
LOANS IN THE UNITED
STATES TO 12%.
It is a business we like for a number of reasons. Credit cards free people from
the need to carry cash and allow them to purchase the things they need today
while paying for them out of future income. There is universal demand for credit
cards. There are approximately 150 million people in the United States, 25
million people in the United Kingdom, and 15 million people in Canada who could
qualify for a credit card. Furthermore, the market for credit cards continually
refreshes itself as young people enter adulthood.
[CUSTOMERS USING CREDIT CARD AT POINT OF SALE]
CREDIT CARDS ALLOW PEOPLE TO PURCHASE THE THINGS THEY NEED TODAY AND PAY FOR
THEM OUT OF FUTURE INCOME.
Credit card lending produces loans without a concentration of risk. There are no
industry, geographic, or individual account concentrations within our loan
portfolio. MBNA's $59.6 billion in loans are spread among 17 million active
borrowers with an average account balance of $3,474.
Credit cards are commodity-like because almost everyone wants one. It is a
business where you must distinguish yourself through marketing, lending, and the
service you provide to Customers. Credit card lending is profitable for MBNA
because we do all of these things very well. As a result, growth has
consistently been much higher than industry averages, and the quality of the
company's Customers is unsurpassed.
Our Customers used their MBNA credit cards for purchases and cash advances more
than 500 million times in 1998.
[CREDIT CARD AT ATM]
7
<PAGE> 11
[PEOPLE TALKING]
MBNA INTERNATIONAL
In 1998, MBNA began marketing its credit card products in Canada--the third
country we have entered since 1993. Our international business now has 3.4
million Customers with $4.9 billion in loans, a 75% increase from $2.8 billion
at the end of 1997.
MBNA INCREASED ITS
MARKET SHARE IN THE
UNITED KINGDOM TO
10% IN 1998.
MBNA Europe marked its fifth anniversary this year and now has a 10% market
share in the United Kingdom. The same affinity marketing and lending strategies
used in the United States are utilized in our international businesses. In 1998,
nearly 100 new membership organizations endorsed MBNA products. They include the
Manchester United Football Club, Royal College of Physicians, University of
Durham Colleges, Dublin Business School, and the Institute of Chemical
Engineers. The 664 organizations that now endorse MBNA Europe products helped
attract more than 850,000 new Customers last year. MBNA Canada completed its
first full year. Total loans reached $400 million with 800,000 new Customers. We
signed 126 new endorsing organizations, including the Canadian Nurses
Association, Canadian Football League, Canadian Society for Civil Engineering,
Canadian Association of Retired Persons, and the University of Manitoba. Canada
also offers additional marketing opportunities, as many endorsing organizations
based in the United States have Canadian members, including the National Hockey
League, Major League Baseball, and Ducks Unlimited. Also in 1998, MBNA Canada
expanded its operations by opening a business development office in Montreal,
Quebec, to support its headquarters in Ottawa, Ontario. There are now nearly
2,000 people working in the United Kingdom, Ireland, and Canada.
CONSUMER FINANCE
In addition to credit cards, MBNA lends people money through a variety of other
loan products, including installment loans and
MBNA IS THE LEADING ISSUER OF AFFINITY CREDIT CARDS IN THE UNITED KINGDOM, WITH
MORE THAN 660 ENDORSEMENTS, INCLUDING THE UNIVERSITY OF OXFORD AND THE ROYAL
COLLEGE OF PHYSICIANS. MBNA CANADA SIGNED 126 ENDORSEMENTS IN 1998, INCLUDING
THE CANADIAN NURSES ASSOCIATION AND THE CANADIAN FOOTBALL LEAGUE.
[CREDIT CARDS AND UNITED KINGDOM FACILITY]
8
<PAGE> 12
[CUSTOMER/REPRESENTATIVE ON TELEPHONE]
MBNA's sales finance initiatives generated more then $1 billion in loan
balances.
home equity loans, for such things as home improvements, vacations, and college
tuition. MBNA Consumer Finance has $5.9 billion in loans, a 28% increase from
$4.6 billion in 1997. In 1998, we added nearly 1 million new consumer loan
accounts, doubling last year's results. Just like credit card products, these
products are marketed through the mail and over the telephone. More than 2,000
of our affinity groups endorse MBNA Consumer Finance products.
In 1996, MBNA entered sales finance lending by offering point-of-sale retail
loan products. MBNA has established several programs with retailers. Through
these programs, MBNA provides fixed-term, unsecured loans for Customers to
finance purchases like computers. MBNA is the first financing company in the
United States to offer immediate decisioning on Web-based loan applications.
This has accelerated loan growth and enhanced Customer satisfaction. In total,
sales finance initiatives generated more than $1 billion in loan balances.
INSURANCE SERVICES
MBNA has been selling credit-related insurance since 1987 and now has more than
1.3 million Customers. In 1997, MBNA Insurance Services began marketing Property
& Casualty and Life & Health products. For each of these products, MBNA acts as
an insurance agent and the policy is underwritten by a third party.
MBNA Insurance Services issued hundreds of thousands of new insurance policies
in 1998. Our Customers' proven stability and responsible financial habits make
them good candidates for a variety of insurance products.
These products are marketed and serviced through the mail and over the
telephone--methods with which MBNA has more than 16 years of experience. Many
organizations that endorse MBNA's loan products also endorse insurance products.
These include Penn State University, California Nurses Association, Purdue
University, the National Trust for Historic Preservation, and Indiana University
Alumni Association. The insurance business is a logical extension of our product
offerings.
Excellence does not come by chance...it comes by choice.
[PEOPLE]
MORE THAN 1.3 MILLION CUSTOMERS ARE INSURED THROUGH MBNA PRODUCTS, INCLUDING
CREDIT, LIFE & HEALTH, AND PROPERTY & CASUALTY INSURANCE.
9
<PAGE> 13
[BASEBALL PLAYER]
MBNA America--19,000 people with an attitude... satisfy the Customer.
GETTING THE RIGHT CUSTOMERS
At MBNA, we have established a marketing franchise, affinity marketing--selling
products to people with a strong common interest. Affinity marketing is done in
two ways: first, by marketing to groups of people who belong to formal
organizations that endorse MBNA products, and second, by marketing to groups of
people who share common interests but do not belong to specific organizations.
Thousands of organizations in the United States, the United Kingdom, Ireland,
and Canada endorse MBNA's products.
One segment of this business is MBNA's Professional sector, which markets to
more than 1,200 professional organizations whose members have generated $13.4
billion in loans using our products. These organizations include the American
College of Surgeons, the American Psychiatric Association, the Association of
Trial Lawyers of America, the American Institute of Architects, and the
California Dental Association. MBNA credit cards are carried by 58% of all
physicians, 25% of all nurses, 39% of all lawyers, 27% of all teachers, 26% of
all engineers, 27% of all architects, and 60% of all dentists. This sector
generated nearly 1.5 million new Customers last year and received endorsements
from 73 new organizations.
MBNA'S PROFESSIONAL
SECTOR MARKETS TO MORE
THAN 1,200 PROFESSIONAL
ORGANIZATIONS.
MBNA products are also endorsed by nearly 600 sports teams and organizations
whose members have generated $4.2 billion in loans. MBNA issues the official
credit card of the National Football League, Major League Baseball, the National
Hockey League, NASCAR, and the Professional Golfers Association. Sports
enthusiasts are very loyal and make excellent Customers. After only four years
of marketing, the National Football League endorsement has generated 1 million
Customers with more than $700 million in loans. An endorsement from Major League
Baseball has added more than 830,000 Customers and $575 million in loans. This
includes individual endorsements with many Major League Baseball teams,
including the New York Yankees, Boston Red Sox, and the Cleveland Indians.
Endorsements from motorsports organizations, including
MBNA'S PLATINUM PLUS CREDIT CARD PRODUCT CONTINUES TO BE VERY SUCCESSFUL,
PARTICULARLY WITH OUR PROFESSIONAL MARKET SECTOR. PLATINUM HELPED GROW OUR LOANS
TO MORE THAN $13 BILLION IN THIS MARKET SECTOR.
[PLATINUMPLUS CREDIT CARD COLLAGE]
10
<PAGE> 14
[BASEBALL STADIUM]
MBNA BEGAN ITS FOURTH SEASON OF MARKETING TO FANS OF THE NATIONAL FOOTBALL
LEAGUE AND FINISHED AN EXCITING YEAR OF MARKETING TO FANS OF MAJOR LEAGUE
BASEBALL.
NASCAR, the Indianapolis Motor Speedway, and the National Hot Rod Association
have generated 1.5 million Customers with $2.1 billion in loans. Motorsport fans
are very loyal and have made excellent Customers for MBNA. MBNA is a principal
sponsor of Joe Gibbs Racing.
MBNA is the official credit card of more than 500 colleges and universities,
including eight of the Big 10 and six of the PAC 10 schools. Marketing to alumni
and students gives MBNA the opportunity to build long-term relationships with
Customers with very attractive characteristics. In 1998, we added more than 1
million Customers in this sector and now have 3.6 million Customers with $4.6
billion in loans.
MBNA products are also sold in more than 6,000 bank branches across the United
States and the United Kingdom through the endorsements of hundreds of financial
institutions. We have generated more than 3.3 million Customers with $4.1
billion in loans in this sector.
In addition, we have developed hundreds of affinity programs for people with a
strong common interest who do not belong to a formal organization. These
programs are often initiated in MBNA's regional marketing offices and appeal to
Customers based on where they live. The Don't mess with Texas credit card
program is a good example. More than 200,000 Texans carry this card with more
than $400 million in loans. Another regional program is the Irish American card,
which has generated more than 20,000 accounts. More than 8 million Customers use
credit cards from these types of programs.
The Colleges and Universities market sector is one of MBNA's largest and most
successful.
[COLLEGE STUDENTS]
11
<PAGE> 15
[TELEPHONE REPRESENTATIVES]
We are what we repeatedly do. Excellence, then, is not an act, but a habit.
MBNA received the endorsement of 475 new organizations in 1998, including the
American College of Dentists, the Canadian Society for Civil Engineering, the
NFL Quarterback Club, the American Optometric Association, and the University of
Hawaii. These new endorsements continue to strengthen MBNA's marketing franchise
and will be an important source of new accounts for many years.
During 1998, this unique marketing proposition enabled the company to add 9.3
million new accounts. We achieved these results through a variety of acquisition
methods. An in-house advertising agency works closely with each organization to
develop programs specifically tailored to the interests of the groups' members.
In 1998, MBNA developed more than 5,000 separate direct mail campaigns. In
addition, we contacted 20 million potential Customers from 13 telemarketing
centers and sold products to Customers at 6,000 events, including NASCAR races,
college football games, and professional conventions. MBNA products are also
offered over the Internet through the Web sites of more than 500 endorsing
organizations. Affinity marketing through effective acquisition methods has
resulted in loan growth rates significantly above others in the credit card
business.
[MARKETING COPY]
Direct mail campaigns are an important part of MBNA's marketing program.
In addition to credit cards, the company also markets a variety of deposit
products over the telephone and through the mail to the members of thousands of
MBNA's affinity groups, including The Retired Officers Association, California
Nurses Association, and the National Education Association. Through effective
marketing of these products, MBNA has increased its deposit base to more than
$15 billion. This generates a significant part of the funding needed to support
the company's growth.
IN 1998, MBNA PEOPLE ATTENDED 400 MOTORSPORTS EVENTS AND ATTRACTED NEARLY
400,000 NEW CUSTOMERS. MORE THAN 100,000 OF THESE NEW CUSTOMERS WERE ADDED
THROUGH THE ENDORSEMENT OF NASCAR.
[DIRECT PROMOTION EVENT]
12
<PAGE> 16
A TYPICAL MBNA CUSTOMER
During the last five years, MBNA's annual loan growth has averaged 38%, far
surpassing the industry's average growth rate of 16%. With this rapid growth,
quality is essential. At MBNA, the focus is on the quality of each individual
Customer. The insight of a credit professional is combined with sophisticated
technology to assess accurately the qualifications of each potential new
Customer. While many credit card issuers let computers make credit decisions, we
prefer to have people make them. An important advantage is that a computer can
only decide yes or no, while MBNA's credit professionals can decide yes, no, or
maybe. When a credit analyst chooses maybe, which happens 25% of the time, the
analyst calls the Customer to obtain additional information to make an informed
decision. As a result of this rigorous approval process, fewer than half of all
applicants receive an MBNA card, but we know that they are the right applicants.
This process ensures that each Customer is treated as an individual. Not only is
the right credit decision made, but a credit line is assigned that properly fits
the Customer's situation. Research indicates that an appropriate credit line is
a key factor in Customer loyalty.
This personal approach to lending has resulted in a Customer base that is
unparalleled in the industry. A typical MBNA Customer has an average household
income of $60,000, owns a home, and has a 15-year history of paying bills on
time. These Customer characteristics have remained consistent over time. As a
result, MBNA's loss rates were 33% below the industry average in 1998.
Affinity marketing, combined with this approach to lending, results in very
loyal Customers. On average, they maintain balances of $3,474, which is 44%
higher than industry averages, and make transactions that are 50% higher than is
typical. This loyalty increases the revenues MBNA earns from each of its
Customers.
<TABLE>
<CAPTION>
OUR CUSTOMERS:
- USE US MORE: MBNA INDUSTRY
- -----------------------------------------------------------------------
<S> <C> <C>
AVERAGE ACCOUNT BALANCE $3,474 $2,417
AVERAGE TRANSACTION $144 $96
- DEFAULT LESS:
- -----------------------------------------------------------------------
LOAN LOSSES PER $1,000
OF AVERAGE OUTSTANDING $43 $64
</TABLE>
MBNA's Customers carry higher balances, spend more, and demonstrate a greater
willingness to repay than the typical customers of our competitors.
[GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
MBNA 3.27 3.28 2.83 2.64 3.28 3.75 4.19
3.46 3.01 2.75 2.64 3.46 3.96 4.42
3.3 2.83 2.44 2.71 3.38 4.07 4.42
3.29 2.79 2.44 2.94 3.3 4.07 4.21
INDUSTRY 5.18 4.46 3.6 3.29 4.5 6.31 6.85
5.32 4.27 3.42 3.56 5.22 6.84 6.55
4.97 4.03 3.16 3.7 5.31 6.56 6.44
4.65 3.73 3.11 4.02 5.72 6.56
</TABLE>
MBNA'S CREDIT LOSSES CONTINUE TO BE FAR SUPERIOR TO INDUSTRY AVERAGES.
13
<PAGE> 17
KEEPING THE RIGHT CUSTOMERS
GETTING THE RIGHT CUSTOMERS IS ONLY HALF OF MBNA'S FORMULA FOR SUCCESS. WE VALUE
LOYAL CUSTOMERS AND STRIVE TO FULFILL THEIR EXPECTATIONS AT EVERY OPPORTUNITY.
SATISFYING CUSTOMERS, ONE AT A TIME
In 1998, Customers contacted us more than 75 million times. Each time--whether
the request was for a credit line increase, an additional card, or information
about a monthly statement--provided an opportunity to demonstrate an absolute
commitment to superior, individualized Customer service. These efforts begin
with the people who work at MBNA. We hire people who like people. It is the most
important quality we look for during the hiring process, because people who
genuinely like other people treat Customers better and, in turn, make the
company more successful.
We strive for a work environment that supports MBNA people's enthusiastic
pursuit of Customer satisfaction. This is done by providing excellent education,
sophisticated technology, a comfortable work setting, and programs that help
people balance the demands of family and the workplace. In 1998, the company was
recognized by publications that included Business Week, Working Mother, and
FORTUNE for its superior work environment. People who feel good about where they
work do a better job of satisfying Customers--which has a direct impact on the
company's financial results.
A COMMITMENT TO SERVICE
Customer satisfaction is measured daily through the Customer Satisfaction Test.
This measures service standards throughout the company, including how fast
telephone calls are answered, the speed and accuracy of changes to Customer
accounts, and the availability of systems used to service Customer requests.
Each day, the results of our efforts are measured against the service standards
Customers expect. Performance levels of more than 100 processes are then
consolidated into the 12 standards that comprise the Customer Satisfaction Test.
The results are posted daily.
THINK OF YOURSELF AS A CUSTOMER
The people of MBNA are encouraged to deliver personalized service, one Customer
at a time. The words "Think of Yourself as a Customer" are above every doorway
at MBNA. To better understand Customer needs, MBNA contacted nearly 35,000
Customers in 1998 to determine their satisfaction with the company's products
and services. In 1998, we enhanced both the statement generation and payment
processing functions based on Customer responses to these surveys. We also
conduct thousands of in-depth interviews with Customers before marketing new
products or adding new services. The success of MBNA's Platinum Plus program was
a direct result of these efforts. More than 12 million Customers now use MBNA's
Platinum Plus credit card.
DOING THINGS BETTER
MBNA people consistently improve service by finding ways to do things better.
Through the company's MasterPiece program, people submit ideas designed to
improve Customer satisfaction and efficiency. Senior managers review and respond
to each idea. MasterPiece was started in 1990, and since then nearly 100,000
ideas have been submitted. In 1998 alone, more than 2,500 ideas were implemented
to improve service, increase efficiency, and make the company an even better
place to work.
PROTECTING CUSTOMERS' ACCOUNTS
MBNA strengthens Customer loyalty by ensuring that accounts are secure and
protected from unauthorized use. Fraud analysts use a range of detection
strategies to accomplish this purpose. We use proprietary neural networks and
predictive modeling software to monitor and analyze each transaction. MBNA
people are also very adept at identifying potentially fraudulent situations.
When there are irregular purchasing patterns or other suspicious activity,
MBNA's fraud analysts contact Customers to ensure that they have their credit
cards. These contacts are an excellent way to reinforce Customer relationships,
and research indicates that the service enhances Customer loyalty. The
combination of human intuition and technology saved MBNA millions of dollars in
losses and earned the loyalty of Customers worldwide. MBNA's fraud losses,
relative to sales volume, are among the lowest in the U.S. credit card industry.
14
<PAGE> 18
[CUSTOMER/REPRESENTATIVE ON TELEPHONE]
MBNA SATISFIES CUSTOMERS ONE AT A TIME--SOMETHING WE DID MORE THAN 75 MILLION
TIMES IN 1998.
<TABLE>
<CAPTION>
GLOBAL SATISFACTION STANDARDS
INDEX STANDARD TODAY
- -------------------------------------------------------------------------------
<S> <C> <C>
READY TO SERVE 98.5% 99.8%
- -------------------------------------------------------------------------------
SYSTEM AVAILABILITY 100% 100%
- -------------------------------------------------------------------------------
TWO-RING PICKUP 100% 100%
- -------------------------------------------------------------------------------
SPEED OF ANSWER 100% 99.1%
- -------------------------------------------------------------------------------
PRODUCT REPLACEMENT 100% 100%
- -------------------------------------------------------------------------------
NEW ACCOUNT SETUP 100% 99.4%
- -------------------------------------------------------------------------------
ACCOUNT ADJUSTMENTS 100% 100%
- -------------------------------------------------------------------------------
NO-ERROR PROCESSING 100% 99.6%
- -------------------------------------------------------------------------------
CREDIT LINE INCREASES 100% 100%
- -------------------------------------------------------------------------------
CUSTOMER CORRESPONDENCE 100% 100%
- -------------------------------------------------------------------------------
STATEMENT GENERATION 100% 100%
- -------------------------------------------------------------------------------
PAYMENT PROCESSING 100% 100%
- -------------------------------------------------------------------------------
</TABLE>
MBNA people are educated from the time they are hired.
CUSTOMER SATISFACTION IS MEASURED ON A DAILY BASIS AT MBNA. THE RESULTS ARE
POSTED THROUGHOUT THE COMPANY FOR PEOPLE TO REVIEW.
15
<PAGE> 19
[CREDIT CARD EMBOSSING EQUIPMENT]
It is always the thousands of little things done right that add up to the
unassailable advantage.
SERVING CUSTOMERS EFFICIENTLY THROUGH INDUSTRY-LEADING TECHNOLOGY
During the past few years, MBNA has made significant investments in new
technology to enhance its products and services. In 1998, we made more than $100
million in technology investments to improve the exceptional service that MBNA
Customers expect.
MBNA has the technology infrastructure to operate the business and control
virtually all interaction with Customers internally. State-of-the-art equipment
supports all functions, including lending, Customer service, transaction
processing, and telecommunications. In 1998, MBNA handled more than 16billion
on-line transactions, 140million payments, 310 million statements and letters,
and 20 million credit card requests.
Technology is developed internally to ensure the reliability, quality, and
responsiveness of the computer and telecommunications systems used to satisfy
Customers. For example, specialized operating systems in the Sales Finance
department provide instant decisioning for all programs. This is one example of
how efficient and flexible systems enable our unique businesses to meet the
changing needs of Customers.
MBNA's investment in technology improves operational efficiency. For example,
enhancements to the systems used in Customer service enable MBNA people to
satisfy Customers faster. During 1998, improvements to MBNA's systems that
process payments increased efficiency by 20%. Additionally, the company's fraud
prevention efforts were improved by installing the most advanced fraud detection
systems in the industry. As a result, MBNA's fraud losses were reduced to their
lowest levels ever.
All of these technology innovations improve efficiency throughout the company.
During the last four years, expense ratios improved by an average of 8% per
year. In 1998, expenses as a percentage of average managed loans decreased to
4.5% from 5.1% in 1997, and 6.7% in 1994. We achieved these efficiencies despite
significant investments in start-up businesses such as insurance, travel, and
MBNA's international operations.
TECHNOLOGY SUPPORTS EVERY ASPECT OF MBNA'S BUSINESS. SPECIALLY DEVELOPED
SELECTIVE INSERTION EQUIPMENT ENABLES MBNA TO INSERT CUSTOMIZED MARKETING
MATERIALS IN EACH CUSTOMER'S STATEMENT.
[SELECTIVE INSERTION EQUIPMENT]
16
<PAGE> 20
[DISCLOSURE DOCUMENTS AND CERTIFICATES]
FUNDING
MBNA continues to expand and diversify its funding sources to support future
asset growth. Asset-backed securitizations of MBNA's loan receivables are a
major source of funding. MBNA has been the leader in this market since we
pioneered the practice of securitizing receivables in 1986. Securitization
involves the sale of a pool of loan receivables to a trust, while MBNA continues
to manage the accounts for a fee. The funds are then used to support further
loan growth.
The market for credit card asset-backed securitizations remains strong. MBNA
strengthened its status as the industry leader by issuing 18 new securitizations
totaling $10.7 billion in 1998. These transactions continue to be well received
by investors. The innovative design of these securitizations, MBNA's reputation,
and the credit quality of the receivables have all allowed the company to price
these issues at favorable rates. In addition, MBNA's cost of funds benefited
with a reduction in the base financing LIBOR and Treasury rates in 1998.
MBNA also has a $15.4 billion deposit base to fund asset growth. More than 2,000
groups endorse our deposit products for their members. MBNA's retail deposit
products are marketed much like our other products, through the mail and over
the telephone. The returns also tend to be higher, since we are able to pass on
the savings of not having a costly branch network.
MBNA has developed funding sources in Europe and Canada to support growth. This
allows MBNA to match assets and liabilities in the United Kingdom and Canada to
minimize currency risk. MBNA International has issued eight sterling-denominated
asset-backed securitizations for a total of Pound Sterling 1.9 billion ($3.2
billion). MBNA has established funding sources in Canada to meet the successful
launch of this new entity, including its first credit card securitization, a
commercial paper program, and medium-term deposit notes.
MBNA also continues to utilize debt issuances as another means to diversify
funding sources. The proceeds from these debt issuances and other diversified
funding sources will provide MBNA with adequate funds to support future growth.
[PEOPLE TALKING]
MBNA CONTINUES TO DIVERSIFY ITS FUNDING SOURCES.
17
<PAGE> 21
[STUDENT]
MBNA EDUCATION FOUNDATION
MBNA's unwavering commitment to Customer satisfaction means that it is critical
to be a company of people who like people. This attitude extends into the
communities in which we live and work. The people of MBNA volunteered more than
200,000 hours of their personal time to charities and education initiatives
during 1998.
Much of our community support revolves around the MBNA Education Foundation.
MBNA initially established the Foundation in 1997 to improve the quality and
availability of education and to provide financial support for innovative
academic programs in Delaware and Maine. The program will be expanded to
Cleveland during 1999. In 1998, MBNA doubled the Foundation's original funding
to $60 million over five years and extended it by a full year, through 2002. The
program is being funded with a $50 million contribution from the Corporation and
$10 million in personal donations from MBNA people.
THE MISSION OF THE
MBNA EDUCATION
FOUNDATION IS TO IMPROVE
THE QUALITY AND AVAILABILITY
OF EDUCATION IN OUR
COMMUNITIES.
The Foundation emphasizes programs that provide enhanced opportunities for
economically disadvantaged young people. The Foundation consists of two main
components: the MBNA Scholars Program, which allows graduating high school
seniors to apply for financial assistance for an accredited college or
university within their state; and the MBNA Excellence in Education Grants
Program, which enables teachers and school administrators to apply for grants to
fund creative programs in local schools. During the last two years, $6.9 million
in scholarships has been awarded to 363 young people. In addition, $5.5 million
in grants has been awarded to support 950 new programs in schools.
The Excellence in Education Grants Program supports innovative programs in local
schools that enrich the quality of students' educational experiences both in and
out of the classroom. The program is unique in that the direct,
into-the-classroom funding allows teachers and school administrators to receive
promptly the needed financial support without bureaucratic delays or
requirements. For example, an Excellence in Education grant made it possible for
20 students from Silver Lake Elementary school in Middletown, Delaware, to
witness Senator John Glenn's historic space shuttle launch in Cape Canaveral,
Florida, in conjunction with a class trip on the space program.
LOCAL SCHOOLS USE MBNA GRANTS TO DEVELOP RESULTS-ORIENTED INITIATIVES, INCLUDING
CHALLENGING READING AND MATH PROGRAMS.
[TEACHER AND STUDENT]
18
<PAGE> 22
[STUDENTS]
HOWARD HIGH SCHOOL STUDENTS IN WILMINGTON, DELAWARE, ARE BECOMING MICROSOFT
CERTIFIED THROUGH AN MBNA GRANT.
MBNA ALSO PROVIDES JOB OPPORTUNITIES TO HELP STUDENTS DEVELOP OUTSIDE THE
CLASSROOM. DELAWARE SCHOLAR LA SHAWN CARTER (LEFT) WORKS AS A SUMMER INTERN AT
MBNA.
In Rockland, Maine, more than 80 students in kindergarten through second grade
at Gilford Butler School learned the importance of recycling, composting,
conservation of resources, and animal habitats with the help of an MBNA grant.
The students attended presentations by environmental experts and were able to
maximize learning opportunities with several field trips to observe forest
ecosystems. In Dover, Delaware, the Boys and Girls Club offered a special
10-week education program to 90 economically disadvantaged students ages 6 to
16. Grant funding made it possible for them to make the most of educational
opportunities during the summer through reading comprehension, writing, and math
improvement programs.
The Foundation also provides advisors, counseling, and job opportunities at MBNA
to encourage students' growth beyond the classroom. In 1998, MBNA offered
internships, tutoring, and mentoring to more than 900 students, and 95 MBNA
people volunteered as advisors to MBNA Scholars.
In addition, MBNA is creating Centers for Academic Excellence in both
Wilmington, Delaware, and Camden, Maine. These centers will provide educational
programs including tutorial assistance, SAT preparation, college financial
planning, college and career counseling, and resume and business writing
workshops for interested local young people.
At MBNA, we firmly believe that the quality of education a person receives is
one of the underlying determinants of his or her success. The Foundation is
committed to opening opportunities for students to better themselves through
scholarships and grants for various educational programs. The funding goes
straight to students and teachers, thereby making an immediate impact on them.
By supporting students, teachers, and schools, the MBNA Education Foundation is
helping young people prepare for their successful future. When these
well-educated students join the workforce, the community and the company will
benefit.
If every company is a portrait of its people . . . MBNA is a masterpiece.
[PEOPLE TALKING]
<PAGE> 23
[GLOBE]
MBNA INTERNATIONAL
[MAP]
KEY
[ ] HEADQUARTERS
O REGIONAL CENTERS
+ SALES OFFICES
/\ MARKETING SYSTEMS
HEADQUARTERS
[ ] MBNA Corporation
Wilmington, DE 19884
(800) 441-7048
UNITED STATES OFFICES
REGIONAL CENTERS
O 16001 N. Dallas Pkwy.
Dallas, TX 75248
(800) 435-9672
O 44 Montgomery St.
San Francisco, CA 94104
(800) 585-4956
O 11333 McCormick Rd.
Hunt Valley, MD 21031
(888) 680-6945
O 32 Washington St.
Camden, ME 04843
(800) 386-6262
O 25875 Science Park Dr.
Beachwood, OH 44122
(800) 410-6262
O 1501 Yamato Rd.
Boca Raton, FL 33431
(800) 841-6845
SALES OFFICES
+ 9 W. 57th St.
New York, NY 10019
(800) 746-6262
+ 676 North Michigan Ave.
Chicago, IL 60611
(800) 906-6262
+ 2600 Century Pkwy.
Atlanta, GA 30345
(800) 446-7048
MARKETING SYSTEMS
/\ 16 Godfrey Dr.
Orono, ME 04473
(800) 503-6262
/\ 901 Washington Ave.
Portland, ME 04103
(800) 626-2488
/\ 5 Industrial Pkwy.
Brunswick, ME 04011
(800) 645-6682
/\ 260 Main Street
Presque Isle, ME 04769
(800) 545-2977
/\ 100 Main St.
Dover, NH 03820
(800) 330-5929
/\ 16001 N. Dallas Pkwy.
Dallas, TX 75248
(800) 435-9672
/\ 1501 Yamato Rd.
Boca Raton, FL 33431
(800) 841-6845
/\ 11333 McCormick Rd.
Hunt Valley, MD 21031
(888) 680-6945
/\ 400 Christiana Rd.
Newark, DE 19713
(800) 441-7048
/\ 860 Silver Lake Blvd.
Dover, DE 19904
(800) 346-2620
/\ 2568 Park Centre Blvd.
State College, PA 16801
(800) 471-6262
/\ 25875 Science Park Dr.
Beachwood, OH 44122
(800) 410-6262
/\ 388 S. Main St.
Akron, OH 44311
(800) 731-9260
/\ Farmington, ME
(To open in 1999)
/\ Fort Kent, ME
(To open in 1999)
INTERNATIONAL OFFICES
CANADA
O 1600 James Naismith Dr.
Gloucester,
Ontario K1B 5N8
(888) 871-6262
+ 1000 de la Gauchetiere
Suite 4300
Montreal, Quebec
H3B 4W5
(514) 390-2151
ENGLAND
O Stansfield House
Chester Business Park
Wrexham Rd.
Chester, Cheshire
CH4 9QQ
United Kingdom
(011) 44-1244-672000
+ 86 Jermyn St.
London SW1Y 6JD
United Kingdom
(011) 44-171-389-6200
IRELAND (The Republic Of)
+ 46 St. Stephen's Green
Dublin 2, Ireland
(011) 353-1-619-6000
SCOTLAND
+ One St. Colme Street
Edinburgh,
Scotland EH3 6AA
(011) 44-131-220-8949
20
<PAGE> 24
<TABLE>
<CAPTION>
FINANCIAL CONTENTS
- ------------------
<S> <C>
22 TEN-YEAR STATISTICAL SUMMARY
24 GLOSSARY OF FINANCIAL TERMS
25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
43 SUPPLEMENTAL FINANCIAL INFORMATION
44 MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL
CONTROL
45 REPORT OF INDEPENDENT AUDITORS
46 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
47 CONSOLIDATED STATEMENTS OF INCOME
48 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
49 CONSOLIDATED STATEMENTS OF CASH FLOWS
50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
72 QUARTERLY DATA
73 PREFERRED STOCK PRICE RANGE AND DIVIDENDS
74 COMMON STOCK PRICE RANGE AND DIVIDENDS
</TABLE>
<PAGE> 25
[PEOPLE TALKING]
EXCELLENCE IS A POINT OF VIEW.
IT ISN'T BRILLIANCE OR GETTING THE BREAKS.
IT'S CONSISTENT ATTENTION TO AND
HONEST RESPECT FOR THE CUSTOMER.
<PAGE> 26
MBNA CORPORATION AND SUBSIDIARIES
TEN-YEAR STATISTICAL SUMMARY
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA FOR THE YEAR
Net interest income......................................... $ 742,339 $ 692,390 $ 640,477 $ 544,226
Provision for possible credit losses........................ 310,039 260,040 178,224 138,176
Other operating income...................................... 3,228,969 2,812,879 1,895,923 1,424,618
Other operating expense..................................... 2,407,204 2,223,121 1,626,882 1,246,067
Net income.................................................. 776,266 622,500 474,495 353,099
PER COMMON SHARE DATA FOR THE YEAR (a)
Earnings ................................................... $ 1.01 $ .80 $ .61 $ .47
Earnings--assuming dilution................................. .97 .76 .59 .46
Dividends................................................... .24 .21 .19 .17
Book value.................................................. 2.90 2.34 1.87 1.48
RATIOS
Return on average total assets.............................. 3.38% 3.25% 3.26% 3.09%
Return on average stockholders' equity...................... 36.91 35.56 34.46 35.51
Average receivables to average deposits..................... 86.04 88.82 92.50 91.60
Stockholders' equity to total assets........................ 9.27 9.25 10.00 9.56
Loan portfolio:
Delinquency (c)......................................... 3.86 3.93 3.59 3.11
Net credit losses....................................... 2.39 2.14 1.98 1.91
Managed loans (d):
Delinquency............................................. 4.62 4.59 4.28 3.70
Net credit losses....................................... 4.31 3.97 3.35 2.74
Net interest margin (e)................................. 7.47 7.50 7.62 7.42
MANAGED LOAN DATA (d)
At year end:
Loans held for securitization........................... $ 1,692,268 $ 2,900,198 $ 2,469,974 $ 3,168,427
Loan portfolio.......................................... 11,776,099 8,261,876 7,659,078 4,967,491
Securitized loans....................................... 46,172,739 38,217,786 28,494,481 18,575,786
-------------- ----------- ----------- -----------
Total managed loans.................................. $ 59,641,106 $49,379,860 $38,623,533 $26,711,704
============== =========== =========== ===========
Average for the year:
Loans held for securitization........................... $ 2,577,482 $ 2,875,212 $ 2,529,484 $ 2,269,362
Loan portfolio.......................................... 9,352,807 7,563,301 6,174,095 4,792,536
Securitized loans....................................... 40,970,936 32,746,963 22,514,014 15,440,499
-------------- ----------- ----------- -----------
Total managed loans.................................. $ 52,901,225 $43,185,476 $31,217,593 $22,502,397
============== =========== =========== ===========
For the year:
Sales and cash advance volume........................... $ 82,968,874 $66,399,425 $48,666,129 $34,272,909
BALANCE SHEET DATA AT YEAR END
Investment securities and money market instruments.......... $ 5,440,939 $ 4,594,709 $ 3,194,664 $ 2,669,402
Loans held for securitization............................... 1,692,268 2,900,198 2,469,974 3,168,427
Credit card loans........................................... 8,975,051 5,830,221 5,722,299 4,090,553
Other consumer loans........................................ 2,801,048 2,431,655 1,936,779 876,938
-------------- ----------- ----------- -----------
Total loans............................................. 11,776,099 8,261,876 7,659,078 4,967,491
Reserve for possible credit losses.......................... (216,911) (162,476) (118,427) (104,886)
-------------- ----------- ----------- -----------
Net loans............................................... 11,559,188 8,099,400 7,540,651 4,862,605
Total assets................................................ 25,806,260 21,305,513 17,035,342 13,228,889
Total deposits.............................................. 15,407,040 12,913,213 10,151,686 8,608,914
Long-term debt and bank notes............................... 5,939,025 5,478,917 3,950,358 2,657,600
Stockholders' equity........................................ 2,391,035 1,970,050 1,704,308 1,265,058
AVERAGE BALANCE SHEET DATA FOR THE YEAR
Investment securities and money market instruments.......... $ 4,905,943 $ 3,851,867 $ 2,927,351 $ 2,451,783
Loans held for securitization............................... 2,577,482 2,875,212 2,529,484 2,269,362
Credit card loans........................................... 6,820,538 5,456,349 4,907,814 4,160,230
Other consumer loans........................................ 2,532,269 2,106,952 1,266,281 632,306
-------------- ----------- ----------- -----------
Total loans............................................. 9,352,807 7,563,301 6,174,095 4,792,536
Reserve for possible credit losses.......................... (192,024) (143,277) (111,041) (103,568)
-------------- ----------- ----------- -----------
Net loans............................................... 9,160,783 7,420,024 6,063,054 4,688,968
Total assets................................................ 22,982,349 19,125,282 14,571,288 11,425,721
Total deposits.............................................. 13,866,645 11,752,887 9,408,843 7,709,840
Long-term debt and bank notes............................... 5,873,122 4,639,430 3,029,250 2,212,591
Stockholders' equity........................................ 2,103,043 1,750,459 1,377,072 994,287
Weighted average common shares outstanding (000) (a)........ 751,856 751,837 751,812 751,839
Weighted average common shares outstanding and
common stock equivalents (000) (a)......................... 789,421 789,801 778,473 770,464
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The consolidated financial statements for the years ended prior to December
31, 1991, reflect the combined results of the "Credit Card and Certain Related
Banking Activities of MBNA America Bank, N.A., and Certain Affiliates" prior to
the organization of MBNA Corporation ("the Corporation"). The consolidated
financial statements for the years ended December 31, 1991, and thereafter
reflect the independent Corporation.
(a) Per common share data and weighted average common shares outstanding
and common stock equivalents have been restated to reflect the
three-for-two split of the Corporation's Common Stock, effected in the
form of a dividend, issued October 1, 1998, to stockholders of record
as of September 15, 1998. Earnings per common share is computed using
net income applicable to common stock and weighted average common
shares outstanding, whereas, earnings per common share--assuming
dilution includes the potential dilutive effect of common stock
equivalents in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share." The Corporation's common stock
equivalents are solely related to employee stock options. The
Corporation has no other common stock equivalents. For comparative
purposes, earnings per common share and earnings per common
share--assuming dilution for the years ended prior to December 31,
1991, are presented on a pro forma basis.
22
<PAGE> 27
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 532,108 $ 474,323 $ 357,515 $ 239,599 $ 164,315 $ 116,754
108,477 98,795 97,534 86,723 57,951 43,319
1,013,580 739,968 577,505 540,708 451,863 343,551
996,110 924,872 565,467 459,035 354,462 258,357
266,593 207,796 172,732 149,213 128,998 104,109
$ .35 $ .28 $ .23 $ .20 $ .17 $ .14
.35 .27 .23 .20 .17 .14
.14 .13 .12 .11 (b) (b)
1.22 1.02 .88 .79 (b) (b)
3.16% 3.15% 2.96% 2.79% 3.87% 4.13%
32.70 30.01 28.55 28.55 (b) (b)
93.05 85.34 69.98 71.77 103.51 124.73
9.51 10.51 10.25 9.86 (b) (b)
2.60 3.03 3.78 4.39 4.15 3.52
1.96 2.43 2.87 2.65 1.79 1.77
3.03 3.27 3.99 4.40 4.52 3.66
2.59 2.97 3.33 3.05 2.21 1.97
8.16 8.47 7.22 6.36 6.55 5.77
$ 2,299,026 $ 741,869 $ 678,000 $ 600,000 $ 567,000 $ 418,800
3,407,974 3,725,509 3,300,650 2,886,405 2,672,733 1,842,473
13,036,864 7,891,140 5,881,479 5,327,901 4,137,950 3,456,587
------------------ -------------- ------------------ ------------------ ------------------ ------------------
$ 18,743,864 $ 12,358,518 $ 9,860,129 $ 8,814,306 $ 7,377,683 $ 5,717,860
================== ============== ================== ================== ================== ==================
$ 1,330,011 $ 642,750 $ 733,473 $ 560,447 $ 707,632 $ 215,223
4,000,271 3,425,935 2,659,305 2,707,535 1,907,208 1,782,051
9,462,401 6,596,387 5,528,394 4,563,279 3,798,409 2,898,169
------------------ -------------- ------------------ ------------------ ------------------ ------------------
$ 14,792,683 $ 10,665,072 $ 8,921,172 $ 7,831,261 $ 6,413,249 $ 4,895,443
================== ============== ================== ================== ================== ==================
$ 25,078,918 $ 17,889,747 $ 14,523,570 $ 12,915,104 $ 11,541,181 $ 9,075,967
$ 2,269,081 $ 1,440,684 $ 1,345,995 $ 1,768,048 $ 540,660 $ 151,973
2,299,026 741,869 678,000 600,000 567,000 418,800
2,882,232 2,949,995 2,659,007 2,299,912 2,216,604 1,587,652
525,742 775,514 641,643 586,493 456,129 254,821
------------------ -------------- ------------------ ------------------ ------------------ ------------------
3,407,974 3,725,509 3,300,650 2,886,405 2,672,733 1,842,473
(101,519) (97,580) (97,580) (97,580) (97,580) (82,098)
------------------ -------------- ------------------ ------------------ ------------------ ------------------
3,306,455 3,627,929 3,203,070 2,788,825 2,575,153 1,760,375
9,671,858 7,319,756 6,454,511 6,009,028 4,579,514 2,858,924
6,632,489 5,241,883 4,568,791 5,094,011 4,202,159 1,743,969
1,687,357 779,553 470,601 - - -
919,578 769,131 661,290 592,230 214,098 256,904
$ 1,684,316 $ 1,364,350 $ 1,572,911 $ 1,401,469 $ 160,356 $ 182,254
1,330,011 642,750 733,473 560,447 707,632 215,223
3,207,110 2,735,191 2,050,487 2,176,144 1,529,759 1,584,368
793,161 690,744 608,818 531,391 377,449 197,683
------------------ -------------- ------------------ ------------------ ------------------ ------------------
4,000,271 3,425,935 2,659,305 2,707,535 1,907,208 1,782,051
(99,175) (97,580) (97,580) (93,284) (76,509) (73,120)
------------------ -------------- ------------------ ------------------ ------------------ ------------------
3,901,096 3,328,355 2,561,725 2,614,251 1,830,699 1,708,931
8,432,511 6,596,419 5,829,052 5,347,990 3,330,155 2,519,192
5,728,432 4,767,669 4,847,911 4,553,186 2,526,109 1,601,225
1,199,520 537,609 116,301 - - -
815,243 692,460 605,079 522,721 258,719 274,991
751,840 751,840 752,360 751,878 751,781 751,781
762,515 760,118 760,187 756,576 751,781 751,781
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) During 1991, MBNA Corporation became an independent corporation traded
publicly on the New York Stock Exchange. Accordingly, dividends per
common share, book value per common share, and stockholders' equity
ratios have not been presented for the years ended prior to December
31, 1991.
(c) Loan portfolio delinquency does not include loans held
for securitization or securitized loans.
(d) Managed loans include the
Corporation's loans held for securitization, loan portfolio, and
securitized loans.
(e) Managed net interest margin is presented on a
fully taxable equivalent basis.
23
<PAGE> 28
MBNA CORPORATION AND SUBSIDIARIES
GLOSSARY OF FINANCIAL TERMS
The following definitions may be helpful when reading Management's Discussion
and Analysis of Financial Condition and Results of Operations of MBNA
Corporation the Corporation").
ASSET SECURITIZATION
Asset securitization removes loan receivables from the consolidated statements
of financial condition by selling them, generally to a trust. Asset
securitization converts interest income, interchange, other fees, and insurance
income in excess of interest paid to Certificateholders; credit losses; and
other trust expenses into securitization income, while reducing the
Corporation's on-balance-sheet assets.
BORROWED FUNDS
Borrowed funds include both short-term borrowings and long-term debt and bank
notes.
CREDIT CARD FEES
Credit card fees include annual, late, overlimit, returned check, cash advance,
and other miscellaneous fees.
CREDIT RISK
Credit risk is the possibility that a loss may occur should a borrower or
counterparty fail to fully honor the terms of a contract.
DIRECT DEPOSITS
Direct deposits are deposits marketed to and received from individual Customers
without the use of a third-party intermediary.
FOREIGN ACTIVITIES
The Corporation's foreign activities are primarily performed through MBNA
America Bank, N.A.'s ("the Bank") two foreign bank subsidiaries, MBNA
International Bank Limited ("MBNA International") and MBNA Canada Bank ("MBNA
Canada"). The Bank also has a foreign branch office in the Grand Cayman
Islands.
FOREIGN CURRENCY EXCHANGE RATE RISK
Foreign currency exchange rate risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange rates
and occurs as a result of cross-currency investment and funding activities. The
Corporation's foreign currency exchange rate risk is primarily limited to the
unhedged position of the Corporation's net investment in its foreign
subsidiaries.
FULLY TAXABLE EQUIVALENT (FTE) BASIS
FTE basis represents the income on total interest-earning assets that is either
tax-exempt or taxed at a reduced rate, adjusted to give effect to the
prevailing incremental federal income tax rate, and adjusted for nondeductible
carrying costs and state income taxes, where applicable. Yield calculations,
where appropriate, include these adjustments.
INSURANCE INCOME
Insurance income represents the fee the Corporation receives for marketing and
servicing credit, automobile, and life insurance products. The Corporation does
not retain any of the underwriting risk associated with the insurance products
it markets and services.
INTERCHANGE INCOME
Interchange income is a fee paid by a merchant bank to the card-issuing bank
through the interchange network as compensation for risk, grace period, and
other operating costs. Such fees are set annually by MasterCard International
and Visa International.
INTEREST RATE RISK
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates, and differences in
the repricing characteristics between interest rate sensitive assets and
liabilities.
INTEREST RATE SENSITIVE ASSETS/LIABILITIES
Interest rate sensitive assets/liabilities have yields/rates that can change
within a designated time period due to: their maturity, a change in an
underlying index rate, or the contractual ability of the Corporation to change
the yield/rate.
INVESTMENT SECURITIES
Investment securities include both those available-for-sale and those
held-to-maturity. The Corporation does not hold investment securities for
trading purposes.
LOAN PORTFOLIO
Loan portfolio includes credit card and other consumer loans, excluding loans
held for securitization, as reported on the consolidated statements of
financial condition as total loans.
LOAN RECEIVABLES
Loan receivables consist of the Corporation's loan portfolio and loans held for
securitization.
MANAGED LOANS
Managed loans consist of the Corporation's loans held for securitization, loan
portfolio, and securitized loans.
MONEY MARKET INSTRUMENTS
Money market instruments include interest-earning time deposits in other banks
and federal funds sold and securities purchased under resale agreements.
NET INTEREST INCOME
Net interest income represents interest income on total interest-earning
assets, on an FTE basis where appropriate, less interest expense on total
interest-bearing liabilities.
NET INTEREST MARGIN
Net interest margin represents net interest income on an FTE basis expressed as
a percentage of average total interest-earning assets.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments include interest rate swap agreements,
forward exchange contracts, and foreign exchange 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 uses forward exchange contracts
and foreign exchange swap agreements to reduce its exposure to foreign currency
exchange rate risk primarily related to its foreign bank subsidiaries.
The Corporation does not hold or issue off-balance-sheet financial instruments
for trading purposes.
24
<PAGE> 29
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion is intended to further the reader's understanding of the
consolidated financial condition and results of operations of MBNA Corporation
("the Corporation"). It should be read in conjunction with the consolidated
financial statements, notes, tables, and glossary of financial terms included
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 International") 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.
<TABLE>
<CAPTION>
NET INCOME
- -----------------------
(millions)
<S> <C>
96 474.5
97 622.5
98 776.3
</TABLE>
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
- ----------------------------
<S> <C>
96 .59
97 .76
98 .97
</TABLE>
On July 14, 1998, the Board of Directors approved a three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend, issued on
October 1, 1998, to stockholders of record as of September 15, 1998.
Accordingly, all common share and per common share data in the following
discussion have been restated to reflect the Corporation's stock split.
EARNINGS SUMMARY
Net income for 1998 increased 24.7% to $776.3 million or $.97 per common share
from $622.5 million or $.76 per common share in 1997. Net income for 1997
increased 31.2% from $474.5 million or $.59 per common share in 1996. Earnings
per common share amounts are presented assuming dilution in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
The overall growth in earnings is primarily attributable to the growth in the
Corporation's managed loans outstanding. Managed loans at December 31, 1998,
increased $10.3 billion to $59.6 billion from December 31, 1997, as the
Corporation acquired 475 new endorsements from organizations and added 9.3
million new accounts. The Corporation's average managed loans increased 22.5%
to $52.9 billion in 1998 from 1997. Managed loans at December 31, 1997
increased $10.8 billion to $49.4 billion from December 31, 1996. During 1997,
the Corporation acquired 563 new endorsements from organizations and added 9.4
million new accounts. The Corporation's average managed loans increased 38.3%
to $43.2 billion in 1997 from 1996.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization converts interest income,
interchange, other fees, and insurance income in excess of interest paid to
Certificateholders; credit losses; and other trust expenses into securitization
income, while reducing the Corporation's on-balance-sheet assets. During 1998,
the Corporation securitized approximately $10.7 billion of loan receivables,
bringing the total amount of outstanding securitized loans to $46.2 billion at
December 31, 1998. During 1997, the Corporation securitized $13.2 billion of
loan receivables, bringing the total amount of securitized loans to $38.2
billion at December 31, 1997.
On January 1, 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("Statement No. 125"), effective for all
transactions occurring after December 31, 1996. In accordance with Statement
No. 125, gains are recognized in securitization income at the time of initial
sale and each subsequent sale of loan receivables in a securitization. As a
result of the adoption of Statement No. 125, securitization income increased
$17.9 million in 1998 and $325.1 million in 1997. During 1997, the Corporation
invested an amount equivalent to the increase in securitization income from the
adoption of Statement No. 125 in additional business development efforts;
therefore, this incremental increase in securitization income did not
materially impact the Corporation's consolidated net income. Prior to 1997, the
Corporation recognized the earnings from each asset securitization over the
life of the transaction.
<TABLE>
<CAPTION>
RETURN ON AVERAGE
TOTAL ASSETS
- -------------------
<S> <C>
96 3.26
97 3.25
98 3.38
</TABLE>
<TABLE>
<CAPTION>
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY
- ----------------------
<S> <C>
96 34.46
97 35.56
98 36.91
</TABLE>
The Corporation's return on average total assets in 1998 increased to 3.38%
from 3.25% in 1997 and 3.26% in 1996. The increase in 1998 was primarily a
result of the percentage growth in net income exceeding the percentage growth
in average total assets. The Corporation's return on average stockholders'
equity was 36.91% in 1998, compared to 35.56% in 1997 and 34.46% in 1996. The
increases in the return on average stockholders' equity in 1998
25
<PAGE> 30
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE 1: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ INCOME
AMOUNT RATE OR EXPENSE
-----------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic....................................................... $ 8,806 4.69% $ 413
Foreign........................................................ 2,349,929 5.75 135,007
----------- ----------
Total interest-earning time deposits in other banks...... 2,358,735 5.74 135,420
Federal funds sold and securities purchased under resale
agreements...................................................... 538,009 5.35 28,783
Investment securities (a):
Taxable........................................................ 1,917,645 5.79 111,092
Tax-exempt (b)................................................. 91,554 5.72 5,238
----------- ----------
Total investment securities.............................. 2,009,199 5.79 116,330
Loans held for securitization:
Domestic....................................................... 1,853,805 14.36 266,190
Foreign........................................................ 723,677 14.64 105,952
----------- ----------
Total loans held for securitization...................... 2,577,482 14.44 372,142
Loans:
Domestic:
Credit card................................................. 6,174,766 14.19 876,094
Other consumer.............................................. 2,288,374 13.94 318,958
----------- ----------
Total domestic loans..................................... 8,463,140 14.12 1,195,052
Foreign........................................................ 889,667 13.52 120,278
----------- ----------
Total loans.............................................. 9,352,807 14.06 1,315,330
----------- ----------
Total interest-earning assets............................ 16,836,232 11.69 1,968,005
Cash and due from banks.............................................. 459,842
Premises and equipment, net.......................................... 1,633,761
Other assets......................................................... 4,244,538
Reserve for possible credit losses................................... (192,024)
-----------
Total assets............................................. $22,982,349
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)........................................... $ 8,965,995 6.27 562,161
Money market deposit accounts............................... 3,564,300 5.40 192,384
Interest-bearing transaction accounts....................... 31,644 4.67 1,478
Savings accounts............................................ 11,303 4.60 520
----------- ----------
Total domestic interest-bearing deposits................. 12,573,242 6.02 756,543
Foreign:
Time deposits............................................... 865,975 6.88 59,561
----------- ----------
Total interest-bearing deposits.......................... 13,439,217 6.07 816,104
Borrowed funds:
Short-term borrowings:
Domestic.................................................... 223,437 5.53 12,347
Foreign..................................................... 225,065 6.08 13,691
----------- ----------
Total short-term borrowings.............................. 448,502 5.81 26,038
Long-term debt and bank notes:
Domestic (c)................................................ 5,643,825 6.44 363,593
Foreign..................................................... 229,297 7.89 18,098
----------- ----------
Total long-term debt and bank notes...................... 5,873,122 6.50 381,691
----------- ----------
Total Borrowed Funds..................................... 6,321,624 6.45 407,729
----------- ----------
Total interest-bearing liabilities....................... 19,760,841 6.19 1,223,833
Demand deposits...................................................... 427,428
Other liabilities.................................................... 691,037
-----------
Total liabilities........................................ 20,879,306
Stockholders' equity................................................. 2,103,043
-----------
Total liabilities and stockholders' equity............... $22,982,349
=========== ----------
Net interest income...................................... $ 744,172
==========
Net interest margin...................................... 4.42
Interest rate spread..................................... 5.50
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
TABLE 1: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
Average Yield/ Income
Amount Rate or Expense
------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic....................................................... $ 2,683 3.80% $ 102
Foreign........................................................ 848,229 5.77 48,971
------------ ----------
Total interest-earning time deposits in other banks...... 850,912 5.77 49,073
Federal funds sold and securities purchased under resale
agreements...................................................... 430,614 5.56 23,962
Investment securities (a):
Taxable........................................................ 2,480,722 5.70 141,429
Tax-exempt (b)................................................. 89,619 6.03 5,402
------------ ----------
Total investment securities.............................. 2,570,341 5.71 146,831
Loans held for securitization:
Domestic....................................................... 2,486,520 14.50 360,506
Foreign........................................................ 388,692 14.44 56,139
------------ ----------
Total loans held for securitization...................... 2,875,212 14.49 416,645
Loans:
Domestic:
Credit card................................................. 5,196,643 14.16 735,971
Other consumer.............................................. 1,938,292 14.49 280,822
------------ ----------
Total domestic loans..................................... 7,134,935 14.25 1,016,793
Foreign........................................................ 428,366 13.91 59,600
------------ ----------
Total loans.............................................. 7,563,301 14.23 1,076,393
------------ ----------
Total interest-earning assets............................ 14,290,380 11.99 1,712,904
Cash and due from banks.............................................. 495,835
Premises and equipment, net.......................................... 1,292,284
Other assets......................................................... 3,190,060
Reserve for possible credit losses................................... (143,277)
------------
Total assets............................................. $ 19,125,282
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)........................................... $ 8,011,904 6.30 504,742
Money market deposit accounts............................... 2,908,901 5.42 157,786
Interest-bearing transaction accounts....................... 27,779 4.72 1,310
Savings accounts............................................ 11,578 4.68 542
------------ ----------
Total domestic interest-bearing deposits................. 10,960,162 6.06 664,380
Foreign:
Time deposits............................................... 452,530 6.53 29,540
------------ ----------
Total interest-bearing deposits.......................... 11,412,692 6.08 693,920
Borrowed funds:
Short-term borrowings:
Domestic.................................................... 285,894 5.69 16,257
Foreign..................................................... 52,261 6.75 3,527
------------ ----------
Total short-term borrowings.............................. 338,155 5.85 19,784
Long-term debt and bank notes:
Domestic (c)................................................ 4,459,829 6.52 290,814
Foreign..................................................... 179,601 7.85 14,105
------------ ----------
Total long-term debt and bank notes...................... 4,639,430 6.57 304,919
------------ ----------
Total Borrowed Funds..................................... 4,977,585 6.52 324,703
------------ ----------
Total interest-bearing liabilities....................... 16,390,277 6.21 1,018,623
Demand deposits...................................................... 340,195
Other liabilities.................................................... 644,351
------------
Total liabilities........................................ 17,374,823
Stockholders' equity................................................. 1,750,459
------------
Total liabilities and stockholders' equity............... $ 19,125,282
============ ----------
Net interest income...................................... $ 694,281
==========
Net interest margin...................................... 4.86
Interest rate spread..................................... 5.78
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
TABLE 1: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
Average Yield/ Income
Amount Rate or Expense
---------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning time deposits in other banks:
Domestic....................................................... $ 2,250 3.87% $ 87
Foreign........................................................ 528,882 5.57 29,441
------------ ----------
Total interest-earning time deposits in other banks...... 531,132 5.56 29,528
Federal funds sold and securities purchased under resale
agreements...................................................... 184,347 5.39 9,935
Investment securities (a):
Taxable........................................................ 2,126,411 5.79 123,054
Tax-exempt (b)................................................. 85,461 5.99 5,116
------------ ----------
Total investment securities.............................. 2,211,872 5.79 128,170
Loans held for securitization:
Domestic....................................................... 2,169,426 14.02 304,118
Foreign........................................................ 360,058 14.44 52,002
------------ ----------
Total loans held for securitization...................... 2,529,484 14.08 356,120
Loans:
Domestic:
Credit card................................................. 4,701,009 13.92 654,410
Other consumer.............................................. 1,227,915 14.03 172,336
------------ ----------
Total domestic loans..................................... 5,928,924 13.94 826,746
Foreign........................................................ 245,171 14.10 34,559
------------ ----------
Total loans.............................................. 6,174,095 13.95 861,305
------------ ----------
Total interest-earning assets............................ 11,630,930 11.91 1,385,058
Cash and due from banks.............................................. 350,463
Premises and equipment, net.......................................... 931,455
Other assets......................................................... 1,769,481
Reserve for possible credit losses................................... (111,041)
------------
Total assets............................................. $ 14,571,288
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits (c)........................................... $ 6,147,083 5.89 361,934
Money market deposit accounts............................... 2,540,850 5.30 134,777
Interest-bearing transaction accounts....................... 23,504 4.58 1,077
Savings accounts............................................ 10,181 4.56 464
------------ ----------
Total domestic interest-bearing deposits................. 8,721,618 5.71 498,252
Foreign:
Time deposits............................................... 497,654 5.95 29,633
------------ ----------
Total interest-bearing deposits.......................... 9,219,272 5.73 527,885
Borrowed funds:
Short-term borrowings:
Domestic.................................................... 337,250 5.48 18,497
Foreign..................................................... - - -
------------ ----------
Total short-term borrowings.............................. 337,250 5.48 18,497
Long-term debt and bank notes:
Domestic (c)................................................ 2,926,018 6.44 188,425
Foreign..................................................... 103,232 7.73 7,983
------------ ----------
Total long-term debt and bank notes...................... 3,029,250 6.48 196,408
------------ ----------
Total Borrowed Funds..................................... 3,366,500 6.38 214,905
------------ ----------
Total interest-bearing liabilities....................... 12,585,772 5.90 742,790
Demand deposits...................................................... 189,571
Other liabilities.................................................... 418,873
------------
Total liabilities........................................ 13,194,216
Stockholders' equity................................................. 1,377,072
------------
Total liabilities and stockholders' equity............... $ 14,571,288
============ ----------
Net interest income...................................... $ 642,268
==========
Net interest margin...................................... 5.52
Interest rate spread..................................... 6.01
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(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 adjustment for the years ended December 31,
1998, 1997, and 1996, was $1,833, $1,891, and $1,791, respectively.
(c) Includes the impact of interest rate swap agreements used to change
fixed-rate funding sources to floating-rate funding sources.
26
<PAGE> 31
MBNA CORPORATION AND SUBSCRIBERS
and 1997 are primarily a result of increases in net income partially offset by
the growth in average stockholders' equity. The slower growth in average
stockholders' equity reflects the Corporation's acquisition of its common stock
and payment of dividends to its stockholders. To the extent stock options are
exercised and 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.
TABLE 2: RATE-VOLUME VARIANCE ANALYSIS (a)
(dollars in thousands, on a fully taxable equivalent basis)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
- -----------------------------------------------------------------------------------------------------------
VOLUME RATE TOTAL
-------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic........................................................ $ 282 $ 29 $ 311
Foreign......................................................... 86,276 (240) 86,036
-------- -------- --------
Total interest-earning time deposits in other banks....... 86,558 (211) 86,347
Federal funds sold and securities purchased under resale agreements 5,776 (955) 4,821
Investment securities:
Taxable......................................................... (32,585) 2,248 (30,337)
Tax-exempt...................................................... 115 (279) (164)
-------- -------- --------
Total investment securities............................... (32,470) 1,969 (30,501)
Loans held for securitization:
Domestic........................................................ (90,884) (3,432) (94,316)
Foreign......................................................... 49,034 779 49,813
-------- -------- --------
Total loans held for securitization....................... (41,850) (2,653) (44,503)
Loans:
Domestic:
Credit card.................................................. 138,777 1,346 140,123
Other consumer .............................................. 49,129 (10,993) 38,136
-------- -------- --------
Total domestic loans...................................... 187,906 (9,647) 178,259
Foreign......................................................... 62,412 (1,734) 60,678
-------- -------- --------
Total loans............................................... 250,318 (11,381) 238,937
-------- -------- --------
Total interest income..................................... 268,332 (13,231) 255,101
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Domestic:
Time deposits................................................ 59,832 (2,413) 57,419
Money market deposit accounts................................ 35,379 (781) 34,598
Interest-bearing transaction accounts........................ 181 (13) 168
Savings accounts............................................. (13) (9) (22)
--------- --------- --------
Total domestic interest-bearing deposits.................. 95,379 (3,216) 92,163
Foreign:
Time deposits................................................ 28,356 1,665 30,021
--------- --------- --------
Total interest-bearing deposits........................... 123,735 (1,551) 122,184
Borrowed funds:
Short-term borrowings:
Domestic..................................................... (3,463) (447) (3,910)
Foreign...................................................... 10,545 (381) 10,164
--------- --------- --------
Total short-term borrowings............................... 7,082 (828) 6,254
Long-term debt and bank notes:
Domestic..................................................... 76,317 (3,538) 72,779
Foreign...................................................... 3,922 71 3,993
--------- --------- --------
Total long-term debt and bank notes....................... 80,239 (3,467) 76,772
--------- --------- --------
Total borrowed funds...................................... 87,321 (4,295) 83,026
--------- --------- --------
Total interest expense.................................... 211,056 (5,846) 205,210
--------- --------- --------
Net interest income....................................... $ 57,276 $ (7,385) $ 49,891
========= ========= ========
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
- -----------------------------------------------------------------------------------------------------------
Volume Rate Total
-------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic....................................................... $ 16 $ (1) $ 15
Foreign........................................................ 18,399 1,131 19,530
-------- ------- --------
Total interest-earning time deposits in other banks...... 18,415 1,130 19,545
Federal funds sold and securities purchased under resale agreement 13,694 333 14,027
Investment securities:
Taxable........................................................ 20,225 (1,850) 18,375
Tax-exempt..................................................... 250 36 286
-------- ------- --------
Total investment securities.............................. 20,475 (1,814) 18,661
Loans held for securitization:
Domestic....................................................... 45,684 10,704 56,388
Foreign........................................................ 4,137 - 4,137
-------- ------- --------
Total loans held for securitization...................... 49,821 10,704 60,525
Loans:
Domestic:
Credit card................................................. 70,024 11,537 81,561
Other consumer ............................................. 102,750 5,736 108,486
-------- ------- --------
Total domestic loans..................................... 172,774 17,273 190,047
Foreign........................................................ 25,494 (453) 25,041
-------- ------- --------
Total loans.............................................. 198,268 16,820 215,088
-------- ------- --------
Total interest income.................................... 300,673 27,173 327,846
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits:
Domestic:
Time deposits............................................... 116,042 26,766 142,808
Money market deposit accounts............................... 19,904 3,105 23,009
Interest-bearing transaction accounts....................... 201 32 233
Savings accounts............................................ 65 13 78
--------- --------- ---------
Total domestic interest-bearing deposits................. 136,212 29,916 166,128
Foreign:
Time deposits............................................... (2,812) 2,719 (93)
Total interest-bearing deposits.......................... 133,400 32,635 166,035
Borrowed funds:
Short-term borrowings:
Domestic.................................................... (2,900) 660 (2,240)
Foreign..................................................... 3,527 - 3,527
--------- --------- ---------
Total short-term borrowings.............................. 627 660 1,287
Long-term debt and bank notes:
Domestic.................................................... 99,987 2,402 102,389
Foreign..................................................... 5,996 126 6,122
--------- --------- ---------
Total long-term debt and bank notes...................... 105,983 2,528 108,511
--------- --------- ---------
Total borrowed funds..................................... 106,610 3,188 109,798
--------- --------- ---------
Total interest expense................................... 240,010 35,823 275,833
--------- --------- ---------
Net interest income...................................... $ 60,663 $ (8,650) $ 52,013
========= ========= =========
===========================================================================================================
</TABLE>
(a) The rate-volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the
percentage of the rate or volume variance to the sum of the two
absolute variances.
NET INTEREST INCOME
Table 2 illustrates the impact that rate and volume changes had on the
Corporation's net interest income for the years presented.
Net interest income, on a fully taxable equivalent basis, increased $49.9
million to $744.2 million in 1998 from 1997. The increase in net interest
income in 1998 was primarily a result of a $2.5 billion increase in average
interest-earning assets from 1997, offset by a $3.4 billion increase in average
interest-bearing liabilities and a 30 basis point decline in the yield earned
on average interest-earning assets for the same period. The increase in average
interest-earning assets for the year ended December 31, 1998, was a result of
an increase in average loan receivables of $1.5 billion combined with an
increase of $1.0 billion in average investment securities and money market
instruments as compared to the same period in 1997. The increase in
interest-bearing liabilities resulted primarily from funding the increase in
interest-earning assets and accounts receivable from securitizations.
Net interest income, on a fully taxable equivalent basis, increased $52.0
million to $694.3 million in 1997 from 1996. The increase in
27
<PAGE> 32
MBNA CORPORATION AND SUBSIDIARIES
[NET INTEREST INCOME GRAPH]
Net Interest Income
(fully taxable equivalent basis)
1996 1997 1998
- ---- ---- ----
642.3 694.3 744.2
net interest income in 1997 was primarily a result of a $2.7 billion increase
in average interest-earning assets combined with an increase of 8 basis points
in the yield earned on average interest-earning assets from 1996, offset by a
$3.8 billion increase in average interest-bearing liabilities, and a 31 basis
point increase in the rate paid on average interest-bearing liabilities for the
same period. The growth in average interest-earning assets was primarily a
result of a $1.7 billion increase in average loan receivables combined with a
$924.5 million increase in average investment securities and money market
instruments. The increase in interest-bearing liabilities resulted primarily
from funding the increase in interest-earning assets and accounts receivable
from securitizations.
The net interest margin, on a fully taxable equivalent basis, was 4.42% in
1998, compared to 4.86% in 1997 and 5.52% in 1996. The decline in the net
interest margin for 1998 and 1997 was primarily a result of average
interest-earning assets growing faster than net interest income as compared to
prior periods.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
In 1998, interest income on investment securities, on a fully taxable
equivalent basis, decreased $30.5 million to $116.3 million from 1997. The
decrease in 1998 was primarily the result of a $561.1 million decrease in
average investment securities, offset by an 8 basis point increase in the yield
earned on these securities. Interest income on investment securities, on a
fully taxable equivalent basis, increased $18.7 million to $146.8 million in
1997 from 1996. This increase was the result of a $358.5 million increase in
average investment securities, offset by an 8 basis point decrease in the yield
earned on these securities.
Interest income on money market instruments increased $91.2 million to $164.2
million in 1998 from 1997. The increase in 1998 was primarily the result of an
increase of $1.6 billion in average money market instruments from 1997, offset
by a 3 basis point decrease in the yield earned on these instruments. Interest
income on money market instruments increased $33.6 million to $73.0 million in
1997 from 1996. The increase in 1997 was primarily the result of an increase of
$566.0 million in average money market instruments from 1996, combined with an
18 basis point increase in the yield earned on these instruments.
The increases in investment securities and money market instruments are
primarily a result of the timing of the receipt of funds from asset
securitizations, deposits, net loan payments, and long-term debt and bank
notes. 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. During 1998, the
Corporation began investing these funds primarily in interest-earning time
deposits.
The Corporation tries to maintain its investment securities and money market
instruments position at a level appropriate for the Corporation's outstanding
managed loans. As a result, average investment securities and money market
instruments as a percentage
[INVESTMENT SECURITIES INTEREST INCOME GRAPH]
Investment Securities Interest Income
(fully taxable equivalent basis)
1996 1997 1998
---- ---- ----
$128.2 $146.8 $116.3
[MONEY MARKET INSTRUMENTS INTEREST INCOME GRAPH]
Money Market Instruments
Interest Income
1996 1997 1998
---- ---- ----
$39.5 $73.0 $164.2
TABLE 3: INVESTMENT SECURITIES
(dollars in thousands, yields on a fully taxable equivalent basis)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ESTIMATED MATURITIES AT DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Within 1 Year 1-5 Years
Book Yield Book Yield
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations..................................... $425,804 5.70% $101,680 4.71%
State and political subdivisions of the
United States............................................ 88,557 6.14 1,012 6.04
Asset-backed and other securities......................... 316,422 5.74 644,523 5.73
-------- --------
Total investment securities available-for-sale......... $830,783 5.76 $747,215 5.59
======== ========
INVESTMENT SECURITIES HELD-TO-MATURITY
U.S. Treasury and other U.S. government
agencies obligations.................................... $ 25,962 5.93 $ - -
State and political subdivisions of the
United States........................................... - - - -
Asset-backed and other securities......................... - - 2,000 6.49
-------- --------
Total investment securities held-to-maturity........... $ 25,962 5.93 $ 2,000 6.49
======== ========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED MATURITIES AT DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
6-10 Years Over 10 Years TOTAL
Book Yield Book Yield BOOK YIELD
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government
agencies obligations.................................... $ - -% $ - -% $ 527,484 5.51%
State and political subdivisions of the
United States........................................... - - - - 89,569 6.14
Asset-backed and other securities........................ 81,888 5.79 3,818 5.77 1,046,651 5.74
------- ----------- -----------
Total investment securities available-for-sale........ $81,888 5.79 $ 3,818 5.77 $ 1,663,704 5.69
======= =========== ===========
INVESTMENT SECURITIES HELD-TO-MATURITY
U.S. Treasury and other U.S. government
agencies obligations................................... $ - - $ 168,456 5.64 $ 194,418 5.68
State and political subdivisions of the
United States.......................................... - - 2,685 5.78 2,685 5.78
Asset-backed and other securities........................ - - 16,917 6.00 18,917 6.05
------- ----------- -----------
Total investment securities held-to-maturity.......... $ - - $ 188,058 5.68 $ 216,020 5.71
======= =========== ===========
=============================================================================================================================
</TABLE>
28
<PAGE> 33
MBNA CORPORATION AND SUBSIDIARIES
of average interest-earning assets grew to 29.1% in 1998, compared to 27.0% in
1997 and 25.2% in 1996.
Table 3 reflects the estimated maturities of the Corporation's investment
securities and weighted average yields, on a fully taxable equivalent basis, at
December 31, 1998.
Note C to the audited consolidated financial statements provides further detail
regarding the Corporation's investment securities.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$194.4 million to $1.7 billion in 1998. The increase is the result of a $1.5
billion increase in average loan receivables, offset by a decrease of 16 basis
points in the yield earned on these receivables.
During 1997, interest income on loan receivables increased $275.6 million to
$1.5 billion. The increase in interest income during 1997 was the result of a
$1.7 billion increase in average loan receivables, combined with an increase of
31 basis points in the yield earned on these receivables.
Table 4 presents the Corporation's loan receivables at year end distributed by
loan type, excluding securitized loans. Loan receivables increased 20.7% to
$13.5 billion at December 31, 1998, compared to $11.2 billion and $10.1 billion
at December 31, 1997 and 1996, respectively.
Domestic credit card loan receivables increased to $9.1 billion at December 31,
1998, compared to $7.8 billion and $7.7 billion at December 31, 1997 and 1996,
respectively. The increases in credit card loan receivables in 1998 and 1997
were primarily a result of the Corporation's successful marketing programs,
such as the MBNA Platinum Plus MasterCard and Visa program, offset by the
Corporation's securitization of domestic credit card loans.
Domestic other consumer loan receivables increased to $2.9 billion at December
31, 1998, compared to $2.2 billion and $1.8 billion at December 31, 1997 and
1996, respectively. The increases in other consumer loans in 1998 and 1997 were
a result of the Corporation's acquisition of $1.0 billion in 1998 and $180.9
million in 1997 of domestic other consumer loan portfolios combined with
efforts to originate lines of credit accessed through checks and home equity
loans. Additionally, the Corporation increased its securitization of domestic
other consumer loans during 1998 to $3.0 billion, from $2.4 billion in 1997 and
$1.4 billion in 1996.
[LOAN RECEIVABLES GRAPH]
Loan Receivables
Interest Income
1996 1997 1998
- ---- ---- ----
1.2 1.5 1.7
TABLE 4: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOANS HELD FOR SECURITIZATION
Domestic:
Credit card............................... $ 1,135,004 8.4% $ 2,297,400 20.6% $ 2,206,218 21.8%
Other consumer............................ 114,747 .9 - - - -
-------------- ----- -------------- ------ ------------ -----
Total domestic loans held for
securitization........................ 1,249,751 9.3 2,297,400 20.6 2,206,218 21.8
Foreign (a)........................... 442,517 3.3 602,798 5.4 263,756 2.6
-------------- ----- -------------- ------ ------------ -----
Total loans held for
securitization........................ 1,692,268 12.6 2,900,198 26.0 2,469,974 24.4
LOAN PORTFOLIO
Domestic:
Credit card............................... 7,981,106 59.2 5,475,933 49.0 5,514,326 54.4
Other consumer............................ 2,748,511 20.4 2,187,216 19.6 1,840,052 18.2
-------------- ----- -------------- ------ ------------ -----
Total domestic loan portfolio.......... 10,729,617 79.6 7,663,149 68.6 7,354,378 72.6
Foreign (a).................................. 1,046,482 7.8 598,727 5.4 304,700 3.0
-------------- ----- -------------- ------ ------------ -----
Total loan portfolio................... 11,776,099 87.4 8,261,876 74.0 7,659,078 75.6
-------------- ----- -------------- ------ ------------ -----
Total loan receivables................. $ 13,468,367 100.0% $11,162,074 100.0% $ 10,129,052 100.0%
============== ===== ============== ===== ============ =====
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOANS HELD FOR SECURITIZATION
Domestic:
Credit card............................... $2,780,802 34.2% $ 1,899,026 33.3%
Other consumer............................ - - 400,000 7.0
---------- ----- -------------- -----
Total domestic loans held for
securitization........................ 2,780,802 34.2 2,299,026 40.3
Foreign (a).................................. 387,625 4.7 - -
---------- ----- -------------- -----
Total loans held for
securitization........................ 3,168,427 38.9 2,299,026 40.3
LOAN PORTFOLIO
Domestic:
Credit card............................... 3,957,129 48.7 2,506,942 43.9
Other consumer............................ 870,893 10.7 521,036 9.1
---------- ----- -------------- -----
Total domestic loan portfolio.......... 4,828,022 59.4 3,027,978 53.0
Foreign (a).................................. 139,469 1.7 379,996 6.7
---------- ----- -------------- -----
Total loan portfolio................... 4,967,491 61.1 3,407,974 59.7
---------- ----- -------------- -----
Total loan receivables................. $8,135,918 100.0% $ 5,707,000 100.0%
========== ===== ============== =====
=================================================================================================
</TABLE>
(a) Note S to the audited consolidated financial statements provides the
foreign loan receivables distribution between credit card and other consumer
loans.
29
<PAGE> 34
MBNA CORPORATION AND SUBSIDIARIES
Foreign loan receivables increased $287.5 million to $1.5 billion at December
31, 1998, as compared to $1.2 billion at December 31, 1997, and $568.5 million
at December 31, 1996. The growth in foreign loan receivables is a direct result
of the increased growth from successful marketing programs at the Corporation's
two foreign bank subsidiaries, MBNA International and MBNA Canada. In addition,
the Corporation securitized $1.8 billion of foreign loan receivables in 1998,
as compared to $410.1 million in 1997.
Note D to the audited consolidated financial statements provides further detail
regarding the Corporation's loan receivables.
<TABLE>
<CAPTION>
LOAN RECEIVABLES DISTRIBUTION
- -----------------------------------------------------------------------------------------
(millions)
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Domestic credit card loan receivables $9,116.1 $7,773.3
Domestic other consumer loan receivables $2,863.3 $2,187.2
Foreign loan receivables $1,489.0 $1,201.5
</TABLE>
The Corporation offers variable-rate credit card loans as well as variable-rate
home equity loans. At December 31, 1998, variable-rate loans made up 17.1% of
total managed loans, compared to 19.9% of total managed loans at December 31,
1997. These variable-rate loans are generally indexed to the U.S. Prime Rate
published in The Wall Street Journal and reprice quarterly.
The Corporation has selectively pursued loan portfolio acquisitions. The
Corporation acquired $3.3 billion, $1.1 billion, and $1.3 billion of domestic
and foreign credit card and domestic other consumer loan portfolios during
1998, 1997, and 1996, respectively. In addition, the Corporation has agreed to
acquire the credit card business of PNC Bank, N.A. ("PNC"). The purchase
includes outstanding credit card receivables of approximately $2.9 billion. At
closing, the Corporation will enter into agreements with PNC Bank, N.A., and
the American Automobile Association ("AAA") to market credit card products to
PNC customers and the members of AAA. The transaction is expected to close in
the first quarter of 1999, subject to regulatory approvals.
DEPOSITS
Total interest expense on deposits was $816.1 million in 1998, compared to
$693.9 million and $527.9 million in 1997 and 1996, respectively. The increase
in interest expense of $122.2 million during 1998 was primarily the result of a
$2.0 billion increase in average interest-bearing deposits. The increase in
interest expense on deposits of $166.0 million in 1997 was primarily the result
of a $2.2 billion increase in average interest-bearing deposits, combined with
a 35 basis point increase in the rate paid on interest-bearing deposits.
The increases in average interest-bearing deposits in 1998 and 1997 were 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, foreign average interest-bearing deposits
increased $413.4 million in 1998. The increase in foreign average
interest-bearing deposits in 1998 provided funding for the Corporation's
foreign bank subsidiaries' loan growth.
BORROWED FUNDS
Interest expense on short-term borrowings increased to $26.0 million in 1998,
compared to $19.8 million and $18.5 million in 1997 and 1996, respectively. The
increase in interest expense on short-term borrowings in 1998 was primarily the
result of an increase in average short-term borrowings of $110.3 million from
1997, offset by a 4 basis point decrease in the rate paid on average short-term
borrowings. The increase in short-term borrowings in 1998 was to provide
funding for the Corporation's domestic and foreign loan growth. The increase in
interest expense in 1997 was the result of higher rates paid on average
short-term borrowings, which increased 37 basis points, and an increase in
foreign short-term borrowings of $52.3 million from 1996.
Note G to the audited consolidated financial statements provides further detail
regarding the Corporation's short-term borrowings.
Interest expense on long-term debt and bank notes increased to $381.7 million
in 1998, compared to $304.9 million in 1997 and $196.4 million in 1996. The
increase in interest expense primarily reflects the issuance of additional
long-term debt and bank notes by the Corporation to diversify its funding
sources, to fund both domestic and foreign loan growth, and for other general
corporate purposes. Average long-term debt and bank notes increased to $5.9
billion in 1998, compared to $4.6 billion in 1997 and $3.0 billion in 1996. The
rate paid on these funds declined 7 basis points during 1998 to 6.50%, and
increased 9 basis points during 1997 to 6.57% from 6.48% in 1996.
Note H to the audited consolidated financial statements provides further detail
regarding the Corporation's long-term debt and bank notes.
30
<PAGE> 35
MBNA CORPORATION AND SUBSIDIARIES
OTHER OPERATING INCOME
Total other operating income increased 14.8% or $416.1 million to $3.2 billion
in 1998 from 1997. The increase in other operating income during 1998 was
primarily attributable to a 13.5% increase or $337.4 million in securitization
income, which grew to $2.8 billion from 1997. The increase in securitization
income was the result of an $8.2 billion or 25.1% increase in average
securitized loans to $41.0 billion from 1997.
<TABLE>
<CAPTION>
OTHER OPERATING INCOME
- ------------------------
(billions)
<S> <C>
96 1.9
97 2.8
98 3.2
</TABLE>
Total other operating income increased 48.4% or $917.0 million to $2.8 billion
in 1997 from 1996. The increase in other operating income was primarily
attributable to an increase of 52.0% or $857.5 million in securitization income
for the period. The increase in securitization income was the result of a $10.2
billion or 45.5% increase in average securitized loans to $32.7 billion from
1996, combined with the adoption of Statement No. 125.
Securitization income includes the gains recognized by the Corporation in
accordance with Statement No. 125, which was adopted by the Corporation on
January 1, 1997, in addition to other fees received by the Corporation for the
servicing of securitized loans. As a result of Statement No. 125,
securitization income increased $17.9 million in 1998 and $325.1 million in
1997.
During 1997, the Corporation invested an amount equivalent to the increase in
securitization income from the adoption of Statement No. 125 in additional
business development efforts; therefore, this incremental increase in
securitization income did not materially impact the Corporation's consolidated
net income.
Without the impact of Statement No. 125, securitization income would have
increased 29.5% and 32.3% in 1998 and 1997, respectively, while other operating
income would have increased 29.1% in 1998 and 31.2% in 1997.
Insurance income increased $36.5 million to $79.0 million in 1998, primarily as
a result of the growth in fee income generated from the Corporation's insurance
agency business, which markets and services credit, automobile, and life
insurance products. In July 1998, the Corporation suspended marketing new
automobile insurance policies and later terminated its agreement with TIG, its
insurance underwriter. In December 1998, the Corporation signed a letter of
intent with American International Group, Inc. ("AIG") to underwrite
automobile, homeowners, and personal umbrella insurance products for the
Corporation's Customers. The Corporation and AIG expect to begin marketing AIG
automobile insurance to the Corporation's Customers during 1999.
During 1998, interchange income increased $23.8 million as the Corporation's
sales volume increased, and credit card fees increased $26.6 million as the
Corporation's loan receivables grew.
During 1997, interchange income increased $26.4 million, insurance income
increased $17.6 million, and other income increased $14.9 million. The increase
in other income primarily resulted from the Corporation's gain on the sale of
its merchant card processing business.
OTHER OPERATING EXPENSE
Total other operating expense increased 8.3% to $2.4 billion in 1998 from $2.2
billion in 1997, compared to an increase of 36.6% in 1997 from $1.6 billion in
1996. Total other operating expense in 1997 includes the Corporation's
investment in additional business development efforts of an amount equivalent
to the increase in securitization income recognized by the Corporation as a
result of the adoption of Statement No. 125. The Corporation added
approximately 9.3 million new accounts in 1998, compared to 9.4 million in 1997
and 7.5 million in 1996. The Corporation added 475 new endorsements from
organizations in 1998, compared to 563 in 1997 and 544 in 1996. The Corporation
also has continued to invest in its other consumer loan, foreign, and insurance
agency businesses.
During 1996, the Corporation recognized $54.3 million ($32.8 million net of
tax) in other operating expenses related to the launch of the MBNA Platinum
Plus MasterCard and Visa program.
Note P to the audited consolidated financial statements provides further detail
regarding the Corporation's other operating expenses.
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
31
<PAGE> 36
MBNA CORPORATION AND SUBSIDIARIES
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 the readiness
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
approximately 75% complete. The Corporation's business units have completed
Year 2000 assessments and are in varying stages of renovation, validation, and
implementation. 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, with final
completion expected by March 31, 1999.
A stand-alone test environment is currently being 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 will
include 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 mainframe
environment has started and is expected to be rolled out to the full
environment by April 1999. Testing will continue through September 1999,
incorporating all critical Year 2000 dates. 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 December 31,
1998 were approximately $20 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 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 been developing and will continue to develop 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
32
<PAGE> 37
MBNA CORPORATION AND SUBSIDIARIES
to be modified as necessary based on identified or perceived market risks.
Efforts are underway in each business unit to revise existing contingency plans
to address specific Year 2000 implications. 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
The Corporation recognized applicable income taxes of $477.8 million in 1998,
compared to $399.6 million in 1997 and $289.6 million in 1996. This represents
an effective tax rate of 38.1% in 1998, 39.1% in 1997, and 39.6% in 1996.
Applicable income taxes for 1996 exclude the effect of the tax benefit from
Customer-based intangible assets described below. Note R to the audited
consolidated financial statements reconciles reported applicable income taxes
to the amount computed by applying the federal statutory rate to income before
income taxes.
Net income for 1996 included a $32.8 million tax benefit related to the
recognition of tax deductions for the amortization of Customer-based intangible
assets acquired in connection with the Corporation's 1991 initial public
offering. The initial public offering resulted in certain Customer-based
intangible assets being recorded for income tax purposes only, creating future
tax deductions relating to these intangible assets. The Corporation did not
initially recognize, for financial statement purposes, any tax benefit related
to these assets because there were uncertainties concerning the tax treatment
of such assets. In 1993, the U.S. Supreme Court affirmed that Customer-based
intangible assets may be amortized for tax purposes. Accordingly, the
Corporation recognized a portion of the tax benefit related to the
Customer-based intangible assets. During 1996, the Internal Revenue Service
completed an audit of the Corporation's 1991 and 1992 tax returns and entered
into a final agreement with the Corporation regarding the tax treatment of the
intangible assets. As a result, the Corporation recognized the remaining tax
benefit relating to the intangible assets.
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 3.86%
at December 31, 1998, compared with 3.93% and 3.59% at December 31, 1997 and
1996, respectively. Delinquency as a percentage of managed loans was 4.62% at
December 31, 1998, compared to 4.59% and 4.28% at December 31, 1997 and 1996,
respectively. Table 5 presents the stages of delinquency of the Corporation's
loan portfolio, excluding loans held for securitization.
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 Table 6.
<TABLE>
<CAPTION>
TABLE 5: DELINQUENT LOANS
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio.......................... $ 11,776,099 $ 8,261,876 $ 7,659,078
Loans delinquent:
30 to 59 days........................ $ 166,352 1.41% $ 125,870 1.52% $ 114,382 1.49%
60 to 89 days........................ 93,699 .80 64,275 .78 52,857 .69
90 or more days...................... 194,472 1.65 134,865 1.63 107,679 1.41
-------------- ----- -------------- ----- -------------- -----
Total............................. $ 454,523 3.86% $ 325,010 3.93% $ 274,918 3.59%
============== ===== ============== ===== ============== =====
Loans delinquent by
geographic area:
Domestic............................. $ 424,324 3.95% $ 313,467 4.09% $ 269,035 3.66%
Foreign.............................. 30,199 2.89 11,543 1.93 5,883 1.93
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan portfolio.......................... $ 4,967,491 $ 3,407,974
Loans delinquent:
30 to 59 days........................ $ 65,651 1.32% $ 38,912 1.14%
60 to 89 days........................ 30,162 .61 17,962 .53
90 or more days...................... 58,894 1.18 31,804 .93
------------- ----- ------------- -----
Total............................. $ 154,707 3.11% $ 88,678 2.60%
============= ===== ============= =====
Loans delinquent by
geographic area:
Domestic............................. $ 151,316 3.13% $ 82,664 2.73%
Foreign.............................. 3,391 2.43 6,014 1.58
- -------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 38
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE 6: OTHER NONPERFORMING LOANS
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................... $ 3,182 $ 2,520 $ 1,820 $ 1,037 $ 502
Reduced-rate loans..................... 157,737 114,218 72,134 28,526 18,848
------------- ------------- ------------- ------------- -------------
Total other nonperforming loans..... $ 160,919 $ 116,738 $ 73,954 $ 29,563 $ 19,350
============= ============= ============= ============= =============
Other nonperforming loans as a % of
ending loan portfolio................ 1.37% 1.41% .97% .60% .57%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET CREDIT LOSSES
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. The Corporation sells charged-off receivables
and records the proceeds received from these sales as recoveries, thereby
reducing net credit losses.
Net credit losses during 1998 were $285.4 million, compared to $223.8 million
in 1997, and $172.7 million in 1996. 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 increases in net
credit losses for 1998 and 1997 reflect increases 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.
Net credit losses as a percentage of average loan receivables increased to
2.39% during 1998, compared to 2.14% in 1997 and 1.98% in 1996. The
Corporation's managed credit losses as a percentage of average managed loans in
1998 were 4.31%, compared to 3.97% and 3.35% in 1997 and 1996, respectively.
RESERVE AND PROVISION FOR POSSIBLE CREDIT LOSSES
Table 7 presents an analysis of the Corporation's reserve 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. The
provision for
<TABLE>
<CAPTION>
TABLE 7: RESERVE FOR POSSIBLE CREDIT LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for possible credit losses,
beginning of year.......................... $ 162,476 $ 118,427 $ 104,886 $ 101,519 $ 97,580
Reserves acquired........................ 29,932 7,975 7,553 - -
Provision for possible credit losses..... 310,039 260,040 178,224 138,176 108,477
Foreign currency translation............. (125) (203) 488 (90) 21
Credit losses:
Domestic:
Credit card........................ (330,952) (294,608) (226,067) (161,004) (98,613)
Other consumer..................... (86,407) (57,970) (23,504) (10,553) (33,331)
-------------- -------------- -------------- -------------- --------------
Total domestic credit losses..... (417,359) (352,578) (249,571) (171,557) (131,944)
Foreign............................... (22,754) (6,964) (4,846) (3,336) (350)
-------------- -------------- --------------
Total credit losses.............. (440,113) (359,542) (254,417) (174,893) (132,294)
Recoveries:
Domestic:
Credit card........................ 133,172 126,012 76,605 37,765 26,052
Other consumer..................... 12,656 7,555 4,438 2,273 1,672
-------------- -------------- -------------- -------------- --------------
Total domestic recoveries........ 145,828 133,567 81,043 40,038 27,724
Foreign............................... 8,874 2,212 650 136 11
-------------- -------------- -------------- -------------- --------------
Total recoveries................. 154,702 135,779 81,693 40,174 27,735
-------------- -------------- --------------
Net credit losses........................ (285,411) (223,763) (172,724) (134,719) (104,559)
-------------- -------------- -------------- -------------- --------------
Reserve for possible credit losses, end
of year.................................... $ 216,911 $ 162,476 $ 118,427 $ 104,886 $ 101,519
============== ============== ============== ============== ==============
Net credit losses as a % of average loan
receivables................................ 2.39% 2.14% 1.98% 1.91% 1.96%
Net credit losses as a % of beginning
reserve.................................... 175.66 188.95 164.68 132.70 107.15
Reserve for possible credit losses as
a % of ending loan receivables............. 1.61 1.46 1.17 1.29 1.78
Ending loan receivables...................... $ 13,468,367 $ 11,162,074 $ 10,129,052 $ 8,135,918 $ 5,707,000
Average loan receivables..................... 11,930,289 10,438,513 8,703,579 7,061,898 5,330,282
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 39
MBNA CORPORATION AND SUBSIDIARIES
possible credit losses for the year ended December 31, 1998, increased 19.2% to
$310.0 million compared to $260.0 million in 1997 and $178.2 million in 1996.
In addition, the Corporation records acquired reserves for loan portfolio
acquisitions. The Corporation internally allocates the reserve for possible
credit losses among domestic credit card loans, domestic other consumer loans,
and foreign loans, as presented in Table 8. 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.
In February 1999, the Federal Financial Institutions Examination Council
published a revised policy statement on the classification of consumer loans.
The revised policy establishes 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 but does not expect
implementation to have a material effect on the Corporation's consolidated
financial statements.
<TABLE>
<CAPTION>
TABLE 8: ALLOCATION OF RESERVE FOR POSSIBLE CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Credit card............................... $ 152,405 70.3% $ 134,910 83.0% $ 95,253 80.4%
Other consumer............................ 54,752 25.2 23,031 14.2 18,446 15.6
---------- ----- ---------- ------ ---------- -----
Domestic reserve for possible
credit losses......................... $ 207,157 95.5 157,941 97.2 113,699 96.0
Foreign...................................... 9,754 4.5 4,535 2.8 4,728 4.0
---------- ----- ---------- ----- ---------- -----
Reserve for possible credit losses..... $ 216,911 100.0% $ 162,476 100.0% $ 118,427 100.0%
========== ===== ========== ===== ========== =====
- --------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:
Credit card............................... $ 82,596 78.7% $ 79,396 78.2%
Other consumer............................ 18,009 17.2 20,691 20.4
---------- ----- ---------- -----
Domestic reserve for possible
credit losses......................... 100,605 95.9 100,087 98.6
Foreign...................................... 4,281 4.1 1,432 1.4
---------- ----- ---------- -----
Reserve for possible credit losses..... $ 104,886 100.0% $ 101,519 100.0%
========== ===== ========== =====
- ------------------------------------------------------------------------------------
</TABLE>
CAPITAL ADEQUACY AND DIVIDEND LIMITATIONS
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 December
31, 1998, 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 9, 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>
<CAPTION>
TABLE 9: REGULATORY CAPITAL RATIOS
- -------------------------------------------------------------------------------------
MINIMUM WELL-CAPITALIZED
DECEMBER 31, 1998 RATIOS REQUIREMENTS REQUIREMENTS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
MBNA CORPORATION
Tier 1........................ 11.44% 4.00% (a)
Total......................... 13.96 8.00 (a)
Leverage...................... 11.34 4.00 (a)
MBNA AMERICA BANK, N.A.
Tier 1........................ 11.69% 4.00% 6.00%
Total......................... 14.28 8.00 10.00
Leverage...................... 11.55 4.00 5.00
- -------------------------------------------------------------------------------------
</TABLE>
(a) Not applicable for bank holding companies.
35
<PAGE> 40
MBNA CORPORATION AND SUBSIDIARIES
In January 1999, the Corporation issued 50 million shares of common stock,
raising approximately $1.2 billion of capital.
At December 31, 1998 and 1997 the Corporation had $566.3 million issued and
outstanding of guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures, which mature in 2026 and
2027.
During 1997, the Corporation issued $280.0 million of guaranteed preferred
beneficial interests in Corporation's junior subordinated deferrable interest
debentures through MBNA Capital B, and issued $36.3 million of 8.25% Trust
Originated Preferred Securities (guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures, series C)
through MBNA Capital C, in exchange for 1.5 million shares of 71/2% Cumulative
Preferred Stock, Series A.
The Corporation has 4.5 million shares of 71/2% Cumulative Preferred Stock,
Series A, and 4.0 million shares of Adjustable Rate Cumulative Preferred Stock,
Series B, with a $25 stated value per share, outstanding at December 31, 1998
and 1997. During 1997, the Corporation repurchased 2.0 million shares of
Adjustable Rate Cumulative Preferred Stock, Series B, for $52.5 million. The
shares of the Series A Preferred Stock are redeemable, in whole or in part,
solely at the option of the Corporation on or after January 15, 2001, while the
shares of the Series B Preferred Stock are redeemable, in whole or in part,
solely at the option of the Corporation on or after October 15, 2001. The
Series B Preferred Stock may also be redeemed in whole at the option of the
Corporation in the event of certain amendments to the Internal Revenue Code of
1986 with respect to the dividends-received deduction.
Shares of the Series A and B Preferred Stock are not convertible into any other
securities of the Corporation. Dividends on the preferred stock are cumulative
from the date of original issue and are payable quarterly.
These securities qualify as regulatory capital for the Corporation, and the
proceeds were used for general corporate purposes.
The Bank has $450.0 million of Subordinated Notes outstanding at December 31,
1998, and had $200.0 million outstanding at December 31, 1997. During 1998, the
Bank issued $250.0 million of 6.75% Subordinated Notes which mature in 2008.
The proceeds from this issuance were used for general corporate purposes. These
Subordinated Notes qualify as regulatory capital under the Comptroller of the
Currency's guidelines and enhance the Bank's regulatory capital, while also
providing a long-term source of funds.
Note N to the audited consolidated financial statements provides further detail
regarding the Corporation's capital adequacy.
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 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 for consecutive
periods covering 10 semiannual periods or 20 consecutive quarterly periods,
depending upon the series, on its guaranteed preferred beneficial interests in
the 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.
During 1998, the Corporation declared dividends of $14.3 million on its
preferred stock and $180.5 million on its common stock.
Table 10 reflects the Corporation's return on average total assets and
stockholders' equity, and other equity ratios, including the Corporation's
dividend payout ratio.
<TABLE>
<CAPTION>
TABLE 10: RETURN ON AVERAGE TOTAL ASSETS AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average total assets........................ 3.38% 3.25% 3.26%
Return on average stockholders' equity................ 36.91 35.56 34.46
Average stockholders' equity to average total assets.. 9.15 9.15 9.45
Dividend payout ratio................................. 24.74 27.63 32.20
- --------------------------------------------------------------------------------------
</TABLE>
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 December 31, 1998, the amount of retained earnings available
for declaration and payment of dividends from the Bank to the Corporation was
$1.4 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 December 31, 1998. If this facility had been
drawn upon as of December 31, 1998, the amount of retained earnings available
for declaration of dividends would have been further limited to $645.9 million.
36
<PAGE> 41
MBNA CORPORATION AND SUBSIDIARIES
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.
The funding programs established by the Corporation include medium-term notes,
senior notes, and committed credit facilities.
During 1998, the Corporation issued $495.0 million in Senior Medium-Term Notes,
compared to $682.5 million in 1997. At December 31, 1998, the Corporation had
$1.8 billion in Senior Medium-Term Notes outstanding that mature in varying
amounts from 1999 to 2004, as compared to $1.4 billion at December 31, 1997. In
addition, the Corporation had $250.0 million in Senior Notes outstanding at
December 31, 1998 and 1997 that mature in 1999 and 2005. The net proceeds were
used to fund growth in other consumer loans, to purchase premises and
equipment, and for other general corporate purposes. The Corporation expects to
pay the interest on both the Senior Notes and Senior Medium-Term Notes from
dividend and other payments received from the Bank.
<TABLE>
<CAPTION>
FUNDING SOURCES
- -------------------------------------------------------------------------------
(millions)
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Borrowed Funds $7,170.2 $5,671.5
Stockholders' Equity $3,789.9 $3,009.2
Direct Deposits $2,391.0 $1,970.1
Other Deposits $11,617.2 $9,904.0
- -------------------------------------------------------------------------------
</TABLE>
In January 1999, the Corporation issued 50 million shares of common stock. The
Corporation intends to use the net proceeds from this offering, approximately
$1.2 billion, to complete the purchase of the credit card business of PNC Bank,
N.A., and for other general corporate purposes.
The Corporation has two one-year revolving credit facilities totaling $75.0
million. These credit facilities were renewed during 1998 with $25.0 million
committed through March 1999 and $50.0 million committed through September
1999. The Corporation intends to renew the $25.0 million credit facility, which
expires in March 1999. The Corporation may take advances under these facilities
subject to certain conditions, including requirements for tangible net worth.
These facilities may be used for general corporate purposes and were not drawn
upon as of December 31, 1998.
Funding programs established by the Corporation's bank subsidiaries include
deposits, bank notes, and committed credit facilities.
Total deposits at December 31, 1998, were $15.4 billion, compared with $12.9
billion and $10.2 billion at December 31, 1997 and 1996, respectively. The
increase in deposits from 1997 is primarily the result of a $1.7 billion
increase in direct deposits. The increase in deposits from 1996 was the result
of a $2.2 billion increase in direct deposits. These increases in direct
deposits were primarily the result of the Corporation's emphasis on marketing
its deposit products and offering competitive rates. Table 11 provides the
maturities of the Corporation's deposits at December 31, 1998. Included in the
deposit maturity category of three months or less are money market deposit
accounts, noninterest-bearing demand deposits, interest-bearing transaction
accounts, and savings accounts totaling $4.7 billion.
<TABLE>
<CAPTION>
TABLE 11: MATURITIES OF DEPOSITS
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
DECEMBER 31, 1998 DIRECT OTHER TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less............... $ 5,964,103 $ 852,786 $ 6,816,889
Over three months through
twelve months..................... 2,991,944 1,014,740 4,006,684
Over one year through five years... 2,654,696 1,922,353 4,577,049
Over five years.................... 6,418 - 6,418
----------- ------------ -----------
Total deposits............... $11,617,161 $ 3,789,879 $15,407,040
=========== ============ ===========
- --------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 42
MBNA CORPORATION AND SUBSIDIARIES
In addition, Table 12 presents the maturity distribution of the Corporation's
domestic time deposits in amounts of $100,000 or more for the most recent three
years. The Corporation also had $644.6 million of foreign time deposits at
December 31, 1998. The majority of the foreign time deposits were in amounts in
excess of $100,000 and mature within one year.
<TABLE>
<CAPTION>
TABLE 12: DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less.... $ 448,223 23.3% $ 467,227 26.8% $ 486,008 33.2%
Over three months
through six months..... 356,045 18.6 314,060 18.0 226,810 15.5
Over six months
through twelve
months................. 483,843 25.2 370,052 21.3 279,976 19.1
Over twelve months...... 632,533 32.9 590,838 33.9 470,704 32.2
----------- ----- ----------- ----- - --------- -----
Total............. $ 1,920,644 100.0% $ 1,742,177 100.0% $ 1,463,498 100.0%
=========== ===== =========== ===== =========== =====
- ----------------------------------------------------------------------------------------------------
</TABLE>
An additional source of funding for the Bank is provided by a global bank note
program. These notes may be issued with maturities of one week or more from the
date of issue. During 1998, the Bank issued $106.5 million of bank notes,
compared to $712.0 million in 1997. At December 31, 1998, the Bank had $2.6
billion of bank notes outstanding, of which $36.5 million were included in
short-term borrowings. At December 31, 1997, the Bank had $2.9 billion of bank
notes included in long-term debt and bank notes.
The Bank has a $2.0 billion syndicated revolving credit facility committed
through February 2001. Advances are subject to covenants and conditions
customary in a transaction of this kind. These conditions include requirements
for tangible net worth of at least $760.0 million, increased by 40% of the
Bank's net income earned after September 30, 1996, and managed loan receivables
90 days or more past due plus nonaccrual receivables not to exceed 6% of
managed credit card receivables. Should managed credit card losses equal or
exceed 5% for a period of four consecutive quarters, a ratio of qualifying loan
receivables to outstanding borrowings under the facility of at least 115% will
be required in order to draw under this facility. The facility may be used for
general corporate purposes and was not drawn upon as of December 31, 1998.
MBNA International has a Pound Sterling 300.0 million (approximately $499.1
million at December 31, 1998) multi-currency syndicated revolving credit
facility committed through October 2000. MBNA International may take advances
under the facility subject to certain conditions, including requirements for
tangible net worth, outstanding loan receivables, and account delinquencies.
The facility may be used for general corporate purposes and had IRPound
Sterling 20.0 million (approximately $29.8 million) outstanding at December 31,
1998. These borrowings, which are included as part of short-term borrowings in
the consolidated statements of financial condition, matured and were repaid in
January 1999.
MBNA Canada has a CAD$300.0 million (approximately $193.7 million at December
31, 1998) multi-currency syndicated revolving credit facility committed through
December 2001. This facility replaced an existing CAD$125.0 million
multi-currency syndicated revolving credit facility and was not drawn upon at
December 31, 1998.
MBNA Canada had CAD$272.4 million (approximately $175.9 million) of short-term
deposit notes outstanding at December 31, 1998. In addition, MBNA Canada had
CAD$102.0 million (approximately $65.9 million) of medium-term deposit notes
outstanding at December 31, 1998.
The Corporation also held $1.9 billion in investment securities and $3.6
billion in money market instruments at December 31, 1998, compared to $2.5
billion in investment securities and $2.1 billion in money market instruments
at December 31, 1997. The investment securities primarily consist of
high-quality, AAA-rated securities, most of which can be used as collateral
under repurchase agreements. Of the investment securities at December 31, 1998,
$856.7 million is anticipated to mature within 12 months. The Corporation's
investment securities available-for-sale portfolio, which consists primarily of
short-term and variable-rate securities, was $1.7 billion at December 31, 1998,
compared to $2.2 billion at December 31, 1997. These investment securities,
along with the money market instruments, provide increased liquidity and
flexibility to support the Corporation's funding requirements. The Corporation
expects to use an estimated $3.0 billion of money market instruments in
connection with the purchase of the credit card business of PNCBank, N.A., and
intends to securitize a portion of these acquired credit card loans.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
- ----------------------------------------------------------------------------------------
(millions)
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Interest-earning time deposits in other banks $2,831.2 $1,427.1
Investment securities available-for-sale $1,663.7 $2,162.5
Federal funds sold and securities purchased
under resale agreements $730.0 $659.0
Investment securities held-to-maturity $216.0 $346.2
- ----------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 43
MBNA CORPORATION AND SUBSIDIARIES
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.
<TABLE>
<CAPTION>
TABLE 13: INTEREST RATE SENSITIVITY SCHEDULE
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 SUBJECT TO REPRICING
- ------------------------------------------------------------------------------------------------------------------------------------
WITHIN 1 YEAR 1-5 Years After 5 Years Total
---------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-earning time deposits in other banks:
Domestic $ 3,309 $ - $ - $ 3,309
Foreign.......................................................... 2,827,906 - - 2,827,906
----------- ----------- ----------- -----------
Total interest-earning time deposits in other banks........ 2,831,215 - - 2,831,215
Federal funds sold and securities purchased under resale agreements. 730,000 - - 730,000
Investment securities (a):
Available-for-sale............................................... 1,561,012 102,692 - 1,663,704
Held-to-maturity................................................. 26,962 1,000 188,058 216,020
Loans held for securitization:
Domestic ........................................................ 1,249,751 - - 1,249,751
Foreign.......................................................... 442,517 - - 442,517
----------- ----------- ----------- -----------
Total loans held for securitization 1,692,268 - - 1,692,268
Loans:
Domestic:
Credit card................................................... 6,662,939 1,318,167 - 7,981,106
Other consumer................................................ 1,586,779 491,761 669,971 2,748,511
----------- ----------- ----------- -----------
Total domestic loans....................................... 8,249,718 1,809,928 669,971 10,729,617
Foreign ........................................................ 718,245 328,237 - 1,046,482
----------- ----------- ----------- -----------
Total loans................................................ 8,967,963 2,138,165 669,971 11,776,099
----------- ----------- ----------- -----------
Total interest-earning assets.............................. 15,809,420 2,241,857 858,029 18,909,306
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Domestic:
Time deposits................................................. 5,516,951 4,577,049 6,418 10,100,418
Money market deposit accounts................................. 4,125,523 - - 4,125,523
Interest-bearing transaction accounts......................... 35,399 - - 35,399
Savings accounts.............................................. 38,790 - - 38,790
----------- ----------- ----------- -----------
Total domestic interest-bearing deposits................... 9,716,663 4,577,049 6,418 14,300,130
Foreign:
Time deposits................................................. 644,644 - - 644,644
----------- ----------- ----------- -----------
Total interest-bearing deposits............................ 10,361,307 4,577,049 6,418 14,944,774
Borrowed funds:
Short-term borrowings:
Domestic...................................................... 1,026,407 - - 1,026,407
Foreign....................................................... 204,788 - - 204,788
----------- ----------- ----------- -----------
Total short-term borrowings................................ 1,231,195 - - 1,231,195
Long-term debt and bank notes:
Domestic...................................................... 3,631,518 1,328,087 693,787 5,653,392
Foreign....................................................... 75,745 209,888 - 285,633
----------- ----------- ----------- -----------
Total long-term debt and bank notes........................ 3,707,263 1,537,975 693,787 5,939,025
----------- ----------- ----------- -----------
Total borrowed funds....................................... 4,938,458 1,537,975 693,787 7,170,220
----------- ----------- ----------- -----------
Total interest-bearing liabilities......................... 15,299,765 6,115,024 700,205 22,114,994
----------- ----------- ----------- -----------
Gap before managed adjustments...................................... 509,655 (3,873,167) 157,824 (3,205,688)
Managed adjustments (b)............................................. (5,345,185) 7,232,080 (255,172) 1,631,723
----------- ----------- ----------- -----------
Gap after managed adjustments....................................... $(4,835,530) $ 3,358,913 $ (97,348) $(1,573,965)
=========== =========== =========== ===========
Cumulative gap after managed adjustments............................ $(4,835,530) $(1,476,617) $(1,573,965)
=========== =========== ===========
Cumulative gap after managed adjustments as a % of managed assets... (6.72)% (2.05)% (2.19)%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Investment securities are presented using estimated maturities.
(b) Managed adjustments reflect the impact interest rates have on securitized
loans and off-balance-sheet financial instruments.
39
<PAGE> 44
MBNA CORPORATION AND SUBSIDIARIES
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. For this reason, the Corporation includes a managed
adjustment to quantify and capture the full impact of interest rate risk on the
Corporation's earnings.
The Corporation analyzes its level of interest rate risk using several
analytical techniques, which include the impact of on-balance-sheet and
off-balance-sheet financial instruments. Table 13 presents the Corporation's
interest rate risk using the static gap methodology. This method reports the
difference between interest rate sensitive assets and liabilities at a specific
point in time. Management uses the static gap methodology to identify the
Corporation's directional interest rate risk. Interest rate sensitive assets
and liabilities are reported based on estimated and contractual repricings.
Fixed-rate credit card loans, which may be repriced by the Corporation at any
time by giving notice to the Customer, are placed in the table using a
seventeen-month repricing schedule. Including the managed adjustment, results
of the gap analysis show that, within one year, the Corporation's liabilities
reprice faster than its assets, indicating an earnings risk from rising
interest rates.
Although the static gap methodology is widely accepted for its simplicity in
identifying interest rate risk, it ignores many changes that can occur such as
repricing strategies, market spread adjustments, and anticipated hedging
transactions. For these reasons, the Corporation analyzes its level of interest
rate risk using several other analytical techniques including simulation
analysis. All of the analytical techniques used by the Corporation to measure
interest rate risk include the impact of on-balance-sheet and off-balance-sheet
financial instruments.
Key assumptions in the Corporation's simulation analysis include cash flows and
maturities of interest rate sensitive instruments; changes in market
conditions; loan volumes and pricing; consumer preferences; fixed-rate credit
card repricings as part of the Corporation's normal planned business strategy;
and management's capital plans. Also included in the analysis are various
actions which the Corporation would undertake to minimize the impact of adverse
movements in interest rates. 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 will 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 December 31, 1998, the Corporation could
experience a decrease in projected 1999 net income of approximately $33
million, as compared to a decrease of approximately $39 million in projected
1998 net income based on the simulation analysis at December 31, 1997, if
interest rates at the time the simulation analysis was performed increased 100
basis points over 12 months.
These assumptions are inherently uncertain, and as a result, the analysis
cannot precisely predict the impact of higher interest rates on net income.
Actual results would differ from simulated results 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 considers
the net impact to stockholders' equity under various foreign exchange rate
scenarios. At December 31, 1998, the Corporation would expect a decrease in
stockholders' equity, net of tax, of approximately $22 million, as compared to
a decrease of approximately $11 million in stockholders' equity, net of tax, at
December 31, 1997, 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.
40
<PAGE> 45
MBNA CORPORATION AND SUBSIDIARIES
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
the accounts. The trust sells certificates representing undivided interests in
the trust to investors, while the Corporation retains the remaining undivided
interests. The Corporation continues to service the accounts and receives a
servicing fee for doing so.
<TABLE>
<CAPTION>
MANAGED LOAN DISTRIBUTION
- -------------------------
(billions)
<S> <C>
96 38.6
97 49.4
98 59.6
</TABLE>
During the revolving period, which generally ranges from 24 months to 168
months, the trust makes no principal payments to the Investor
Certificateholders. Instead, the trust uses 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 Certificate remains unchanged. Once the revolving period ends, the
trust distributes principal payments to the Investor Certificateholders
according to the terms of the transaction. When the trust allocates principal
payments to the Investor Certificateholders, the Corporation's loan receivables
increase by the amount of any new purchases or cash advance activity on the
accounts.
<TABLE>
<CAPTION>
SECURITIZED LOANS
- -----------------
(billions)
<S> <C>
96 28.5
97 38.2
98 46.2
</TABLE>
During 1998, the Corporation securitized credit card loan receivables totaling
$9.3 billion, including the securitization of Pound Sterling 750.0 million by
MBNA International and CAD$250.0 million by MBNA Canada. The Corporation also
increased its securitization of other consumer loans through a net increase in
a private multi-seller commercial paper conduit to $3.0 billion at December 31,
1998, from $2.4 billion at December 31, 1997, and the securitization of Pound
Sterling 225.0 million of installment loans by MBNA International. In 1997, the
Corporation securitized a total of $13.2 billion of its loan receivables,
including a securitization of Pound Sterling 250.0 million by MBNA
International, and a net increase in its securitization of other consumer loans
through private multi-seller commercial paper conduits to $2.4 billion in 1997
from $1.4 billion in 1996. The total amount of outstanding securitized loans
was $46.2 billion or 77.4% of managed loans as of December 31, 1998, compared
to $38.2 billion or 77.4% at December 31, 1997.
Table 14 shows the Corporation's securitized loan distribution.
<TABLE>
<CAPTION>
TABLE 14: SECURITIZED LOAN DISTRIBUTION
- -------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIZED LOANS
Domestic:
Credit card.................... $39,739,387 $ 34,181,350 $ 25,854,779
Other consumer................. 3,007,858 2,442,116 1,412,435
----------- ------------ ------------
Total domestic
securitized loans.......... 42,747,245 36,623,466 27,267,214
Foreign:
Credit card.................... 3,052,070 1,594,320 1,227,267
Other consumer................. 373,424 - -
----------- ------------ ------------
Total foreign
securitized loans.......... 3,425,494 1,594,320 1,227,267
----------- ------------ ------------
Total securitized loans..... $46,172,739 $ 38,217,786 $ 28,494,481
=========== ============ ============
- -------------------------------------------------------------------------------------
</TABLE>
Distribution of principal to the Investor Certificateholders may begin sooner
if the average annualized yield (generally including interest income,
interchange, and other fees) for three consecutive months, drops below a
minimum yield (generally equal to the sum of the certificate rate payable to
investors, contractual servicing fees, and principal credit losses during the
period) or certain other events occur. Table 15 compares the average annualized
yield for the three-month period ended December 31, 1998, 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.
41
<PAGE> 46
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE 15: YIELDS ON SECURITIZED TRANSACTIONS (a)
THREE-MONTH AVERAGE
- -----------------------------------------------------------------------------------
Yield in
Annualized Minimum Excess of
Yield Yield Minimum
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
MasterTrust 93-3 (b)..................... 24.63% 13.78% 10.85%
MasterTrust 93-4 (b)..................... 22.37 13.64 8.73
MasterTrust 94-1 (b)..................... 21.51 13.32 8.19
MasterTrust 94-2......................... 19.55 12.86 6.69
MasterTrust II 94-A...................... 18.54 12.76 5.78
MasterTrust II 94-B...................... 18.54 12.75 5.79
MasterTrust II 94-C...................... 18.54 12.85 5.69
MasterTrust II 94-E...................... 18.54 12.75 5.79
MasterTrust II 95-A...................... 18.54 12.83 5.71
MasterTrust II 95-B...................... 18.54 12.70 5.84
MasterTrust II 95-C...................... 18.54 12.75 5.79
MasterTrust II 95-D...................... 18.54 12.62 5.92
MasterTrust II 95-E...................... 18.54 12.76 5.78
Cards No. 1.............................. 21.20 12.58 8.62
MasterTrust II 95-F...................... 18.54 13.54 5.00
MasterTrust II 95-G ..................... 18.54 12.76 5.78
MasterTrust II 95-I...................... 18.54 12.70 5.84
MasterTrust II 95-J...................... 18.54 12.77 5.77
MasterTrust II 96-A...................... 18.54 12.74 5.80
MasterTrust II 96-B...................... 18.54 12.81 5.73
MasterTrust II 96-C...................... 18.54 12.68 5.86
MasterTrust II 96-D...................... 18.54 12.69 5.85
Cards No. 2.............................. 21.20 12.24 8.96
MasterTrust II 96-E...................... 18.54 12.72 5.82
MasterTrust II 96-F...................... 18.54 12.72 5.82
MasterTrust II 96-G...................... 18.54 12.74 5.80
MasterTrust II 96-H...................... 18.56 12.73 5.83
MasterTrust II 96-I...................... 18.56 12.71 5.85
MasterTrust II 96-J...................... 18.54 12.70 5.84
MasterTrust II 96-K...................... 18.54 12.69 5.85
MasterTrust II 96-L...................... 18.56 12.67 5.89
MasterTrust II 96-M...................... 18.56 12.78 5.78
Cards No. 3.............................. 21.20 12.46 8.74
MasterTrust II 97-A...................... 18.56 12.57 5.99
MasterTrust II 97-B...................... 18.54 12.74 5.80
MasterTrust II 97-C...................... 18.54 12.67 5.87
MasterTrust II 97-D...................... 18.56 12.72 5.84
MasterTrust II 97-E...................... 18.56 12.57 5.99
MasterTrust II 97-F...................... 18.54 12.61 5.93
MasterTrust II 97-G...................... 18.54 12.71 5.83
Cards No. 4.............................. 21.20 12.83 8.37
MasterTrust II 97-H...................... 18.56 12.71 5.85
MasterTrust II 97-I...................... 18.54 12.65 5.89
MasterTrust II 97-J...................... 18.54 12.68 5.86
Consumer Loan MasterTrust 97-1 (c)....... 18.05 13.27 4.78
MasterTrust II 97-K...................... 18.54 12.68 5.86
MasterTrust II 97-L...................... 18.56 12.64 5.92
MasterTrust II 97-M...................... 18.56 12.60 5.96
MasterTrust II 97-N...................... 18.56 12.70 5.86
MasterTrust II 97-O...................... 18.54 12.72 5.82
MasterTrust II 98-A...................... 18.54 12.66 5.88
Cards No. 5.............................. 21.20 12.13 9.07
MasterTrust II 98-B...................... 18.56 12.61 5.95
MasterTrust II 98-C...................... 18.54 12.65 5.89
MasterTrust II 98-D....................... 18.54 12.57 5.97
MasterTrust II 98-E...................... 18.56 12.67 5.89
MasterTrust II 98-F...................... 18.57 12.79 5.78
MasterTrust II 98-G...................... 18.34 13.02 5.32
MasterTrust II 98-H...................... 18.49 12.68 5.81
Cards No. 6.............................. 21.01 13.46 7.55
- -----------------------------------------------------------------------------------
</TABLE>
(a) MasterTrust II 98-I issued October 22, 1998, MasterTrust II 98-J issued
October 29, 1998, MasterTrust II 98-K issued November 24, 1998, UK 98-A
issued December 14, 1998, Cards No. 7 issued December 17, 1998,
Gloucester Credit Card Trust 98-1 issued December 18, 1998, and
MasterTrust II 98-L issued December 22, 1998, 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
Investor Certificateholders may begin sooner if the credit enhancement
amount falls below a predetermined contractual level.
During 1998, $3.0 billion of previously securitized loans amortized back into
the Corporation's loan portfolio, compared to $3.6 billion in 1997. After the
revolving period, new charges and cash advances are for the account of the
Corporation, which increases the Corporation's on-balance-sheet assets. Table
16 presents the amounts, at December 31, 1998, of investor principal (face
value) in securitized loan receivables scheduled to amortize into the
Corporation's loan receivables in future years. The amortization amounts are
based upon estimated amortization periods which are subject to change.
<TABLE>
<CAPTION>
TABLE 16: AMORTIZATIONS OF INVESTOR PRINCIPAL (FACE VALUE)
- -------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C>
1999................................................................. $ 6,548,021
2000................................................................. 7,658,050
2001................................................................. 7,325,353
2002................................................................. 6,952,823
2003................................................................. 6,043,755
Thereafter........................................................... 10,746,392
------------
Total amortizations of investor principal......................... 45,274,394
Accrued interest included in securitized loans....................... 898,345
------------
Total securitized loans........................................... $ 46,172,739
============
- -------------------------------------------------------------------------------------
</TABLE>
CROSS-BORDER OUTSTANDINGS
The Corporation holds cross-border outstandings, which are generally
interest-earning time deposits in other banks. At December 31, 1998, the
Corporation had cross-border outstandings of $358.7 million in the United
Kingdom, $402.8 million in Germany, and $325.9 million in Canada. At December
31, 1997, the Corporation had cross-border outstandings of $255.0 million in
Canada, and did not have any reportable cross-border outstandings at December
31, 1996. The Corporation does not have significant local currency outstandings
in these countries that are not hedged or funded by local currency borrowings.
The cross-border outstandings in the above countries are primarily short-term
in nature.
42
<PAGE> 47
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.
<TABLE>
<CAPTION>
MANAGED ASSET DATA
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AT YEAR END
Loans held for securitization..................... $ 1,692,268 $ 2,900,198 $ 2,469,974
Loan portfolio.................................... 11,776,099 8,261,876 7,659,078
Securitized loans................................. 46,172,739 38,217,786 28,494,481
------------ ------------ ------------
Total managed loans............................ $ 59,641,106 $ 49,379,860 $ 38,623,533
============ ============ ============
AVERAGE
Loans held for securitization..................... $ 2,577,482 $ 2,875,212 $ 2,529,484
Loan portfolio.................................... 9,352,807 7,563,301 6,174,095
Securitized loans................................. 40,970,936 32,746,963 22,514,014
------------ ------------ ------------
Total managed loans............................ $ 52,901,225 $ 43,185,476 $ 31,217,593
============ ============ ============
MANAGED RATIOS
Delinquency....................................... 4.62% 4.59% 4.28%
Net credit losses................................. 4.31 3.97 3.35
Net interest margin (on an FTE basis)............. 7.47 7.50 7.62
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ENDING LOANS
(managed)
- ---------------------
(billions)
<S> <C>
96 38.6
97 49.4
98 59.6
</TABLE>
<TABLE>
<CAPTION>
DELINQUENCY
(managed)
- ----------------------
(billions)
<S> <C>
96 4.28
97 4.59
98 4.62
</TABLE>
<TABLE>
<CAPTION>
NET CREDIT LOSSES
(managed)
- ----------------------
(billions)
<S> <C>
96 3.35
97 3.97
98 4.31
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(managed)
- ----------------------
(billions)
<S> <C>
96 7.62
97 7.50
98 7.47
</TABLE>
43
<PAGE> 48
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL
The accompanying consolidated financial statements were prepared by management,
which is responsible for the integrity and objectivity of the information
presented, including amounts that must necessarily be based on judgments and
estimates. The consolidated financial statements were prepared in conformity
with generally accepted accounting principles, and in situations where
acceptable alternative accounting principles exist, management selected the
method that was appropriate in the circumstance. Financial information
appearing throughout this Annual Report to Stockholders is consistent with the
consolidated financial statements.
Management depends upon MBNA Corporation's systems of internal control in
meeting its responsibilities for reliable consolidated financial statements. In
management's opinion, these systems provide reasonable assurance that assets
are safeguarded and that transactions are properly recorded and executed in
accordance with management's authorizations. Judgments are required to assess
and balance the relative cost and expected benefits of these controls. As an
integral part of the systems of internal control, the Corporation maintains a
professional staff of internal auditors who conduct operational and special
audits and coordinate audit coverage with the independent auditors.
The consolidated financial statements have been audited by the Corporation's
independent auditors, Ernst & Young LLP, whose independent professional opinion
appears separately.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the internal auditors, the independent
auditors, and management to review the work of each and ensure that each is
properly discharging its responsibilities. The independent auditors have free
access to the Committee to discuss the results of their audit work and their
evaluations of the adequacy of internal controls and the quality of financial
reporting.
/s/ ALFRED LERNER /s/ CHARLES M. CAWLEY
Alfred Lerner Charles M. Cawley
Chairman and President
Chief Executive Officer MBNA Corporation
MBNA Corporation
/s/ M. SCOT KAUFMAN /s/ KENNETH F. BOEHL
M. Scot Kaufman Kenneth F. Boehl
Chief Financial Officer General Auditor
MBNA Corporation MBNA Corporation
44
<PAGE> 49
MBNA CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
MBNA Corporation
We have audited the accompanying consolidated statements of financial condition
of MBNA Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBNA Corporation
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note I to the consolidated financial statements, effective
January 1, 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities."
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
January 15, 1999
45
<PAGE> 50
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................................................... $ 382,882 $ 263,064
Interest-earning time deposits in other banks.............................................. 2,831,215 1,427,065
Federal funds sold and securities purchased under resale agreements........................ 730,000 659,000
Investment securities:
Available-for-sale (at market value, amortized cost of $1,666,123
and $2,160,869 at December 31, 1998 and 1997, respectively)............................ 1,663,704 2,162,464
Held-to-maturity (market value of $211,473and $341,868 at December 31, 1998
and 1997, respectively)................................................................ 216,020 346,180
Loans held for securitization.............................................................. 1,692,268 2,900,198
Loans:
Credit card............................................................................. 8,975,051 5,830,221
Other consumer.......................................................................... 2,801,048 2,431,655
------------- -------------
Total loans.......................................................................... 11,776,099 8,261,876
Reserve for possible credit losses...................................................... (216,911) (162,476)
------------- -------------
Net loans............................................................................ 11,559,188 8,099,400
Premises and equipment, net................................................................ 1,617,596 1,579,058
Accrued income receivable.................................................................. 193,019 146,964
Accounts receivable from securitizations................................................... 3,595,556 2,835,831
Prepaid expenses and deferred charges...................................................... 237,587 212,563
Other assets............................................................................... 1,087,225 673,726
------------- -------------
Total assets......................................................................... $ 25,806,260 $ 21,305,513
============= =============
LIABILITIES
Deposits:
Time deposits........................................................................... $ 10,745,062 $ 9,435,171
Money market deposit accounts........................................................... 4,125,523 3,122,385
Noninterest-bearing demand deposits..................................................... 462,266 311,670
Interest-bearing transaction accounts................................................... 35,399 31,669
Savings accounts........................................................................ 38,790 12,318
------------- -------------
Total deposits....................................................................... 15,407,040 12,913,213
Short-term borrowings...................................................................... 1,231,195 192,623
Long-term debt and bank notes.............................................................. 5,939,025 5,478,917
Accrued interest payable................................................................... 153,201 137,215
Accrued expenses and other liabilities..................................................... 684,764 613,495
------------- -------------
Total liabilities.................................................................... 23,415,225 19,335,463
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000 shares authorized, 8,573,882 shares
issued and outstanding at December 31, 1998 and 1997)..................................... 86 86
Common stock ($.01 par value, 1,500,000,000 shares authorized, 751,795,674 shares and
751,781,250 shares issued and outstanding at December 31, 1998 and 1997, respectively).... 7,518 7,518
Additional paid-in capital................................................................. 271,050 421,871
Retained earnings.......................................................................... 2,112,374 1,530,868
Accumulated other comprehensive income..................................................... 7 9,707
------------- -------------
Total stockholders' equity........................................................... 2,391,035 1,970,050
------------- -------------
Total liabilities and stockholders' equity........................................... $ 25,806,260 $ 21,305,513
============= =============
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 51
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME 1998 1997 1996
<S> <C> <C> <C>
Loans .................................................................... $ 1,315,330 $ 1,076,393 $ 861,305
Investment securities:
Taxable................................................................ 111,092 141,429 123,054
Tax-exempt............................................................. 3,405 3,511 3,325
Time deposits in other banks.............................................. 135,420 49,073 29,528
Federal funds sold and securities purchased under resale agreements....... 28,783 23,962 9,935
Loans held for securitization............................................. 372,142 416,645 356,120
-------------- -------------- --------------
Total interest income............................................... 1,966,172 1,711,013 1,383,267
INTEREST EXPENSE
Deposits.................................................................. 816,104 693,920 527,885
Short-term borrowings..................................................... 26,038 19,784 18,497
Long-term debt and bank notes............................................. 381,691 304,919 196,408
-------------- -------------- --------------
Total interest expense.............................................. 1,223,833 1,018,623 742,790
-------------- -------------- --------------
NET INTEREST INCOME....................................................... 742,339 692,390 640,477
Provision for possible credit losses...................................... 310,039 260,040 178,224
-------------- -------------- -------------
Net interest income after provision for possible credit losses............ 432,300 432,350 462,253
OTHER OPERATING INCOME
Interchange............................................................... 138,415 114,598 88,191
Credit card fees.......................................................... 129,758 103,144 102,579
Securitization income..................................................... 2,844,244 2,506,817 1,649,337
Insurance................................................................. 78,981 42,455 24,877
Other .................................................................... 37,571 45,865 30,939
-------------- -------------- ---------------
Total other operating income........................................ 3,228,969 2,812,879 1,895,923
OTHER OPERATING EXPENSE
Salaries and employee benefits............................................ 1,070,909 990,039 732,971
Occupancy expense of premises............................................. 119,879 85,552 66,536
Furniture and equipment expense........................................... 170,975 150,410 97,785
Special marketing program................................................. - - 54,331
Other .................................................................... 1,045,441 997,120 675,259
-------------- -------------- ---------------
Total other operating expense....................................... 2,407,204 2,223,121 1,626,882
-------------- -------------- ---------------
INCOME BEFORE INCOME TAXES ............................................... 1,254,065 1,022,108 731,294
Applicable income taxes................................................... 477,799 399,608 289,592
Tax benefit from Customer-based intangible assets......................... - - (32,793)
-------------- -------------- ---------------
NET INCOME................................................................ $ 776,266 $ 622,500 $ 474,495
============== ============== ===============
EARNINGS PER COMMON SHARE................................................. $ 1.01 $ .80 $ .61
EARNINGS PER COMMON SHARE--ASSUMING DILUTION.............................. .97 .76 .59
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE> 52
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Outstanding Shares
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Common Preferred Common Paid-in
(000) (000) Stock Stock Capital
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995......................... 6,000 751,781 $ 60 $ 7,518 $ 486,445
Comprehensive income:
Net income...................................... - - - - -
Foreign currency translation, net of tax
(accumulated amount of $7,910 at
December 31, 1996)......................... - - - - -
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated
amount of $723 at December 31, 1996)....... - - - - -
Other comprehensive income, net of tax...........
Comprehensive income................................
Cash dividends:
Common--$.19 per share.......................... - - - - -
Preferred....................................... - - - - -
Exercise of stock options and other awards......... - 7,408 - 74 38,972
Acquisition and retirement of common stock......... - (7,408) - (74) (71,839)
Issuance of preferred stock, net of issuance costs. 6,000 - 60 - 146,147
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996......................... 12,000 751,781 120 7,518 599,725
Comprehensive income:
Net income...................................... - - - - -
Foreign currency translation, net of tax
(accumulated amount of $2,924 at
December 31, 1997)......................... - - - - -
Net unrealized gains on investment securities
available-for-sale and other financial
instruments, net of tax (accumulated
amount of $6,783 at December 31, 1997)..... - - - - -
Other comprehensive income, net of tax...........
Comprehensive income................................
Cash dividends:
Common--$.21 per share........................... - - - - -
Preferred....................................... - - - - -
Exercise of stock options and other awards......... - 9,464 - 95 65,116
Acquisition and retirement of common stock......... - (9,464) - (95) (157,351)
Acquisition and retirement of preferred stock....... (3,426) - (34) - (85,619)
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.......................... 8,574 751,781 86 7,518 421,871
Comprehensive income:
Net income....................................... - - - - -
Foreign currency translation, net of tax
(accumulated amount of $2,422 at
December 31, 1998).......................... - - - - -
Net unrealized losses on investment securities
available-for-sale and other financial
instruments, net of tax (accumulated
amount of $2,160 at December 31, 1998)...... - - - - -
Minimum benefit plan liability adjustment,
net of tax (accumulated amount of ($4,575)
at December 31, 1998)....................... - - - - -
Other comprehensive income, net of tax...........
Comprehensive income................................
Cash dividends:
Common--$.24 per share........................... - - - - -
Preferred........................................ - - - - -
Exercise of stock options and other awards.......... - 11,923 - 119 96,320
Acquisition and retirement of common stock.......... - (11,908) - (119) (247,141)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.......................... 8,574 751,796 $ 86 $ 7,518 $ 271,050
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Outstanding Shares
- -----------------------------------------------------------------------------------------------------
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income Equity
--------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......................... $ 770,455 $ 580 $ 1,265,058
Comprehensive income:
Net income....................................... 474,495 - 474,495
Foreign currency translation, net of tax
(accumulated amount of $7,910 at
December 31, 1996).......................... - 7,519 7,519
Net unrealized gains on investment securities
available-for-sale, net of tax (accumulated
amount of $723 at December 31, 1996)........ - 534 534
-----------
Other comprehensive income, net of tax........... 8,053
-----------
Comprehensive income................................ 482,548
Cash dividends:
Common--$.19 per share.......................... (142,583) - (142,583)
Preferred....................................... (14,055) - (14,055)
Exercise of stock options and other awards......... - - 39,046
Acquisition and retirement of common stock......... - - (71,913)
Issuance of preferred stock, net of issuance costs. - - 146,207
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996......................... 1,088,312 8,633 1,704,308
Comprehensive income:
Net income...................................... 622,500 - 622,500
Foreign currency translation, net of tax
(accumulated amount of $2,924 at
December 31, 1997)......................... - (4,986) (4,986)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments, net of tax (accumulated
amount of $6,783 at December 31, 1997)..... - 6,060 6,060
-----------
Other comprehensive income, net of tax........... 1,074
-----------
Comprehensive income................................ 623,574
Cash dividends:
Common--$.21 per share........................... (160,417) - (160,417)
Preferred....................................... (16,394) - (16,394)
Exercise of stock options and other awards......... - - 65,211
Acquisition and retirement of common stock......... - - (157,446)
Acquisition and retirement of preferred stock....... (3,133) - (88,786)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.......................... 1,530,868 9,707 1,970,050
Comprehensive income:
Net income....................................... 776,266 - 776,266
Foreign currency translation, net of tax
(accumulated amount of $2,422 at
December 31, 1998).......................... - (502) (502)
Net unrealized losses on investment securities
available-for-sale and other financial
instruments, net of tax (accumulated
amount of $2,160 at December 31, 1998)...... - (4,623) (4,623)
Minimum benefit plan liability adjustment,
net of tax (accumulated amount of ($4,575)
at December 31, 1998)....................... - (4,575) (4,575)
-----------
Other comprehensive income, net of tax........... (9,700)
-----------
Comprehensive income................................ 766,566
Cash dividends:
Common--$.24 per share........................... (180,468) - (180,468)
Preferred........................................ (14,292) - (14,292)
Exercise of stock options and other awards.......... - - 96,439
Acquisition and retirement of common stock.......... - - (247,260)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.......................... $ 2,112,374 $ 7 $ 2,391,035
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE> 53
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income............................................................. $ 776,266 $ 622,500 $ 474,495
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for possible credit losses................................ 310,039 260,040 178,224
Depreciation, amortization, and accretion........................... 256,587 145,957 96,602
Provision (benefit) for deferred income taxes....................... 6,689 41,349 (32,006)
Increase in accrued income receivable............................... (46,055) (48,804) (4,524)
Increase in accounts receivable from securitizations................ (759,725) (1,058,508) (825,755)
Increase in accrued interest payable................................ 15,986 30,028 13,787
(Increase) decrease in other operating activities................... (49,466) 130,103 63,477
-------------- -------------- --------------
Net cash provided by (used in) operating activities.............. 510,321 122,665 (35,700)
INVESTING ACTIVITIES
Net increase in money market instruments .............................. (1,475,150) (1,209,451) (303,003)
Proceeds from maturities of investment securities available-for-sale... 2,113,501 8,546,878 4,450,709
Purchases of investment securities available-for-sale.................. (1,604,699) (8,947,215) (5,234,815)
Proceeds from maturities of investment securities held-to-maturity..... 215,239 305,206 604,869
Purchases of investment securities held-to-maturity.................... (84,791) (53,269) (19,302)
Proceeds from securitization of loans.................................. 10,681,836 13,172,133 11,223,917
Loan portfolio acquisitions............................................ (3,654,132) (1,307,038) (1,475,498)
Proceeds from sale of loan portfolios.................................. 171,769 34,734 -
Amortization of securitized loans...................................... (3,008,978) (3,637,385) (1,608,334)
Net loan originations.................................................. (7,119,584) (9,728,725) (10,540,920)
Net purchases of premises and equipment................................ (214,640) (660,046) (303,173)
-------------- -------------- --------------
Net cash used in investing activities............................ (3,979,629) (3,484,178) (3,205,550)
FINANCING ACTIVITIES
Net increase in money market deposit accounts, noninterest-bearing
demand deposits, interest-bearing transaction accounts, and savings ac 1,183,936 485,796 530,931
Net increase in time deposits.......................................... 1,309,891 2,275,731 1,011,841
Net increase (decrease) in short-term borrowings....................... 1,038,572 (500,764) 403,844
Proceeds from issuance of long-term debt and bank notes................ 876,126 1,803,231 1,444,985
Maturity of long-term debt and bank notes.............................. (424,677) (312,770) (165,192)
Proceeds from issuance of preferred stock.............................. - - 146,207
Acquisition and retirement of preferred stock.......................... - (52,483) -
Proceeds from exercise of stock options and other awards............... 42,454 31,948 22,869
Acquisition and retirement of common stock............................. (247,260) (157,446) (71,913)
Dividends paid......................................................... (189,916) (173,729) (149,115)
-------------- -------------- --------------
Net cash provided by financing activities........................ 3,589,126 3,399,514 3,174,457
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 119,818 38,001 (66,793)
Cash and cash equivalents at beginning of year......................... 263,064 225,063 291,856
-------------- -------------- --------------
Cash and cash equivalents at end of year............................. $ 382,882 $ 263,064 $ 225,063
============== ============== ==============
SUPPLEMENTAL DISCLOSURES
Interest expense paid.................................................. $ 1,207,603 $ 988,675 $ 728,091
============== ============== ==============
Income taxes paid...................................................... $ 406,191 $ 224,840 $ 248,329
============== ============== ==============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
49
<PAGE> 54
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements.
BUSINESS
MBNA Corporation ("the Corporation") is a registered bank holding company,
incorporated under the laws of Maryland. It is the parent company of MBNA
America Bank, N.A. ("the Bank") a national bank. Through the Bank, the
Corporation is the world's largest independent credit card lender. The
Corporation 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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require the
Corporation's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements as well as
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include, after intercompany
elimination, the accounts of all subsidiaries of the Corporation, all of which
are wholly owned. For purposes of comparability, certain prior year amounts have
been reclassified.
FOREIGN ACTIVITIES
The Corporation's foreign activities are primarily performed through the Bank's
two foreign bank subsidiaries, MBNA International Bank Limited ("MBNA
International") and MBNA Canada Bank ("MBNA Canada"). The Bank also has a
foreign branch office in the Grand Cayman Islands.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Corporation's foreign subsidiaries have been
translated into U.S. dollars in accordance with generally accepted accounting
principles. Assets and liabilities have been translated using the exchange rate
at year end. Income and expense amounts have been translated using the
appropriate exchange rate for the period in which the transaction took place.
The translation gains and losses resulting from the change in exchange rates
have been reported as a component of comprehensive income included in
stockholders' equity, net of tax. The effect on the consolidated statements of
income from foreign currency transaction gains and losses is immaterial for all
years presented.
INVESTMENT SECURITIES
Investment securities available-for-sale are at market value with unrealized
gains and losses, net of tax, reported as a component of comprehensive income
included in stockholders' equity. Investment securities held-to-maturity are
reported at cost (adjusted for amortization of premiums and accretion of
discounts). The Corporation does not have a trading securities portfolio.
Realized gains and losses and other-than-temporary impairments related to
investment securities are determined using the specific identification method
and are reported in other operating income as gains or losses on investment
securities.
LOANS HELD FOR SECURITIZATION
Loans held for securitization are the lesser of loans eligible for
securitization or sale, or loans that management intends to securitize or sell
within one year. These loans are carried at the lower of aggregate cost or
market value.
INTEREST INCOME ON LOANS
Interest income is recognized based upon the principal amount of loans
outstanding. Interest income is generally recognized until the loan is charged
off. The accrued interest portion of the charged-off loan balance is deducted
from current period interest income, while the principal balance is charged off
against the reserve for possible credit losses.
CREDIT CARD FEES AND COSTS
Credit card fees include annual, late, overlimit, returned check, cash advance,
and other miscellaneous fees. These fees are assessed according to agreements
with Customers. Accrued credit card fees previously recognized on charged-off
accounts are deducted from credit card fee income.
Annual credit card fees and incremental direct loan origination costs are
deferred and amortized on a straight-line basis over the one-year period to
which they pertain. The Corporation does not charge an annual credit card fee
during the first year the account is originated, while incremental direct loan
origination costs are deferred only in the first year. These costs are included
in prepaid expenses and deferred charges. At December 31, 1998 and 1997, the
incremental direct loan origination costs deferred were $42.4 million and $45.6
million, respectively.
RESERVE FOR POSSIBLE CREDIT LOSSES
The Corporation makes certain estimates and assumptions that affect the
determination of the reserve 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. Significant changes in these factors could impact the
appropriate reserve for possible credit losses. A provision is charged to
operating expense to maintain the reserve at an appropriate level. The
Corporation's policy is generally to charge off accounts when they become 180
days contractually past due.
CREDIT CARD FRAUD LOSSES
The Corporation incurs credit card fraud losses from unauthorized use of
Customer credit cards and counterfeiting. These fraudulent transactions, when
identified, are reclassified to other assets from loans and reduced to estimated
net recoverable values through a charge to operating expense. The remaining net
recoverable values are generally charged off after four months (sooner if the
collectibility of the account is no longer assured).
PREPAID EXPENSES AND DEFERRED CHARGES
The principal components of prepaid expenses and deferred charges include direct
loan origination costs, royalties advanced
50
<PAGE> 55
MBNA CORPORATION AND SUBSIDIARIES
to the Corporation's affinity groups and financial institutions, and commissions
paid on brokered certificates of deposit. These costs are deferred and amortized
over the period the Corporation receives a benefit or the remaining term of the
liability.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization, computed principally by the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are included in
operating expense, while the cost of improvements is capitalized.
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. Interest rate swap agreements are agreements between
counterparties to exchange cash flows based on the difference between two
interest rates, applied to a notional principal amount for a specific period.
Interest rate swap agreements may subject the Corporation to market risk
associated with changes in interest rates, as a result of the change to
floating-rate funding sources, as well as the risk of default by a counterparty
to the agreement. Under the terms of certain interest rate swap agreements, each
party may be required to pledge certain assets if the market value of the
interest rate swap agreement exceeds an amount set forth in the agreement or in
the event of a change in its credit rating.
Amounts paid or received related to outstanding interest rate swap contracts
that are used in the asset/liability management process are accrued and
recognized in earnings, as an adjustment to the related interest income or
expense of the hedged asset/liability, over the life of the related agreement.
For interest rate swap agreements to qualify for hedge accounting treatment the
following conditions must be met: the underlying asset/liability being hedged by
the interest rate swap agreement exposes the Corporation to interest rate risk;
the interest rate swap agreement reduces the Corporation's sensitivity to
interest rate risk; and the interest rate swap agreements are designated and
deemed effective in hedging the Corporation's exposure to interest rate risk.
All of the Corporation's interest rate swap agreements qualify for hedge
accounting treatment. The Corporation does not hold or issue interest rate swap
agreements for trading purposes. Gains and losses associated with the
termination of interest rate swap agreements for identified positions are
deferred and amortized over the remaining lives of the related agreements as an
adjustment to the yield. Unamortized deferred gains and losses on terminated
interest rate swap agreements are included in the underlying assets/liabilities
hedged.
FOREIGN EXCHANGE SWAP AGREEMENTS
The Corporation enters into foreign exchange swap agreements to reduce its
exposure to foreign currency exchange rate risk primarily related to its foreign
bank subsidiaries. Foreign exchange swap agreements are agreements to exchange
principal amounts of different currencies, usually at a prevailing exchange
rate. When the agreement matures, the underlying principal or notional amount
will be reexchanged at the agreed-upon exchange rate. These foreign exchange
swap agreements are marked to market with any unrealized gains or losses
recognized in other operating income. The Corporation does not hold or issue
foreign exchange swap agreements for trading purposes.
FORWARD EXCHANGE CONTRACTS
The Corporation enters into forward exchange contracts to reduce its exposure to
foreign currency exchange rate risk primarily related to its foreign bank
subsidiaries. Forward exchange contracts are commitments to buy or sell foreign
currency at a future date for a contracted price. These financial instruments
may expose the Corporation to varying degrees of credit and market risk and are
subject to the same credit and risk limitations as those recorded on the balance
sheet. The premium paid or received for these contracts is amortized over the
life of the agreement to other operating income. For contracts to effectively
hedge foreign currency exchange risk, they must reduce the Corporation's
sensitivity to foreign currency exchange risk. For contracts that are designated
and effective as hedges of its net investment in the Bank's foreign
subsidiaries, gains and losses are deferred and reported in stockholders'
equity, net of tax, as an offset to translation gains and losses. Contracts, or
portions thereof, that are not effective as hedges are marked to market with any
gains or losses recognized in other operating income. The Corporation only has
forward exchange contracts that are designated and effective as hedges. The
Corporation does not hold or issue forward exchange contracts for trading
purposes. For any contracts that are terminated early, the remaining premium or
discount is immediately recognized in other operating income.
The Corporation can also enter into forward exchange contracts to reduce its
exposure to foreign currency exchange rate risk related to its deposits. The
contracts are marked to market with gains or losses recognized in other
operating income.
STOCK-BASED EMPLOYEE COMPENSATION
The Corporation measures compensation cost for employee stock options and
similar instruments using the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25").
INCOME TAXES
The Corporation accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
the differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary differences) and are
measured at the prevailing enacted tax rates that will be in effect when these
differences are settled or realized.
STATEMENTS OF CASH FLOWS
The Corporation has presented the consolidated statements of cash flows using
the indirect method, which involves the reconciliation of net income to net cash
flow from operating activities. In addition, the Corporation nets certain cash
receipts and cash payments relating to deposits placed with and withdrawn from
other financial institutions; time deposits accepted and repayments of those
deposits; and loans made to Customers and principal collections of those loans.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks.
51
<PAGE> 56
MBNA CORPORATION AND SUBSIDIARIES
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
$671.4 million and $366.1 million at December 31, 1998 and 1997, respectively.
The Corporation had accumulated amortization related to its intangible assets of
$144.1 million and $89.9 million at December 31, 1998 and 1997, 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.
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 all 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.
SUBSEQUENT EVENTS
During December 1998, the Corporation agreed to acquire the credit card business
of PNC Bank, N.A. ("PNC"). The purchase includes outstanding credit card
receivables of approximately $2.9 billion. At closing, the Corporation will
enter into agreements with PNC Bank, N.A., and the American Automobile
Association ("AAA") to market credit card products to PNC customers and members
of AAA. The transaction is expected to close in the first quarter of 1999,
subject to regulatory approvals.
In January 1999, the Corporation issued 50 million shares of common stock. The
Corporation intends to use the net proceeds from this offering, approximately
$1.2 billion, to complete the purchase of the credit card business of PNC Bank,
N.A., and for other general corporate purposes.
NOTE B: EARNINGS PER COMMON SHARE
The Corporation computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("Statement No.
128"). 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.
<TABLE>
<CAPTION>
Computation of Earnings Per Common Share
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income..................................................................... $ 776,266 $ 622,500 $ 474,495
Less: preferred stock dividend requirements.................................... 14,292 19,527 14,055
------------ ------------ ------------
Net income applicable to common stock.......................................... $ 761,974 $ 602,973 $ 460,440
============ ============ ============
Weighted average common shares outstanding (000)............................... 751,856 751,837 751,812
============ ============ ============
Earnings per common share...................................................... $ 1.01 $ .80 $ .61
============ ============ ============
DILUTED
Net income..................................................................... $ 776,266 $ 622,500 $ 474,495
Less: preferred stock dividend requirements.................................... 14,292 19,527 14,055
------------ ------------ ------------
Net income applicable to common stock.......................................... $ 761,974 $ 602,973 $ 460,440
============ ============ ============
Weighted average common shares outstanding (000)............................... 751,856 751,837 751,812
Net effect of dilutive stock options--based on the treasury stock
method using average market price (000)..................................... 37,565 37,964 26,661
------------ ------------ ------------
Weighted average common shares outstanding and common stock equivalents (000).. 789,421 789,801 778,473
============ ============ ============
Earnings per common share--assuming dilution................................... $ .97 $ .76 $ .59
============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were 8,947,000 stock options with an average option price of $22.46 per
share outstanding at December 31, 1998, which were not included in the
computation of earnings per common share--assuming dilution for 1998 as a result
of the stock options' exercise price being greater than the average market price
of the common shares. These stock options expire in 2008.
52
<PAGE> 57
MBNA CORPORATION AND SUBSIDIARIES
For comparative purposes, earnings per common share and weighted average common
shares outstanding and common stock equivalents have been restated to reflect
the three-for-two stock split of the Corporation's Common Stock, effected in the
form of a dividend, issued October 1, 1998, to stockholders of record as of
September 15, 1998.
NOTE C: INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Summary of Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies obligations...... $ 526,192 $ 1,340 $ (48) $ 527,484
State and political subdivisions of the United States................ 89,529 40 - 89,569
Asset-backed and other securities................................. 1,050,402 $ 189 (3,940) 1,046,651
----------- ------------ ------------ ------------
Total investment securities available-for-sale................. $ 1,666,123 $ 1,569 $ (3,988) $ 1,663,704
========== ============ ============ ============
Investment securities held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations...... $ 194,418 $ 412 $ (5,189) $ 189,641
State and political subdivisions of the United States............. 2,685 255 - 2,940
Asset-backed and other securities................................. 18,917 $ - (25) 18,892
----------- ------------ ------------ ------------
Total investment securities held-to-maturity................... $ 216,020 $ 667 $ (5,214) $ 211,473
=========== ============ ============ ============
DECEMBER 31, 1997
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies obligations...... $ 1,074,179 $ 1,371 $ (170) $ 1,075,380
State and political subdivisions of the United States............. 91,282 48 (14) 91,316
Asset-backed and other securities................................. 995,408 720 (360) 995,768
----------- ------------ ------------ ------------
Total investment securities available-for-sale................. $ 2,160,869 $ 2,139 $ (544) $ 2,162,464
=========== ============ ============ ============
Investment securities held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations...... $ 285,747 $ 105 $ (4,142) $ 281,710
State and political subdivisions of the United States............. 1,628 105 (265) 1,468
Asset-backed and other securities.................................... 58,805 97 (212) 58,690
----------- ------------ ------------ ------------
Total investment securities held-to-maturity................... $ 346,180 $ 307 $ (4,619) $ 341,868
=========== ============ ============ ============
DECEMBER 31, 1996
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agencies obligations...... $ 605,034 $ - $ (150) $ 604,884
State and political subdivisions of the United States............. 87,521 128 (48) 87,601
Asset-backed and other securities................................. 1,026,088 1,821 (664) 1,027,245
----------- ------------ ------------ ------------
Total investment securities available-for-sale................. $ 1,718,643 $ 1,949 $ (862) $ 1,719,730
=========== ============ ============ ============
Investment securities held-to-maturity:
U.S. Treasury and other U.S. government agencies obligations...... $ 506,346 $ 368 $ (6,409) $ 500,305
State and political subdivisions of the United States............. 454 29 (1) 482
Asset-backed and other securities.................................... 91,520 373 (472) 91,421
----------- ------------ ------------ ------------
Total investment securities held-to-maturity................... $ 598,320 $ 770 $ (6,882) $ 592,208
=========== ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Estimated Maturities of Investment Securities
- -------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------
Amortized Market
December 31, 1998 Cost Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Due within one year............................. $ 830,100 $ 830,783
Due after one year through five years........... 749,481 747,215
Due after five years through ten years.......... 82,678 81,888
Due after ten years............................. 3,864 3,818
----------- -----------
Total investment securities available-for-sale $ 1,666,123 $ 1,663,704
=========== ===========
INVESTMENT SECURITIES HELD-TO-MATURITY
Due within one year............................. $ 25,962 $ 25,918
Due after one year through five years........... 2,000 1,975
Due after five years through ten years.......... - -
Due after ten years............................. 188,058 183,580
----------- -----------
Total investment securities held-to-maturity. $ 216,020 $ 211,473
=========== ===========
- -------------------------------------------------------------------------------------
</TABLE>
The Corporation did not sell any investment securities during 1998, 1997, and
1996. No investment securities were pledged by the Corporation at December 31,
1998 and 1997.
53
<PAGE> 58
MBNA CORPORATION AND SUBSIDIARIES
NOTE D: GEOGRAPHIC DIVERSIFICATION OF LOANS
The Corporation originates credit card and other consumer loans, primarily
throughout the United States, the United Kingdom, and Canada. The table below
details the geographic distribution of the Corporation's loan receivables,
securitized loans, and managed loans. Credit card and other consumer loans
originated in the United States are broadly distributed throughout the United
States' geographic regions. Credit card and other consumer loans issued by MBNA
International are primarily located in the United Kingdom, while MBNA Canada
issues credit card loans in Canada.
The Corporation's loans are generally made on an unsecured basis after reviewing
each potential Customer's credit application and evaluating the applicant's
financial history and ability and willingness to repay. The maximum credit line
to individual credit card Customers is generally $100,000, the average line is
$10,100, and the average balance outstanding per account is $3,400 at December
31, 1998.
<TABLE>
<CAPTION>
Geographic Distribution of Loan Receivables, Securitized Loans, and Managed
Loans
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
LOAN RECEIVABLES SECURITIZED LOANS MANAGED LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998 United States:
Northern............................ $ 1,547,570 11.5% $ 5,823,424 12.6% $ 7,370,994 12.4%
Mid-Atlantic........................ 1,917,398 14.2 6,823,748 14.8 8,741,146 14.6
Southern............................ 1,995,097 14.8 7,149,923 15.5 9,145,020 15.3
Central............................. 2,007,707 14.9 7,340,829 15.9 9,348,536 15.7
Western............................. 2,659,009 19.7 8,974,906 19.4 11,633,915 19.5
Southwestern........................ 1,824,832 13.6 6,536,971 14.2 8,361,803 14.0
United Kingdom......................... 1,247,682 9.3 3,262,905 7.1 4,510,587 7.6
Canada................................. 241,317 1.8 162,589 .3 403,906 .7
Other ................................. 27,755 .2 97,444 .2 125,199 .2
------------- ----- ------------- ----- ------------- -----
Total............................ $ 13,468,367 100.0% $ 46,172,739 100.0% $ 59,641,106 100.0%
============= ===== ============= ===== ============= =====
DECEMBER 31, 1997 United States:
Northern............................ $ 1,314,058 11.8% $ 5,003,281 13.1% $ 6,317,339 12.8%
Mid-Atlantic........................ 1,616,834 14.5 5,895,442 15.4 7,512,276 15.2
Southern............................ 1,592,768 14.2 6,009,081 15.7 7,601,849 15.4
Central............................. 1,855,943 16.6 6,249,683 16.3 8,105,626 16.4
Western............................. 2,230,449 20.0 7,782,734 20.4 10,013,183 20.3
Southwestern........................ 1,266,552 11.3 5,604,259 14.7 6,870,811 13.9
United Kingdom......................... 1,201,522 10.8 1,594,320 4.2 2,795,842 5.7
Canada................................. 3 - - - 3 -
Other ................................. 83,945 .8 78,986 .2 162,931 .3
------------- ----- ------------- ----- ------------- -----
Total............................ $ 11,162,074 100.0% $ 38,217,786 100.0% $ 49,379,860 100.0%
============= ===== ============= ===== ============= =====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE E: RESERVE FOR POSSIBLE CREDIT LOSSES
- --------------------------------------------------------------------------------------
Changes in the Reserve for Possible Credit Losses
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for possible credit losses,
beginning of year......................... $ 162,476 $ 118,427 $ 104,886
Reserves acquired......................... 29,932 7,975 7,553
Provision for possible credit losses...... 310,039 260,040 178,224
Foreign currency translation.............. (125) (203) 488
Credit losses............................. (440,113) (359,542) (254,417)
Recoveries................................ 154,702 135,779 81,693
--------- --------- ---------
Net credit losses...................... (285,411) (223,763) (172,724)
--------- --------- ---------
Reserve for possible credit losses,
end of year................................. $ 216,911 $ 162,476 $ 118,427
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NOTE F: PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------------
Summary of Premises and Equipment
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Land............................................... $ 148,118 $ 160,876
Buildings and improvements........................ 1,323,301 1,158,703
Furniture and equipment............................ 676,838 623,670
----------- -----------
Total........................................... 2,148,257 1,943,249
Accumulated depreciation and amortization.......... (530,661) (364,191)
----------- -----------
Premises and equipment, net..................... $ 1,617,596 $ 1,579,058
=========== ===========
- --------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and 1996, was
$172.3 million, $124.6 million, and $76.7 million, respectively.
54
<PAGE> 59
MBNA CORPORATION AND SUBSIDIARIES
The Corporation leases certain office facilities and equipment under operating
lease agreements that provide for payment of property taxes, insurance, and
maintenance costs. These leases generally include renewal options, with certain
leases providing purchase options. Rental expense for operating leases was $33.1
million, $31.3 million, and $26.7 million for the years ended December 31, 1998,
1997, and 1996, respectively.
<TABLE>
<CAPTION>
Future Minimum Rental Payments Under Noncancelable Operating Leases
- -------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C>
1999................................................................. $ 26,928
2000................................................................. 18,924
2001................................................................. 14,340
2002................................................................. 8,011
2003................................................................. 4,888
Thereafter........................................................... 6,269
-----------
Total minimum lease payments...................................... $ 79,360
===========
- -------------------------------------------------------------------------------------
</TABLE>
NOTE G: SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements are
overnight borrowings that generally mature within one business day of the
transaction date. Other short-term borrowings consist primarily of federal funds
purchased that mature in more than one business day, short-term bank notes
issued from the global bank note program established by the Bank, and other
transactions with maturities greater than one business day but less than one
year.
The Corporation entered into a $275.0 million receivables financing facility
during 1998 that is included in short-term borrowings. This receivables
financing facility was used by the Corporation to fund an acquisition of loan
receivables. Loan receivables in the amount of $387.4 million are subject to a
lien by the provider of the facility.
<TABLE>
<CAPTION>
Summary of Short-Term Borrowings
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end.......................... $ - $ - $ -
Weighted average interest rate at year end. -% -% -%
Average amount outstanding
during the year............................. $ 54,426 $ 16,712 $ 67,712
Maximum amount outstanding at any
month end................................... 410,000 297,000 325,000
Weighted average interest rate during
the year.................................... 5.66% 5.59% 5.39%
OTHER SHORT-TERM BORROWINGS
Balance at year end.......................... $1,231,195 $192,623 $693,387
Weighted average interest rate at year end... 5.13% 7.53% 5.66%
Average amount outstanding
during the year............................. $ 394,076 $321,443 $269,538
Maximum amount outstanding at any
month end................................... 1,231,195 646,529 693,387
Weighted average interest rate during
the year.................................... 5.83% 5.86% 5.51%
- --------------------------------------------------------------------------------------
</TABLE>
NOTE H: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more.
<TABLE>
<CAPTION>
Summary of Long-Term Debt and Bank Notes
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
PARENT COMPANY
6 7/8 % Senior Notes, maturing in 1999 and 2005.... $ 249,226 $ 248,935
Fixed-Rate Senior Medium-Term Notes, with a
weighted average interest rate of 6.61% and
6.70%, respectively, maturing in varying
amounts from 1999 through 2004.................... 625,604 520,246
Floating-Rate Senior Medium-Term Notes,
maturing in varying amounts from 1999
through 2003...................................... 1,183,146 872,838
----------- -----------
Total parent company......................... 2,057,976 1,642,019
SUBSIDIARIES
Fixed-Rate Bank Notes, with a weighted average
interest rate of 6.80% and 7.29%,
respectively, maturing in varying amounts from 1999
through 2005...................................... 770,767 875,117
Floating-Rate Bank Notes, maturing in varying
amounts from 1999 through 2004.................... 1,815,244 1,978,281
Fixed-Rate Bilateral Credit Facility, with an
interest rate of 7.29%, maturing in varying
amounts from 1999 through 2001.................... 6,204 10,756
Fixed-Rate Bilateral Credit Facility, with an
interest rate of 7.2033%, maturing in 2000........ 16,636 16,425
Floating-Rate Bilateral Credit Facility,
maturing in 2001.................................. 16,636 16,425
Fixed-Rate Syndicated Credit Facility, with an
interest rate of 7.645%, maturing in 2001......... 124,770 123,187
Fixed-Rate Medium-Term Deposit Notes, with an
interest rate of 6.35%, maturing in 2001.......... 65,615 -
7.25% Subordinated Notes, maturing in 2002......... 198,789 198,519
6.75% Subordinated Notes, maturing in 2008......... 247,392 -
Subordinated Guaranteed Floating-Rate Notes,
maturing in 2005.................................. 55,772 55,039
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series A, with an interest
rate of 8.278%, maturing in 2026................. 250,000 250,000
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series B, with an interest
rate equal to 80 basis points above the
three-month London Interbank Offered Rate,
maturing in 2027................................. 276,921 276,846
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable
Interest Debentures, series C, with an interest
rate of 8.25%, maturing in 2027................... 36,303 36,303
----------- -----------
Long-term debt and bank notes................ $ 5,939,025 $ 5,478,917
=========== ===========
- --------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 60
MBNA CORPORATION AND SUBSIDIARIES
6 7/8% SENIOR NOTES
These notes are direct, unsecured obligations of the Corporation and are not
subordinated to any other indebtedness of the Corporation. Interest on the 6
7/8% Senior Notes is payable semiannually. These notes may not be redeemed prior
to their stated maturity.
SENIOR MEDIUM-TERM NOTES
These notes are direct, unsecured obligations of the Corporation and are not
subordinated to any other indebtedness of the Corporation. The Corporation has
$627.5 million of Fixed-Rate Senior Medium-Term Notes outstanding, with rates
ranging from 5.97% to 7.49%. Interest on the Fixed-Rate Senior Medium-Term Notes
is payable semiannually. The Corporation also has $1.2 billion of Floating-Rate
Senior Medium-Term Notes outstanding. These Floating-Rate Senior Medium-Term
Notes are priced between 27 basis points and 66 basis points over the
three-month London Interbank Offered Rate (LIBOR). Interest on the Floating-Rate
Senior Medium-Term Notes is payable quarterly. At December 31, 1998, the
three-month LIBOR was 5.08%.
BANK NOTES
The Bank Notes are direct, unconditional, unsecured obligations of the Bank, and
are not subordinated to any other obligations of the Bank. The Bank has $772.2
million outstanding of Fixed-Rate Bank Notes, with rates ranging from 5.96% to
7.76%. Interest is payable semiannually. The Bank also has $1.8 billion
outstanding of Floating-Rate Bank Notes, with rates priced between 12.5 basis
points and 37.5 basis points over the three-month LIBOR. Interest is payable
quarterly.
BILATERAL CREDIT FACILITIES
These facilities are direct, unsecured obligations of MBNA International,
and are not subordinated to any other obligations of MBNA International. At
December 31, 1998, MBNA International had fixed-rate facilities totaling Pound
Sterling 13.7 million (approximately $22.8 million) outstanding with interest
payable monthly. MBNA International also had a Pound Sterling 10.0 million
(approximately $16.6 million) floating-rate facility outstanding at December 31,
1998. This draw was priced at 17.5 basis points above the three-month Sterling
LIBOR and is payable semiannually. At December 31, 1998, the three-month
Sterling LIBOR was 6.28%.
SYNDICATED CREDIT FACILITY
The syndicated credit facility is an unsecured obligation of MBNA International
and is not subordinated to any other obligation of MBNA International. Interest
is payable quarterly.
MEDIUM-TERM DEPOSIT NOTES
These notes are direct, unconditional, unsecured obligations of MBNA Canada and
are not subordinated to any other obligation of MBNA Canada. At December 31,
1998, MBNA Canada had CAD$102.0 million (approximately $65.9 million)
outstanding with interest payable semiannually. The Medium-Term Deposit Notes
are unconditionally guaranteed as to payment of principal and interest by the
Bank, and are not redeemable prior to their stated maturity.
7.25% SUBORDINATED NOTES
The 7.25% Subordinated Notes are subordinated to the claims of depositors and
other creditors of the Bank, unsecured, and not subject to redemption prior to
maturity. Interest is payable semiannually. The 7.25% Subordinated Notes were
issued by the Bank in 1992 and qualify as Tier 2 Capital, which is included in
Total Capital, under the risk-based capital guidelines for both banks and bank
holding companies.
6.75% SUBORDINATED NOTES
The 6.75% Subordinated Notes are subordinated to the claims of depositors and
other creditors of the Bank, unsecured, and not subject to redemption prior to
maturity. Interest is payable semiannually. The 6.75% Subordinated Notes were
issued by the Bank in 1998 and qualify as Tier 2 Capital, which is included in
Total Capital, under the risk-based capital guidelines for both banks and bank
holding companies.
SUBORDINATED GUARANTEED FLOATING-RATE NOTES
MBNA International has Pound Sterling 34.0 million (approximately $56.6 million)
of Subordinated Guaranteed Floating-Rate Notes outstanding. Interest on these
notes is priced between 100 basis points and 145 basis points over the
three-month Sterling LIBOR for the first five years, with a 50 basis point
increase for the last five years. These notes were issued by MBNA International
in 1995 and are unsecured. Interest on these notes is payable quarterly or
semiannually. The Subordinated Guaranteed Floating-Rate Notes are redeemable, in
whole or in part, at their principal amount in or after May 2000, at the option
of MBNA International, subject, if required, to the prior consent of the
Financial Services Authority.
The Subordinated Guaranteed Floating-Rate Notes are unconditionally and
irrevocably guaranteed on a subordinated basis by the Bank. The obligations of
the Bank, under this guarantee, also constitute unsecured obligations,
subordinated to the claims of all senior creditors of the Bank.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Corporation, through MBNA Capital A, MBNA Capital B, and MBNA Capital C,
each a statutory business trust created under the laws of the State of Delaware,
issued capital securities and common securities: series A, series B, and series
C, respectively. The series capital securities are presented as "guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures" in the summary of long-term debt and bank notes. MBNA
Corporation is the owner of all the beneficial ownership interests represented
by the common securities of the trusts. The trusts exist for the sole purpose of
issuing the series capital securities and the series common securities and
investing the proceeds in junior subordinated deferrable interest debentures
issued by the Corporation. For financial reporting purposes, the trusts are
treated as wholly owned subsidiaries of the Corporation.
The junior subordinated deferrable interest debentures are the sole assets of
the trusts, and the payments under the junior subordinated deferrable interest
debentures are the sole revenues of the trusts. Interest on the series capital
securities is payable semiannually or quarterly; however, the Corporation has
the right to defer payment of interest on the junior subordinated deferrable
interest debentures at any time, or from time to time, for a period not
exceeding 10 consecutive semiannual periods or 20 consecutive quarterly periods
depending upon the series. If the payment of interest is deferred on the junior
subordinated deferrable interest debentures, distributions on the
56
<PAGE> 61
MBNA CORPORATION AND SUBSIDIARIES
series securities will be deferred and the Corporation also 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 less priority than the junior
subordinated deferrable interest debentures.
The series capital securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated deferrable interest
debentures at their stated maturity or their earlier redemption. The junior
subordinated deferrable interest debentures are redeemable prior to their stated
maturity at the option of the Corporation, on or after the contractually
specified dates, in whole at any time, or in part from time to time, or prior to
the contractually specified dates, in whole only within 90 days following the
occurrence of certain tax or capital treatment events. The series capital
securities have a preference with respect to cash distributions and amounts
payable on liquidation or redemption over the series common securities.
The obligations of the Corporation under the relevant junior subordinated
deferrable interest debentures, indenture, trust agreement, and guarantee in the
aggregate constitute a full and unconditional guarantee by the Corporation of
all trust obligations under the series capital securities issued by the trusts.
The junior subordinated deferrable interest debentures are unsecured and rank
junior and are subordinate in right of payment to all senior debt obligations of
the Corporation.
These securities qualify as regulatory capital for the Corporation.
<TABLE>
<CAPTION>
Minimum Annual Maturities of Long-Term Debt and Bank Notes
- -------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------
Parent
Parent Company and
Company Subsidiaries
- -------------------------------------------------------------------------------------
<S> <C> <C>
1999............................................... $ 591,000 $ 1,118,337
2000............................................... 367,000 1,033,611
2001............................................... 241,000 894,155
2002............................................... 345,000 1,219,150
2003............................................... 384,000 604,000
- -------------------------------------------------------------------------------------
</TABLE>
Deposit liabilities have priority over the claims of other unsecured creditors
of the Bank, including the holders of obligations, such as bank notes, in the
event of liquidation.
Original issue discount and deferred issuance costs are amortized over the terms
of the related debt issuances.
The Corporation has used interest rate swap agreements to change a portion of
fixed-rate long-term debt and bank notes to floating-rate long-term debt and
bank notes to better match the rate sensitivity of the Corporation's assets.
NOTE I: ASSET SECURITIZATION
The Corporation periodically securitizes certain pools of loan receivables in
both public and private markets. Certificates representing undivided interests
in the trust are sold by the trust to investors, while the remaining undivided
interest is retained by the Corporation. The Corporation includes the remaining
undivided interest in loan receivables and had $7.6 billion and $8.5 billion of
such amounts outstanding at December 31, 1998, and 1997, respectively. The
carrying value of these loan receivables approximates fair value. The senior
classes of the asset-backed securities are generally credit-enhanced by a third
party to provide a AAA credit rating at the time of issuance.
On January 1, 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("Statement No. 125"), effective for all
transactions occurring after December 31, 1996. In accordance with Statement No.
125, gains are recognized in securitization income at the time of initial sale
and each subsequent sale of loan receivables in an asset securitization. As a
result, the Corporation recognizes the gain from securitized loans in
securitization income on the Corporation's consolidated statements of income and
includes the related receivable in accounts receivable from securitizations on
the consolidated statements of financial condition at the time of sale. The
related receivable represents the contractual right to receive interest and
other cash flows from the trusts and is reported at market value with unrealized
gains and losses, net of tax, included as a component of stockholders' equity.
At December 31, 1998 and 1997, the amount of this related receivable was $497.0
million and $454.1 million, respectively. Transaction costs incurred by the
Corporation are immediately recognized as a reduction to the gain recorded from
the asset securitization transaction. Securitization income also includes the
other fees received by the Corporation for the servicing of securitized loans.
As a result of the adoption of Statement No. 125, securitization income
increased $17.9 million in 1998 and $325.1 million in 1997. These increases are
not representative of future periods. Prior to 1997, the Corporation recognized
the earnings from each asset securitization over the life of the transaction. In
accordance with Statement No. 125, prior years have not been restated.
The Corporation uses certain assumptions and estimates in determining the gain
recognized at the time of initial sale and each subsequent sale in accordance
with Statement No. 125. These assumptions and estimates include projections
concerning the annual percentage rates charged to Customers, charge-off
experience, loan repayment rates, the cost of funds, and discount rates
commensurate with the risks involved. Significant changes in these assumptions
could impact the realization of the related receivable.
Proceeds from securitization transactions were approximately $10.7 billion,
$13.2 billion, and $11.2 billion in 1998, 1997, and 1996, respectively. At
December 31, 1998 and 1997, approximately $45.3 billion and $37.6 billion of
investor principal (face value) remained outstanding, respectively.
Included in accounts receivable from securitizations in the consolidated
statements of financial condition at December 31, 1998 and 1997, were $294.8
million and $284.1 million, respectively, of receivables subject to a lien by
the providers of the credit enhancement facility for individual securitizations.
The providers of the credit enhancement have no other recourse to the
Corporation. The Corporation does not receive collateral from any party to the
securitization, and the Corporation does not have any risk of counterparty
nonperformance.
57
<PAGE> 62
MBNA CORPORATION AND SUBSIDIARIES
NOTE J: EMPLOYEE BENEFIT PLANS
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Statement No. 132"),
effective for financial statements issued for fiscal years beginning after
December 15, 1997, revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The adoption of Statement No. 132 did not have an impact on the
Corporation's consolidated financial statements. For purposes of comparability,
prior year consolidated financial statement disclosures have been restated to
conform with the requirements of Statement No. 132.
The Corporation has a noncontributory defined benefit pension plan and a
supplemental executive retirement plan ("SERP"). The following illustrates the
combined financial information of the two employee benefit plans.
<TABLE>
<CAPTION>
Benefit Plan Financial Information
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Net benefit obligation, beginning of year.......... $ 157,468 $ 113,853
Service cost--benefits earned during the year... 23,151 20,692
Interest cost on projected benefit obligation... 11,937 10,246
Actuarial loss.................................. 20,724 13,664
Gross benefits paid............................. (1,122) (987)
---------- ----------
Net benefit obligation, end of year............... $ 212,158 $ 157,468
========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year ...... $ 108,737 $ 71,941
Actual return on plan assets ................... 11,242 21,479
Employer contributions.......................... 21,017 16,304
Gross benefits paid............................. (1,122) (987)
---------- ----------
Fair value of plan assets, end of year ............ $ 139,874 $ 108,737
========== ==========
Funded status ..................................... $ (72,284) $ (48,731)
Unrecognized net actuarial loss.................... 36,614 19,851
Unrecognized prior service cost.................... 1,786 (838)
Unrecognized net transition obligation............. 3,491 3,836
---------- ----------
Net amount recognized .......................... $ (30,393) $ (25,882)
========== ==========
Amounts recognized in the consolidated
statements of financial condition consist of:
Prepaid benefit cost............................... $ 2,912 $ -
Accrued benefit cost .............................. (33,305) (25,882)
Additional minimum liability....................... (17,895) (11,938)
Intangible asset and accumulated other
comprehensive income.............................. 17,895 11,938
---------- ----------
Net amount recognized .......................... $ (30,393) $ (25,882)
========== ==========
Significant actuarial assumptions used in
determining the projected benefit obligation
are as follows:
Discount rate................................... 6.75% 7.50%
Rate of compensation increase................... 6.00 6.50
- --------------------------------------------------------------------------------------
</TABLE>
The accumulated benefit obligation in excess of the fair value of SERP plan
assets was $51.2 million at December 31, 1998, and $36.4 million at December 31,
1997. There were no plan assets for the SERP plan at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Net Periodic Benefit Cost
- ---------------------------------------------------------------------------------------
(dollars in thousands)
- ---------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned
during the year........................... $ 23,151 $ 20,692 $ 18,721
Interest cost on projected benefit
obligation................................ 11,937 10,246 8,311
Expected return on plan assets............... (10,031) (6,752) (4,399)
Net amortization and deferral................ 464 630 1,734
--------- --------- ---------
Net periodic benefit cost.............. $ 25,521 $ 24,816 $ 24,367
========= ========= =========
Significant actuarial assumptions used in
determining the net periodic benefit
cost are as follows:
Expected return on plan assets......... 9.00% 9.00% 9.00%
Discount rate.......................... 6.75 7.50 7.75
Rate of compensation increase.......... 6.00 6.50 6.50
- ---------------------------------------------------------------------------------------
</TABLE>
The Corporation lowered the discount rate and rate of compensation increase used
to value its projected benefit obligation for both the pension and SERP plans in
1998 to reflect the current rate environment. The change in assumptions will not
have a material impact on the Corporation's consolidated financial statements
for 1999.
In 1997, the Corporation lowered the discount rate used to value its projected
benefit obligation for both the pension and SERP plans to reflect the then
current rate environment. This change in assumption did not have a material
impact on the Corporation's consolidated financial statements for 1998.
PENSION PLAN
The Corporation's noncontributory defined benefit pension plan covers
substantially all people employed by the Corporation in the United States who
meet certain age and service requirements. The benefits are based on years of
service and the person's compensation during the last 10 years of employment.
The Corporation's funding policy is to make contributions sufficient to achieve
a target-funded ratio on an accumulated benefit obligation basis between 130%
and 140%, and only tax-deductible contributions may be made. Contributions are
intended to provide not only for benefits earned to date, but also for those
expected to be earned in the future.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Corporation's unfunded SERP plan, established in 1991, provides certain
officers with supplemental retirement benefits in excess of limits imposed on
qualified plans by federal tax law.
OTHER PLANS
The Corporation's foreign bank subsidiaries each have pension plans for their
employees. MBNA International has a pension plan that covers substantially all
of its people who meet certain age and service requirements. MBNA International
contributes 6% of an eligible person's base salary. In addition, eligible
participants may contribute up to a maximum of 15% of base salary, with the
first 6% matched at a rate of 50% by MBNAInternational. MBNA Canada has a
registered retirement savings plan that covers substantially all of its people
who meet certain age and service requirements. MBNA Canada contributes 5% of an
eligible person's base salary.
58
<PAGE> 63
MBNA CORPORATION AND SUBSIDIARIES
In addition, eligible participants may contribute up to a maximum of 10% of base
salary, with the first 6% matched at the rate of 50% by MBNA Canada. The
expenses for these plans are charged to other operating expense and were not
material to the Corporation's consolidated financial statements.
401(K) PLUS SAVINGS PLAN
The MBNA Corporation 401(k) Plus Savings Plan ("the 401(k) Plan") is a defined
contribution plan that is intended to qualify under section 401(k) of the
Internal Revenue Code. The 401(k) Plan covers substantially all people in the
United States who have been employed by the Corporation for one or more years
and have completed at least one thousand hours of service in any one year. For
these people, the Corporation automatically contributes 1% of base salary.
Additionally, eligible participants may make pretax and after-tax contributions,
with contributions up to 6% of base salary matched 50% by the Corporation.
Expense charged to operations for the 401(k) Plan was $14.8 million, $12.1
million, and $9.9 million in 1998, 1997, and 1996, respectively.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for certain people upon reaching retirement. Initially, a
plan was established for people aged 45 and older with at least 10 years of
service as of December 31, 1993. The plan was closed to future enrollment
effective December 31, 1998. The plan was extended on January 1, 1999, to people
aged 40 and older with at least 5 years of service. A person must meet the
requirements for early retirement status to be eligible for these benefits. The
Corporation records the estimated cost of benefits provided to its former or
inactive employees on an accrual basis. Expenses charged to other operating
expense were not material to the Corporation's consolidated financial
statements.
NOTE K: STOCK OPTION PLAN
The Corporation's 1997 Long Term Incentive Plan ("1997 Plan") authorizes the
issuance of shares of common stock pursuant to incentive and nonqualified stock
options, and restricted or unrestricted share awards to officers, directors, key
employees, consultants, and advisors of the Corporation. Beginning in 1997, all
stock options and restricted stock awards were granted from this plan. Prior to
1997, grants were made under the Corporation's 1991 Long Term Incentive Plan
("1991 Plan").
During 1998, the shareholders approved an amendment to the 1997 Plan, which
increased the number of shares of the Corporation's Common Stock which may be
issued pursuant to grants made under the 1997 Plan from 24.8 million shares to
32.3 million shares. At December 31, 1998 and 1997, the amount of shares of
common stock available for future grants under the 1997 Plan was 4.8 million
shares and 8.5 million shares, respectively.
Stock options are granted with an exercise price that is not less than the fair
market value of the Corporation's Common Stock on the date the option is
granted, and none may be exercised more than 10 years from the date of grant.
Stock options granted to selected officers and key employees of the Corporation,
other than performance-based common stock options and other special grants,
generally become exercisable for one-fifth of the common shares subject to the
options each year and continue to become exercisable for up to one-fifth per
year until they are completely exercisable after five years. Those granted to
nonemployee directors are exercisable immediately.
<TABLE>
<CAPTION>
Summary of Stock Option Plans Activity
- --------------------------------------------------------------------------------------
(shares in thousands)
- --------------------------------------------------------------------------------------
Number Weighted Average
of Shares Exercise Price
- --------------------------------------------------------------------------------------
<S> <C> <C>
1998
Options outstanding, beginning of year........... 65,261 $ 7.47
Granted........................................ 10,483 22.07
Exercised...................................... (9,821) 4.32
Canceled....................................... (1,501) 13.52
-------
Options outstanding, end of year.................. 64,422 10.19
=======
Options exercisable, end of year.................. 35,770
=======
Weighted average fair value of options
granted during the year.......................... $ 6.99
=======
1997
Options outstanding, beginning of year........... 58,244 $ 5.22
Granted........................................ 15,199 14.18
Exercised...................................... (8,182) 3.90
Canceled....................................... - -
-------
Options outstanding, end of year.................. 65,261 7.47
=======
Options exercisable, end of year.................. 25,955
=======
Weighted average fair value of options
granted during the year.......................... $ 4.91
=======
1996
Options outstanding, beginning of year............ 57,069 $ 4.61
Granted........................................ 7,778 8.23
Exercised...................................... (6,573) 3.48
Canceled....................................... (30) 4.11
-------
Options outstanding, end of year.................. 58,244 5.22
=======
Options exercisable, end of year.................. 21,373
=======
Weighted average fair value of options
granted during the year.......................... $ 2.37
=======
- ------------------------------------------------------------------------------------
</TABLE>
During 1998, 1.8 million shares of performance-based common stock options were
granted under the 1997 Plan. In 1997, performance-based common stock options for
13.4 million shares were granted, while 3.9 million shares were granted in 1996.
These options become exercisable when the Corporation achieves certain net
income targets, net income and stock price targets, or outstanding managed loan
targets. If these conditions are not achieved, these options then become
exercisable for one day on the day before their termination date.
59
<PAGE> 64
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Summary of Stock Options Outstanding
- ---------------------------------------------------------------------------------------------------------------------------------
(shares in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices of Shares Contractual Life Exercise Price of Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 to $ 4.99 19,929 5.0 YEARS $ 4.23 19,929 $ 4.23
5.00 to 9.99 19,563 6.9 7.13 11,795 6.88
10.00 to 14.99 12,250 8.3 13.13 485 12.55
15.00 to 19.99 2,356 9.0 18.28 137 17.52
20.00 to 24.99 10,324 9.4 22.16 3,424 22.33
------- -------
$ 1.00 to $24.99 64,422 35,770
======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, the Corporation granted 2.3 million stock options which were
immediately exercisable following the effective date of the grant, 225,000 stock
options which become exercisable in October 2001, and 75,000 stock options which
become exercisable in three equal installments beginning in January 1999. The
Corporation also granted 750,000 stock options during 1997 which are exercisable
in July 2001. In 1996, 54,000 options were granted subject to shareholder
approval of the 1997 Plan and are included in the Summary of Stock Option Plans
Activity in 1997.
Restricted shares were also issued under the 1997 Plan to the Corporation's
senior officers. A total of 1.5 million common shares, net of forfeited
restricted shares, and 1.3 million common shares, with an approximate aggregate
market value of $31.8 million and $22.1 million at the time of grant, were
issued in 1998 and 1997, respectively. A total of 835,000 common shares, with an
approximate aggregate market value of $9.5 million at the time of grant, were
issued in 1996 under the 1991 Plan. The market value of these restricted shares
at the date of grant is amortized into expense over a period less than the
restriction period. If the restrictions are removed, generally upon death,
disability, or retirement, any remaining unamortized market value of the
restricted shares is expensed.
To the extent stock options are exercised and restricted shares are awarded from
time to time under the 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.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123"), defines a fair-value-based method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
APB Opinion No. 25. As permitted by Statement No. 123, the Corporation elected
to retain the intrinsic-value-based method of accounting for stock option grants
in accordance with APB Opinion No. 25. Statement No. 123 requires certain
additional disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. In accordance with Statement
No. 123, the Black-Scholes option pricing model is one technique allowed to
determine the fair value of options. The model uses different assumptions that
can significantly affect the fair value of the options. The derived fair value
estimates cannot be substantiated by comparison to independent markets.
The Corporation estimated the fair value of each option grant on the date of
grant with the following weighted average assumptions used in the Black-Scholes
option pricing model for grants in 1998, 1997, and 1996, respectively: dividend
yield of 1.59%, 2.11%, and 2.71%; expected volatility of 30.81%, 30.08%, and
28.74%; risk-free interest rates of 5.44%, 6.63%, and 6.46%; and expected lives
of 5.1 years, 6.5 years, and 5.4 years.
If the fair value of option grants determined in accordance with Statement
No. 123 had been included in operating expenses in 1998, 1997, and 1996, the
Corporation's net income, earnings per common share, and earnings per common
share--assuming dilution on a pro forma basis would have been as presented in
the following table. The compensation expense recognized in pro forma net income
for 1998, 1997, and 1996 may not be representative of the effects on pro forma
net income for future years.
<TABLE>
<CAPTION>
Pro Forma Net Income and Earnings Per Common Share
- ------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported................... $ 776,266 $ 622,500 $ 474,495
Pro forma..................... 746,138 608,838 466,020
EARNINGS PER COMMON SHARE
As reported................... 1.01 .80 .61
Pro forma..................... .97 .78 .60
EARNINGS PER COMMON SHARE--
ASSUMING DILUTION
As reported................... .97 .76 .59
Pro forma..................... .93 .75 .58
- ------------------------------------------------------------------------------------
</TABLE>
NOTE L: STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Corporation is authorized to issue 20.0 million shares of preferred stock
with a par value of $.01 per share. In 1995, the Corporation issued 6.0 million
shares of 7 1/2% Cumulative Preferred Stock, Series A, with a $25 stated value
per share. In 1996, the Corporation issued 6.0 million shares of Adjustable Rate
Cumulative Preferred Stock, Series B, with a $25 stated value per share.
60
<PAGE> 65
MBNA CORPORATION AND SUBSIDIARIES
The Corporation repurchased 2.0 million shares of Adjustable Rate Cumulative
Preferred Stock, Series B, during 1997 for $52.5 million. There were 4.0 million
shares of Adjustable Rate Cumulative Preferred Stock, Series B, outstanding at
December 31, 1998 and 1997.
During 1997, the Corporation, through MBNA Capital C, issued $36.3 million of
8.25% Trust Originated Preferred Securities (guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
series C) in exchange for 1.5 million shares of 7 1/2% Cumulative Preferred
Stock, Series A. After the exchange, the Corporation had 4.5 million shares of
7 1/2% Cumulative Preferred Stock, Series A, outstanding at December 31, 1998
and 1997.
Shares of the series preferred stock are not convertible into any other
securities of the Corporation. The series preferred stock will not be entitled
to the benefits of any sinking fund. All preferred shares rank senior to common
shares both as to dividends and liquidation preference, but have no general
voting rights. In the event that the equivalent of six full quarterly dividend
periods are in arrears, the holders of the outstanding shares of the preferred
stock (voting as a single class) will be entitled to vote for the election of
two additional directors to serve until all dividends in arrears have been paid
in full.
Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly in arrears on January 15, April 15,
July 15, and October 15 of each year, commencing on January 15, 1996, at a rate
of 7.50% per annum. The shares of the Series A Preferred Stock are redeemable,
in whole or in part, solely at the option of the Corporation on or after January
15, 2001, at a price of $25 per share, plus accrued and unpaid dividends.
Dividends on the Series B Preferred Stock are cumulative from the date of
original issue and are payable quarterly in arrears on January 15, April 15,
July 15, and October 15 of each year, commencing on October 15, 1996. The
dividend rate for any dividend period will be equal to 99.0% of the highest of
the Treasury Bill Rate, the Ten-Year Constant Maturity Rate, and the Thirty-Year
Constant Maturity Rate, as determined in advance of such dividend period, but
not less than 5.5% per annum or more than 11.5% per annum. The amount of
dividends payable with respect to the Series B Preferred Stock will be adjusted
in the event of certain amendments to the Internal Revenue Code of 1986 ("the
Code") with respect to the dividends-received deduction. The shares of the
Series B Preferred Stock are redeemable, in whole or in part, solely at the
option of the Corporation on or after October 15, 2001, at a price of $25 per
share, plus accrued and unpaid dividends. The Series B Preferred Stock may also
be redeemed in whole, at the option of the Corporation, in the event of certain
amendments to the Code with respect to the dividends-received deduction.
The Corporation may, from time to time, acquire series preferred stock in the
open market by tender offer, exchange offer, or otherwise. The Corporation's
decision to make such acquisitions is dependent on many factors, including
market conditions in effect at the time of any contemplated acquisition.
The Board of Directors declared the following dividends for the Corporation's
Series A and Series B Preferred Stock.
<TABLE>
<CAPTION>
Preferred Stock Dividend Summary
- ----------------------------------------------------------------------------------------------------------------------------------
Series A Series B
- ----------------------------------------------------------------------------------------------------------------------------------
Declaration Payment Dividend Dividend per Dividend Dividend per
Date Date Rate Preferred Share Rate Preferred Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 15, 1999 APRIL 15, 1999 7.50% $ .46875 5.50% $ .34380
OCTOBER 13, 1998 JANUARY 15, 1999 7.50 .46875 5.50 .34380
JULY 14, 1998 OCTOBER 15, 1998 7.50 .46875 5.58 .34900
APRIL 14, 1998 JULY 15, 1998 7.50 .46875 5.85 .36540
JANUARY 13, 1998 APRIL 15, 1998 7.50 .46875 5.86 .36600
October 14, 1997 January 15, 1998 7.50 .46875 6.29 .39320
July 15, 1997 October 15, 1997 7.50 .46875 6.66 .41610
April 21, 1997 July 15, 1997 7.50 .46875 6.98 .43622
January 14, 1997 April 15, 1997 7.50 .46875 6.56 .40990
October 15, 1996 January 15, 1997 7.50 .46875 6.83 .42690
September 24, 1996 October 15, 1996 - - 7.00 .10690
July 11, 1996 October 15, 1996 7.50 .46875 - -
April 18, 1996 July 15, 1996 7.50 .46875 - -
January 17, 1996 April 15, 1996 7.50 .46875 - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK
On July 14, 1998, the Board of Directors approved a 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 September 15, 1998. Accordingly, all
common share and per common share data have been restated to reflect the
Corporation's stock split.
On April 21, 1998, the stockholders of the Corporation approved an amendment to
the Corporation's charter to increase the number of authorized shares of common
stock from 700.0 million shares to 1.5 billion shares. The amendment became
effective April 28, 1998.
61
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MBNA CORPORATION AND SUBSIDIARIES
NOTE M: CASH AND DIVIDEND RESTRICTIONS
The Bank is required by the Federal Reserve Bank to maintain cash reserves
against certain categories of average deposit liabilities. During 1998, the
average amount of these reserves was $1.2 million, after deducting currency and
coin holdings. During 1997, these required cash reserves were satisfied by
currency and coin holdings.
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 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 for consecutive
periods covering 10 semiannual periods or 20 consecutive quarterly periods,
depending upon 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 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 transfer 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 December 31, 1998, the
amount of retained earnings available for declaration and payment of dividends
from the Bank to the Corporation was $1.4 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 December 31, 1998. If this facility had been
drawn upon as of December 31, 1998, the amount of retained earnings available
for declaration of dividends would have been further limited to $645.9 million.
NOTE N: 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
<TABLE>
<CAPTION>
Capital Adequacy
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
To Be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
MBNA CORPORATION AND SUBSIDIARIES
Tier 1 Capital (to Risk-Weighted Assets):
MBNACorporation............................. $ 2,829,507 11.44% $ 989,510 4.00% (a)
MBNAAmerica Bank, N.A....................... 2,625,832 11.69 898,139 4.00 $ 1,347,208 6.00%
Total Capital (to Risk-Weighted Assets):
MBNACorporation............................. 3,454,181 13.96 1,979,021 8.00 (a)
MBNAAmerica Bank, N.A....................... 3,205,671 14.28 1,796,278 8.00 2,245,347 10.00
Tier 1 Capital (to Average Assets):
MBNACorporation............................. 2,829,507 11.34 997,628 4.00 (a)
MBNAAmerica Bank, N.A....................... 2,625,832 11.55 909,112 4.00 1,136,390 5.00
DECEMBER 31, 1997
Tier 1 Capital (to Risk-Weighted Assets):
MBNACorporation............................. $ 2,283,775 9.82% $ 930,006 4.00% (a)
MBNAAmerica Bank, N.A....................... 2,034,966 9.56 851,237 4.00 $ 1,276,856 6.00%
Total Capital (to Risk-Weighted Assets):
MBNACorporation............................. 2,787,958 11.99 1,860,013 8.00 (a)
MBNAAmerica Bank, N.A....................... 2,353,460 11.06 1,702,474 8.00 2,128,093 10.00
Tier 1 Capital (to Average Assets):
MBNACorporation............................. 2,283,775 11.13 820,969 4.00 (a)
MBNAAmerica Bank, N.A....................... 2,034,966 10.90 746,553 4.00 933,191 5.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Not applicable for bank holding companies.
62
<PAGE> 67
MBNA CORPORATION AND SUBSIDIARIES
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 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 December 31,
1998, 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 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.
NOTE O: COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Corporation had outstanding lines of credit of $317.8
billion committed to its Customers. Of that total commitment, $258.2 billion is
unused. While this amount represents the total available lines of credit to
Customers, the Corporation has not experienced and does not anticipate that all
of its Customers will exercise their entire available line of credit at any
given point in time. The Corporation has the right to reduce or cancel these
available lines of credit at any time.
The Corporation has two one-year revolving credit facilities totaling $75.0
million. These credit facilities were renewed during 1998 with $25.0 million
committed through March 1999 and $50.0 million committed through September 1999.
The Corporation may take advances under these facilities subject to certain
conditions, including requirements for tangible net worth. These facilities may
be used for general corporate purposes and were not drawn upon as of December
31, 1998.
The Bank has a $2.0 billion syndicated revolving credit facility committed
through February 2001. Advances are subject to covenants and conditions
customary in a transaction of this kind. These conditions include requirements
for tangible net worth of at least $760.0 million, increased by 40% of the
Bank's net income earned after September 30, 1996, and managed loan receivables
90 days or more past due plus nonaccrual receivables not to exceed 6% of managed
credit card receivables. Should managed credit card losses equal or exceed 5%
for a period of four consecutive quarters, a ratio of qualifying loan
receivables to outstanding borrowings under the facility of at least 115% will
be required in order to draw under this facility. The facility may be used for
general corporate purposes and was not drawn upon as of December 31, 1998.
MBNA International has six bilateral credit facilities, with maturities ranging
from 1999 to 2002, totaling 60.0 million Pound Sterling (approximately $99.8
million at December 31, 1998). MBNA International may take advances under the
facilities subject to certain conditions, including requirements for tangible
net worth. The facilities may be used for general corporate purposes. At
December 31, 1998, MBNA International had 30.0 million Pound Sterling
(approximately $49.9 million) available to be drawn under the facilities.
In addition, MBNA International has a 300.0 million Pound Sterling
(approximately $499.1 million at December 31, 1998) multi-currency syndicated
revolving credit facility committed through October 2000. MBNA International may
take advances under the facility subject to certain conditions, including
requirements for tangible net worth, outstanding loan receivables, and account
delinquencies. The facility may be used for general corporate purposes and had
20.0 million IRPound Sterling (approximately $29.8 million) outstanding at
December 31, 1998. These borrowings, which are included as part of short-term
borrowings in the consolidated statements of financial condition, matured and
were repaid in January 1999.
MBNA Canada has a CAD$300.0 million (approximately $193.7 million at December
31, 1998) multi-currency syndicated revolving credit facility committed through
December 2001. This facility replaced MBNA Canada's previous CAD$125.0 million
multi-currency syndicated revolving credit facility. MBNA Canada may take
advances under the facility subject to certain conditions customary in a
transaction of this kind. The facility may be used for general corporate
purposes and was not drawn upon as of December 31, 1998.
NOTE P: OTHER OPERATING EXPENSE
In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") was issued. This
statement, effective for financial statements issued for fiscal years beginning
after December 15, 1998, provides guidance on accounting for the costs of
computer software developed or obtained for internal use. Earlier application is
encouraged. The Corporation adopted SOP 98-1 in 1998. The adoption of SOP 98-1
did not have a material impact on the Corporation's consolidated financial
statements.
During 1996, the Corporation recognized $54.3 million ($32.8 million, net of
tax) in other operating expenses related to the launch of the MBNA Platinum Plus
MasterCard and Visa program.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Other Expense Component of Other Operating Expense
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased services........................... $ 226,773 $ 287,016 $ 177,701
Advertising.................................. 146,896 133,124 103,407
Collection................................... 31,987 27,378 23,914
Stationery and supplies...................... 32,376 30,960 26,155
Service bureau............................... 35,159 31,516 25,112
Postage and delivery......................... 194,321 186,015 114,591
Telephone usage.............................. 60,538 57,647 49,016
Credit card fraud losses..................... 81,958 64,572 47,307
Amortization of intangible assets............ 54,155 31,290 14,577
Computer software............................ 49,419 46,227 23,880
Other ....................................... 131,859 101,375 69,599
---------- --------- ---------
Total other operating expense............. $1,045,441 $ 997,120 $ 675,259
========== ========= =========
</TABLE>
63
<PAGE> 68
MBNA CORPORATION AND SUBSIDIARIES
NOTE Q: COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement No. 130").
Statement No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components in the financial statements. The
adoption of Statement No. 130 had no impact on the Corporation's consolidated
financial statements. Statement No. 130 requires the impact of foreign currency
translation, unrealized gains or losses on the Corporation's investment
securities available-for-sale and other financial instruments, and changes in
certain minimum benefit plan liabilities, which, prior to adoption, were
reported separately in stockholders' equity, to be included in other
comprehensive income. For purposes of comparability, prior years' consolidated
financial statements have been reclassified to conform to the requirements of
Statement No. 130.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income Components
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Before Tax Tax (Benefit) Net of Tax
Year Ended Amount Expense Amount
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
<S> <C> <C> <C>
Foreign currency translation ...................................... $ (510) $ (8) $ (502)
Net unrealized losses on investment securities available-for-sale
and other financial instruments .................................... (7,332) (2,709) (4,623)
Minimum benefit plan liability adjustment ........................... (7,205) (2,630) (4,575)
------------- ------------ ------------
Other comprehensive income .................................... $ (15,047) $ (5,347) $ (9,700)
============= ============ ============
DECEMBER 31, 1997
Foreign currency translation ........................................ $ (4,588) $ 398 $ (4,986)
Net unrealized gains on investment securities available-for-sale
and other financial instruments .................................... 9,570 3,510 6,060
------------- ------------ ------------
Other comprehensive income .................................... $ 4,982 $ 3,908 $ 1,074
============= ============ ============
DECEMBER 31, 1996
Foreign currency translation ........................................ $ 5,839 $ (1,680) $ 7,519
Net unrealized gains on investment securities available-for-sale .... 900 366 534
------------- ------------ ------------
Other comprehensive income .................................... $ 6,739 $ (1,314) $ 8,053
============= ============ ============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE R: INCOME TAXES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Reconciliation of Statutory Income Taxes
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes............. $ 1,254,065 $ 1,022,108 $ 731,294
Statutory tax rate..................... 35% 35% 35%
------------ ------------ ------------
Income tax at statutory tax rate....... 438,923 357,738 255,953
State taxes, net of federal benefit.... 17,800 11,182 9,751
Other.................................. 21,076 30,688 23,888
------------ ------------ ------------
Applicable income taxes................ 477,799 399,608 289,592
Tax benefit from Customer-based
intangible assets..................... - - (32,793)
------------ ------------ ------------
Total income taxes.................. $ 477,799 $ 399,608 $ 256,799
============ ============ ============
Current income taxes:
U.S. federal......................... $ 410,532 $ 324,891 $ 267,692
U.S. state and local................. 27,384 17,203 15,001
Foreign.............................. 33,194 16,165 6,112
------------ ------------ ------------
Total current income taxes.......... 471,110 358,259 288,805
Deferred income taxes (benefit):
U.S. federal, state, and local....... 409 44,479 (25,920)
Foreign.............................. 6,280 (3,130) (6,086)
------------ ------------ ------------
Total deferred income taxes (benefit) 6,689 41,349 (32,006)
------------ ------------ ------------
Total income taxes.................. $ 477,799 $ 399,608 $ 256,799
============ ============ ============
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Summary of Net Deferred Tax Assets
- --------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Reserve for possible credit losses................. $ 61,887 $ 51,979
Customer-based intangible assets................... 54,386 65,927
Other deferred tax assets.......................... 175,306 141,111
------------ ------------
Total deferred tax assets....................... 291,579 259,017
Valuation allowance............................... - -
------------ ------------
Total deferred tax assets less valuation
allowance...................................... 291,579 259,017
Total deferred tax liabilities.................. (239,092) (205,333)
------------ ------------
Net deferred tax assets......................... $ 52,487 $ 53,684
============ ============
- ---------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 69
MBNA CORPORATION AND SUBSIDIARIES
Net income for 1996 included a $32.8 million tax benefit related to the
recognition of tax deductions for the amortization of Customer-based intangible
assets acquired in connection with the Corporation's 1991 initial public
offering. The initial public offering resulted in certain Customer-based
intangible assets being recorded for income tax purposes only, creating future
tax deductions relating to these intangible assets. The Corporation did not
initially recognize, for financial statement purposes, any tax benefit related
to these assets because there were uncertainties concerning the tax treatment of
such assets. In 1993, the U.S. Supreme Court affirmed that Customer-based
intangible assets may be amortized for tax purposes. Accordingly, the
Corporation recognized a portion of the tax benefit related to the
Customer-based intangible assets. During 1996, the Internal Revenue Service
completed an audit of the Corporation's 1991 and 1992 tax returns and entered
into a final agreement with the Corporation regarding the tax treatment of the
intangible assets. As a result, the Corporation recognized the remaining tax
benefit relating to the intangible assets.
NOTE S: FOREIGN ACTIVITIES
The Corporation's foreign activities are primarily performed through the Bank's
two foreign bank subsidiaries, MBNA International and MBNA Canada. The Bank also
has a foreign branch office in the Grand Cayman Islands, which invests in
interest-earning time deposits and accepts eurodollar deposits. This branch also
participates in the loan receivables securitized by MBNA International.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Foreign Loan Receivables Distribution
- -------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------
LOANS HELD FOR SECURITIZATION
<S> <C> <C>
Credit card..................................... $ 442,517 $ 602,798
------------ ------------
Total loans held for securitization.......... 442,517 602,798
LOAN PORTFOLIO
Credit card..................................... 993,945 354,288
Other consumer.................................. 52,537 244,439
------------ ------------
Total loan portfolio......................... 1,046,482 598,727
------------ ------------
Total loan receivables....................... $ 1,488,999 $ 1,201,525
============ ============
- -------------------------------------------------------------------------------------
</TABLE>
Because certain foreign operations are integrated with many of the Bank's
domestic operations, estimates and assumptions have been made to assign certain
income and expense items between domestic and foreign operations. Amounts are
allocated for interest costs to users of funds, capital invested, and for other
items incurred. The provision for possible credit losses is allocated based on
specific charge-off experience and risk characteristics of the foreign loan
receivables.
The Corporation does not have a significant foreign geographic area in which
total assets, total income, income before income taxes, or net income exceeds
10% of the comparable amount reported in the consolidated financial statements.
Therefore, the Corporation's foreign financial information is presented on a
combined basis.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Selected Financial Data
(dollars in thousands)
- ---------------------------------------------------------------------------------------
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------
DOMESTIC
<S> <C> <C> <C>
Total assets $ 21,017,293 $ 18,386,590 $ 15,625,584
Total income 4,529,070 4,180,772 3,080,178
Income before income taxes 1,200,334 993,222 731,950
Net income 748,892 602,962 473,345
FOREIGN
Total assets 4,788,967 2,918,923 1,409,758
Total income 666,071 343,120 199,012
Income (loss) before income taxes 53,731 28,886 (656)
Net income 27,374 19,538 1,150
MBNA CORPORATION
Total assets 25,806,260 21,305,513 17,035,342
Total income 5,195,141 4,523,892 3,279,190
Income before income taxes 1,254,065 1,022,108 731,294
Net income 776,266 622,500 474,495
- ---------------------------------------------------------------------------------------
</TABLE>
NOTE T: RELATED PARTY TRANSACTIONS
The Corporation's directors and executive officers hold credit cards or other
lines of credit issued by the Bank on the same terms prevailing at the time for
those issued to other persons.
NOTE U: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following presents the fair value of financial instruments as of December
31, 1998 and 1997, whether or not recognized in the Corporation's consolidated
statements of financial condition, for which it is practicable to estimate that
value. In addition, certain financial instruments and all nonfinancial
instruments are excluded in accordance with generally accepted accounting
principles. In cases where quoted market prices are not available, fair values
are estimated using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The derived fair value
estimates cannot be substantiated by comparison to independent market values
and, in many cases, could not be realized in an immediate settlement of the
instrument. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
FINANCIAL ASSETS
CASH AND DUE FROM BANKS: Cash and due from banks are carried at an amount that
approximates fair value.
MONEY MARKET INSTRUMENTS: Money market instruments include interest-earning time
deposits in other banks and federal funds sold and securities purchased under
resale agreements. As a result of the short-term nature of these instruments,
the carrying amounts reported in the consolidated statements of financial
condition approximate these assets' fair value.
INVESTMENT SECURITIES: Fair value is based on the market value of the individual
investment security without regard to any premium or discount that may result
from concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. Market value for investment
securities is based on quoted market prices or dealer quotes.
65
<PAGE> 70
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Values and Estimated Fair Values of the Corporation's Financial Assets
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
--------------------------------------------------------------------
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks...................................... $ 382,882 $ 382,882 $ 263,064 $ 263,064
Money market instruments..................................... 3,561,215 3,561,215 2,086,065 2,086,065
Investment securities:
Available-for-sale........................................ 1,663,704 1,663,704 2,162,464 2,162,464
Held-to-maturity.......................................... 216,020 211,473 346,180 341,868
Loans held for securitization................................ 1,692,268 1,692,268 2,900,198 2,900,198
Loan portfolio, net of reserve for possible credit losses.... 11,559,188 11,559,188 8,099,400 8,099,400
Accrued income receivable.................................... 193,019 193,019 146,964 146,964
Accounts receivable from securitizations..................... 3,595,556 3,590,000 2,835,831 2,825,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS HELD FOR SECURITIZATION: The carrying value of loans held for
securitization approximates its fair value due to the short-term nature of these
assets.
LOAN PORTFOLIO: The carrying value of the Corporation's loan portfolio
approximates its fair value. The loan portfolio includes variable-rate loans,
with interest rates that approximate current market rates, and fixed-rate loans,
which can be repriced frequently at market rates.
The valuations of loans held for securitization and loan portfolio do not
include the value that relates to estimated cash flows from new loans generated
from existing Customers over the remaining life of the loan receivables or the
value of established Customer relationships. Accordingly, the fair values of
loans held for securitization and the loan portfolio do not represent the
underlying value of the Corporation's loan receivables.
ACCRUED INCOME RECEIVABLE: Accrued income receivable includes interest income
earned but not yet received from investment securities, money market
instruments, loan receivables, and interest rate swap agreements. The carrying
amount reported in the consolidated statements of financial condition
approximates the fair value of these assets due to their relatively short-term
nature.
ACCOUNTS RECEIVABLE FROM SECURITIZATIONS: The fair value of accounts receivable
from securitizations is determined by discounting the future cash flows from the
securitizations using rates currently available to the Corporation for
instruments with similar terms and remaining maturities.
FINANCIAL LIABILITIES
TOTAL DEPOSITS: The fair value of noninterest-bearing demand deposits, savings
accounts, interest-bearing transaction accounts, and money market deposit
accounts is equal to the amount payable upon demand. The fair value of time
deposits is estimated by discounting the future cash flows of the stated
maturities using estimated rates currently offered for like deposits. The
valuation does not include the benefit that results from the low-cost funding
provided by the various deposit liabilities compared to the cost of borrowing
funds in the market.
SHORT-TERM BORROWINGS: Short-term borrowings include federal funds purchased and
securities sold under repurchase agreements, short-term bank notes, and other
short-term borrowings. The fair value of short-term borrowings approximates the
carrying value of these instruments based upon their short-term nature.
LONG-TERM DEBT AND BANK NOTES: The fair value of primarily all of the
Corporation's long-term debt and bank notes is estimated by discounting the
future cash flows of the stated maturities of the long-term debt and bank notes
using estimated rates currently offered for similar debt obligations. The fair
value of the Corporation's guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures is based upon
its quoted market price.
ACCRUED INTEREST PAYABLE: Accrued interest payable includes interest expensed
but not yet paid for deposits, short-term borrowings, long-term debt and bank
notes, and interest rate swap agreements. The carrying amount approximates the
fair value of these liabilities due to their relatively short-term nature.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Carrying Values and Estimated Fair Values of the Corporation's Financial Liabilities
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
----------------------------------------------------------------------------
FINANCIAL LIABILITIES
<S> <C> <C> <C> <C>
Total deposits............................ $ 15,407,040 $ 15,613,000 $ 12,913,213 $ 13,052,000
Short-term borrowings..................... 1,231,195 1,231,195 192,623 192,623
Long-term debt and bank notes............. 5,939,025 6,054,000 5,478,917 5,532,000
Accrued interest payable.................. 153,201 153,201 137,215 137,215
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 71
MBNA CORPORATION AND SUBSIDIARIES
NOTE V: OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
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 uses forward exchange contracts to
reduce its exposure to foreign currency exchange rate risk primarily related to
its foreign bank subsidiaries.
The Corporation also entered into a foreign exchange swap agreement to
facilitate the issuance of a portion of the Subordinated Guaranteed
Floating-Rate Notes by MBNA International and offset this exposure to foreign
currency exchange rate risk with an additional foreign exchange swap agreement.
These foreign exchange swap agreements have no impact on the Corporation's
consolidated financial statements.
The fair value of the Corporation's off-balance-sheet financial instruments is
represented by the estimated unrealized gains or losses as determined by quoted
market prices or dealer quotes. This value generally reflects the estimated
amounts that the Corporation would receive or pay to terminate the instruments
at the reporting date.
As of December 31, 1998 and 1997, the Corporation had interest rate swap
agreements with underlying notional amounts of $655.0 million and $350.0
million, respectively. These agreements had a net unrealized gain of
approximately $24.0 million and $5.0 million at December 31, 1998 and 1997,
respectively.
The notional amounts underlying the Corporation's forward exchange contracts at
December 31, 1998 and 1997, were $857.1 million and $512.1 million,
respectively. These contracts had a net unrealized gain of $4.9 million at
December 31, 1998 and $2.3 million at December 31, 1997.
The notional value underlying the Corporation's foreign exchange swap agreements
at December 31, 1998 and 1997, was $40.0 million, and did not have a net
realizable value for either period.
Although off-balance-sheet financial instruments do not expose the Corporation
to credit risk equal to the notional amount, the Corporation is exposed to
credit risk if the counterparty fails to perform. This credit risk is measured
as the gross unrealized gain on the financial instrument. The Corporation enters
into swap agreements with counterparties who have credit ratings of investment
grade as rated by the major rating agencies.
There were no securities pledged under the terms of the interest rate swap
agreements at December 31, 1998 and 1997.
At December 31, 1998, the Corporation had interest rate swap agreements maturing
in varying amounts from 1999 through 2008. The Corporation's forward exchange
contracts mature in 1999 and the foreign exchange swap agreements mature in
2005.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Summary of Activity of Off-Balance-Sheet Financial Instruments (Notional Amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Forward Exchange Interest Rate Foreign Exchange
Contracts Swap Agreements Swap Agreements Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......... $ 269,973 $ 1,350,000 $ 40,000 $ 1,659,973
Additions........................... 2,641,344 - - 2,641,344
Maturities.......................... (2,491,062) - - (2,491,062)
--------------- ---------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1996.......... 420,255 1,350,000 40,000 1,810,255
Additions........................... 2,825,310 - - 2,825,310
Maturities.......................... (2,733,440) (1,000,000) - (3,733,440)
--------------- ---------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1997.......... 512,125 350,000 40,000 902,125
Additions........................... 3,939,639 305,000 - 4,244,639
Maturities.......................... (3,594,633) - - (3,594,633)
--------------- ---------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1998 ......... $ 857,131 $ 655,000 $ 40,000 $ 1,552,131
================ ================= ================= =================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 72
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Significant Classes of Off-Balance-Sheet Financial Instruments
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average
- -----------------------------------------------------------------------------------------------------------------------------
Notional Maturity Estimated
Amount Receive Rate (a) Pay Rate (b) in Years Fair Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Forward exchange contracts--pounds sterling.. $ 834,686 1.67 1.66 .2
Gross unrealized gains.................... $ 6,462
Gross unrealized losses................... (1,762)
--------------
Total.................................. $ 4,700
==============
Forward exchange contracts--Irish punts...... 15,162 1.51 1.49 .1
Gross unrealized gains.................... $ 190
Gross unrealized losses................... -
--------------
Total.................................. $ 190
==============
Forward exchange contracts--U.S. dollars..... 7,283 .60 .60 .1
Gross unrealized gains.................... $ 3
Gross unrealized losses................... (29)
--------------
Total.................................. $ (26)
==============
Interest rate swap agreements................ 655,000 6.28% 5.22% 5.2
Gross unrealized gains.................... $ 24,031
Gross unrealized losses................... -
--------------
Total.................................. $ 24,031
==============
Foreign exchange swap agreements............. 40,000 1.66 1.66 6.4
Gross unrealized gains.................... $ 835
Gross unrealized losses................... (835)
--------------
Total.................................. $ -
==============
DECEMBER 31, 1997
Forward exchange contracts--pounds sterling.. $ 512,125 1.65 1.64 .1
Gross unrealized gains.................... $ 6,360
Gross unrealized losses................... (4,022)
--------------
Total.................................. $ 2,338
==============
Interest rate swap agreements................ 350,000 6.45% 5.91% 3.4
Gross unrealized gains.................... $ 5,033
Gross unrealized losses................... -
--------------
Total.................................. $ 5,033
==============
Foreign exchange swap agreements............. 40,000 1.64 1.64 7.4
Gross unrealized gains.................... $ 765
Gross unrealized losses................... (765)
--------------
Total.................................. $ -
==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Weighted average receive rate represents the fixed-rate contracted for at
the time the off-balance-sheet financial instruments were entered into.
(b) Weighted average pay rate for the forward exchange contracts represents the
spot rate for the currency the forward exchange contract is denominated in
at December 31, 1998 and 1997, respectively. The pay rate for the interest
rate swap agreements is generally based upon the three-month LIBOR and is
the rate in effect at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Expected Maturities of Off-Balance-Sheet Financial Instruments
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 Within 1 Year 1-5 Years 6-10 Years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FORWARD EXCHANGE CONTRACTS
Notional amount....................... $ 857,131 $ - $ - $ 857,131
Estimated fair value.................. 4,864 - - 4,864
INTEREST RATE SWAP AGREEMENTS
Notional amount....................... 150,000 255,000 250,000 655,000
Estimated fair value.................. 1,230 10,884 11,917 24,031
FOREIGN EXCHANGE SWAP AGREEMENTS
Notional amount....................... - - 40,000 40,000
Estimated fair value.................. - - - -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE> 73
MBNA CORPORATION AND SUBSIDIARIES
NOTE W: SEGMENT REPORTING
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("Statement No. 131"),
was issued, effective for fiscal years beginning after December 15, 1997.
Statement No. 131 establishes standards for the disclosure of selected
information pertaining to operating segments of a public company in its interim
and annual financial statements. The adoption of Statement No. 131 did not have
an impact on the Corporation's consolidated financial statements.
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's Chief Operating Decision-Maker allocates resources on a
managed basis. Therefore, the financial information provided to the
Corporation's Chief Operating Decision-Maker reflects the Corporation on a
managed basis. The managed basis reflects the Corporation's interest income,
interchange, other fees, and insurance income in excess of interest paid to
Certificateholders, credit losses, and other trust expenses before it is
converted into securitization income due to asset securitizations. The managed
results also include the impact of Statement No. 125.
Therefore, an adjustment is required to reconcile the managed financial
information to the Corporation's reported financial information shown in its
consolidated financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Segment Reporting
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Total Securitization Total
Year Ended Managed Adjustment Consolidated
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Interest income ............................................................. $ 7,856,703 $(5,890,531) $ 1,966,172
Interest expense ............................................................ 3,543,127 (2,319,294) 1,223,833
---------- ---------- ----------
Net interest income ......................................................... 4,313,576 (3,571,237) 742,339
Provision for possible credit losses ........................................ 2,303,166 (1,993,127) 310,039
---------- ---------- ----------
Net interest income after provision for possible credit losses .............. 2,010,410 (1,578,110) 432,300
Other operating income ...................................................... 1,650,859 1,578,110 3,228,969
Other operating expense ..................................................... 2,407,204 - 2,407,204
---------- ---------- ----------
Income before income taxes .................................................. 1,254,065 - 1,254,065
Applicable income taxes ..................................................... 477,799 - 477,799
---------- ---------- ----------
Net income .................................................................. $ 776,266 $ - $ 776,266
========== ========== ==========
Loans ....................................................................... $59,641,106 $(46,172,739) $13,468,367
DECEMBER 31, 1997
Interest income ............................................................. $ 6,401,838 $(4,690,825) $1,711,013
Interest expense ............................................................ 2,877,851 (1,859,228) 1,018,623
---------- ---------- ----------
Net interest income ......................................................... 3,523,987 (2,831,597) 692,390
Provision for possible credit losses ........................................ 1,749,243 (1,489,203) 260,040
---------- ---------- ----------
Net interest income after provision for possible credit losses .............. 1,774,744 (1,342,394) 432,350
Other operating income ...................................................... 1,470,485 1,342,394 2,812,879
Other operating expense ..................................................... 2,223,121 - 2,223,121
---------- ---------- ----------
Income before income taxes .................................................. 1,022,108 - 1,022,108
Applicable income taxes ..................................................... 399,608 - 399,608
---------- ---------- ----------
Net income .................................................................. $ 622,500 $ - $ 622,500
========== ========== ==========
Loans ....................................................................... $49,379,860 $(38,217,786) $11,162,074
DECEMBER 31, 1996
Interest income ............................................................. $ 4,634,164 $(3,250,897) $1,383,267
Interest expense ............................................................ 2,035,727 (1,292,937) 742,790
---------- ---------- ----------
Net interest income ......................................................... 2,598,437 (1,957,960) 640,477
Provision for possible credit losses ........................................ 1,050,858 (872,634) 178,224
---------- ---------- ----------
Net interest income after provision for possible credit losses .............. 1,547,579 (1,085,326) 462,253
Other operating income ...................................................... 810,597 1,085,326 1,895,923
Other operating expense ..................................................... 1,626,882 - 1,626,882
---------- ---------- ----------
Income before income taxes .................................................. 731,294 - 731,294
Applicable income taxes and tax benefit from Customer-based intangible assets 256,799 - 256,799
---------- ---------- ----------
Net income .................................................................. $ 474,495 $ - $ 474,495
========== ========== ==========
Loans ....................................................................... $38,623,533 $(28,494,481) $10,129,052
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 74
MBNA CORPORATION AND SUBSIDIARIES
NOTE X: PARENT COMPANY FINANCIAL INFORMATION
MBNA Corporation conducts its credit card operations primarily through its
wholly owned subsidiary, MBNA America Bank, N.A. At December 31, 1998, the Bank
constituted 91.3% of the consolidated assets of MBNA Corporation. The parent
company's investment in subsidiaries represents the total equity of all
consolidated subsidiaries, using the equity method of accounting for
investments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Financial Condition
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks............................................................... $ 6,928 $ 5,991
Money market instruments.............................................................. 167,213 158,413
Notes receivable from non-bank subsidiaries........................................... 1,833,384 1,678,173
Investment in subsidiaries:
Bank............................................................................... 2,753,782 2,096,490
Non-bank........................................................................... 225,835 204,211
Premises and equipment, net........................................................... 61,081 72,119
Accrued income receivable............................................................. 21,907 19,177
Other assets.......................................................................... 107,229 76,588
---------------- ----------------
Total assets.................................................................... $ 5,177,359 $ 4,311,162
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt........................................................................ $ 2,057,976 $ 1,642,019
Junior subordinated deferrable interest debentures due to non-bank subsidiaries ...... 580,644 580,566
Accrued interest payable.............................................................. 27,134 23,025
Dividends payable..................................................................... 48,105 43,261
Accrued expenses and other liabilities................................................ 72,465 52,241
---------------- ----------------
Total liabilities............................................................... 2,786,324 2,341,112
Stockholders' equity.................................................................. 2,391,035 1,970,050
---------------- ----------------
Total liabilities and stockholders' equity...................................... $ 5,177,359 $ 4,311,162
================ ================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Income
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Interest income......................................... $ 134,751 $ 100,351 $ 66,056
Dividends from subsidiaries:
Bank................................................. 194,000 188,000 148,000
Non-bank............................................. 1,298 4,201 23
Management fees from subsidiaries....................... 32,993 32,507 29,058
Other .................................................. 43 23 23
---------------- ---------------- ---------------
Total operating income............................ 363,085 325,082 243,160
OPERATING EXPENSE
Interest expense........................................ 167,241 120,997 60,605
Salaries and employee benefits.......................... 18,073 16,117 16,320
Occupancy expense of premises........................... 2,304 2,280 2,233
Furniture and equipment expense......................... 8,047 8,448 4,860
Other .................................................. 2,894 1,672 2,157
---------------- ---------------- ---------------
Total operating expense........................... 198,559 149,514 86,175
---------------- ---------------- ---------------
Income before income taxes and equity in undistributed
net income (loss) of subsidiaries.................... 164,526 175,568 156,985
Applicable income taxes (benefit)....................... (10,466) (6,807) 2,560
Equity in undistributed net income (loss) of
subsidiaries:
Bank................................................. 606,872 450,375 326,590
Non-bank............................................. (5,598) (10,250) (6,520)
---------------- ---------------- ---------------
NET INCOME.............................................. $ 776,266 $ 622,500 $ 474,495
================ ================ ===============
</TABLE>
70
<PAGE> 75
MBNA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 776,266 $ 622,500 $ 474,495
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries............................... (601,274) (440,125) (320,070)
Provision (benefit) for deferred income taxes.................................. 610 (233) 371
Depreciation and amortization.................................................. 12,924 9,615 8,532
Decrease in other operating activities......................................... 38,824 15,974 2,615
------------- ------------- -----------
Net cash provided by operating activities................................... 227,350 207,731 165,943
INVESTING ACTIVITIES
Net (increase) decrease in money market instruments............................... (8,800) (58,238) 83,164
Net increase in notes receivable from non-bank subsidiaries....................... (155,211) (646,457) (317,682)
Net sales (purchases) of premises and equipment................................... 5,741 (29,439) (11,868)
Net investment in subsidiaries.................................................... (87,339) (37,701) (298,532)
------------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................................... (245,609) (771,835) (544,918)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ......................................... 493,918 679,304 199,222
Maturity of long-term debt ....................................................... (80,000) (50,000) (25,000)
Proceeds from issuance of junior subordinated deferrable interest debentures
due to non-bank subsidiaries..................................................... - 286,469 257,732
Proceeds from issuance of preferred stock......................................... - - 146,207
Acquisition and retirement of preferred stock..................................... - (52,483) -
Proceeds from exercise of stock options and other awards.......................... 42,454 31,948 22,869
Acquisition and retirement of common stock........................................ (247,260) (157,446) (71,913)
Dividends paid.................................................................... (189,916) (173,729) (149,115)
------------- ------------- -----------
Net cash provided by financing activities................................... 19,196 564,063 380,002
------------- ------------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 937 (41) 1,027
Cash and cash equivalents at beginning of year.................................... 5,991 6,032 5,005
------------- ------------- -----------
Cash and cash equivalents at end of year.......................................... $ 6,928 $ 5,991 $ 6,032
============= ============= ===========
SUPPLEMENTAL DISCLOSURES
Interest expense paid............................................................. $ 161,102 $ 111,665 $ 58,308
============= ============= ===========
Income taxes paid................................................................. $ - $ - $ -
============= ============= ===========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 76
MBNA CORPORATION AND SUBSIDIARIES
QUARTERLY DATA
(unaudited)
Summary of Consolidated Quarterly Financial Information
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest income.................................................. $ 465,653 $ 458,337 $ 515,523 $ 526,659
Interest expense................................................. 290,080 291,454 317,094 325,205
Net interest income.............................................. 175,573 166,883 198,429 201,454
Provision for possible credit losses............................. 88,598 78,542 78,569 64,330
Other operating income........................................... 699,510 765,196 831,211 933,052
Other operating expense.......................................... 545,135 575,688 601,163 685,218
Income before income taxes....................................... 241,350 277,849 349,908 384,958
Net income....................................................... 149,396 171,988 216,593 238,289
Net income applicable to common stock............................ 145,774 168,384 213,046 234,770
Earnings per common share (a).................................... .19 .22 .28 .31
Earnings per common share--assuming dilution (a)................. .18 .21 .27 .30
Weighted average common shares outstanding (000) (a)............. 751,871 751,808 751,806 751,937
Weighted average common shares outstanding and
common stock equivalents (000) (a).............................. 792,247 790,417 787,685 787,406
1997
Interest income.................................................. $ 405,288 $ 435,268 $ 437,224 $ 433,233
Interest expense................................................. 224,509 250,524 263,775 279,815
Net interest income.............................................. 180,779 184,744 173,449 153,418
Provision for possible credit losses............................. 58,405 87,363 60,403 53,869
Other operating income........................................... 642,620 694,834 692,039 783,386
Other operating expense.......................................... 559,791 565,388 523,542 574,400
Income before income taxes....................................... 205,203 226,827 281,543 308,535
Net income....................................................... 123,942 138,433 171,826 188,299
Net income applicable to common stock............................ 117,711 132,686 168,006 184,570
Earnings per common share (a).................................... .16 .18 .22 .25
Earnings per common share--assuming dilution (a)................. .15 .17 .21 .23
Weighted average common shares outstanding (000) (a)............. 751,843 751,829 751,813 751,864
Weighted average common shares outstanding and
common stock equivalents (000) (a).............................. 787,921 787,388 792,465 791,363
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per common share data and weighted average common shares outstanding and
common stock equivalents have been restated to reflect the three-for-two
split of the Corporation's Common Stock, effected in the form of a dividend,
issued October 1, 1998, to stockholders of record as of September 15, 1998.
72
<PAGE> 77
MBNA CORPORATION AND SUBSIDIARIES
PREFERRED STOCK PRICE RANGE AND DIVIDENDS
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Price Range and Dividends
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS
DECLARED PER
HIGH LOW CLOSE PREFERRED SHARE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERIES A
1998
First quarter............. $ 27 5/8 $ 26 1/2 $ 26 3/4 $.46875
Second quarter............ 27 7/16 26 5/8 27 1/16 .46875
Third quarter............. 27 26 1/2 26 1/2 .46875
Fourth quarter............ 26 1/4 24 25/32 26 .46875
1997
First quarter............. $ 27 5/32 $ 25 5/8 $ 26 1/8 $.46875
Second quarter............ 26 45/64 25 7/8 26 1/8 .46875
Third quarter............. 26 13/16 26 26 1/8 .46875
Fourth quarter............ 27 5/16 26 1/16 26 9/16 .46875
SERIES B
1998
First quarter............. $ 26 1/16 $ 25 3/16 $ 25 7/8 $.36600
Second quarter............ 26 1/8 25 3/8 26 1/8 .36540
Third quarter............. 26 7/16 25 5/8 25 5/8 .34900
Fourth quarter............ 25 1/2 25 25 .34380
1997
First quarter............. $ 27 1/4 $ 25 1/2 $ 27 $.40990
Second quarter............ 27 1/4 26 3/4 26 7/8 .43622
Third quarter............. 27 26 3/8 26 3/8 .41610
Fourth quarter............ 26 3/4 25 13/16 25 13/16 .39320
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation has two series of preferred stock issued and outstanding, both
with a $25 stated value per share. Each series of preferred stock is traded on
the New York Stock Exchange, the Series A Preferred Stock under the symbol
"KRBpfa" and the Series B Preferred Stock under the symbol "KRBpfb."
On January 15, 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 $.34380 per share on the Adjustable Rate
Cumulative Preferred Stock, Series B. Both dividends are payable April 15,
1999, to stockholders of record as of March 31, 1999.
73
<PAGE> 78
MBNA CORPORATION AND SUBSIDIARIES
(unaudited)
Common Stock Price Range and Dividends
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE RANGE AND DIVIDENDS
- ----------------------------------------------------------------------------------------------------------------
DIVIDENDS
DECLARED PER
HIGH LOW CLOSE COMMON SHARE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
First quarter................ $ 25 $ 17 3/16 $ 23 7/8 $ .06
Second quarter............... 25 5/16 20 5/16 22 1/16 .06
Third quarter................ 25 1/16 15 11/16 19 1/16 .06
Fourth quarter............... 25 3/8 13 3/4 24 13/16 .06
1997
First quarter................ $ 16 1/2 $ 12 1/8 $ 12 3/8 $ .05
Second quarter............... 16 7/16 12 7/16 16 1/4 .05
Third quarter................ 20 1/16 16 9/16 18 .05
Fourth quarter............... 19 1/2 17 1/16 18 3/16 .05
</TABLE>
Market price and per common share data have been restated to reflect the
three-for-two split of the Corporation's Common Stock, effected in the form of a
dividend, issued October 1, 1998, to stockholders of record as of September 15,
1998.
The Corporation's Common Stock is traded on the New York Stock Exchange under
the symbol "KRB" and is listed as "MBNA" in newspapers. At February 8, 1999, the
Corporation had 3,201 common stockholders of record. This does not include
beneficial owners for whom Cede & Co. or others act as nominees.
On January 4, 1999, the Corporation's Board of Directors approved an increase of
16.7% in the quarterly dividend rate and declared a $.07 per common share
dividend. This cash dividend is payable April 1, 1999, to stockholders of record
as of March 16, 1999.
74
<PAGE> 79
SENIOR EXECUTIVES
- --------------------------------------------------------------------------------
CHARLES M. CAWLEY, 58, is president of MBNA Corporation and chief executive
officer of its banking subsidiary, MBNA America Bank, N.A. Mr. Cawley has more
than 33 years' management experience in the financial services industry and was
the senior member of the management team that established MBNA in 1982. A
graduate of Georgetown University and a member of its board of directors, Mr.
Cawley also serves on the boards of the University of Delaware, the Eisenhower
Exchange Fellowships, the American Architectural Foundation, and the Marine
Corps Law Enforcement Foundation. He is chairman of the board of The Grand Opera
House in Wilmington, Delaware.
Chief Marketing Officer JOHN R. COCHRAN III, 47, oversees all business
development and marketing activities, including sales, marketing, advertising,
regional marketing, telemarketing, and group administration. He is also
responsible for Customer Satisfaction. Mr. Cochran has 26 years' management
experience in the financial services industry and was a member of the management
team that established MBNAin 1982. A graduate of Loyola College (Maryland), Mr.
Cochran developed the endorsed marketing concept that has led to MBNA signing
thousands of membership groups and financial institutions. He also established
what is now one of the nation's largest financial institution telephone sales
operations. Mr. Cochran is vice chairman of the board of trustees of Loyola
College and the Ronald McDonald House of Delaware, and is a member of the board
of visitors of the Delaware Council for Economic Education.
Chief Operating Officer BRUCE L. HAMMONDS, 50, oversees MBNA's credit, loss
prevention, consumer finance, and technology services. Mr. Hammonds has 29
years' management experience in consumer lending and was a member of the
management team that established MBNA in 1982. A graduate of the University of
Baltimore, Mr. Hammonds is director of the Delaware State Chamber of Commerce,
the Delaware Housing Partnership, and the Delaware Business Roundtable. He is on
the Board of Trustees of Goldey-Beacom College and is a member of the College of
Business and Economics Visiting Committee at the University of Delaware.
Chief Financial Officer M. SCOT KAUFMAN, 49, joined MBNA in 1985 and oversees
MBNA's accounting, finance, and treasury activities. Mr. Kaufman has 28 years'
experience in the financial services industry. A graduate of the University of
Baltimore with an M.B.A. in finance, Mr. Kaufman has held senior management
positions overseeing a variety of areas within MBNA and supervised the financial
aspects of MBNA's transition to a public company in 1991. Mr. Kaufman began his
career as an internal auditor, later becoming the corporate auditor, treasurer,
and controller. Mr. Kaufman is active in many professional associations,
including the American Institute of CPAs, the Financial Executive Institute, and
the National Association of Accountants. He is also a member of the Delaware
Economic and Financial Advisory Council.
ALFRED LERNER, 65, is chief executive officer of MBNA Corporation and chairman
of its Board of Directors. Mr. Lerner served as chairman of the board and chief
executive officer of MNC Financial Inc. from September 1990 to July 1991 and as
chairman of the board from July 1991 to October 1993. He also served as chairman
of the board of Equitable Bancorporation from July 1983 until it merged with MNC
Financial in January 1990. He has been chairman of the Town and Country Trust
since August 1993 and was chief executive officer from August 1993 to October
1997. He has been chairman and owner of the Cleveland Browns since October 1998.
A graduate of Columbia University and vice chairman of its board of trustees,
Mr. Lerner also is president of the Cleveland Clinic Foundation and a member of
its board of trustees. He is also a trustee of Case Western Reserve University
and a member of the Board of Directors of the Marine Corps Law Enforcement
Foundation.
Chief Administrative Officer LANCE L. WEAVER, 44, joined MBNA in 1991 and
oversees corporate affairs, law, government relations, compensation and
benefits, real estate, corporate insurance, facility management, security,
transportation, and purchasing activities. Mr. Weaver has 24 years' experience
in consumer lending and administration. A graduate of Georgetown University, Mr.
Weaver has had previous experience at two national banks as a vice president and
senior vice president of mortgage lending activities. Mr. Weaver is board
chairman of the United Way of Delaware and is a member of the Georgetown
University Board of Regents. He serves on the board of Tower Hill School and is
chairman of The Wilmington Renaissance Corporation, a consortium of business and
government planners working toward the revitalization of downtown Wilmington,
Delaware, and its environs. Mr. Weaver also serves on MasterCard International's
Global Board and Executive Committee.
75
<PAGE> 80
MBNA CORPORATION
BOARD OF DIRECTORS
- ------------------
ALFRED LERNER
Chairman and
Chief Executive Officer
MBNA Corporation
CHARLES M. CAWLEY
President
MBNA Corporation
Chief Executive Officer
MBNA America Bank, N.A.
JAMES H. BERICK, ESQ.
Chairman
Berick, Pearlman & Mills Co., L.P.A.
BENJAMIN R. CIVILETTI, ESQ.
Chairman
Venable, Baetjer and Howard, LLP
Former Attorney General
of the United States
RANDOLPH D. LERNER, ESQ.
Partner
Securities Advisors, L.P.
STUART L. MARKOWITZ, M.D.
Internist and Managing Partner
Drs. Markowitz, Rosenberg,
Stein & Associates
Clinical Professor
Case Western Reserve University,
College of Medicine
MICHAEL ROSENTHAL, PH.D.
Professor
Columbia University
Former Associate Dean
for Academic Administration
Columbia College
MBNA AMERICA BANK, N.A.
OFFICERS
- --------------------------------------------------------------------------------
EXECUTIVE COMMITTEE
- --------------------------------------------------------------------------------
Charles M. Cawley Alfred Lerner exofficio Kenneth F. Boehl
John R. Cochran III Gregg Bacchieri Michael G. Rhodes
Bruce L. Hammonds Ronald W. Davies John W. Scheflen
M. Scot Kaufman Richard K. Struthers David W. Spartin
Lance L. Weaver
MANAGEMENT COMMITTEE
- --------------------------------------------------------------------------------
Jules J. Bonavolonta John J. Hewes Diane C. Sievering
Steve Boyden Janine D. Marrone Kenneth A. Vecchione
William H. Daiger, Jr. Thomas P. McGinley Kevin P. Wren
Douglas R. Denton William P. Morrison Thomas D. Wren
Shane G. Flynn Terri C. Murphy Vernon H.C. Wright
Terrance R. Flynn Kevin C. Schindler
Robert J.A. Fraser Michelle D. Shepherd
OPERATING EXECUTIVES
- --------------------------------------------------------------------------------
Sunil F. Antani H. Thomas Groft Francis H. Otenasek
Ann L. Balthis Bob B. Hallmark Anthony Pallante
Lisa F. Baughman David L. Harris Kenneth R. Pizer
Randall J. Black James E. Healy Edward G. Plummer
Elizabeth A. Cahill Elizabeth Hershey-Ross Gerald P. Plush
John P. Carey David M. Hirt Jerald M. Pollard
James E. Carrington Thomas W. Horne Frank W. Quillen
William T. Christie Richard G. Huber John C. Richmond
Robert V. Ciarrocki Scott A. Hudson Karen E. Rose
Michael H. Copley James K. Kallstrom Salvatore J. Rossi, Jr.
John A. Corrozi Alvin Kaltman James J. Roszkowski
Richard M. Croswell Michael D. Keeports Michael R. Scanlan
Joseph R. Crouse Kevin L. Kramer W. Craig Schroeder
Douglas M. Cummings Elizabeth B. Lee Michael S. Schuck
Brian D. Dalphon Mark Levitt Stephen K. Shock
Salvatore A. DeAngelo Craig S. Lewis David L. Simms
Joseph A. DePaulo Timothy E. Love Richard B. Skinner, Jr.
Joseph A. DeSantis Victor P. Manning Timothy P. Staley
Robert V. DeSantis David H. Maxwell April M. Stercula
Peter S.P. Dimsey Frank B. McEntee Penelope J. Taylor
Theodore Dixon Kathleen B. McEntee Thomas G. Thomaides
Michael E. Durroh Frank J. McKelvey III James D. Thornton
K. David Elgena Charles K. Messick Thomas D. Veale
James H. Erskine III Charles H. Moloney William W. Wagner
William J. Esposito Susan D. Morrison Steven P. Walczak
William M. Fore Paul Muller III Howard C. Wallace
Lee M. Friedman Edward H. Murphy Todd T. Weaver
John M. Gala Al Natali Charles F. Wheatley
Joseph J. Gatti Matthew H. Neels Robert J. Wolf
Peter J. Gatti Maureen M. O'Brien
Brian F. Gimlett Patrick J. O'Dwyer
76
<PAGE> 81
SUBSIDIARIES OF MBNA CORPORATION
- --------------------------------------------------------------------------------
MBNA AMERICA BANK, N.A.
The principal subsidiary of MBNA Corporation, MBNA America, a national bank with
$59 billion in managed loans, is the largest independent credit card lender in
the world. It also provides retail deposit, consumer loan, and insurance
products. MBNA America is the recognized industry leader in affinity marketing,
with endorsements from thousands of membership organizations and financial
institutions.
SUBSIDIARIES OF MBNA AMERICA BANK, N.A.
- --------------------------------------------------------------------------------
MBNA INTERNATIONAL BANK LIMITED (MBNA EUROPE)
MBNA issues credit cards in the United Kingdom and the Republic of Ireland. MBNA
Europe is headquartered in Chester, England, with a business development office
in London and sales offices in Dublin, Ireland, and Edinburgh, Scotland.
MBNA CANADA BANK (MBNA CANADA)
MBNA has established a bank to issue credit cards in Canada. MBNA Canada began
marketing in early 1998 and is headquartered in Ottawa, Ontario, with a business
development office in Montreal, Quebec.
MBNA INSURANCE SERVICES
MBNA Insurance Services, which markets and services credit-related Life and
Disability, personal Property & Casualty, and Life & Health insurance, is
located in Greenville, Delaware.
MBNA MARKETING SYSTEMS, INC.
MBNA has state-of-the-art telephone sales facilities to support account
acquisition and maintains offices in Delaware, Florida, Maine, Maryland, New
Hampshire, Ohio, Pennsylvania, and Texas. In addition to credit cards, MBNA
Marketing Systems cross-sells consumer loan, deposit, and insurance products.
MBNA CONSUMER SERVICES, INC.
(subsidiary of MBNA Corporation)
MBNA CONSUMER SERVICES, INC., is licensed to provide home equity loans in 42
states and the District of Columbia.
MBNA HALLMARK INFORMATION SERVICES, INC.
MBNA Hallmark Information Services, Inc., headquartered in Dallas, Texas,
provides information technology support and services to MBNA America Bank, N.A.,
and its affiliates.
MBNA DELAWARE
MBNA Delaware is a state-chartered bank engaged in home equity lending and
travel agency activities.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Ernst & Young LLP
CORPORATE REGISTRARS AND TRANSFER AGENTS
- --------------------------------------------------------------------------------
National City Bank (common stock)
The Bank of New York (preferred stock)
PRINCIPAL FINANCIAL CONTACT
- --------------------------------------------------------------------------------
For further information about MBNA Corporation or its subsidiaries, please
contact:
Brian D. Dalphon
Director, Investor Relations
MBNA Corporation
Wilmington, DE 19884-0131
(800) 362-6255
(302) 432-1251
Internet address: www.mbnainternational.com
COMMON STOCK
- --------------------------------------------------------------------------------
Listed on New York Stock Exchange
Stock Symbol KRB
[RECYCLE LOGO]
printed recycled paper
This annual report was printed on paper recycled from MBNA offices.
<PAGE> 82
ATTENTION TO DETAIL DRIVES EVERYTHING WE DO.
[ANTIQUE CAR]
SUCCESS IS NEVER FINAL.
<PAGE> 1
Exhibit 21 Subsidiaries of MBNA Corporation
<TABLE>
<CAPTION>
Name Incorporated
- ---- ------------
<S> <C>
MBNA America Bank, N.A. United States
MBNA International Bank Limited* United Kingdom
MBNA Consumer Services, Inc. Delaware
MBNA Hallmark Information Services, Inc.* Delaware
MBNA Marketing Systems, Inc.* Delaware
MBNA Canada Bank* Canada
</TABLE>
*A subsidiary of MBNA America Bank, N.A.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of MBNA Corporation, and in the related Prospectuses, of our report
dated January 15, 1999, with respect to the consolidated financial statements
of MBNA Corporation, included in the 1998 Annual Report to Stockholders of MBNA
Corporation and incorporated by reference in this Annual Report (Form 10-K) for
the year ended December 31, 1998:
<TABLE>
<S> <C> <C>
Number 33-41936 on Form S-8 dated July 22, 1991
Number 33-41895 on Form S-8 dated July 24, 1991
Number 33-50498 on Form S-3 (as amended by Post-Effective
Amendment No. 1) dated August 28, 1992
Number 33-71640 on Form S-8 dated November 15, 1993
Number 33-76278 on Form S-3 (as amended by Amendment No. 1)
dated April 8, 1994
Number 33-95438 on Form S-8 dated August 4, 1995
Number 33-95600 on Form S-3 (as amended by Pre-Effective
Amendment No. 1) dated September 1, 1995
Number 333-17187 on Form S-3 dated December 3, 1996
Number 333-15721 on Form S-3 (as amended by Amendment No. 2)
dated December 10, 1996
Number 333-21181 on Form S-4 (as amended by Amendment No. 1)
dated February 25, 1997
Number 333-06824 on Form S-8 dated April 22, 1997
Number 333-47179 on Form S-3 dated April 6, 1998
</TABLE>
Baltimore, Maryland
March 16, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MBNA
CORPORATION'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 382,882
<INT-BEARING-DEPOSITS> 2,831,215
<FED-FUNDS-SOLD> 730,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,663,704
<INVESTMENTS-CARRYING> 216,020
<INVESTMENTS-MARKET> 211,473
<LOANS> 13,468,367<F1>
<ALLOWANCE> 216,911
<TOTAL-ASSETS> 25,806,260
<DEPOSITS> 15,407,040
<SHORT-TERM> 1,231,195
<LIABILITIES-OTHER> 837,965
<LONG-TERM> 5,939,025
0
86
<COMMON> 7,518
<OTHER-SE> 2,383,431
<TOTAL-LIABILITIES-AND-EQUITY> 25,806,260
<INTEREST-LOAN> 1,687,472<F1>
<INTEREST-INVEST> 114,497
<INTEREST-OTHER> 164,203
<INTEREST-TOTAL> 1,966,172
<INTEREST-DEPOSIT> 816,104
<INTEREST-EXPENSE> 1,223,833
<INTEREST-INCOME-NET> 742,339
<LOAN-LOSSES> 310,039
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,407,204
<INCOME-PRETAX> 1,254,065
<INCOME-PRE-EXTRAORDINARY> 1,254,065
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 776,266
<EPS-PRIMARY> 1.01<F2>
<EPS-DILUTED> .97<F2>
<YIELD-ACTUAL> 11.69<F3>
<LOANS-NON> 3,182<F4>
<LOANS-PAST> 194,472<F4>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 157,737<F4>
<ALLOWANCE-OPEN> 162,476
<CHARGE-OFFS> 440,113
<RECOVERIES> 154,702
<ALLOWANCE-CLOSE> 216,911
<ALLOWANCE-DOMESTIC> 207,157
<ALLOWANCE-FOREIGN> 9,754
<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>
