8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file number 1-10683
---------------------------------------------------------
MBNA Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1713008
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wilmington, DE 19884-0141
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(800) 362-6255
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---------- ----------
Common Stock, $.01 Par Value - 801,781,250 Shares
Outstanding as of September 30, 1999
MBNA CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
September 30, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Income - 3
For the Three and Nine Months Ended September 30, 1999 and 1998
(unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Supplemental Financial Information 45
Part II - Other Information
Item 5. Other Information 46
Item 6. Exhibits and Reports on Form 8-K 46
Signature 57
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 430,289 $ 382,882
Interest-earning time deposits in other banks..... 2,596,012 2,831,215
Federal funds sold and securities purchased
under resale agreements.......................... 1,235,000 730,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $2,679,295 and $1,666,123 at
September 30, 1999 and December 31, 1998,
respectively).................................. 2,668,690 1,663,704
Held-to-maturity (market value of $256,906
and $211,473 at September 30, 1999 and
December 31, 1998, respectively)............... 279,199 216,020
Loans held for securitization..................... 5,815,060 1,692,268
Loans:
Credit card..................................... 7,104,049 8,975,051
Other consumer.................................. 1,771,315 2,801,048
------------- ------------
Total loans................................... 8,875,364 11,776,099
Reserve for possible credit losses.............. (328,095) (216,911)
------------- ------------
Net loans..................................... 8,547,269 11,559,188
Premises and equipment, net....................... 1,657,698 1,617,596
Accrued income receivable......................... 175,642 193,019
Accounts receivable from securitizations.......... 4,045,711 3,595,556
Prepaid expenses and deferred charges............. 297,033 237,587
Other assets...................................... 1,799,477 1,087,225
------------- ------------
Total assets.................................. $ 29,547,080 $ 25,806,260
============= ============
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 12,644,135 $ 10,745,062
Money market deposit accounts................... 4,327,144 4,125,523
Noninterest-bearing demand deposits............. 607,163 462,266
Interest-bearing transaction accounts........... 37,073 35,399
Savings accounts................................ 8,854 38,790
------------- ------------
Total deposits................................ 17,624,369 15,407,040
Short-term borrowings............................. 609,194 1,231,195
Long-term debt and bank notes..................... 6,096,160 5,939,025
Accrued interest payable.......................... 172,641 153,201
Accrued expenses and other liabilities............ 1,078,553 684,764
------------- ------------
Total liabilities............................. 25,580,917 23,415,225
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at September 30, 1999 and
December 31, 1998)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 801,781,250 shares and
751,795,674 shares issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively).................................... 8,018 7,518
Additional paid-in capital........................ 1,324,171 271,050
Retained earnings................................. 2,637,973 2,112,374
Accumulated other comprehensive income............ (4,085) 7
------------- ------------
Total stockholders' equity.................... 3,966,163 2,391,035
------------- ------------
Total liabilities and stockholders' equity.... $ 29,547,080 $ 25,806,260
============= ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(unaudited)
INTEREST INCOME
Loans........................... $ 329,997 $ 350,613 $ 1,055,089 $ 935,895
Investment securities:
Taxable....................... 36,116 24,370 90,908 85,336
Tax-exempt.................... 876 869 2,612 2,562
Time deposits in other banks.... 25,745 37,965 88,516 94,106
Federal funds sold and
securities purchased under
resale agreements.............. 9,377 2,571 33,800 18,321
Loans held for securitization... 142,711 99,135 402,069 303,293
---------- ---------- ----------- -----------
Total interest income....... 544,822 515,523 1,672,994 1,439,513
INTEREST EXPENSE
Deposits........................ 230,398 209,261 665,873 599,127
Short-term borrowings........... 9,209 8,976 26,445 14,969
Long-term debt and bank notes... 96,194 98,857 277,813 284,532
---------- ---------- ----------- -----------
Total interest expense...... 335,801 317,094 970,131 898,628
---------- ---------- ----------- -----------
NET INTEREST INCOME............. 209,021 198,429 702,863 540,885
Provision for possible credit
losses......................... 105,020 78,569 319,240 245,709
---------- ---------- ----------- -----------
Net interest income after
provision for possible credit
losses......................... 104,001 119,860 383,623 295,176
OTHER OPERATING INCOME
Interchange..................... 56,822 36,097 157,602 100,111
Credit card fees................ 51,153 33,512 143,070 95,041
Securitization income........... 972,303 724,584 2,648,088 2,018,598
Insurance....................... 14,618 23,374 43,430 60,565
Other........................... 23,411 13,644 58,379 21,602
---------- ---------- ----------- -----------
Total other operating
income..................... $1,118,307 $ 831,211 $ 3,050,569 $ 2,295,917
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.. $ 335,474 $ 254,334 $ 968,489 $ 762,132
Occupancy expense of premises... 32,620 30,916 94,576 84,354
Furniture and equipment expense. 45,400 41,209 135,306 126,998
Other........................... 337,919 274,704 1,097,438 748,502
---------- ---------- ----------- -----------
Total other operating
expense.................... 751,413 601,163 2,295,809 1,721,986
---------- ---------- ----------- -----------
Income before income taxes...... 470,895 349,908 1,138,383 869,107
Applicable income taxes......... 179,411 133,315 433,724 331,130
---------- ---------- ----------- -----------
NET INCOME...................... $ 291,484 $ 216,593 $ 704,659 $ 537,977
========== ========== =========== ===========
EARNINGS PER COMMON SHARE....... $ .36 $ .28 $ .87 $ .70
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION.............. .34 .27 .83 .67
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts) (unaudited)
Outstanding Shares
-------------------
Preferred Common Preferred Common
(000) (000) Stock Stock
--------- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.. 8,574 751,796 $ 86 $ 7,518
Comprehensive income:
Net income................ - - - -
Other comprehensive
income, net of tax....... - - - -
Comprehensive income........
Cash dividends:
Common-$.21 per share..... - - - -
Preferred................. - - - -
Exercise of stock options
and other awards........... - 6,737 - 68
Issuance of common stock,
net of issuance costs...... - 50,000 - 500
Acquisition and retirement
of common stock............ - (6,752) - (68)
--------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1999. 8,574 801,781 $ 86 $ 8,018
========= ======== ========= =========
BALANCE, DECEMBER 31, 1997.. 8,574 751,781 $ 86 $ 7,518
Comprehensive income:
Net income................ - - - -
Other comprehensive
income, net of tax....... - - - -
Comprehensive income........
Cash dividends:
Common-$.18 per share..... - - - -
Preferred................. - - - -
Exercise of stock options
and other awards........... - 9,176 - 92
Acquisition and retirement
of common stock............ - (9,176) - (92)
--------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1998. 8,574 751,781 $ 86 $ 7,518
========= ======== ========= =========
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 1998.. $ 271,050 $2,112,374 $ 7 $ 2,391,035
Comprehensive income:
Net income................ - 704,659 - 704,659
Other comprehensive
income, net of tax....... - - (4,092) (4,092)
------------
Comprehensive income........ 700,567
------------
Cash dividends:
Common-$.21 per share..... - (168,392) - (168,392)
Preferred................. - (10,668) - (10,668)
Exercise of stock options
and other awards........... 65,179 - - 65,247
Issuance of common stock,
net of issuance costs...... 1,173,586 - - 1,174,086
Acquisition and retirement
of common stock............ (185,644) - - (185,712)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 1999. $1,324,171 $2,637,973 $ (4,085) $ 3,966,163
========== ========== ============= ============
BALANCE, DECEMBER 31, 1997.. $ 421,871 $1,530,868 $ 9,707 $ 1,970,050
Comprehensive income:
Net income................ - 537,977 - 537,977
Other comprehensive
income, net of tax....... - - (297) (297)
------------
Comprehensive income........ 537,680
------------
Cash dividends:
Common-$.18 per share..... - (135,332) - (135,332)
Preferred................. - (10,773) - (10,773)
Exercise of stock options
and other awards........... 76,389 - - 76,481
Acquisition and retirement
of common stock............ (195,512) - - (195,604)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 1998. $ 302,748 $1,922,740 $ 9,410 $ 2,242,502
========== ========== ============= ============
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------------ -----------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 704,659 $ 537,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 319,240 245,709
Depreciation, amortization, and accretion....... 298,143 179,941
Benefit for deferred income taxes............... (13,923) (5,762)
Decrease (increase) in accrued income
receivable..................................... 17,377 (8,445)
Increase in accounts receivable from
securitizations................................ (450,155) (805,278)
Increase in accrued interest payable............ 19,440 5,938
Decrease in other operating activities.......... 234,248 53,031
------------ -----------
Net cash provided by operating activities..... 1,129,029 203,111
INVESTING ACTIVITIES
Net increase in money market instruments.......... (269,797) (598,686)
Proceeds from maturities of investment securities
available-for-sale............................... 651,729 1,912,968
Purchases of investment securities
available-for-sale............................... (1,667,089) (1,286,114)
Proceeds from maturities of investment securities
held-to-maturity ................................ 36,662 73,382
Purchases of investment securities
held-to-maturity................................. (77,512) (59,288)
Proceeds from securitization of loans............. 10,272,482 7,238,835
Proceeds from sale of loan portfolios............. 4,748 78,943
Acquisition of credit card business
of PNC Bank, N.A................................. (3,191,786) -
Loan portfolio acquisitions....................... (982,370) (2,483,701)
Amortization of securitized loans................. (4,067,243) (2,045,833)
Net loan originations............................. (4,189,680) (4,645,562)
Net purchases of premises and equipment........... (181,622) (184,721)
------------ -----------
Net cash used in investing activities......... $ (3,661,478) $(1,999,777)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------------ -----------
(unaudited)
FINANCING ACTIVITIES
Net increase in time deposits..................... $ 1,899,073 $ 475,590
Net increase in money market deposit accounts,
noninterest-bearing demand deposits,
interest-bearing transaction accounts,
and savings accounts............................. 318,256 736,511
Net (decrease) increase in short-term borrowings.. (622,001) 427,480
Proceeds from issuance of long-term debt
and bank notes................................... 674,454 760,011
Maturity of long-term debt and bank notes......... (535,595) (283,636)
Proceeds from exercise of stock options
and other awards................................. 25,257 32,892
Acquisition and retirement of common stock........ (185,712) (195,604)
Proceeds from issuance of common stock............ 1,174,086 -
Dividends paid.................................... (167,962) (141,278)
------------ -----------
Net cash provided by financing activities..... 2,579,856 1,811,966
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS............. 47,407 15,300
Cash and cash equivalents at beginning of period.. 382,882 263,064
------------ -----------
Cash and cash equivalents at end of period........ $ 430,289 $ 278,364
============ ===========
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 947,912 $ 893,253
============ ===========
Income taxes paid................................. $ 428,328 $ 279,407
============ ===========
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MBNA
Corporation ("the Corporation") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete consolidated financial statements.
For purposes of comparability, certain prior period amounts have been
reclassified. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The notes to the consolidated
financial statements contained in the Annual Report on Form 10-K for the year
ended December 31, 1998 should be read in conjunction with these consolidated
financial statements.
NOTE B: PREFERRED STOCK
The Corporation's Board of Directors declared the following quarterly dividends
for the Corporation's Series A and Series B Preferred Stock:
Series A Series B
--------------------- ---------------------
Dividend Per Dividend Per
Dividend Preferred Dividend Preferred
Declaration Date Payment Date Rate Share Rate Share
- ---------------- ---------------- -------- ------------ -------- ------------
January 15, 1999 April 15, 1999 7.50% $ .46875 5.50% $ .3438
April 13, 1999 July 15, 1999 7.50 .46875 5.55 .3468
July 13, 1999 October 15, 1999 7.50 .46875 6.01 .3756
October 7, 1999 January 15, 2000 7.50 .46875 6.01 .3759
NOTE C: COMMON STOCK
In January 1999, the Corporation issued 50 million shares of common stock. The
Corporation used the net proceeds from this offering, approximately $1.2
billion, to complete the purchase of the credit card business of PNC Bank, N.A.
("PNC"), and for other general corporate purposes.
On October 7, 1999 the Corporation's Board of Directors declared a quarterly
cash dividend of $.07 per common share, payable January 1, 2000 to stockholders
of record as of December 15, 1999.
NOTE D: EARNINGS PER COMMON SHARE
Earnings per common share ("basic") is computed using net income applicable to
common stock and weighted average common shares outstanding during the period.
Earnings per common share-assuming dilution ("diluted") is computed using net
income applicable to common stock and weighted average common shares
outstanding during the period after consideration of the potential dilutive
effect of common stock equivalents, based on the treasury stock method using an
average market price for the period. The Corporation's common stock
equivalents are solely related to employee stock options. The Corporation does
not have any other common stock equivalents.
Computation of Earnings Per Common Share
(dollars in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
BASIC
Net income...................... $ 291,484 $ 216,593 $ 704,659 $ 537,977
Less: preferred stock dividend
requirements................... 3,625 3,547 10,668 10,773
--------- --------- --------- ---------
Net income applicable to common
stock.......................... $ 287,859 $ 213,046 $ 693,991 $ 527,204
========= ========= ========= =========
Weighted average common shares
outstanding (000).............. 801,890 751,806 800,756 751,828
========= ========= ========= =========
Earnings per common share....... $ .36 $ .28 $ .87 $ .70
========= ========= ========= =========
DILUTED
Net income...................... $ 291,484 $ 216,593 $ 704,659 $ 537,977
Less: preferred stock dividend
requirements................... 3,625 3,547 10,668 10,773
--------- --------- --------- ---------
Net income applicable to common
stock.......................... $ 287,859 $ 213,046 $ 693,991 $ 527,204
========= ========= ========= =========
Weighted average common shares
outstanding (000).............. 801,890 751,806 800,756 751,828
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price (000)............. 36,718 35,879 36,680 38,272
--------- --------- --------- ---------
Weighted average common shares
outstanding and common stock
equivalents (000).............. 838,608 787,685 837,436 790,100
========= ========= ========= =========
Earnings per common share-
assuming dilution.............. $ .34 $ .27 $ .83 $ .67
========= ========= ========= =========
To the extent stock options are exercised or restricted shares are awarded from
time to time under the Corporation's Long Term Incentive Plans, the Board of
Directors has approved the purchase, on the open market or in privately
negotiated transactions, of the number of common shares issued.
NOTE E: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, for the three and nine
months ended September 30, 1999 and 1998 are as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net income......................... $ 291,484 $ 216,593 $ 704,659 $ 537,977
Other comprehensive income:
Foreign currency translation..... 19,054 3,414 3,115 6,227
Net unrealized losses on
investment securities
available-for-sale and other
financial instruments........... (1,685) (111) (4,756) (1,949)
Minimum benefit plan liability
adjustment...................... - - (2,451) (4,575)
--------- --------- --------- ---------
Other comprehensive income......... 17,369 3,303 (4,092) (297)
--------- --------- --------- ---------
Comprehensive income............... $ 308,853 $ 219,896 $ 700,567 $ 537,680
========= ========= ========= =========
The components of accumulated other comprehensive income, net of tax, at
September 30, 1999 and December 31, 1998 are as follows:
September 30, December 31,
1999 1998
------------- ------------
Foreign currency translation................... $ 5,537 $ 2,422
Net unrealized (losses) gains on investment
securities available-for-sale and other
financial instruments......................... (2,596) 2,160
Minimum benefit plan liability adjustment...... (7,026) (4,575)
------------- ------------
Accumulated other comprehensive income......... $ (4,085) $ 7
============= ============
NOTE F: CREDIT CARD BUSINESS ACQUISITION
In March 1999, MBNA America Bank, N.A. ("Bank"), a wholly owned subsidiary of
the Corporation, acquired the credit card business of PNC for approximately
$3.2 billion. The acquisition included $2.7 billion of credit card receivables.
The Bank funded the acquisition from the proceeds of the issuance of shares of
common stock by MBNA Corporation in January 1999, from securitization of credit
card receivables, and from the proceeds of maturing money market instruments.
NOTE G: LONG-TERM DEBT AND BANK NOTES
Long-term debt and bank notes consist of borrowings having an original maturity
of one year or more. During the nine months ended September 30, 1999, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
Floating-Rate Bank Notes, priced between 42 basis
points and 50 basis points over the three-month
London Interbank Offered Rate (LIBOR), payable
quarterly, maturing in 2004........................... $ 45,000
Fixed-Rate Bank Notes, with an interest rate of
6.875%, payable semi-annually, maturing in 2004....... 250,000
Fixed-Rate Medium-Term Deposit Notes, with interest
rates varying from 5.875% to 5.98%, payable
semiannually, maturing in varying amounts from
2001 through 2004 (approximately CAD$73.1 million).... 49,412
Floating-Rate Medium-Term Deposit Notes, priced
between 58 basis points and 73 basis points over the
ninety-day Bankers Acceptance Rate, payable
quarterly, maturing in varying amounts from 2001
through 2004 (approximately CAD$95.0 million)......... 64,151
Floating-Rate Euro Medium-Term Notes, priced at 37.5
basis points over the three-month sterling
LIBOR, payable quarterly, maturing in 2002
(approximately 150.0 million pounds sterling)......... 236,265
Floating-Rate Euro Medium-Term Notes, priced at 47
basis points over the three-month Euro Interbank
Offered Rate (EURIBOR), payable quarterly, maturing
in 2002 (approximately 15.5 million EURO currency).... 16,526
The Floating-Rate Euro Medium-Term Notes were issued by MBNA International Bank
Limited and are unsecured, with all payments unconditionally and irrevocably
guaranteed by MBNA America Bank, N.A.
NOTE H: SEGMENT REPORTING
(dollars in thousands)
The Corporation derives its income primarily from credit card loans, other
consumer loans, and insurance products. The credit card and other consumer loan
products have similar economic characteristics and, therefore, have been
aggregated into one operating segment. The Corporation's insurance products
have also been aggregated into the one operating segment due to immateriality.
The Corporation allocates resources on a managed basis and financial
information provided to management reflects the Corporation's results on a
managed basis. Therefore, an adjustment is required to reconcile the managed
financial information to the Corporation's reported financial information in
its consolidated financial statements. This adjustment reclassifies
securitization income into interest income, interchange, other fees, insurance
income, interest paid to investors, credit losses, and other trust expenses.
The managed results also include the impact of Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities."
For the Three Months Ended
September 30, 1999
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 2,315,412 $ (1,770,590) $ 544,822
Interest expense.................. 1,002,053 (666,252) 335,801
------------ -------------- ------------
Net interest income............... 1,313,359 (1,104,338) 209,021
Provision for possible credit
losses........................... 712,387 (607,367) 105,020
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 600,972 (496,971) 104,001
Other operating income............ 621,336 496,971 1,118,307
Other operating expense........... 751,413 - 751,413
------------ -------------- ------------
Income before income taxes........ 470,895 - 470,895
Applicable income taxes........... 179,411 - 179,411
------------ -------------- ------------
Net income........................ $ 291,484 $ - $ 291,484
============ ============== ============
For the Three Months Ended
September 30, 1998
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 2,024,974 $ (1,509,451) $ 515,523
Interest expense.................. 910,160 (593,066) 317,094
------------ -------------- ------------
Net interest income............... 1,114,814 (916,385) 198,429
Provision for possible credit
losses........................... 599,341 (520,772) 78,569
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 515,473 (395,613) 119,860
Other operating income............ 435,598 395,613 831,211
Other operating expense........... 601,163 - 601,163
------------ -------------- ------------
Income before income taxes........ 349,908 - 349,908
Applicable income taxes........... 133,315 - 133,315
------------ -------------- ------------
Net income........................ $ 216,593 $ - $ 216,593
============ ============== ============
For the Nine Months Ended
September 30, 1999
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 6,666,238 $ (4,993,244) $ 1,672,994
Interest expense.................. 2,819,255 (1,849,124) 970,131
------------ -------------- ------------
Net interest income............... 3,846,983 (3,144,120) 702,863
Provision for possible credit
losses........................... 2,078,814 (1,759,574) 319,240
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 1,768,169 (1,384,546) 383,623
Other operating income............ 1,666,023 1,384,546 3,050,569
Other operating expense........... 2,295,809 - 2,295,809
------------ -------------- ------------
Income before income taxes........ 1,138,383 - 1,138,383
Applicable income taxes........... 433,724 - 433,724
------------ -------------- ------------
Net income........................ $ 704,659 $ - $ 704,659
============ ============== ============
Ending loans outstanding.......... $ 67,353,183 $ (52,662,759) $ 14,690,424
For the Nine Months Ended
September 30, 1998
------------------------------------------
Total Securitization Total
Managed Adjustments Consolidated
------------ -------------- ------------
Interest income................... $ 5,720,663 $ (4,281,150) $ 1,439,513
Interest expense.................. 2,594,880 (1,696,252) 898,628
------------ -------------- ------------
Net interest income............... 3,125,783 (2,584,898) 540,885
Provision for possible credit
losses........................... 1,698,188 (1,452,479) 245,709
------------ -------------- ------------
Net interest income after
provision for possible credit
losses........................... 1,427,595 (1,132,419) 295,176
Other operating income............ 1,163,498 1,132,419 2,295,917
Other operating expense........... 1,721,986 - 1,721,986
------------ -------------- ------------
Income before income taxes........ 869,107 - 869,107
Applicable income taxes........... 331,130 - 331,130
------------ -------------- ------------
Net income........................ $ 537,977 $ - $ 537,977
============ ============== ============
Ending loans outstanding.......... $ 56,287,534 $ (43,703,887) $ 12,583,647
NOTE I: 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. Generally, the Corporation amortizes its
intangible assets using the straight-line method. The Corporation may use an
accelerated method in order to better match the expected future cash flows from
the use of the asset. Intangible assets, which are included in other assets,
had a net book value of $1.2 billion and $671.4 million at September 30, 1999
and December 31, 1998, respectively. The Corporation had accumulated
amortization related to its intangible assets of $255.1 million at
September 30, 1999 and $144.1 million at December 31, 1998.
The Corporation periodically reviews the carrying value of its intangible
assets for impairment. The intangible assets are carried at the lower of net
book value or fair value, with the fair value determined by discounting the
expected future cash flows from the use of the asset, using an appropriate
discount rate. The Corporation performs this valuation based on the size and
nature of the intangible asset. For intangible assets that are not considered
material, the Corporation performs this calculation by grouping the assets by
year of acquisition.
NOTE J: NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133") establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. In June 1999, Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" ("Statement No. 137") was issued and
extends the effective date for Statement No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Based on the Corporation's current
level of derivative and hedging activities, the implementation of Statement No.
133, as amended by Statement No. 137, will not have a material impact on the
Corporation's consolidated financial statements.
In February 1999, the Federal Financial Institutions Examination Council
published a revised policy statement on the classification of consumer loans.
The revised policy establishes uniform guidelines for the 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 December 31, 2000. The
Corporation is currently working on its programming changes and expects to
complete and implement the guidelines prior to or on December 31, 2000. The
Corporation will accelerate charge-off of some delinquent loans when it
implements the guidelines, and does not expect implementation to have a
material impact on the Corporation's consolidated financial statements.
MBNA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(unaudited)
This discussion is intended to further the reader's understanding of the
consolidated financial condition and results of operations of MBNA Corporation
("the Corporation"). It should be read in conjunction with the consolidated
financial statements, notes, and tables included elsewhere in this report.
INTRODUCTION
MBNA Corporation, a bank holding company located in Wilmington, Delaware, is
the parent company of MBNA America Bank, N.A. ("the Bank"), a national bank and
MBNA Corporation's principal subsidiary. The Bank has two wholly owned foreign
bank subsidiaries, MBNA International Bank Limited ("MBNA Europe") located in
the United Kingdom and MBNA Canada Bank ("MBNA Canada") located in Canada.
Through the Bank, the Corporation is the world's largest independent credit
card lender and is the leading issuer of affinity credit cards marketed
primarily to members of associations and Customers of financial institutions.
In addition to its credit card lending, the Corporation also makes other
consumer loans and offers insurance and deposit products.
The Corporation generates interest and other income through finance charges
assessed on outstanding loan receivables, interchange income, credit card and
other fees, securitization income, insurance income, and interest earned on
investment securities and money market instruments. The Corporation's primary
costs are the costs of funding its loan receivables and investment securities
and money market instruments, which include interest paid on deposits, short-
term borrowings, and long-term debt and bank notes; credit losses; royalties
paid to affinity groups and financial institutions; business development and
operating expenses; and income taxes.
EARNINGS SUMMARY
Net income for the three months ended September 30, 1999 increased 34.6% to
$291.5 million or $.34 per common share, from $216.6 million or $.27 per
common share for the same period in 1998. Net income for the nine months ended
September 30, 1999 increased 31.0% to $704.7 million or $.83 per common share,
from $538.0 million or $.67 per common share for the same period in 1998.
Earnings per common share amounts are presented assuming dilution.
The overall growth in earnings was primarily attributable to the growth in the
Corporation's managed loans outstanding. The Corporation's average managed
loans increased 21.3% and 21.8% to $65.6 billion and $62.6 billion for the
three and nine months ended September 30, 1999, compared to $54.1 billion and
$51.4 billion for the three and nine months ended September 30, 1998,
respectively. Total managed loans at September 30, 1999 were $67.4 billion, an
$11.1 billion increase from September 30, 1998, and a $7.7 billion increase
since December 31, 1998. The increase in managed loans includes $2.7 billion
of credit card loans acquired from PNC Bank, N.A.("PNC") during the three
months ended March 31, 1999.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization is the sale of loans to
investors, generally through a trust, that converts interest income,
interchange, other fees, and insurance income in excess of interest paid to
investors; credit losses; and other trust expenses into securitization income,
while reducing the Corporation's on-balance-sheet assets. During the three
and nine months ended September 30, 1999, the Corporation securitized
approximately $5.7 billion and $10.3 billion of credit card and other consumer
loan receivables, respectively, bringing the total amount of outstanding
securitized loans to $52.7 billion at September 30, 1999.
Return on average total assets for the three and nine months ended
September 30, 1999 was 4.02% and 3.39%, as compared to 3.66% and 3.23% for the
same periods during 1998, respectively. The increase in the return on average
total assets for the three and nine months ended September 30, 1999 is a
result of the Corporation's net income growing faster than its average total
assets as a result of securitization. The Corporation's return on average
stockholders' equity for the three and nine months ended September 30, 1999
was 30.15% and 25.67%, compared to 39.77% and 35.26% for the same periods in
1998, respectively. The lower return on average stockholders' equity is
primarily a result of the increase in average stockholders' equity from the
issuance of 50 million shares of common stock in January 1999 for
approximately $1.2 billion, net of issuance costs.
NET INTEREST INCOME
Net interest income for the three and nine months ended September 30, 1999, on
a fully taxable equivalent basis, was $209.5 million and $704.3 million,
compared to $198.9 million and $542.3 million for the same periods in 1998,
respectively. The increase in net interest income for the three and nine
months ended September 30, 1999 is a result of an increase in average interest-
earning assets of $2.3 billion and $3.6 billion, respectively, offset by an
increase in average interest-bearing liabilities of $3.0 billion and $3.4
billion, respectively, as compared to the same periods in 1998. The increase in
average interest-earning assets for the three and nine months ended
September 30, 1999 is primarily a result of an increase in average loan
receivables of $1.4 billion and $2.6 billion, respectively, as compared to the
same periods in 1998. The increase in average interest-bearing liabilities
during these periods resulted primarily from funding the increases in average
interest-earning assets and accounts receivable from securitization. The yield
earned on average interest-earning assets decreased 81 basis points and 53
basis points for the three and nine months ended September 30 1999,
respectively. The rate paid on average interest-bearing liabilities declined
49 basis points and 52 basis points for the three and nine months ended
September 30 1999, respectively. The decrease in the rate paid on average
interest-bearing liabilities is a result of the decreases in interest rates by
the Federal Reserve Board in the last four months of 1998 which impacted
overall market interest rates.
The net interest margin, on a fully taxable equivalent basis, was 4.25% and
4.72% for the three and nine months ended September 30, 1999, respectively, as
compared to 4.58% and 4.43% for the same periods in 1998.
INVESTMENT SECURITIES AND MONEY MARKET INSTRUMENTS
Interest income on investment securities, on a fully taxable equivalent basis,
increased $11.8 million and $5.6 million to $37.5 million and $94.9 million for
the three months ended September 30, 1999, as compared to the same periods in
1998, respectively. The increase for the three and nine months ended
September 30, 1999 is the result of an increase in average investment
securities of $1.0 billion and $338.3 million, offset by a decrease in the
yield earned on average investment securities of 48 basis points and 51 basis
points, as compared to the same periods in 1998, respectively.
Interest income on money market instruments decreased $5.4 million to $35.1
million for the three months ended September 30, 1999, as compared to the same
period in 1998. The decrease for the three months ended September 30, 1999 is
a result of a decrease of $113.7 million in average money market instruments,
in addition to a decrease of 56 basis points in the yield earned on average
money market instruments, as compared to the same period in 1998.
Interest income on money market instruments increased $9.9 million to $122.3
million for the nine months ended September 30, 1999, as compared to the same
period in 1998. The increase for the nine months ended September 30, 1999 is a
result of an increase of $637.8 million in average money market instruments,
offset by a decrease of 73 basis points in the yield earned, as compared to the
same period in 1998.
The changes in average money market instruments and investment securities are
primarily a result of the timing of receipt of funds from asset
securitizations, deposits, net loan payments, long-term debt and bank notes,
and maturities of investment securities. Funds received from these sources are
invested in short-term, liquid money market instruments and investment
securities available-for-sale until the funds are needed for loan growth and
other liquidity needs. In addition, average money market instruments were also
higher during the nine months ended September 30, 1999, as a result of the
investment of the net proceeds from the issuance of common stock by the
Corporation in January 1999, until used to complete the acquisition of the
credit card business of PNC in March 1999, and for other general corporate
purposes.
LOAN RECEIVABLES
Interest income generated by the Corporation's loan receivables increased
$23.0 million to $472.7 million for the three months ended September 30, 1999
and $218.0 million to $1.5 billion for the nine months ended September 30,
1999, as compared to the same periods in 1998. The increase is primarily
attributable to an increase in average loan receivables of $1.4 billion and
$2.6 billion for the three and nine months ended September 30, 1999,
respectively, as compared to the same periods in 1998. The yield earned by the
Corporation on loan receivables declined 75 basis points to 13.31% and 52 basis
points to 13.60% for the three and nine months ended September 30, 1999,
respectively, as compared to the same periods in 1998.
Table 1 presents the Corporation's period-end loan receivables distribution by
loan type, excluding securitized loans. Loan receivables increased 9.1% to
$14.7 billion at September 30, 1999, respectively, compared to $13.5 billion at
December 31, 1998. The increase in loan receivables includes $2.7 billion of
credit card receivables related to the acquisition of the credit card business
of PNC. In addition, during the nine months ended September 30, 1999, the
Corporation securitized loan receivables totaling $10.3 billion, while $4.1
billion of previously securitized loans amortized back into the Corporation's
loan portfolio.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Loans held for securitization:
Domestic:
Credit card.......................... $ 3,862,068 $ 1,135,004
Other consumer....................... 756,022 114,747
------------------ -----------------
Total domestic loans held for
securitization.................... 4,618,090 1,249,751
Foreign................................ 1,196,970 442,517
------------------ -----------------
Total loans held for
Securitization.................... 5,815,060 1,692,268
Loan portfolio:
Domestic:
Credit card.......................... 6,123,695 7,981,106
Other consumer....................... 1,592,377 2,748,511
------------------ -----------------
Total domestic loan portfolio...... 7,716,072 10,729,617
Foreign................................ 1,159,292 1,046,482
------------------ -----------------
Total loan portfolio............... 8,875,364 11,776,099
------------------ -----------------
Total loan receivables............. $ 14,690,424 $ 13,468,367
================== =================
DEPOSITS
Total interest expense on deposits increased $21.1 million and $66.7 million to
$230.4 million and $665.9 million for the three and nine months ended
September 30, 1999, respectively, compared to the same periods in 1998. The
increase in interest expense for the three and nine months ended September 30,
1999 is the result of an increase in average interest-bearing deposits of $2.8
billion and $2.9 billion, respectively, offset by a 53 basis point and 55 basis
point decline in the rate paid on average interest-bearing deposits,
respectively, as compared with the same periods in 1998. The increases in
average interest-bearing deposits for the three and nine months ended
September 30, 1999 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.
BORROWED FUNDS
Interest expense on short-term borrowings was $9.2 million and $26.4 million
for the three and nine months ended September 30, 1999, as compared to $9.0
million and $15.0 million for the same periods in 1998, respectively. The
increases are primarily the result of an increase in average short-term
borrowings of $26.0 million and $333.4 million for the three and nine months
ended September 30, 1999, offset by a 7 basis point and 73 basis point decline
in the rates paid on average short-term borrowings, as compared to the same
periods in 1998. The increases in average short-term borrowings for the three
and nine months ended September 30, 1999 were to provide funding for the
Corporation's short-term liquidity needs.
Total interest expense on long-term debt and bank notes for the three and nine
months ended September 30, 1999 decreased to $96.2 million and $277.8 million,
respectively, as compared to $98.9 million and $284.5 million for the same
periods in 1998. The declines in interest expense are primarily a result of the
decrease of 40 basis points and 39 basis points in the rates paid on average
long-term debt and bank notes, offset by the increase in average long-term debt
and bank notes of $218.6 million and $218.3 million for the three and nine
months ended September 30, 1999, respectively, as compared to the same periods
in 1998.
Table 2 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three and nine months ended
September 30, 1999 and 1998.
TABLE 2: STATEMENT OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
September 30, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 3,689 4.41% $ 41
Foreign................................... 1,949,700 5.23 25,704
------------ ----------
Total interest-earning time deposits
in other banks....................... 1,953,389 5.23 25,745
Federal funds sold and securities purchased
under resale agreements.................... 714,266 5.21 9,377
Investment securities(a):
Taxable................................... 2,692,985 5.32 36,116
Tax-exempt(b)............................. 96,788 5.53 1,348
------------ ----------
Total investment securities........... 2,789,773 5.33 37,464
Loans held for securitization:
Domestic.................................. 3,227,950 13.02 105,914
Foreign................................... 1,094,648 13.34 36,797
------------ ----------
Total loans held for securitization... 4,322,598 13.10 142,711
Loans:
Domestic:
Credit card............................. 7,069,013 13.21 235,360
Other consumer.......................... 1,588,307 14.28 57,187
------------ ----------
Total domestic loans.................. 8,657,320 13.41 292,547
Foreign................................... 1,113,766 13.34 37,450
------------ ----------
Total loans........................... 9,771,086 13.40 329,997
------------ ----------
Total interest-earning assets......... 19,551,112 11.07 $ 545,294
Cash and due from banks....................... 567,976
Premises and equipment, net................... 1,672,239
Other assets.................................. 7,315,586
Reserve for possible credit losses............ (327,877)
------------
Total assets.......................... $ 28,779,036
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the three months
ended September 30, 1999 was $472.
For the Three Months Ended
September 30, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 11,287,050 5.85% $ 166,484
Money market deposit accounts........... 4,346,288 5.01 54,920
Interest-bearing transaction accounts... 35,542 3.90 349
Savings accounts........................ 8,922 4.18 94
------------ ----------
Total domestic interest-bearing
deposits............................. 15,677,802 5.61 221,847
Foreign:
Time deposits........................... 673,309 5.04 8,551
------------ ----------
Total interest-bearing deposits....... 16,351,111 5.59 230,398
Borrowed funds:
Short-term borrowings:
Domestic................................ 421,641 5.71 6,065
Foreign................................. 245,576 5.08 3,144
------------ ----------
Total short-term borrowings........... 667,217 5.48 9,209
Long-term debt and bank notes:
Domestic(c)............................. 5,572,523 6.13 86,063
Foreign................................. 625,806 6.42 10,131
------------ ----------
Total long-term debt and bank notes... 6,198,329 6.16 96,194
------------ ----------
Total borrowed funds.................. 6,865,546 6.09 105,403
------------ ----------
Total interest-bearing liabilities.... 23,216,657 5.74 335,801
Demand deposits............................... 646,194
Other liabilities............................. 1,080,845
------------
Total liabilities..................... 24,943,696
Stockholders' equity.......................... 3,835,340
------------
Total liabilities and stockholders'
equity............................... $ 28,779,036
============ ----------
Net interest income................... $ 209,493
==========
Net interest margin................... 4.25
Interest rate spread.................. 5.33
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Three Months Ended
September 30, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 4,014 4.55% $ 46
Foreign................................... 2,594,776 5.80 37,919
------------ ----------
Total interest-earning time deposits
in other banks....................... 2,598,790 5.80 37,965
Federal funds sold and securities purchased
under resale agreements.................... 182,570 5.59 2,571
Investment securities(a):
Taxable................................... 1,659,607 5.83 24,370
Tax-exempt(b)............................. 94,575 5.60 1,336
------------ ----------
Total investment securities........... 1,754,182 5.81 25,706
Loans held for securitization:
Domestic.................................. 2,043,504 14.29 73,623
Foreign................................... 724,533 13.97 25,512
------------ ----------
Total loans held for securitization... 2,768,037 14.21 99,135
Loans:
Domestic:
Credit card............................. 6,204,907 14.33 224,124
Other consumer.......................... 2,478,017 13.60 84,946
------------ ----------
Total domestic loans.................. 8,682,924 14.12 309,070
Foreign................................... 1,238,554 13.31 41,543
------------ ----------
Total loans........................... 9,921,478 14.02 350,613
------------ ----------
Total interest-earning assets......... 17,225,057 11.88 $ 515,990
Cash and due from banks....................... 437,933
Premises and equipment, net................... 1,647,176
Other assets.................................. 4,363,096
Reserve for possible credit losses............ (197,943)
------------
Total assets.......................... $ 23,475,319
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the three months
ended September 30, 1999 was $467.
For the Three Months Ended
September 30, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 8,790,345 6.28% $ 139,071
Money market deposit accounts........... 3,665,430 5.48 50,616
Interest-bearing transaction accounts... 29,659 4.74 354
Savings accounts........................ 8,253 4.66 97
------------ ----------
Total domestic interest-bearing
deposits............................. 12,493,687 6.04 190,138
Foreign:
Time deposits........................... 1,065,454 7.12 19,123
------------ ----------
Total interest-bearing deposits....... 13,559,141 6.12 209,261
Borrowed funds:
Short-term borrowings:
Domestic ............................... 321,776 5.64 4,575
Foreign................................. 319,410 5.47 4,401
------------ ----------
Total short-term borrowings........... 641,186 5.55 8,976
Long-term debt and bank notes:
Domestic(c)............................. 5,759,459 6.49 94,147
Foreign................................. 220,288 8.48 4,710
------------ ----------
Total long-term debt and bank notes... 5,979,747 6.56 98,857
------------ ----------
Total borrowed funds.................. 6,620,933 6.46 107,833
------------ ----------
Total interest-bearing liabilities.... 20,180,074 6.23 317,094
Demand deposits............................... 433,497
Other liabilities............................. 701,105
------------
Total liabilities..................... 21,314,676
Stockholders' equity.......................... 2,160,643
------------
Total liabilities and stockholders'
equity............................... $ 23,475,319
============ ----------
Net interest income................... $ 198,896
==========
Net interest margin................... 4.58
Interest rate spread.................. 5.65
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Nine Months Ended
September 30, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 3,434 3.82% $ 98
Foreign................................... 2,316,316 5.10 88,418
------------ ----------
Total interest-earning time deposits
in other banks....................... 2,319,750 5.10 88,516
Federal funds sold and securities purchased
under resale agreements.................... 917,202 4.93 33,800
Investment securities(a):
Taxable................................... 2,286,548 5.32 90,908
Tax-exempt(b)............................. 95,092 5.65 4,018
------------ ----------
Total investment securities........... 2,381,640 5.33 94,926
Loans held for securitization:
Domestic.................................. 3,005,294 13.69 307,639
Foreign................................... 911,904 13.84 94,430
------------ ----------
Total loans held for securitization... 3,917,198 13.72 402,069
Loans:
Domestic:
Credit card............................. 7,363,871 13.45 740,676
Other consumer.......................... 2,011,251 13.92 209,402
------------ ----------
Total domestic loans.................. 9,375,122 13.55 950,078
Foreign................................... 1,028,564 13.65 105,011
------------ ----------
Total loans........................... 10,403,686 13.56 1,055,089
------------ ----------
Total interest-earning assets......... 19,939,476 11.23 $1,674,400
Cash and due from banks....................... 518,780
Premises and equipment, net................... 1,642,604
Other assets.................................. 6,000,740
Reserve for possible credit losses............ (290,067)
------------
Total assets.......................... $ 27,811,533
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the nine months
ended September 30, 1999 was $1,406.
For the Nine Months Ended
September 30, 1999
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 10,837,995 5.89% $ 477,727
Money market deposit accounts........... 4,284,486 4.90 157,121
Interest-bearing transaction accounts... 36,263 4.14 1,124
Savings accounts........................ 47,605 4.31 1,535
------------ ----------
Total domestic interest-bearing
deposits............................. 15,206,349 5.61 637,507
Foreign:
Time deposits........................... 703,047 5.39 28,366
------------ ----------
Total interest-bearing deposits....... 15,909,396 5.60 665,873
Borrowed funds:
Short-term borrowings:
Domestic................................ 431,508 5.48 17,687
Foreign................................. 232,488 5.04 8,758
------------ ----------
Total short-term borrowings........... 663,996 5.32 26,445
Long-term debt and bank notes:
Domestic(c)............................. 5,589,438 6.09 254,762
Foreign................................. 448,948 6.86 23,051
------------ ----------
Total long-term debt and bank notes... 6,038,386 6.15 277,813
------------ ----------
Total borrowed funds.................. 6,702,382 6.07 304,258
------------ ----------
Total interest-bearing liabilities.... 22,611,778 5.74 970,131
Demand deposits............................... 565,282
Other liabilities............................. 964,844
------------
Total liabilities..................... 24,141,904
Stockholders' equity.......................... 3,669,629
------------
Total liabilities and stockholders'
equity............................... $ 27,811,533
============ ----------
Net interest income................... $ 704,269
==========
Net interest margin................... 4.72
Interest rate spread.................. 5.49
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
For the Nine Months Ended
September 30, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS
Interest-earning assets:
Interest-earning time deposits in other
banks:
Domestic.................................. $ 10,731 4.88% $ 392
Foreign................................... 2,149,328 5.83 93,714
------------ ----------
Total interest-earning time deposits
in other banks....................... 2,160,059 5.82 94,106
Federal funds sold and securities purchased
under resale agreements.................... 439,065 5.58 18,321
Investment securities(a):
Taxable................................... 1,952,423 5.84 85,336
Tax-exempt(b)............................. 90,942 5.79 3,941
------------ ----------
Total investment securities........... 2,043,365 5.84 89,277
Loans held for securitization:
Domestic.................................. 2,214,653 14.43 239,023
Foreign................................... 595,991 14.42 64,270
------------ ----------
Total loans held for securitization... 2,810,644 14.43 303,293
Loans:
Domestic:
Credit card............................. 5,841,733 14.19 620,174
Other consumer.......................... 2,178,656 13.76 224,246
------------ ----------
Total domestic loans.................. 8,020,389 14.08 844,420
Foreign................................... 903,068 13.54 91,475
------------ ----------
Total loans........................... 8,923,457 14.02 935,895
------------ ----------
Total interest-earning assets......... 16,376,590 11.76 $1,440,892
Cash and due from banks....................... 455,656
Premises and equipment, net................... 1,635,140
Other assets.................................. 4,011,147
Reserve for possible credit losses............ (184,063)
------------
Total assets.......................... $ 22,294,470
============
(a) Average amounts for investment securities available-for-sale are based on
market values; if these securities were carried at amortized cost, there
would be no impact on the net interest margin.
(b) The fully taxable equivalent (FTE) basis adjustment for the nine months
ended September 30, 1998 was $1,379.
For the Nine Months Ended
September 30, 1998
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits........................... $ 8,785,414 6.32% $ 415,290
Money market deposit accounts........... 3,435,610 5.51 141,501
Interest-bearing transaction accounts... 30,921 4.77 1,103
Savings accounts........................ 9,267 4.70 326
------------ ----------
Total domestic interest-bearing
deposits............................. 12,261,212 6.09 558,220
Foreign:
Time deposits........................... 765,966 7.14 40,907
------------ ----------
Total interest-bearing deposits....... 13,027,178 6.15 599,127
Borrowed funds:
Short-term borrowings:
Domestic ............................... 126,866 5.64 5,351
Foreign................................. 203,726 6.31 9,618
------------ ----------
Total short-term borrowings........... 330,592 6.05 14,969
Long-term debt and bank notes:
Domestic(c)............................. 5,598,714 6.49 271,644
Foreign................................. 221,333 7.79 12,888
------------ ----------
Total long-term debt and bank notes... 5,820,047 6.54 284,532
------------ ----------
Total borrowed funds.................. 6,150,639 6.51 299,501
------------ ----------
Total interest-bearing liabilities.... 19,177,817 6.26 898,628
Demand deposits............................... 404,744
Other liabilities............................. 672,030
------------
Total liabilities..................... 20,254,591
Stockholders' equity.......................... 2,039,879
------------
Total liabilities and stockholders'
equity............................... $ 22,294,470
============ ----------
Net interest income................... $ 542,264
==========
Net interest margin................... 4.43
Interest rate spread.................. 5.50
(c) Includes the impact of interest rate swap agreements used to change fixed-
rate funding sources to floating-rate funding sources.
OTHER OPERATING INCOME
Total other operating income increased 34.5% and 32.9% to $1.1 billion and $3.1
billion for the three and nine months ended September 30, 1999, respectively,
from $831.2 million and $2.3 billion for the same periods in 1998. The
increase in other operating income is primarily attributable to a $247.7
million and $629.5 million, or 34.2% and 31.2% increase in securitization
income for the three and nine months ended September 30, 1999, respectively, as
compared to the same periods in 1998. The increase in securitization income is
primarily attributable to the growth in average securitized loans of $10.1
billion and $8.6 billion, or 24.5% and 21.7%, for the three and nine months
ended September 30, 1999, respectively, in addition to a decline in the average
rate paid to investors in the Corporation's securitized loans. Also, during
the three months ended March 31, 1999, the Corporation increased the fees
charged to its credit card and other consumer loan customers. As a result,
loan servicing fees related to securitized loans, credit card fees, and other
income increased for the three and nine months ended September 30, 1999, as
compared to the same periods in 1998. Interchange income increased for the
three and nine months ended September 30, 1999, as compared to the same periods
in 1998, as the Corporation's credit card sales volume increased.
OTHER OPERATING EXPENSE
Total other operating expense increased 25.0% to $751.4 million and 33.3% to
$2.3 billion, for the three and nine months ended September 30, 1999,
respectively, from $601.2 million and $1.7 billion for the same periods in
1998. The growth in other operating expense reflects the Corporation's
continued investment in business development activities to enhance the ability
of the Corporation to attract and retain customers. For the nine months ended
September 30, 1999, the Corporation added 9.5 million new accounts, of which
2.8 million new accounts were acquired from PNC, as compared to 6.6 million new
accounts for the same period in 1998. The Corporation added 280 new
endorsements from organizations, including 118 in the United Kingdom and
Canada, during the nine months ended September 30, 1999.
Amortization of intangible assets increased $28.3 million and $79.3 million to
$40.1 million and $111.4 million for the three and nine months ended
September 30, 1999, respectively, as a result of the Corporation's loan
portfolio acquisitions, including the acquisition of the credit card business
of PNC in March 1999. Table 3 provides further detail regarding the
Corporation's other operating expenses.
TABLE 3: OTHER EXPENSE COMPONENT OF OTHER OPERATING EXPENSE
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1999 1998 1999 1998
---------- --------- ----------- ---------
(unaudited)
Purchased services................ $ 71,641 $ 58,069 $ 241,751 $ 168,246
Advertising....................... 43,850 45,403 158,016 103,811
Collection........................ 10,467 8,554 30,029 23,514
Stationery and supplies........... 8,391 8,338 27,555 23,514
Service bureau.................... 12,396 9,370 34,003 25,022
Postage and delivery.............. 61,699 49,433 215,025 143,631
Telephone usage................... 18,582 17,056 55,356 41,929
Credit card fraud losses.......... 27,154 19,380 73,433 60,104
Amortization of intangible assets. 40,085 11,807 111,408 32,062
Computer software................. 13,631 12,235 43,853 36,039
Other............................. 30,023 35,059 107,009 90,630
---------- --------- ----------- ---------
Total other operating expense... $ 337,919 $ 274,704 $ 1,097,438 $ 748,502
========== ========= =========== =========
YEAR 2000 Readiness Disclosure
Project Overview
Like most major financial institutions, the Corporation is highly dependent
upon technology to deliver products and services to its Customers. Credit card
transactions and authorizations require a variety of voice and data networks
and service providers to operate successfully. Sophisticated computer and
telecommunication systems enable the Corporation to process these transactions
and service customer accounts. Many computer applications have been written
using two digits rather than four to define the applicable year, and therefore
may not recognize a date using "00" as the Year 2000. Computer applications may
not be able to properly process transactions with dates in the year 2000 or
thereafter.
The Corporation began its Year 2000 Project ("the Project") to address this
issue in 1994. The Project is organized into six major components: Application
Software, Infrastructure, Business Unit, Telecommunication, Desktop
Infrastructure, and Readiness Testing. The Application Software component
includes all internally developed and purchased software used to perform
specific business functions. This portion of the Project encompasses nearly all
mission critical applications, including systems that service and support
loans, deposits, customer service activities, and financial systems. The
Infrastructure component includes the computer hardware and associated system's
software upon which Application Software is run and includes mainframe and
distributed system platforms. The Business Unit component encompasses
internally developed or acquired application software that is managed outside
the technology area. It also includes all vendor supplied services and non-
technology equipment, such as building operation and security systems. The
Telecommunication component incorporates all voice and data networking and
switching components; voice response technology; and local, long distance, and
international telecommunication services. The Desktop Infrastructure component
addresses local area network and desktop computing environments and includes
all hardware and software components. The Readiness Testing component is the
final comprehensive integrated test of Application Software and Infrastructure
in a fully Year 2000 compliant environment. This includes interfaces with major
vendors such as MasterCard International and Visa International.
Project Readiness
The Corporation has completed the Application Software, Infrastructure,
Business Unit, Telecommunication, and Desktop Infrastructure components of the
Project. This included the assessment, renovation, validation and
implementation phases.
A stand-alone test environment has been constructed to perform extensive final
readiness testing. The stand-alone test environment is separate from the
Corporation's production systems and thus reduces the risk that testing will
disrupt the Corporation's operations. This environment includes a voice and
data network as well as mainframe, distributed, and desktop computers. All
critical applications will be fully tested in a Year 2000 compliant environment
as a final assurance step. Testing within the readiness environment began in
March 1999. The Corporation has successfully completed three test cycles. The
fourth test cycle has started and will be completed in December. This final
series of tests enables the Corporation to perform integrated testing on
applications installed into production during 1999 through September. In
addition to testing the transition to the new century, all applications
installed are tested for other key dates including, year-end 2000 and the Year
2000 leap year. Also, the Corporation has had portions of its applications
systems which are significantly affected by Year 2000 dates independently
reviewed by third-party vendors.
The Corporation relies on various third-parties to perform processing services
and to supply critical system applications. Critical third-party provided
software applications are tested regardless of vendor statements of fitness to
ensure Year 2000 compliance. Regular meetings and site visits have been held
and will continue to be held with MasterCard International, Visa International,
and other critical third-party service providers to evaluate and monitor their
project status. The Corporation considers all critical vendor-supplied
products to be compliant.
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 September 30,
1999 were approximately $32 million. The majority of the remaining cost is
associated with completing the readiness testing 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 or cause customers to curtail credit card spending for a
period of time.
Contingency Plans
The Corporation has a standing contingency plan that addresses various types of
business interruptions. This plan is tested and updated on a regular basis. The
Corporation has developed and will continue to refine contingency plans to
address possible negative impacts specific to the Year 2000 problem. Round
table testing of contingency plans has been conducted for all major business
areas. Contingency plans will continue to be reviewed throughout the remainder
of 1999 and into early 2000. Two comprehensive simulation exercises have been
conducted to further test contingency plans. Contingency plans for critical
third-party providers have also been completed. The Corporation also maintains
a standing contingency plan to address liquidity and capital needs. A plan
specific to Year 2000 implications has been completed. This plan will continue
to be modified as necessary based on identified or perceived market risks.
Safe Harbor for Forward-Looking Statements
The Corporation's 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 make such
products or services Year 2000 compliant; insufficient staff and other
technical resources; disruptions in the overall consumer credit market due to
Year 2000 problems or perceived problems; disruptions in capital markets due to
Year 2000 problems; and disruptions with local or national infrastructure.
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 4.00%
at September 30, 1999, compared to 3.86% at December 31, 1998. The
Corporation's managed delinquency, as a percentage of managed loans, was 4.67%
at September 30, 1999, as compared to 4.62% at December 31, 1998.
Table 4 presents the stages of delinquency of the Corporation's loan portfolio,
excluding loans held for securitization.
TABLE 4: DELINQUENT LOANS
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Loan portfolio....................... $8,875,364 $11,776,099
Loans delinquent:
30 to 59 days...................... $ 127,410 1.44% $ 166,352 1.41%
60 to 89 days...................... 68,580 .77 93,699 .80
90 or more days.................... 158,985 1.79 194,472 1.65
----------- ----- ----------- -----
Total............................ $ 354,975 4.00% $ 454,523 3.86%
=========== ===== =========== =====
Loans delinquent by geographic area:
Domestic........................... $ 322,071 4.17% $ 424,324 3.95%
Foreign............................ 32,904 2.84 30,199 2.89
The Corporation may modify the terms of its credit card and other consumer loan
agreements with borrowers who have experienced financial difficulties, by
either reducing their interest rate or placing them on nonaccrual status.
These other nonperforming loans, excluding loans held for securitization, are
presented in the following table.
TABLE 5: OTHER NONPERFORMING LOANS
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------ ------------------
(unaudited)
Nonaccrual loans..................... $ 7,232 $ 3,182
Reduced-rate loans................... 166,753 157,737
------------------ ------------------
Total other nonperforming loans.... $ 173,985 $ 160,919
================== ==================
Other nonperforming loans as a % of
ending loan portfolio.............. 1.96% 1.37%
The Corporation's total managed other nonperforming loans as a percentage of
ending managed loans was 2.37% at September 30, 1999, as compared to 2.01% at
December 31, 1998.
NET CREDIT LOSSES
The Corporation's policy is generally to charge off accounts when they become
180 days contractually past due. The Corporation sells certain charged-off
receivables and records the proceeds received from these sales as recoveries,
thereby reducing net credit losses.
Net credit losses for the three and nine months ended September 30, 1999 were
$105.0 million and $292.5 million, compared to $76.8 million and $222.3 million
for the same periods in 1998, respectively. Net credit losses do not include
credit losses from securitized loans, which are charged to the related trusts
in accordance with their respective contractual agreements. The increase in
net credit losses for the three and nine months ended September 30, 1999,
reflects an increase in the Corporation's outstanding loan receivables, the
general economic conditions, and the seasoning of the Corporation's accounts,
offset by recoveries from the sale of charged-off receivables.
Annualized net credit losses as a percentage of average loan receivables were
2.98% and 2.72% for the three and nine months ended September 30, 1999,
respectively, as compared to 2.42% and 2.53% for the same periods in 1998. The
Corporation's annualized managed credit losses as a percentage of average
managed loans for the three and nine months ended September 30, 1999 were 4.34%
and 4.37%, respectively, as compared to 4.42% and 4.34% for the same periods in
1998.
Reserve and Provision for Possible Credit Losses
The loan portfolio is regularly reviewed to determine an appropriate reserve
for possible credit losses based upon the impact of economic conditions on the
borrowers' ability to repay, past collection experience, the risk
characteristics of the portfolio, and other factors. A provision is charged to
operating expense to maintain the reserve at an appropriate level. Table 6
presents an analysis of the Corporation's reserve for possible credit losses.
The provision for possible credit losses for the three and nine months ended
September 30, 1999, increased 33.7% to $105.0 million and 29.9% to $319.2
million, respectively, as compared to $78.6 million and $245.7 million for the
three and nine months ended September 30, 1998. In addition, the Corporation
records acquired reserves for current period loan portfolio acquisitions.
During the nine months ended September 30, 1999, the Corporation recorded $84.3
million of reserves acquired in connection with the credit card business of PNC
and other loan portfolios. The reserve for possible credit losses is a general
allowance applicable to the Corporation's loan portfolio and does not include
an allocation for credit risk related to securitized loans. Losses on
securitized loans are absorbed directly by the related trusts under their
respective contractual agreements, and reduce securitization income rather than
the reserve for possible credit losses.
TABLE 6: RESERVE FOR POSSIBLE CREDIT LOSSES
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited)
Reserve for possible credit
losses, beginning of period....... $ 326,897 $ 194,685 $ 216,911 $ 162,476
Reserves acquired................ 194 9,673 84,285 20,181
Provision for possible
credit losses................... 105,020 78,569 319,240 245,709
Foreign currency translation..... 957 62 197 131
Credit losses:
Domestic:
Credit card.................. (123,680) (88,967) (326,205) (256,256)
Other consumer............... (20,339) (21,104) (79,355) (65,862)
--------- --------- --------- ---------
Total domestic credit
losses.................... (144,019) (110,071) (405,560) (322,118)
Foreign........................ (11,095) (6,490) (29,471) (14,698)
--------- --------- --------- ---------
Total credit losses........ (155,114) (116,561) (435,031) (336,816)
Recoveries:
Domestic:
Credit card.................. 39,991 34,447 115,339 101,437
Other consumer............... 5,197 3,829 16,241 9,382
--------- --------- --------- ---------
Total domestic recoveries.. 45,188 38,276 131,580 110,819
Foreign........................ 4,953 1,498 10,913 3,702
--------- --------- --------- ---------
Total recoveries........... 50,141 39,774 142,493 114,521
--------- --------- --------- ---------
Net credit losses................ (104,973) (76,787) (292,538) (222,295)
--------- --------- --------- ---------
Reserve for possible credit
losses, end of period............. $ 328,095 $ 206,202 $ 328,095 $ 206,202
========= ========= ========= =========
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 the 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 December 31, 2000. The
Corporation is currently working on its programming changes and expects to
complete and implement the guidelines prior to or on December 31, 2000.
The Corporation will accelerate charge-off of some delinquent loans when it
implements the guidelines, and does not expect implementation to have a
material impact on the Corporation's consolidated financial statements.
CAPITAL ADEQUACY
The Corporation is subject to risk-based capital guidelines adopted by the
Federal Reserve Board for bank holding companies. The Bank is also subject to
similar capital requirements adopted by the Office of the Comptroller of the
Currency. 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 and the
Bank's financial statements. Under the capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
federal bank regulators about components, risk weightings, and other factors.
At September 30, 1999, the Corporation's and the Bank's capital exceeded all
minimum regulatory requirements to which they are subject, and the Bank was
"well-capitalized" as defined under the federal bank regulatory guidelines.
The risk-based capital ratios, shown in Table 7, have been computed in
accordance with regulatory accounting practices.
TABLE 7: REGULATORY CAPITAL RATIOS
September 30, 1999
-------------------------------------------
Minimum Well-Capitalized
Ratios Requirements Requirements
---------- ------------- ----------------
(unaudited)
MBNA Corporation
Tier 1............................ 16.59% 4.00% (a)
Total............................. 19.06 8.00 (a)
Leverage.......................... 15.36 4.00 (a)
MBNA America Bank, N.A.
Tier 1............................ 12.91% 4.00% 6.00%
Total............................. 15.56 8.00 10.00
Leverage.......................... 12.18 4.00 5.00
(a) Not applicable for bank holding companies.
In January 1999, the Corporation issued 50 million shares of common stock,
raising approximately $1.2 billion of capital, net of issuance costs. The
Corporation contributed $300.0 million of the net proceeds from this offering
to the Bank in order to complete the acquisition of the credit card business of
PNC. The Corporation used the remaining portion for other general corporate
purposes.
During the nine months ended September 30, 1999, the Corporation declared
dividends on its preferred and common stock of $179.1 million. The payment of
dividends in the future and the amount of such dividends, if any, will be at
the discretion of the Corporation's Board of Directors. The payment of
preferred and common stock dividends by the Corporation may be limited by
certain factors, including regulatory capital requirements, broad enforcement
powers of the federal bank regulatory agencies, and tangible net worth
maintenance requirements under the Corporation's revolving credit facilities.
The payment of common stock dividends may also be limited by the terms of the
outstanding preferred stock. If the Corporation has not paid scheduled
dividends on the preferred stock, or declared the dividends and set aside funds
for payment, the Corporation may not declare or pay any cash dividends on the
common stock. In addition, if the Corporation defers interest payments for
consecutive periods covering 10 semiannual periods or 20 consecutive quarterly
periods, depending on the series, on its guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
the Corporation may not be permitted to declare or pay any cash dividends on
the Corporation's capital stock or interest on debt securities that have equal
or lower priority than the junior subordinated deferrable interest debentures.
The Corporation is a legal entity separate and distinct from its banking and
other subsidiaries. Therefore, the primary source of funds for payment of
preferred and common stock dividends by the Corporation is dividends received
from the Bank. The amount of dividends that a bank may declare in any year is
subject to certain regulatory restrictions. Generally, dividends declared in a
given year by a national bank are limited to its net profit, as defined by
regulatory agencies, for that year, combined with its retained net income for
the preceding two years, less any required transfers to surplus or to a fund
for the retirement of any preferred stock. In addition, a national bank may
not pay any dividends in an amount greater than its undivided profit. Under
current regulatory practice, national banks may pay dividends only out of
current operating earnings. Also, a bank may not declare dividends if such
declaration would leave the bank inadequately capitalized. Therefore, the
ability of the Bank to declare dividends will depend on its future net income
and capital requirements. At September 30, 1999, the amount of retained
earnings available for declaration and payment of dividends from the Bank to
the Corporation was $1.6 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 September 30, 1999. If this facility
had been drawn upon as of September 30, 1999, the amount of retained earnings
available for declaration of dividends would have been limited to $615.3
million.
On October 7, 1999, the Corporation's Board of Directors declared a quarterly
dividend of $.07 per common share, payable January 1, 2000 to shareholders of
record as of December 15, 1999. Also, on October 7, 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 $.3759
per share on the Adjustable Rate Cumulative Preferred Stock, Series B. The
preferred stock dividends are payable January 15, 2000 to stockholders of
record as of December 30, 1999.
LIQUIDITY AND RATE SENSITIVITY
The Corporation seeks to maintain prudent levels of liquidity, interest rate
risk, and foreign currency exchange rate risk.
Liquidity Management
Liquidity management is the process by which the Corporation manages the use
and availability of various funding sources to meet its current and future
operating needs. These needs change as loans grow, deposits mature, and
payments on obligations are made. Because the characteristics of the
Corporation's assets and liabilities change, liquidity management is a dynamic
process, affected by the pricing and maturity of loans, deposits, and other
assets and liabilities. This process is also affected by changes in the
relationship between short-term and long-term interest rates.
To facilitate liquidity management, the Corporation uses a variety of funding
sources to establish a maturity pattern that provides a prudent mixture of
short- and long-term funds. The Corporation obtains funds through deposits and
debt issuance, and uses securitization of the Corporation's loan receivables as
a major funding alternative.
Total deposits at September 30, 1999 and December 31, 1998 were $17.6 billion
and $15.4 billion, respectively. Included in total deposits at September 30,
1999 are $792.5 million of foreign time deposits which all mature within one
year. Table 8 presents the maturities of the Corporation's deposits at
September 30, 1999.
TABLE 8: MATURITIES OF DEPOSITS AT SEPTEMBER 30, 1999
(dollars in thousands)
Direct Other Total
Deposits Deposits Deposits
------------ ------------ ------------
(unaudited)
Three months or less(a).............. $ 6,059,469 $ 1,077,481 $ 7,136,950
Over three months through twelve
Months.............................. 3,628,308 1,106,035 4,734,343
Over one year through five years..... 2,801,686 2,945,231 5,746,917
Over five years...................... 6,159 - 6,159
------------ ------------ ------------
Total deposits..................... $ 12,495,622 $ 5,128,747 $ 17,624,369
============ ============ ============
(a) Includes money market deposit accounts, noninterest-bearing demand
deposits, interest-bearing transaction accounts, and savings accounts
totaling $5.0 billion.
The Corporation also held $2.9 billion in investment securities and $3.8
billion of money market instruments at September 30, 1999, compared with $1.9
billion in investment securities and $3.6 billion of money market instruments
at December 31, 1998. The Corporation partially funded the acquisition of the
credit card business of PNC in March 1999 from the proceeds of maturing money
market instruments. The Corporation's investment securities primarily consist
of high-quality, AAA-rated securities, most of which can be used as collateral
under repurchase agreements. Of the $2.9 billion in investment securities at
September 30, 1999, $645.3 million is anticipated to mature within twelve
months. The Corporation's investment securities available-for-sale portfolio,
which consists primarily of short-term and variable-rate securities, was $2.7
billion at September 30, 1999, compared to $1.7 billion at December 31, 1998,
as the Corporation increased its investment in U.S. Treasury securities as part
of its contingency funding plans related to its Year 2000 readiness planning.
These investment securities, along with the money market instruments, provide
increased liquidity and flexibility to support the Corporation's funding
requirements.
Estimated maturities, including the impact of estimated prepayments of the
Corporation's investment securities portfolio, are presented in Table 9.
TABLE 9: SUMMARY OF INVESTMENT SECURITIES AT SEPTEMBER 30, 1999
(dollars in thousands) (unaudited)
Estimated Maturity
--------------------------------------------
Within 1 Over
Year 1-5 Years 6-10 Years 10 Years
---------- ---------- ---------- --------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $ 150,602 $1,263,441 $ - $ -
State and political subdivisions
of the United States............. 97,128 - - -
Asset-backed and other securities. 392,005 726,743 38,683 88
---------- ---------- ---------- --------
Total investment securities
available-for-sale............. $ 639,735 $1,990,184 $ 38,683 $ 88
========== ========== ========== ========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 5,486 $ - $ - $228,532
State and political subdivisions
of the United States............. 95 207 - 5,845
Asset-backed and other securities. - 13,114 - 25,920
---------- ---------- ---------- --------
Total investment securities
held-to-maturity............... $ 5,581 $ 13,321 $ - $260,297
========== ========== ========== ========
Book Market
Value Value
---------- ----------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies obligations.. $1,414,043 $1,414,043
State and political subdivisions
of the United States............. 97,128 97,128
Asset-backed and other securities. 1,157,519 1,157,519
---------- ----------
Total investment securities
available-for-sale............. $2,668,690 $2,668,690
========== ==========
HELD-TO-MATURITY
U.S. Treasury and other U.S.
government agencies obligations.. $ 234,018 $ 212,202
State and political subdivisions
of the United States............. 6,147 5,698
Asset-backed and other securities. 39,034 39,006
---------- ----------
Total investment securities
held-to-maturity............... $ 279,199 $ 256,906
========== ==========
Interest Rate Sensitivity
Interest rate sensitivity refers to the change in earnings resulting from
fluctuations in interest rates, variability in spread relationships, and the
differences in repricing intervals between assets and liabilities. The
management of interest rate sensitivity attempts to maximize earnings by
minimizing any negative impacts of changing market rates, asset and liability
mix, and prepayment trends.
In addition to on-balance-sheet activities, interest rate risk includes the
interest rate sensitivity of securitization income from securitized loans and
the impact of off-balance-sheet financial instruments. Off-balance-sheet
financial instruments include interest rate swap agreements. The Corporation
uses interest rate swap agreements to change fixed-rate funding sources to
floating-rate funding sources to better match the rate sensitivity of the
Corporation's assets. The Corporation analyzes its level of interest rate risk
using several analytical techniques, which reflect the impact of on-balance-
sheet and off-balance-sheet financial instruments.
An analytical technique that the Corporation uses to measure interest rate risk
is simulation analysis. The Corporation's simulation analysis uses key
assumptions which include cash flows and maturities of interest rate sensitive
instruments; changes in market conditions; loan volumes and pricing; consumer
preferences; fixed-rate credit card repricings as part of the Corporation's
normal planned business strategy; and management's capital plans. Also
included in the analysis are various actions which the Corporation would
undertake to minimize the impact of adverse movements in interest rates. The
Corporation has the contractual right to reprice fixed-rate credit card loans
at any time by giving notice to the Customer. Accordingly, a key assumption in
the simulation analysis is the repricing of fixed-rate credit card loans in
response to an upward movement in interest rates, with a lag of approximately
45 days between interest rate movements and fixed-rate credit card loan
repricings. The Corporation has repriced its fixed-rate credit card loans on
numerous occasions in the past, and expects to continue to do so in the future
in response to changes in interest rates, market conditions, or other factors.
Based on the simulation analysis at September 30, 1999, the Corporation could
experience a decrease in projected net income during the next twelve months of
approximately $34 million, if interest rates at the time the simulation
analysis was performed increased 100 basis points over twelve months.
The assumptions used in the simulation analysis are inherently uncertain and,
as a result, the analysis cannot precisely predict the impact of higher
interest rates on net income. Actual results would differ from simulated
results due to timing, magnitude, and frequency of interest rate changes,
changes in market conditions, and management strategies to offset its potential
exposure, among other factors.
Foreign Currency Exchange Rate Sensitivity
Foreign currency exchange rate risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange
rates. The Corporation's foreign currency exchange rate risk is primarily
limited to the unhedged position of the Corporation's net investment in its
foreign subsidiaries. The Corporation uses forward exchange contracts and
foreign exchange swap agreements to reduce its exposure to foreign currency
exchange rate risk. Management reviews the foreign currency exchange rate risk
of the Corporation on a routine basis. During this review, management
regularly reviews the net impact to stockholders' equity under various foreign
exchange rate scenarios. At September 30, 1999, the Corporation would expect a
decrease in stockholders' equity, net of tax, of approximately $32 million as a
result of a 10% depreciation of the Corporation's unhedged foreign exposure to
the U.S. dollar position.
The Corporation does not have any other off-balance-sheet financial
instruments.
ASSET SECURITIZATION
Asset securitization of loan receivables is accomplished primarily through the
public and private issuance of asset-backed securities. As loan receivables
are securitized, the Corporation's on-balance-sheet funding needs are reduced
by the amount of loans securitized.
Asset securitization involves the sale, generally to a trust, of a pool of loan
receivables. The Corporation continues to own the accounts, which generate the
loan receivables. In addition, the Corporation also sells the rights to new
loan receivables, including most fees generated by and payments received from
these accounts. The trust sells undivided interests in the trust to investors,
while the Corporation retains the remaining undivided interest. The Corporation
continues to service the accounts and receives a servicing fee for doing so.
During the revolving period, which generally ranges from 24 to 108 months, the
trust makes no principal payments to the investors. Instead, the trust uses
principal payments received on the accounts to purchase new loan receivables
generated by these accounts, in accordance with the terms of the transaction,
so that the principal dollar amount of the investor's undivided interest
remains unchanged. Once the revolving period ends, the trust distributes
principal payments to investors according to the terms of the transaction.
When the trust allocates principal payments to the investors, the Corporation's
loan receivables increase by the amount of any new purchases or cash advance
activity on the accounts.
During the three and nine months ended September 30, 1999, the Corporation
securitized credit card and other consumer loan receivables totaling $5.7
billion and $10.3 billion, respectively, including the securitization of 500.0
million pounds sterling (approximately $802.0 million) by MBNA Europe and
CAD$250.0 million (approximately $170.2 million) by MBNA Canada. Amortization
of previously securitized loan receivables totaled $2.5 billion and $4.1
billion for the three and nine months ended September 30, 1999, respectively.
The total amount of outstanding securitized loans was $52.7 billion or 78.2% of
managed loans at September 30, 1999, compared to $46.2 billion or 77.4% at
December 31, 1998. An additional $751.0 million of previously securitized
loans is scheduled to amortize during the remainder of 1999. The amortization
amounts are based upon estimated amortization periods, which are subject to
change.
Distribution of principal to investors may begin sooner if the average
annualized yield (generally including interest income, interchange, and other
fees) for three consecutive months, drops below a minimum yield (generally
equal to the sum of the coupon rate payable to investors, contractual servicing
fees, and principal credit losses during the period) or certain other events
occur. Table 10 compares the average annualized yield for the three month
period ended September 30, 1999, to the minimum yield for each transaction.
The yield for each of the transactions is presented on a cash basis and
includes various credit card or other fees as specified in the securitization
agreements.
TABLE 10: YIELDS ON SECURITIZED TRANSACTIONS (a)
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust 94-2(b).................. 24.25% 16.49% 7.76%
MasterTrust II 94-C.................. 18.30 12.47 5.83
MasterTrust II 94-E.................. 19.71 12.71 7.00
MasterTrust II 95-A.................. 18.30 12.50 5.80
MasterTrust II 95-B.................. 18.30 12.37 5.93
MasterTrust II 95-C.................. 18.30 12.43 5.87
MasterTrust II 95-D.................. 18.30 12.29 6.01
MasterTrust II 95-E.................. 18.30 12.44 5.86
Cards No. 1.......................... 20.61 11.11 9.50
MasterTrust II 95-F.................. 18.30 13.35 4.95
MasterTrust II 95-G.................. 18.30 12.43 5.87
MasterTrust II 95-I.................. 18.30 12.37 5.93
MasterTrust II 95-J.................. 18.30 12.45 5.85
MasterTrust II 96-A.................. 18.30 12.42 5.88
MasterTrust II 96-B.................. 18.30 12.48 5.82
MasterTrust II 96-C.................. 18.30 12.36 5.94
MasterTrust II 96-D.................. 18.30 12.36 5.94
Cards No. 2.......................... 20.61 11.18 9.43
MasterTrust II 96-E.................. 18.30 12.39 5.91
MasterTrust II 96-F.................. 18.30 12.56 5.74
MasterTrust II 96-G.................. 18.30 12.41 5.89
MasterTrust II 96-H.................. 18.32 12.34 5.98
MasterTrust II 96-I.................. 18.33 12.35 5.98
MasterTrust II 96-J.................. 18.30 12.37 5.93
MasterTrust II 96-K.................. 18.30 12.36 5.94
MasterTrust II 96-L.................. 18.32 12.27 6.05
MasterTrust II 96-M.................. 18.32 12.39 5.93
Cards No. 3.......................... 20.61 11.24 9.37
MasterTrust II 97-A.................. 18.32 12.18 6.14
MasterTrust II 97-B.................. 18.30 12.41 5.89
MasterTrust II 97-C.................. 18.30 12.34 5.96
MasterTrust II 97-D.................. 18.32 12.32 6.00
MasterTrust II 97-E.................. 18.33 12.34 5.99
MasterTrust II 97-F.................. 18.30 12.28 6.02
MasterTrust II 97-G.................. 18.30 12.38 5.92
Cards No. 4.......................... 20.61 11.55 9.06
MasterTrust II 97-H.................. 18.32 12.39 5.93
Three-Month Average
----------------------- Yield in
Annualized Minimum Excess of
Yield Yield Minimum
---------- ----------- ---------
(unaudited)
MasterTrust II 97-I.................. 18.30% 12.32% 5.98%
MasterTrust II 97-J.................. 18.30 12.35 5.95
MasterTrust II 97-K.................. 18.30 12.36 5.94
MasterTrust II 97-L.................. 18.32 12.25 6.07
MasterTrust II 97-M.................. 18.33 12.37 5.96
MasterTrust II 97-N.................. 18.32 12.31 6.01
MasterTrust II 97-O.................. 18.30 12.39 5.91
Consumer Loan MasterTrust 97-1(c).... 18.72 13.67 5.05
MasterTrust II 98-A.................. 18.30 12.33 5.97
Cards No. 5.......................... 20.61 12.90 7.71
MasterTrust II 98-B.................. 18.33 12.38 5.95
MasterTrust II 98-C.................. 18.30 12.33 5.97
MasterTrust II 98-D.................. 18.30 12.25 6.05
MasterTrust II 98-E.................. 18.33 12.45 5.88
MasterTrust II 98-F.................. 18.32 12.35 5.97
MasterTrust II 98-G.................. 18.30 12.38 5.92
MasterTrust II 98-H.................. 18.30 12.37 5.93
MasterTrust II 98-I.................. 18.30 12.50 5.80
Cards No. 6.......................... 20.61 11.71 8.90
MasterTrust II 98-J.................. 18.30 12.14 6.16
MasterTrust II 98-K.................. 18.30 12.50 5.80
MasterTrust II 98-L.................. 18.30 12.40 5.90
Cards No. 7.......................... 20.61 11.91 8.70
Gloucester Credit Card Trust 98-1.... 17.53 10.45 7.08
UK 98-A.............................. 16.56 13.32 3.24
MasterTrust II 99-A.................. 18.30 12.42 5.88
MasterTrust II 99-B.................. 18.30 12.43 5.87
Acquired Portfolio MasterTrust 99-1.. 21.53 13.16 8.37
MasterTrust II 99-C.................. 18.32 12.45 5.87
Cards No. 8.......................... 20.61 11.81 8.80
MasterTrust II 99-D.................. 18.30 12.54 5.76
(a) MasterTrust II 99-E issued on July 7, 1999, MasterTrust II 99-G
issued on July 29, 1999, MasterTrust II 99-F issued on August 3, 1999,
Cards No. 9 issued on August 12, 1999, MasterTrust II 99-H issued
on August 18, 1999, MasterTrust II 99-I issued on September 8, 1999,
MasterTrust II 99-J issued on September 23, 1999, and Gloucester Credit
Card Trust 99-1 issued on September 23, 1999 are excluded from the yields
presented above as a result of their recency.
(b) Represents a transaction that has entered its scheduled controlled
amortization period.
(c) Yields are provided for informational purposes only. Distribution to
Investors may begin sooner if the credit enhancement amount falls
below a predetermined contractual level.
MBNA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(unaudited)
The following supplemental financial information presents selected managed
asset data and managed ratios pertaining to the Corporation. This information
is used to evaluate the Corporation's financial condition as well as the impact
securitizations have on the Corporation's managed assets.
MANAGED ASSET DATA
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------ -----------------
AT PERIOD END:
Loans held for securitization....... $ 5,815,060 $ 1,692,268
Loan portfolio...................... 8,875,364 11,776,099
Securitized loans................... 52,662,759 46,172,739
------------------ -----------------
Total managed loans............... $ 67,353,183 $ 59,641,106
================== =================
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
AVERAGE FOR THE PERIOD:
Loans held for
securitization......... $ 4,322,598 $ 2,768,037 $ 3,917,198 $ 2,810,644
Loan portfolio.......... 9,771,086 9,921,478 10,403,686 8,923,457
Securitized loans....... 51,512,620 41,375,203 48,282,248 39,672,626
----------- ----------- ----------- -----------
Total managed loans... $65,606,304 $54,064,718 $62,603,132 $51,406,727
=========== =========== =========== ===========
MANAGED RATIOS:
Delinquency............ 4.67% 4.69%
Net credit losses...... 4.34 4.42 4.37% 4.34%
Net interest margin
(on an FTE basis)..... 7.33 7.55 7.54 7.46
PART II-OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Stockholder proposals to be included in the Corporation's proxy material for
the 2000 Annual Meeting of Stockholders must be received at the Corporation's
principal executive offices not later than November 20, 1999.
With respect to any other stockholder proposals, a Corporation Bylaw provides
that no business may be brought before an annual or special meeting unless the
stockholder has given written notice of the business to the Corporation's
Secretary no later than 60 days prior to the date of the meeting, or if less
than 70 days notice of the date of the meeting has been given, the stockholder
has given written notice within 10 days following notice or publication of the
date of the meeting.
The Corporation's 2000 Annual Meeting of Stockholders is scheduled for
April 25, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Index of Exhibits
Exhibit Description of Exhibit
------- ----------------------
10 Form of Executive Non-Competition Agreement
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements
27 Financial Data Schedule
Exhibit 10: Form of Executive Non-Competition Agreement
Attached is a form of Executive Non-Competition Agreement entered into by the
following executive officers. The number of shares of restricted stock issued
under Section 4 of this agreement is as follows.
Executive Officers Shares
- -------------------- ------
Gregg Bacchieri 52,515
Ronald W. Davies 52,515
Richard K. Struthers 52,515
Kenneth F. Boehl 44,640
David W. Spartin 44,640
Jules J. Bonavolonta 42,015
Michael G. Rhodes 47,265
John W. Scheflen 44,640
Vernon H.C. Wright 42,015
EXECUTIVE NON-COMPETITION AGREEMENT
This Agreement is made among ____________ (the "Executive"), MBNA
Corporation (the "Corporation") and MBNA America Bank, N.A. (the "Bank") (the
Corporation and the Bank are collectively designated in this Agreement as the
"Company").
1. Purpose. Executive is a senior executive of the Company and has
extensive knowledge of the Company's business and marketing practices,
customer and vendor relationships and other matters of a confidential nature
which are proprietary and highly valuable to the Company. The Company's
business would be substantially damaged if, following the end of the
Executive's employment by the Company, the Executive were to be employed by a
competitor of the Company or to use or disclose to others the Company's
business information. The purpose of this Agreement is to set forth certain
agreements between the Executive and the Company relating to the Executive's
activities following the end of the Executive's employment by the Company.
2. Non-competition. Unless otherwise agreed in writing by the Company,
the Executive will not, directly or indirectly, in any capacity (including as
director, officer, employee, stockholder, partner, owner, consultant or
advisor) provide services of any kind, anywhere in the world, until eighteen
(18) months following the end of the Executive's employment by the Company
("Restricted Period"), to any issuer of MasterCard, VISA, American Express,
Discover Card or any other type of credit card or charge card, any bank or
other lender which makes consumer loans of any kind, any insurance company or
agency which issues or markets personal lines insurance policies, or any
affiliate of any such entity. These services include, but are not limited to,
services relating to (i) sales, endorsement, co-branding or similar agreements,
(ii) product development and marketing, (iii) credit approval and collections,
(iv) customer service, (v) funding or other treasury matters, (vi) loan
portfolio acquisitions, mergers or other acquisitions, (vii) financial, legal
or accounting matters, or (viii) acquisition of or advice or assistance to
others to acquire the Corporation or the Bank or beneficial ownership of 10% or
more of the Corporation's Common Stock. In addition, the Executive agrees that
during the Restricted Period, the Executive will not provide services to any
affinity group or commercial organization, or any affiliate of such entity,
relating to an affinity or co-branded credit card, consumer loan or personal
lines insurance program with the Company or any other entity. The Executive
agrees that these restrictions are reasonable.
3. Confidentiality.
a. Following the end of the Executive's employment by the Company, or
sooner upon request of the Company, the Executive will deliver to the Company
the originals and all copies of all records and other documents acquired in the
Executive's capacity as an employee of the Company which relate to the Company
or its business, customers, vendors or employees and which are in the
Executive's possession or within the Executive's control, other than records
and other documents which (i) are a matter of public record, (ii) relate
directly and primarily to the Executive's compensation and benefits as an
employee of the Company, or (iii) the Company gives the Executive permission to
retain in the Executive's possession. The Executive shall not retain or
deliver to any other person any copies of any such records or documents.
b. The Executive will not use for the Executive's benefit or for the
benefit of any person other than the Company, and will not ever disclose to any
person who is not a Company employee, or to any Company employee except as
necessary in the performance of the Executive's duties to the Company, any
confidential information concerning the Company. The determination of whether
information concerning the Company is confidential shall be made by the Company
in its sole discretion. The Executive acknowledges that all information
concerning the Company, its plans, programs, policies, finances, customers,
vendors, employees and business shall be deemed confidential unless a matter of
public record or unless publicly known otherwise than through a breach by the
Executive of this Agreement.
c. The Executive will not make any statement in writing, orally or
otherwise, to any person, including without limitation any employee, customer
or other person known by the Executive to be a business associate of the
Company or of its directors, officers or employees, which criticizes,
disparages, condemns or impugns the reputation or character of the Company or
any director, officer or employee of the Company, whether or not true and
whether or not confidential.
d. The Executive shall not disclose this Agreement or any provision of
this Agreement to any person without the Company's prior written consent except
that (i) the Executive may disclose the terms of this Agreement as necessary in
connection with obtaining personal tax, financial planning or legal advice; and
(ii) the Executive may disclose the terms of Section 2 to any person who
proposes to engage the Executive as an employee or consultant. This obligation
of the Executive shall continue notwithstanding the filing of a copy of this
Agreement with the Securities and Exchange Commission.
e. Disclosure which otherwise would constitute a breach of this
Section 3 shall not be deemed a breach thereof to the extent such disclosure is
required by law.
f. The obligations of the Executive under Section 3.a. and 3.b. shall
continue so long as the information remains confidential. The obligations of
the Executive under Section 3.d. shall expire eighteen (18) months after the
end of the Executive's employment with the Company.
4. Consideration to Executive. As consideration to the Executive for the
execution and performance of this Agreement, the Company will issue to the
Executive __________ shares of the Corporation's Common Stock subject to the
restrictions set forth in Section 5 of this Agreement ("Restricted Shares") and
will make the payments described in Section 6 of this Agreement. Additional
consideration to the Executive for the execution and performance of this
Agreement includes the continued employment of the Executive by the Company,
and the compensation and benefits received and to be received by the Executive
in connection with the Executive's present and future employment by the
Company.
5. Restricted Shares.
a. Except as provided below in Section 5.b. or as otherwise approved
in writing by the Company, the Restricted Shares may not be sold or transferred
by the Executive until after the Restricted Period.
b. If the Executive's employment is terminated due to the death or
Disability (as defined in the Policies adopted under the Corporation's 1997
Long Term Incentive Plan ("Policies")) of the Executive, all restrictions on
the Restricted Shares shall lapse.
c. As described in Section 4, the Restricted Shares have been granted
as consideration for the Executive agreeing to the provisions of Sections 2 and
3 of this Agreement. Accordingly, the restrictions on the Restricted Shares
shall not lapse upon a Change in Control (as defined in the Policies) or a
termination of the Executive's employment due to Retirement (as defined in the
Policies), notwithstanding any provisions in the Policies to the contrary.
Furthermore, the Restricted Shares shall not be forfeited as a result of
termination of the Executive's employment, regardless of the reason for
termination, notwithstanding any provision in the Policies to the contrary.
d. If during the Restricted Period the Executive violates any
provision of Section 2 or 3 of this Agreement, then in addition to any other
remedies available at law or in equity or under this Agreement, the Restricted
Shares shall be forfeited.
e. Even if the Executive is no longer obligated to comply with Section
2 of this Agreement in the limited circumstances described in Section 6.a. of
this Agreement, the Restricted Shares remain subject to the terms of this
Section 5 as these shares have been granted as consideration for the Executive
agreeing to the provisions of Sections 2 and 3 of this Agreement. Accordingly,
in such case the Restricted Shares may not be sold or transferred during the
Restricted Period as provided in Section 5.a. and the Restricted Shares shall
be forfeited if during the Restricted Period the Executive violates any
provision of Section 2 or 3.
f. The Corporation agrees to issue the Restricted Shares registered in
the name of the Executive upon execution of this Agreement. Thereafter the
Executive shall have all of the rights of a stockholder of the Corporation with
respect to such shares, including the right to receive dividends and to vote,
subject to this Agreement. If any of the shares are forfeited, the Executive
authorizes the Corporation to cancel the shares and the certificates for the
shares and irrevocably appoints the Corporation as its attorney-in-fact for
this purpose. The Corporation will hold certificates representing the shares
until the Restricted Period has lapsed or terminated. Upon lapse or
termination of the Restricted Period, the Corporation will deliver to the
Executive a certificate representing the shares. Certificates delivered to the
Executive evidencing such shares may bear a legend to the effect that they may
be sold, pledged or otherwise transferred only in accordance with applicable
federal and state securities laws. The Executive agrees to sell or transfer
such shares only in accordance with applicable laws.
g. The Executive shall be entitled to receive dividends and
distributions paid by the Corporation with respect to the shares subject to the
following. Dividends paid by the Corporation in cash with respect to the
shares shall be paid to the Executive as and when paid by the Corporation to
its stockholders, and the Executive shall be entitled to retain such cash
dividends notwithstanding subsequent forfeiture of the shares. Dividends paid
by the Corporation in stock or other property or shares issued with respect to
Common Stock in connection with a stock split, reclassification of shares or
recapitalization of the Corporation, shall be issued in the name of the
Executive but retained by the Corporation until expiration of the Restricted
Period and, in the event of a forfeiture, shall be retained by the Corporation
without payment of any consideration to the Executive.
6. Payments.
a. If the Executive's employment ends (i) as a result of the
Executive's retirement, resignation or otherwise voluntarily by the Executive
or (ii) for Cause (as defined below) by the Company, the Company may elect by
written notice to the Executive sent within 30 business days following the end
of the Executive's employment, to commence making the payments set forth in
Section 6.c. ("Non-Compete Payments") during the Restricted Period, in which
event the Executive shall be required to comply with Section 2 of this
Agreement. If the Company does not make such election, the Executive shall not
be required to comply with Section 2 of this Agreement. During the 30 business
day notice period under this Section 6.a. the Executive shall be required to
comply with Section 2 of the Agreement unless the Company sends a written
notice to the Executive stating that the Company will not require such
compliance.
b. If the Executive's employment is terminated by the Company without
Cause, the Company shall make the Non-Compete Payments during the Restricted
Period and the Executive shall be required to comply with Section 2 of this
Agreement.
c. The Non-Compete Payments will be an amount equal to the Executive's
salary at the time of the Executive's employment termination payable in bi-
weekly installments.
d. If the Executive fails to comply with Section 2 or 3 of this
Agreement, the Company will not be obligated to make the Non-Compete Payments.
e. The Company will not be obligated to make the Non-Compete Payments
if the Executive receives a payment under the Company's Supplemental Executive
Retirement Plan. In such case, the Executive shall still be required to comply
with Section 2 of this Agreement.
f. For purposes of this Agreement, "Cause" shall mean the occurrence
of one of the following:
(i) A conviction of the Executive of (i) a felony or (ii) any lesser
crime or offense than a felony involving the property of the Company, provided
that such lesser crime or offense causes demonstrable and serious injury to the
Company, monetary or otherwise.
(ii) The willful engaging by the Executive in conduct which has
caused demonstrable and serious injury to the Company, monetary or otherwise,
as evidenced by a determination in a binding and final judgment, order or
decree of a court or administrative 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.
(iii) Willful gross neglect of the Executive's duties, willful gross
dereliction of duty or other grave misconduct by the Executive and failure to
cure such situation within thirty (30) days after receipt of notice thereof
from the Chief Executive Officer of the Corporation or the Bank. For purposes
of this Agreement, no act, or failure to act, by an Executive shall be deemed
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Company. Notwithstanding the foregoing, an Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to the Executive 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 of the Corporation at a meeting called and held for
such purpose (after reasonable notice to the Executive and an opportunity for
the Executive, together with the Executive's counsel, to be heard before the
Board of Directors), finding that in the good faith opinion of the Board of
Directors the Executive is guilty of conduct set forth above in clauses (i),
(ii), or (iii) of this subsection and specifying the particulars thereof in
detail.
g. Following termination of the Executive's employment with the
Company, the Executive will be entitled to receive any benefits to which the
Executive is entitled under the Company's pension and profit sharing plans and
under its other compensation and benefit plans in accordance with the terms of
those plans, including provisions, if applicable, for termination, forfeiture
or reduction of benefits upon termination of employment or engaging in
competition with the Company. No financial benefits will accrue to the
Executive under those plans following the end of the Executive's employment by
the Company.
h. The Executive will not, as a condition to receipt of the Non-
Compete Payments, be required to seek or accept other employment of any kind,
nor will any compensation received by the Executive from another employer be
deducted or credited against such payments.
i. The Executive will not be excused from compliance with Section 2 of
this Agreement if the Company has failed to make Non-Compete Payments because
the Company believes in good faith that the Executive has violated the terms of
this Agreement, even if the Company's belief is incorrect, provided that the
Company resumes payments when it determines that its belief is incorrect. In
such event, the Executive's only remedy shall be a suit for damages against the
Company.
7. Other Terms.
a. In the event of the death or permanent disability of the Executive,
this Agreement shall terminate and the Executive shall not be entitled to
receive any Non-Compete Payments.
b. This Agreement represents the entire agreement, and supersedes all
prior and contemporaneous agreements and understandings, relative to the same
subject matter. Except as set forth below, this Agreement does not affect or
amend prior agreements as to the Company's benefit plans available generally
to employees, the Corporation's Supplemental Executive Retirement Plan if
applicable, split dollar insurance agreements if applicable, stock option and
restricted stock agreements if applicable, and any Executive Deferred
Compensation Plan agreements with the Executive. Notwithstanding the
preceding sentence, the Company and the Executive agree that the term
"competition" in the Corporation's Supplemental Executive Retirement Plan and
in the Policies adopted under the Corporation's 1997 Long Term Incentive Plan
shall be interpreted to include the activities described in Section 2 of this
Agreement.
b. This Agreement may not be amended or changed, and neither party
shall be deemed to have waived any provision of this Agreement, unless the
amendment or change or waiver is set forth in a writing signed by a duly
authorized officer of the Company and by the Executive. The failure of either
party to enforce any term of this Agreement shall not constitute a waiver of
any rights or deprive the party of the right to insist thereafter upon strict
adherence to that or any other term of this Agreement, nor shall a waiver of
any breach of this Agreement constitute a waiver of any preceding or succeeding
breach.
c. The Executive acknowledges that the Executive has read and
understands each provision of this Agreement and has had an opportunity for
counsel of the Executive's choice to review this Agreement and that no promises
or inducements have been made for the Executive to sign this Agreement except
as expressly set forth in this Agreement.
d. The Executive agrees to pay to the Company any federal, state and
local income and other taxes required by law to be withheld with respect to any
compensation, benefit or other action taken by or pursuant to this Agreement,
including, without limitation, any taxes payable with respect to vesting of
restricted stock. Such payment may be made in cash or, with respect to the
vesting of the Restricted Shares, by delivering shares of Common Stock,
including shares of Common Stock otherwise deliverable in connection with the
vesting of the Restricted Shares, as authorized in the Plan and Policies as the
same may be amended from time to time. The Company has the right to deduct from
any payment of any kind otherwise due the Executive any such taxes, or to
retain or sell without notice a sufficient number of Restricted Shares to be
issued to the Executive to cover any such taxes. The Executive shall not be
entitled to be "grossed up" with respect to any taxes.
e. This Agreement shall be interpreted under the laws of the State of
Delaware, without regard to principles of conflicts of laws.
f. The Executive agrees that any breach by the Executive of any
provision of Section 2 or 3 of this Agreement would cause the Company
irreparable damage and that no remedy available at law would be adequate for
such violation. Accordingly, in addition to any other remedies available at
law or in equity or under any Company benefit or compensation plan or this
Agreement, the Company may immediately seek enforcement of this Agreement in a
court of appropriate jurisdiction by means of specific performance or
injunction, without posting of a bond, or otherwise.
g. It is the intention of the parties that this Agreement shall be
enforceable to the fullest extent allowed by law. In the event that a court
holds any provision of Section 2 or Section 3 of this Agreement to be
unenforceable, the parties agree that, if allowed by law, that provision shall
be reduced to the degree necessary to render it enforceable without affecting
the rest of this Agreement, and, if such reduction is not allowed by law, the
parties shall promptly agree in writing to a provision to be substituted
therefor which will have an effect as close as possible to the invalid
provision that is consistent with applicable law. The invalidity or
unenforceability of any provision of this Agreement shall not affect or limit
the validity and enforceability of the other provisions hereof.
h. This Agreement shall inure to the benefit of and be binding upon
and enforceable by the Company's successors and assigns, including any
successor through merger or purchase of substantially all the assets of the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
____________ day of ____________, 1999.
WITNESS/ATTEST: EXECUTIVE
______________________________ ______________________________
Executive
MBNA CORPORATION
______________________________ By:______________________________
MBNA AMERICA BANK, N.A.
______________________________ By:______________________________
Exhibit 12: Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
(dollars in thousands)
For the Nine Months Ended
September 30,
--------------------------
1999 1998
------------ ------------
(unaudited)
INCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,138,383 $ 869,107
Fixed charges.................................... 979,685 910,813
Interest capitalized during period, net of
amortization of previously capitalized interest. (2,144) (4,965)
------------ ------------
Earnings, for computation purposes............... $ 2,115,924 $ 1,774,955
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on deposits, short-term borrowings,
and long-term debt and bank notes, expensed or
capitalized..................................... $ 972,579 $ 903,796
Portion of rents representative of the interest
factor.......................................... 7,106 7,017
------------ ------------
Fixed charges.................................... 979,685 910,813
Preferred stock dividend requirements............ 17,234 17,404
------------ ------------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes........................ $ 996,919 $ 928,217
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
including interest on deposits.................. 2.12 1.91
For the Nine Months Ended
September 30,
--------------------------
1999 1998
------------ ------------
(unaudited)
EXCLUDING INTEREST ON DEPOSITS
Earnings:
Income before income taxes....................... $ 1,138,383 $ 869,107
Fixed charges.................................... 313,812 311,686
Interest capitalized during period, net of
amortization of previously capitalized interest. (2,160) (4,981)
------------ ------------
Earnings, for computation purposes............... $ 1,450,035 $ 1,175,812
============ ============
Fixed Charges and Preferred Stock Dividend
Requirements:
Interest on short-term borrowings and long-term
debt and bank notes, expensed or capitalized.... $ 306,706 $ 304,669
Portion of rents representative of the interest
factor.......................................... 7,106 7,017
------------ ------------
Fixed charges.................................... 313,812 311,686
Preferred stock dividend requirements............ 17,234 17,404
------------ ------------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes........................ $ 331,046 $ 329,090
============ ============
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements,
excluding interest on deposits.................. 4.38 3.57
The ratio of earnings to combined fixed charges and preferred stock dividend
requirements is computed by dividing (i) income before income taxes and fixed
charges less interest capitalized during such period, net of amortization of
previously capitalized interest, by (ii) fixed charges and preferred stock
dividend requirements. Fixed charges consist of interest, expensed or
capitalized, on borrowings (including or excluding deposits, as applicable) and
the portion of rental expense which is deemed representative of interest. The
preferred stock dividend requirements represent the pretax earnings which would
have been required to cover such dividend requirements on the Corporation's
Preferred Stock outstanding.
b. Reports on Form 8-K
1. Report dated July 7, 1999, reporting the securitization of
$1.0 billion of credit card receivables by MBNA America Bank, N.A.
2. Report dated July 13, 1999, reporting MBNA Corporation's earnings
release for the second quarter of 1999.
3. Report dated July 29, 1999, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
4. Report dated July 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 July 1999.
5. Report dated August 12, 1999, reporting the securitization of
250.0 million pounds sterling of credit card receivables by
MBNA International Bank Limited.
6. Report dated August 18, 1999, reporting the securitization of
$1.0 billion of credit card receivables by MBNA America Bank, N.A.
7. Report dated August 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 August 1999.
8. Report dated September 8, 1999, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
9. Report dated September 23, 1999, reporting the securitization of
$1.0 billion of credit card receivables by MBNA America Bank, N.A.
10. Report dated September 30, 1999, reporting the net credit losses and
loan delinquencies for MBNA America Bank, N.A., for its net loan
portfolio and managed loan portfolio for September 1999.
11. Report dated October 7, 1999, reporting MBNA Corporation's earnings
release for the third quarter of 1999.
12. Report dated October 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 October 1999.
13. Report dated November 5, 1999, reporting the securitization of
$750.0 million of credit card receivables by MBNA America Bank, N.A.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBNA CORPORATION
Date: November 15, 1999 By: /s/ M. Scot Kaufman
------------------------
M. Scot Kaufman
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MBNA
CORPORATION'S FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 430,289
<INT-BEARING-DEPOSITS> 2,596,012
<FED-FUNDS-SOLD> 1,235,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,668,690
<INVESTMENTS-CARRYING> 279,199
<INVESTMENTS-MARKET> 256,906
<LOANS> 14,690,424<F1>
<ALLOWANCE> 328,095
<TOTAL-ASSETS> 29,547,080
<DEPOSITS> 17,624,369
<SHORT-TERM> 609,194
<LIABILITIES-OTHER> 1,251,194
<LONG-TERM> 6,096,160
0
86
<COMMON> 8,018
<OTHER-SE> 3,958,059
<TOTAL-LIABILITIES-AND-EQUITY> 29,547,080
<INTEREST-LOAN> 1,457,158<F1>
<INTEREST-INVEST> 93,520
<INTEREST-OTHER> 122,316
<INTEREST-TOTAL> 1,672,994
<INTEREST-DEPOSIT> 665,873
<INTEREST-EXPENSE> 970,131
<INTEREST-INCOME-NET> 702,863
<LOAN-LOSSES> 319,240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,295,809
<INCOME-PRETAX> 1,138,383
<INCOME-PRE-EXTRAORDINARY> 1,138,383
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 704,659
<EPS-BASIC> .87
<EPS-DILUTED> .83
<YIELD-ACTUAL> 11.23<F2>
<LOANS-NON> 7,232<F3>
<LOANS-PAST> 158,985<F3>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 166,753<F3>
<ALLOWANCE-OPEN> 216,911
<CHARGE-OFFS> 435,031
<RECOVERIES> 142,493
<ALLOWANCE-CLOSE> 328,095
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Includes loans held for securitization.
<F2> On a fully taxable equivalent basis.
<F3> Excludes loans held for securitization.
</FN>
</TABLE>
