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, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10683
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MBNA Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1713008
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wilmington, Delaware 19884-0141
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(Address of principal executive offices) (Zip Code)
(800) 362-6255
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
---------- ----------
Common Stock, $.01 Par Value - 1,277,671,875 Shares
Outstanding as of September 30, 2002
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
September 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Income - 3
For the Three and Nine Months Ended September 30, 2002
and 2001 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Nine Months Ended September 30, 2002 and 2001
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Nine Months Ended September 30, 2002 and 2001
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations (unaudited)
Item 3. Quantitative and Qualitative Disclosure About Market Risk 77
Item 4. Controls and Procedures 77
Part II - Other Information
Item 1. Legal Proceedings 78
Item 6. Exhibits and Reports on Form 8-K 80
Signature 104
Certifications 105
ITEM 1.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
ASSETS
Cash and due from banks......................... $ 1,007,501 $ 962,118
Interest-earning time deposits in other banks... 2,076,491 1,676,863
Federal funds sold.............................. 2,005,000 1,354,000
Investment securities:
Available-for-sale (at market value, amortized
cost of $3,405,245 and $3,077,711 at
September 30, 2002 and December 31, 2001,
respectively)................................ 3,447,467 3,106,884
Held-to-maturity (market value of $491,285
and $426,317 at September 30, 2002 and
December 31, 2001, respectively)............. 485,254 439,987
Loans held for securitization................... 8,739,327 9,929,948
Loan portfolio:
Credit card................................... 9,328,647 8,261,575
Other consumer................................ 8,268,388 6,442,041
------------- -------------
Total loan portfolio........................ 17,597,035 14,703,616
Reserve for possible credit losses............ (983,374) (833,423)
------------- -------------
Net loan portfolio.......................... 16,613,661 13,870,193
Premises and equipment, net..................... 2,157,667 2,112,139
Accrued income receivable....................... 333,000 369,383
Accounts receivable from securitization......... 8,313,066 7,495,501
Intangible assets, net.......................... 3,160,871 2,582,163
Prepaid expenses and deferred charges........... 446,127 344,692
Other assets.................................... 1,847,047 1,204,074
------------- -------------
Total assets................................ $ 50,632,479 $ 45,447,945
============= =============
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................. $ 21,638,276 $ 19,792,466
Money market deposit accounts................. 7,253,121 6,271,850
Noninterest-bearing deposits.................. 979,034 948,440
Interest-bearing transaction accounts......... 45,129 49,234
Savings accounts.............................. 183,242 32,755
------------- -------------
Total deposits.............................. 30,098,802 27,094,745
Short-term borrowings........................... 1,307,880 1,774,816
Long-term debt and bank notes................... 8,264,145 6,867,033
Accrued interest payable........................ 293,066 226,653
Accrued expenses and other liabilities.......... 2,126,476 1,685,980
------------- -------------
Total liabilities........................... 42,090,369 37,649,227
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at September 30, 2002 and
December 31, 2001)............................. 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 1,277,671,875 shares
issued and outstanding at September 30, 2002
and December 31, 2001)......................... 12,777 12,777
Additional paid-in capital...................... 2,234,813 2,529,563
Retained earnings............................... 6,259,962 5,304,725
Accumulated other comprehensive income.......... 34,472 (48,433)
------------- -------------
Total stockholders' equity.................. 8,542,110 7,798,718
------------- -------------
Total liabilities and stockholders' equity.. $ 50,632,479 $ 45,447,945
============= =============
==============================================================================
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,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
INTEREST INCOME
Loan portfolio................ $ 511,878 $ 458,208 $1,466,079 $1,315,359
Loans held for securitization. 237,566 240,983 797,596 731,930
Investment securities:
Taxable..................... 32,653 40,963 103,378 126,783
Tax-exempt.................. 449 675 1,428 2,570
Time deposits in other banks.. 12,056 16,152 35,864 56,511
Federal funds sold............ 8,679 12,019 26,592 45,916
Other interest income......... 84,142 98,036 267,805 280,406
---------- ---------- ---------- ----------
Total interest income...... 887,423 867,036 2,698,742 2,559,475
INTEREST EXPENSE
Deposits...................... 313,826 359,816 942,385 1,102,561
Short-term borrowings......... 11,356 8,313 31,884 12,618
Long-term debt and bank notes. 79,970 83,204 224,109 268,766
---------- ---------- ---------- ----------
Total interest expense..... 405,152 451,333 1,198,378 1,383,945
---------- ---------- ---------- ----------
NET INTEREST INCOME........... 482,271 415,703 1,500,364 1,175,530
Provision for possible credit
losses....................... 288,195 314,322 922,520 855,378
---------- ---------- ---------- ----------
Net interest income after
provision for possible
credit losses................ 194,076 101,381 577,844 320,152
OTHER OPERATING INCOME
Securitization income......... 1,402,121 1,547,483 4,106,681 4,155,511
Interchange................... 93,474 71,944 255,988 217,893
Credit card fees.............. 88,761 83,580 280,186 212,831
Other consumer loan fees...... 20,610 25,626 72,591 66,215
Insurance..................... 43,814 38,309 130,581 97,538
Other......................... 19,365 38,672 52,013 84,114
---------- ---------- ---------- ----------
Total other operating
income.................... $1,668,145 $1,805,614 $4,898,040 $4,834,102
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee
benefits..................... $ 501,713 $ 477,571 $1,445,927 $1,356,087
Occupancy expense of premises. 43,997 39,493 128,150 113,738
Furniture and equipment
expense...................... 60,496 54,424 173,343 161,752
Other......................... 628,189 568,933 1,795,035 1,648,438
---------- ---------- ---------- ----------
Total other operating
expense................... 1,234,395 1,140,421 3,542,455 3,280,015
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.... 627,826 766,574 1,933,429 1,874,239
Applicable income taxes....... 229,784 288,232 707,635 704,714
---------- ---------- ---------- ----------
NET INCOME.................... $ 398,042 $ 478,342 $1,225,794 $1,169,525
========== ========== ========== ==========
EARNINGS PER COMMON SHARE..... $ .31 $ .37 $ .95 $ .91
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION............ .30 .36 .93 .88
=============================================================================
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, 2001... 8,574 1,277,672 $ 86 $ 12,777
Comprehensive income:
Net income................. - - - -
Other comprehensive
income, net of tax........ - - - -
Comprehensive income.........
Cash dividends:
Common-$.20 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 24,015 - 240
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (24,015) - (240)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 2002.. 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
BALANCE, DECEMBER 31, 2000... 8,574 1,277,706 $ 86 $ 12,777
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............ - 13,389 - 134
Stock option tax benefit..... - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (13,423) - (134)
----------- ---------- --------- ----------
BALANCE, SEPTEMBER 30, 2001.. 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 2001.. $2,529,563 $5,304,725 $ (48,433) $ 7,798,718
Comprehensive income:
Net income................ - 1,225,794 - 1,225,794
Other comprehensive
income, net of tax....... - - 82,905 82,905
------------
Comprehensive income........ 1,308,699
------------
Cash dividends:
Common-$.20 per share..... - (259,897) - (259,897)
Preferred................. - (10,660) - (10,660)
Exercise of stock options
and other awards........... 128,131 - - 128,371
Stock option tax benefit.... 125,363 - - 125,363
Amortization of deferred
compensation expense....... 36,267 - - 36,267
Acquisition and retirement
of common stock............ (584,511) - - (584,751)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2002. $2,234,813 $6,259,962 $ 34,472 $ 8,542,110
========== ========== ============= ============
BALANCE, DECEMBER 31, 2000.. $2,721,691 $3,931,248 $ (38,524) $ 6,627,278
Comprehensive income:
Net income................ - 1,169,525 - 1,169,525
Other comprehensive
income, net of tax....... - - 11,286 11,286
------------
Comprehensive income........ 1,180,811
------------
Cash dividends:
Common-$.18 per share..... - (230,005) - (230,005)
Preferred................. - (10,622) - (10,622)
Exercise of stock options
and other awards........... 77,075 - - 77,209
Stock option tax benefit.... 61,605 - - 61,605
Amortization of deferred
compensation expense....... 23,627 - - 23,627
Acquisition and retirement
of common stock............ (323,778) - - (323,912)
---------- ---------- ------------- ------------
BALANCE, SEPTEMBER 30, 2001. $2,560,220 $4,860,146 $ (27,238) $ 7,405,991
========== ========== ============= ============
==============================================================================
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,
--------------------------
2002 2001
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 1,225,794 $ 1,169,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 922,520 855,378
Depreciation, amortization, and accretion....... 541,055 528,373
Benefit for deferred income taxes............... (100,201) (97,391)
Decrease (increase) in accrued income receivable 41,162 (1,809)
Increase in accounts receivable from
securitization................................. (799,890) (2,535,633)
Increase in accrued interest payable............ 62,933 19,439
Increase in other operating activities.......... 231,325 323,062
------------ ------------
Net cash provided by operating activities......... 2,124,698 260,944
INVESTING ACTIVITIES
Net increase in money market instruments.......... (1,026,783) (1,993,292)
Proceeds from maturities of investment securities
available-for-sale............................... 956,296 1,243,103
Proceeds from sale of investment securities
available-for-sale............................... 13,126 505
Purchases of investment securities
available-for-sale............................... (1,293,567) (1,487,416)
Proceeds from maturities of investment securities
held-to-maturity ................................ 26,028 16,167
Purchases of investment securities
held-to-maturity................................. (71,302) (65,666)
Proceeds from securitization of loans............. 10,822,699 9,423,565
Proceeds from sale of loans....................... 620,355 486,219
Loan portfolio acquisitions....................... (3,980,916) (1,026,610)
Increase in loans due to principal payments to
investors in the Corporation's securitization
transactions .................................... (7,497,789) (4,866,667)
Net loan originations............................. (2,942,564) (3,883,720)
Net purchases of premises and equipment........... (275,704) (452,351)
------------ ------------
Net cash used in investing activities............. $ (4,650,121) $ (2,606,163)
For the Nine Months
Ended September 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing deposits, interest-bearing
transaction accounts, and savings accounts....... $ 1,145,374 $ 897,236
Net increase in time deposits..................... 1,746,036 421,021
Net (decrease) increase in short-term borrowings.. (466,197) 1,092,630
Proceeds from issuance of long-term debt
and bank notes................................... 2,095,395 1,375,952
Maturity of long-term debt and bank notes......... (1,235,708) (793,486)
Proceeds from exercise of stock options
and other awards................................. 128,371 77,209
Acquisition and retirement of common stock........ (584,751) (323,912)
Dividends paid.................................... (257,714) (232,172)
------------ ------------
Net cash provided by financing activities......... 2,570,806 2,514,478
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS............. 45,383 169,259
Cash and cash equivalents at beginning of period.. 962,118 971,469
------------ ------------
Cash and cash equivalents at end of period........ $ 1,007,501 $ 1,140,728
============ ============
SUPPLEMENTAL DISCLOSURE
Interest expense paid............................. $ 1,171,812 $ 1,389,898
============ ============
Income taxes paid................................. $ 642,423 $ 394,581
============ ============
==============================================================================
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 ("GAAP") 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 GAAP for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The notes to
the consolidated financial statements contained in the Annual Report on Form
10-K for the year ended December 31, 2001, should be read in conjunction with
these consolidated financial statements. For purposes of comparability,
certain prior period amounts have been reclassified. Operating results for the
three and nine months ended September 30, 2002, are not necessarily indicative
of the results that may be expected for the year ended December 31, 2002.
NOTE B: CHANGE IN ACCOUNTING ESTIMATE FOR INTEREST AND FEES
On July 22, 2002, the Federal Financial Institutions Examination Council
("FFIEC") released draft "Account Management and Loss Allowance Guidance"
("FFIEC guidance") for credit card lending to be effective August 16, 2002.
Subsequently, the FFIEC extended the comment period to September 23, 2002,
without indicating the expected effective date. The FFIEC guidance addresses
credit line management, over-limit practices, workout and forbearance
practices, income recognition and loss allowance practices and policy
exceptions. Management believes that the Corporation substantially complies
with the FFIEC guidance for credit line management, over-limit practices,
workout and forbearance practices and policy exceptions as presently proposed
and that adoption of these guidelines would not materially affect its business
operations or earnings.
In September 2002, the Corporation implemented the FFIEC guidance for
uncollectible accrued interest and fees for its managed loan portfolio. As a
result, the Corporation changed its estimate of the value of accrued interest
and fees in September 2002.
Prior to September 2002, the Corporation accrued interest and fees on loan
receivables until the loan receivables were paid or charged off. When loan
receivables were charged off, the Corporation deducted the accrued interest
and fees related to the loan receivables against current period income. Prior
to the change in the estimated value of accrued interest and fees, and
consistent with the treatment of the Corporation's loan receivables, interest
and fee income on securitized loans continued to be recognized until the
securitized loans were either paid or charged off. When the securitized loans
were charged off, the Corporation deducted the accrued interest and fees
against current period securitization income.
The Corporation recognizes interest income based on the amount of the loan
receivables outstanding and their contractual annual percentage rates. The
Corporation also recognizes fees on loan receivables in earnings as the fees
are assessed according to agreements with the Corporation's loan Customers.
Interest income accrued from the Customer's statement billing cycle date to the
end of the month is included in accrued income receivable on the consolidated
statement of financial condition. Interest income and fees are included in
loan receivables in the consolidated statement of financial condition when
billed. The Corporation adjusts the amount of interest income and fee income
recognized in the current period for its estimate of interest and fee income
that it does not expect to collect in subsequent periods through offsetting
adjustments to the respective income captions and loan receivables. The
estimate of uncollectible interest and fees is based on a migration analysis of
delinquent and current loan receivables that will progress through the various
delinquency stages and will ultimately not be collected. The Corporation also
adjusts the estimated value of accrued interest and fees on securitized loans
for the amount of uncollectible interest and fees that are not expected to be
collected with a corresponding adjustment to securitization income. This
estimate is also based on a migration analysis of delinquent and current
securitized loans that will progress through the various delinquency stages and
ultimately not be collected. The accrued interest and fees on securitized
loans is included in accounts receivable from securitization in the
consolidated statement of financial condition.
In accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," this change in the estimated value of accrued interest and fees has
been recorded as a change in accounting estimate in the third quarter of 2002.
The change in the estimated value of accrued interest and fees resulted in a
decrease to income before income taxes of $263.7 million ($167.2 million after
taxes) or $.13 per common share-assuming dilution for the three and nine months
ended September 30, 2002, through a reduction of $66.3 million of interest
income and $197.4 million of other operating income. This change in the
estimated value of accrued interest and fees also reduced ending total loan
receivables by $86.5 million, accrued income receivable by $5.2 million, and
accounts receivable from securitization by $172.0 million. The Corporation's
earnings per common share, excluding the change in the estimated value of
accrued interest and fees, would have been $.44 and $1.08 and earnings per
common share-assuming dilution would have been $.43 and $1.06 for the three and
nine months ended September 30, 2002, respectively. The Corporation does not
expect the change in the estimated value of accrued interest and fees to have a
material effect on earnings in subsequent periods.
NOTE C: 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 10, 2002 April 15, 2002 7.50% $ .46875 5.50% $ .34380
April 11, 2002 July 15, 2002 7.50 .46875 5.90 .36850
July 11, 2002 October 15, 2002 7.50 .46875 5.56 .34740
October 17, 2002 January 15, 2003 7.50 .46875 5.50 .34380
NOTE D: COMMON STOCK
On June 6, 2002, the Corporation announced a three-for-two split of the
Corporation's Common Stock, effected in the form of a dividend, issued July 15,
2002, to stockholders of record as of the close of business on July 1, 2002.
Accordingly, all common share and per common share data have been adjusted to
reflect this stock split.
During the nine months ended September 30, 2002, 3.0 million shares of
restricted common stock were issued under the Corporation's 1997 Long Term
Incentive Plan to the Corporation's senior officers. The restricted common
shares issued had an approximate aggregate market value of $69.1 million when
issued. At September 30, 2002, the unamortized compensation expense related to
all of the Corporation's outstanding restricted stock awards was $216.0
million.
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. During the
nine months ended September 30, 2002, the Corporation purchased 24.0 million
common shares for $584.8 million. The Corporation issued 24.0 million common
shares upon the exercise of stock options and issuance of restricted stock.
The Corporation received $128.4 million in proceeds from the exercise of these
stock options for the nine months ended September 30, 2002.
On October 17, 2002, the Corporation's Board of Directors declared a quarterly
cash dividend of $.07 per common share, payable January 1, 2003, to
stockholders of record as of December 13, 2002.
NOTE E: EARNINGS PER COMMON SHARE
Earnings per common share is computed using net income applicable to common
stock and weighted average common shares outstanding during the period.
Earnings per common share-assuming dilution 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 and director stock options. The Corporation does
not have any other common stock equivalents.
COMPUTATION OF EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
(unaudited)
EARNINGS PER COMMON SHARE
Net income........................ $ 398,042 $ 478,342 $1,225,794 $1,169,525
Less: preferred stock dividend
requirements..................... 3,544 3,538 10,660 10,622
--------- --------- ---------- ----------
Net income applicable to common
stock............................ $ 394,498 $ 474,804 $1,215,134 $1,158,903
========= ========= ========== ==========
Weighted average common shares
outstanding (000)................ 1,277,720 1,277,718 1,277,805 1,277,753
========= ========= ========== ==========
Earnings per common share......... $ .31 $ .37 $ .95 $ .91
========= ========= ========== ==========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION
Net income........................ $ 398,042 $ 478,342 $1,225,794 $1,169,525
Less: preferred stock dividend
requirements..................... 3,544 3,538 10,660 10,622
--------- --------- ---------- ----------
Net income applicable to common
stock............................ $ 394,498 $ 474,804 $1,215,134 $1,158,903
========= ========= ========== ==========
Weighted average common shares
outstanding (000)................ 1,277,720 1,277,718 1,277,805 1,277,753
Net effect of dilutive stock
options (000).................... 19,692 34,990 26,736 37,874
--------- --------- ---------- ----------
Weighted average common shares
outstanding and common stock
equivalents (000)................ 1,297,412 1,312,708 1,304,541 1,315,627
========= ========= ========== ==========
Earnings per common share-
assuming dilution................ $ .30 $ .36 $ .93 $ .88
========= ========= ========== ==========
There were 45.2 million and 20.7 million common stock options with an average
exercise price of $22.53 and $23.91 per share outstanding for the three and
nine months ended September 30, 2002, respectively, that were not included in
the computation of earnings per common share-assuming dilution as a result of
the stock options' exercise prices being greater than the average market price
of the common shares. The common stock options outstanding for the three
months ended September 30, 2002, excluded from the earnings per common share-
assuming dilution calculation, expire from 2009 through 2012. The common stock
options outstanding for the nine months ended September 30, 2002, excluded from
the earnings per common share-assuming dilution calculation, expire in 2011 and
2012. There were .1 million common stock options with an average exercise
price of $23.72 and $24.12 per share outstanding for the three and nine months
ended September 30, 2001, respectively, that were not included in the
computation of earnings per common share-assuming dilution as a result of the
stock options' exercise prices being greater than the average market price of
the common shares. These stock options expire in 2011.
NOTE F: INVESTMENT SECURITIES
For the nine months ended September 30, 2002, the Corporation sold investment
securities available-for-sale resulting in a realized loss of $95,000 ($62,000
after taxes). For the nine months ended September 30, 2001, the Corporation
sold investment securities available-for-sale resulting in a realized loss of
$36,000 ($23,000 after taxes).
NOTE G: INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"). The effective date for Statement No. 142 was for fiscal
years beginning after December 15, 2001. In accordance with Statement No. 142,
goodwill and intangible assets that are determined to have indefinite lives are
no longer amortized, but instead are subject to an annual impairment test. At
September 30, 2002, and December 31, 2001, the Corporation did not have a
material amount of intangible assets with indefinite lives or any other
nonamortizing assets and, as a result, the pro forma net income, pro forma
earnings per common share, and pro forma earnings per common share-assuming
dilution amounts required by Statement No. 142 have not been shown. Other
separately identifiable intangible assets, which for the Corporation are
primarily the value of acquired Customer accounts, continue to be amortized
over their estimated useful lives. Prior to 2002, the Corporation amortized
the value of acquired Customer accounts over a period that was generally
limited to ten years. In accordance with Statement No. 142, the Corporation
completed an analysis of the associated benefits of the value of its acquired
Customer accounts. As a result, on January 1, 2002, the Corporation extended
the amortization period of the value of the acquired Customer accounts,
generally to 15 years, to better match their estimated useful lives. For the
three and nine months ended September 30, 2002, the Corporation's income before
income taxes increased $25.8 million and $75.0 million, respectively ($16.4
million and $47.5 million after taxes, respectively), as a result of the
extension of the amortization period. The Corporation's earnings per common
share, excluding the change in amortization period, would have been $.30 and
$.91 and earnings per common share-assuming dilution would have been $.29 and
$.90 for the three and nine months ended September 30, 2002, respectively.
Intangible assets include the value of acquired Customer accounts and all other
intangible assets. The Corporation amortizes its identifiable intangible
assets generally using an accelerated method over 15 years based on expected
future cash flows from the use of the assets. The Corporation's intangible
assets had a gross carrying value of $4.4 billion at September 30, 2002, and
$3.6 billion at December 31, 2001, and accumulated amortization of $1.2 billion
and $971.7 million at September 30, 2002, and December 31, 2001, respectively.
For the three and nine months ended September 30, 2002, the Corporation
acquired approximately $1.4 billion and $3.2 billion of credit card loan
receivables, respectively. As part of the cost of these acquisitions, the
Corporation recognized an additional $429.1 million and $817.6 million for the
value of acquired Customer accounts for the three and nine months ended
September 30, 2002, respectively.
The Corporation's identifiable intangible assets had total amortization expense
of $92.7 million and $251.7 million for the three and nine months ended
September 30, 2002, as compared to $92.2 million and $282.3 million for the
same periods in 2001, respectively. An additional $96.2 million of unamortized
identifiable intangible assets are scheduled to amortize during the remainder
of 2002 and $382.5 million, $363.6 million, $342.6 million, and $318.2 million
of unamortized identifiable intangible assets are scheduled to amortize during
the years ending December 31, 2003, 2004, 2005, and 2006, respectively.
The Corporation reviews the carrying value of its intangible assets for
impairment on a quarterly basis. The intangible assets, which consist
primarily of the value of acquired Customer accounts, are carried at the lower
of net book value or estimated fair value with the estimated fair value
determined by discounting the expected future cash flows from the use of the
asset at an appropriate discount rate. The Corporation performs this
impairment valuation quarterly 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. The
Corporation makes certain estimates and assumptions that affect the
determination of the estimated fair value of the intangible assets. These
estimates and assumptions include levels of account activation, active account
attrition, funding costs, credit loss experience, servicing costs, growth in
average account balances, interest and fees assessed on loans, and other
factors. Significant changes in these estimates and assumptions could result
in an impairment of the intangible assets. An impairment would result in a
write down of intangible assets on the consolidated statement of financial
condition and an increase in other operating expense on the consolidated
statement of income (see "Critical Accounting Policies").
NOTE H: ASSET SECURITIZATION
Asset securitization removes loan principal receivables from the Corporation's
consolidated statement of financial condition and converts interest income,
interchange income, credit card and other consumer loan fees, insurance income,
and recoveries on charged-off securitized loans in excess of interest paid to
investors, gross credit losses, and other trust expenses into securitization
income. The Corporation retains servicing responsibilities for the loans in
the trusts and maintains other retained interests in the securitized assets.
These retained interests include an interest-only strip receivable, cash
reserve accounts, accrued interest and fees on securitized loans, and other
subordinated interests. These retained interests are reported at estimated
fair value with changes in fair value recorded in earnings.
ACCOUNTS RECEIVABLE FROM SECURITIZATION:
(dollars in thousands)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Sale of new loan receivables..................... $ 3,220,437 $ 2,202,403
Accrued interest and fees on securitized loans... 2,018,032 2,216,839
Interest-only strip receivable................... 1,120,585 1,124,063
Accrued servicing fees........................... 652,002 688,185
Cash reserve accounts............................ 471,727 397,954
Other subordinated retained interests............ 626,583 657,246
Other............................................ 203,700 208,811
------------- ------------
Total accounts receivable from securitization.. $ 8,313,066 $ 7,495,501
============= ============
During September 2002, as a result of the change in the estimated value of
accrued interest and fees (for further discussion, see "Note B: Change in
Accounting Estimate for Interest and Fees"), accounts receivable from
securitization was reduced by $172.0 million. This reduction was primarily a
result of a decrease in accrued interest and fees on securitized loans.
The change in the estimated value of accrued interest and fees reduced accrued
interest and fees on securitized loans by $295.9 million. The Corporation also
adjusted the value of the interest-only strip receivable as a result of the
change in the estimated value of the uncollectible accrued interest and fees.
The Corporation has always included an estimate of uncollectible accrued
interest and fees in determining the value of the interest-only strip
receivable. Since the Corporation now recognizes uncollectible interest and
fees in the estimated value of accrued interest and fees on securitized loans,
the estimated value of the interest-only strip receivable was adjusted at
September 30, 2002. The value of uncollectible accrued interest and fees on
securitized loans that are currently owed by the underlying Customer are now
considered in the value of accrued interest and fees on securitized loans.
Accordingly, the estimated value of the interest-only strip receivable now only
considers the impact of uncollectible interest and fees that will be billed to
the underlying Customer in the future. As a result, the estimate of
uncollectible accrued interest and fees was adjusted which caused the interest-
only strip receivable to increase $123.9 million at September 30, 2002.
Included in securitization income is the net incremental change in the
interest-only strip receivable for all securitization transactions that the
Corporation recognizes as sales in accordance with Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 125" ("Statement No. 140"). The net incremental change in the
interest-only strip receivable for all securitization transactions recognized
by the Corporation in securitization income, net of securitization transaction
costs, was a $121.3 million increase and a $39.6 million decrease during the
three and nine months ended September 30, 2002, as compared to a $131.6 million
and a $215.7 million increase for the same periods in 2001, respectively.
Excluding the change in the estimated value of accrued interest and fees, the
net incremental change in the interest-only strip receivable for all
securitization transactions recognized by the Corporation in securitization
income, net of securitization transaction costs, would have been a $2.6 million
and a $163.5 million decrease during the three and nine months ended
September 30, 2002, respectively.
Included in securitization income is the gain from the sale of loan principal
receivables for new securitization transactions that the Corporation recognizes
as sales in accordance with Statement No. 140. The gain from the sale of loan
principal receivables in new securitization transactions is a component of the
net incremental change in the interest-only strip receivable. This gain was
$40.3 million (net of securitization transaction costs of $6.9 million) and
$104.9 million (net of securitization transaction costs of $32.1 million) for
the three and nine months ended September 30, 2002 (on the sale of $3.8 billion
and $10.9 billion of credit card loan principal receivables for the three and
nine months ended September 30, 2002), as compared to $55.9 million (net of
securitization transaction costs of $13.9 million) and $73.3 million (net
of securitization transaction costs of $51.7 million) for the same periods in
2001 (on the sale of $5.0 billion and $9.5 billion of credit card loan
principal receivables for the three and nine months ended September 30, 2001),
respectively.
In accordance with Statement No. 140, the Corporation recognizes an interest-
only strip receivable, which represents the contractual right to receive from
the trusts interest and other revenue less certain costs over the estimated
life of securitized loan principal receivables. The Corporation uses certain
key assumptions and estimates in determining the value of the interest-only
strip receivable. These key assumptions and estimates include projections
concerning interest income, late fees, charged-off loan recoveries, gross
credit losses, contractual servicing fees, and the coupon paid to investors.
They are used to determine the excess spread to be earned by the Corporation
over the estimated life of the securitized loan principal receivables. Other
key assumptions and estimates used by the Corporation include projected loan
payment rates, which are used to determine the estimated life of the
securitized loan principal receivables, and an appropriate discount rate. The
Corporation reviews the key assumptions and estimates used in determining the
fair value of the interest-only strip receivable on a quarterly basis and
adjusts them as appropriate. If these assumptions change or actual results
differ from projected results, the interest-only strip receivable and
securitization income would be affected.
The Corporation's securitization key assumptions and their sensitivities to
adverse changes are presented below. The adverse changes to the key
assumptions and estimates are hypothetical and are presented in accordance with
Statement No. 140. The adverse changes presented were selected based on
changes in estimates that the Corporation has experienced. The amount of the
adverse change has been limited to the recorded amount of the interest-only
strip receivable where the hypothetical change exceeds the value of the
interest-only strip receivable. The sensitivities do not reflect actions
management might take to offset the impact of the adverse changes. For
discussion of changes in the excess spread, see "Other Operating Income" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
September 30, 2002 September 30, 2001
--------------------- ---------------------
(unaudited) (unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,022,049 $ 98,536 $1,005,789 $ 119,696
Weighted average life (in years). .35 .85 .35 .96
Loan payment rate
(weighted average rate)......... 13.40% 5.17% 13.59% 4.51%
Impact on fair value of
20% adverse change............ $ 147,124 $ 14,976 $ 144,842 $ 17,848
Impact on fair value of
40% adverse change............ 251,382 25,783 246,275 30,905
Gross credit losses (b)
(weighted average rate)......... 4.92% 8.93% 5.00% 8.67%
Impact on fair value of
20% adverse change............ $ 223,545 $ 73,784 $ 202,043 $ 79,491
Impact on fair value of
40% adverse change............ 447,090 98,536 404,086 119,237
Excess spread (c)
(weighted average rate)......... 4.49% 2.39% 4.95% 2.61%
Impact on fair value of
20% adverse change............ $ 204,410 $ 19,707 $ 201,152 $ 23,939
Impact on fair value
40% adverse change............ 408,820 39,414 402,304 47,878
Discount rate
(weighted average rate)......... 9.00% 9.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,786 $ 1,013 $ 6,157 $ 1,819
Impact on fair value of
40% adverse change............ 9,535 2,009 12,251 3,594
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections of interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors. At September 30, 2002,
the excess spread included the change in the estimated value of accrued
interest and fees.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
June 30, 2002 June 30, 2001
-------------------- ---------------------
(unaudited) (unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
--------- --------- ---------- ---------
Interest-only strip receivable... $ 901,847 $ 90,515 $ 867,695 $ 108,399
Weighted average life (in years). .35 .86 .36 .91
Loan payment rate
(weighted average rate)......... 13.50% 5.10% 13.09% 4.78%
Impact on fair value of
20% adverse change............ $ 129,705 $ 13,665 $ 123,588 $ 16,175
Impact on fair value of
40% adverse change............ 221,487 23,635 212,469 28,004
Gross credit losses (b)
(weighted average rate)......... 4.81% 8.72% 5.00% 7.97%
Impact on fair value of
20% adverse change............ $ 204,082 $ 72,219 $ 198,267 $ 69,319
Impact on fair value of
40% adverse change............ 408,164 90,515 396,532 108,399
Excess spread (c)
(weighted average rate)......... 4.27% 2.18% 4.39% 2.49%
Impact on fair value of
20% adverse change............ $ 181,097 $ 18,161 $ 174,319 $ 21,615
Impact on fair value of
40% adverse change............ 362,192 36,320 348,636 43,228
Discount rate
(weighted average rate)......... 10.00% 10.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,651 $ 1,041 $ 5,462 $ 1,563
Impact on fair value of
40% adverse change............ 9,261 2,064 10,868 3,090
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections of interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
December 31, 2001 December 31, 2000
--------------------- ---------------------
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,008,419 $ 115,644 $ 698,758 $ 155,568
Weighted average life (in years). .35 .93 .35 .82
Loan payment rate
(weighted average rate)......... 13.60% 4.67% 13.88% 5.26%
Impact on fair value of
20% adverse change............ $ 144,892 $ 17,304 $ 99,982 $ 23,224
Impact on fair value of
40% adverse change............ 246,857 29,870 170,920 40,312
Gross credit losses (b)
(weighted average rate)......... 5.25% 8.40% 4.31% 6.17%
Impact on fair value of
20% adverse change............ $ 205,460 $ 74,666 $ 163,314 $ 49,402
Impact on fair value of
40% adverse change............ 410,919 115,644 326,628 98,804
Excess spread (c)
(weighted average rate)......... 5.14% 2.60% 3.73% 3.89%
Impact on fair value of
20% adverse change............ $ 201,684 $ 23,129 $ 139,752 $ 31,096
Impact on fair value of
40% adverse change............ 403,368 46,258 279,504 62,192
Discount rate
(weighted average rate)......... 12.00% 12.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 6,195 $ 1,709 $ 4,212 $ 2,055
Impact on fair value of
40% adverse change............ 12,326 3,378 8,337 4,036
(a) The sensitivities do not reflect actions management might take to offset
the impact of adverse changes.
(b) Gross credit losses exclude the impact of recoveries; however, recoveries
are included in the determination of the excess spread.
(c) Excess spread includes projections of interest income, late fees,
and charged-off loan recoveries, less gross credit losses, contractual
servicing fees, and the coupon paid to investors.
NOTE I: 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, 2002, the
Corporation issued long-term debt and bank notes consisting of the following:
Par Value
----------------------
(dollars in thousands)
(unaudited)
Fixed-Rate Senior Medium-Term Notes, with interest
rates of 6.25% and 7.50%, payable semi-annually,
maturing in 2007 and 2012............................. $800,000
Fixed-Rate Medium-Term Deposit Notes, with interest
rates of 4.35% and 5.02%, payable semi-annually,
maturing in 2004 and 2005 (CAD$80.0 million).......... 50,004
Floating-Rate Medium-Term Deposit Notes, priced
at 95 basis points over the ninety-day Bankers
Acceptance Rate, payable quarterly, maturing in 2004
(CAD$15.0 million).................................... 9,503
Fixed-Rate Euro Medium-Term Notes, with an interest
rate of 6.50%, payable annually, maturing in 2007
(EUR500.0 million).................................... 436,901
Floating-Rate Euro Medium-Term Notes, priced at
100 basis points over the three-month Hong Kong
Interbank Offered Rate payable quarterly,
maturing in 2004 (HKD130.0 million)................... 16,660
6.625% Subordinated Notes, payable semi-annually,
maturing in 2012...................................... 500,000
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures, series D, with an interest
rate of 8.125%, payable quarterly, maturing
in 2032............................................... 300,000
The 6.625% Subordinated Notes are subordinated to the claims of depositors and
other creditors of MBNA America Bank, N.A. ("the Bank"), unsecured, and not
subject to redemption prior to maturity. The 6.625% Subordinated Notes qualify
as regulatory capital for both the Bank and the Corporation.
The Corporation, through MBNA Capital D, a statutory business trust created
under the laws of the State of Delaware, issued guaranteed preferred beneficial
interests in Corporation's junior subordinated deferrable interest debentures,
series D, as shown above.
The Corporation owns all the common securities of the trust. For financial
reporting purposes, the trust is treated as a wholly owned subsidiary of the
Corporation and is included in the Corporation's consolidated financial
results. The junior subordinated deferrable interest debentures are the sole
assets of the trust, and the payments under the junior subordinated deferrable
interest debentures are the sole revenues of the trust. The obligations of the
Corporation, under the relevant indenture, trust agreement, and guarantee, in
the aggregate, constitute a full and unconditional guarantee by the Corporation
of all trust obligations under the guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures issued by the
trust. These securities qualify as regulatory capital for the Corporation.
The Corporation uses interest rate swap agreements and foreign exchange swap
agreements to change a portion of fixed-rate long-term debt and bank notes to
floating-rate long-term debt and bank notes to better match the rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to reduce its foreign currency exchange risk on a
portion of long-term debt and bank notes issued by MBNA Europe Bank Limited
("MBNA Europe").
During the nine months ended September 30, 2002, the Corporation entered into
interest rate swap agreements, with a total notional value of $800.0 million,
related to the issuance of the Fixed-Rate Senior Medium-Term Notes and with a
total notional amount of $300.0 million related to the issuance of guaranteed
preferred beneficial interests in Corporation's junior subordinated deferrable
interest debentures, series D.
During the nine months ended September 30, 2002, the Bank entered into interest
rate swap agreements, with a total notional value of $500.0 million, related to
the issuance of the 6.625% Subordinated Notes.
During the nine months ended September 30, 2002, MBNA Europe entered into
interest rate swap agreements, with a total notional value of $436.9 million
(EUR500.0 million) and foreign exchange swap agreements, with a total notional
value of $436.9 million (EUR500.0 million) and $16.7 million (HKD130.0
million), related to the issuance of the Fixed-Rate Euro Medium-Term Notes and
the Floating-Rate Euro Medium-Term Notes, respectively. MBNA Canada Bank
("MBNA Canada") entered into interest rate swap agreements, with a total
notional value of $50.0 million (CAD$80.0 million), related to the issuance of
the Fixed-Rate Medium-Term Deposit Notes.
All of the interest rate swap agreements entered into during the nine months
ended September 30, 2002, qualified as fair value hedges in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), as amended by
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") and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of FASB Statement No. 133" ("Statement No.
138".) The foreign exchange swap agreements that were entered into during the
nine months ended September 30, 2002, were not designated as accounting hedges.
NOTE J: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(unaudited)
Net income...................... $ 398,042 $ 478,342 $1,225,794 $1,169,525
Other comprehensive income:
Foreign currency translation.. 14,229 30,024 83,703 (11,836)
Net unrealized gains (losses)
on investment securities
available-for-sale and other
financial instruments........ 8,513 14,494 (798) 23,122
--------- --------- ---------- ----------
Other comprehensive income...... 22,742 44,518 82,905 11,286
--------- --------- ---------- ----------
Comprehensive income............ $ 420,784 $ 522,860 $1,308,699 $1,180,811
========= ========= ========== ==========
The components of accumulated other comprehensive income, net of tax, are as
follows:
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
Foreign currency translation..................... $ 7,763 $ (75,940)
Net unrealized gains on investment securities
available-for-sale and other financial
instruments..................................... 26,709 27,507
------------ ------------
Accumulated other comprehensive income........... $ 34,472 $ (48,433)
============ ============
The Corporation's consolidated statement of financial condition includes the
statements of financial condition of the Corporation's foreign subsidiaries,
translated at period-end currency exchange rates. The differences from
historical exchange rates are reflected in other comprehensive income as
foreign currency translation.
Favorable foreign currency translation during the nine month period ended
September 30, 2002, was primarily related to the strengthening of foreign
currencies against the U.S. dollar.
NOTE K: NEW ACCOUNTING PRONOUNCEMENTS
In October 2002, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions" ("Statement No. 147") was
issued. Statement No. 147 provides guidance on the accounting for the
acquisition of a financial institution and eliminates the specialized
provisions of paragraph 5 of Statement of Financial Accounting Standards No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" for
acquisitions occuring after September 30, 2002. Statement No. 147 also amends
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" to include long-term customer-
relationship intangible assets such as the value of the acquired Customer
accounts in the scope of that Statement. The implementation of Statement No.
147 will not have a material impact on the Corporation's consolidated financial
statements.
ITEM 2.
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 statements, financial condition, and results of
operations of MBNA Corporation. It should be read in conjunction with the
consolidated financial statements, notes, and tables included in this report.
For purposes of comparability, certain prior period amounts have been
reclassified.
INTRODUCTION
MBNA Corporation ("the 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 the Corporation's principal subsidiary. The Bank
has two wholly owned foreign bank subsidiaries, MBNA Europe 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 largest
independent credit card lender in the world and is the leading issuer of
endorsed 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 is also the parent of MBNA America
(Delaware), N.A. ("MBNA Delaware"), which offers home equity loans, aircraft
loans, and business card products.
The Corporation's primary business is giving its Customers the ability to have
what they need today and pay for it out of future income by lending money
through credit card and other consumer loans. The Corporation obtains funds to
make these loans to its Customers primarily through raising deposits, the
issuance of short-term and long-term debt, and the process of asset
securitization. Asset securitization removes loan principal receivables from
the consolidated statement of financial condition through the sale of loan
principal receivables to a trust. The trusts sells securities backed by those
loan principal receivables to investors. The trusts are independent of the
Corporation, and the Corporation has no control over the trusts. The trusts
are not subsidiaries of the Corporation, and are not included in the
Corporation's consolidated financial statements in accordance with generally
accepted accounting principles ("GAAP").
The Corporation generates income through finance charges assessed on
outstanding loan receivables, securitization income, interchange income, credit
card and other consumer loan fees, insurance income, interest earned on
investment securities, money market instruments, and other interest-earning
assets. The Corporation's primary costs are the costs of funding its loan
receivables, investment securities, and other assets, which include interest
paid on deposits, short-term borrowings, and long-term debt and bank notes;
credit losses; royalties paid to endorsing organizations and financial
institutions; business development and operating expenses; and income taxes.
CRITICAL ACCOUNTING POLICIES
The Corporation makes certain judgments and uses certain estimates and
assumptions when applying accounting principles in the preparation of the
Corporation's consolidated financial statements. The Corporation's critical
accounting policies relate to the accounting for asset securitization, the
reserve for possible credit losses, intangible assets, interest income on
loans, credit card fees and costs, and royalties. These critical accounting
policies are discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the notes to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended
December 31, 2001, and should be read in conjunction with the information
contained in the consolidated financial statements, notes, and tables included
in this report.
Where appropriate, these critical accounting policies that require management
to make significant judgments, estimates, and assumptions have been further
discussed and are included in this report as follows: asset securitization
under "Other Operating Income" and "Asset Securitization," the reserve for
possible credit losses under "Reserve and Provision for Possible Credit
Losses," and intangible assets under "Other Operating Expense." These critical
accounting policies are also discussed below.
Asset Securitization:
The Corporation uses securitization of its loan principal receivables as one
source to meet its funding needs. In accordance with Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 125" ("Statement No. 140"), when the Corporation securitizes loan
principal receivables, an interest-only strip receivable is recognized which
represents the contractual right to receive from the trust interest and other
revenue less certain costs over the estimated life of the securitized loan
principal receivables.
The Corporation estimates the fair value of the interest-only strip receivable
based on the present value of expected future net revenue flows using
management's judgment in determining certain key assumptions and estimates,
since quoted market prices are generally not available.
These key assumptions and estimates include projections concerning interest
income, late fees, recoveries on charged-off securitized loans, gross credit
losses, contractual servicing fees, and the coupon paid to investors and are
used to determine the excess spread to be earned by the Corporation over the
estimated life of the securitized loan principal receivables. Other key
assumptions and estimates used by the Corporation include projected loan
payment rates, which are used to determine the estimated life of the
securitized loan principal receivables, and an appropriate discount rate.
The Corporation's key assumptions and estimates impacting the interest-only
strip receivable at September 30, 2002, reflect management's judgment as to the
expected excess spread to be earned and payment rates to be experienced. These
estimates are likely to change in the future, as the individual components of
the excess spread and payment rates are sensitive to market and economic
conditions. For example, the rates paid to investors in the Corporation's
securitization transactions are primarily variable in nature, and these rates
are subject to change based on changes in market interest rates. Changes in
market interest rates can also have an impact on the projected interest income
on securitized loans as the Corporation could reprice its portfolio due to
changes in market conditions. Credit loss projections could change in the
future based on the credit quality of the securitized loans, the Corporation's
success at collection efforts, and general economic conditions. Payment rates
could fluctuate based on general economic conditions and competition. Actual
and expected changes in these factors may result in future estimates of the
excess spread and payment rates being materially different than the current
estimates.
The Corporation reviews the key assumptions and estimates used in determining
the fair value of the interest-only strip receivable in the Corporation's
securitization transactions on a quarterly basis and adjusts them as
appropriate. If these assumptions change or actual results differ from
projected results, the interest-only strip receivable and securitization income
would be affected. See "Note H: Asset Securitization" for the Corporation's
securitization key assumptions and their sensitivities to adverse changes. If
management had made different assumptions, which raised or lowered the excess
spread, the impact of such a change could have had a material impact on the
Corporation's financial position and results of operations. For example, a 20%
change in the excess spread assumption for all securitization trusts would have
resulted in a $224.1 million change in the value of the total interest-only
strip receivable.
Reserve for Possible Credit Losses:
The Corporation maintains the reserve for possible credit losses at an amount
sufficient to absorb losses inherent in the Corporation's loan principal
receivables based on a projection of probable future net credit losses. The
Corporation's net credit losses include the principal balance of loans charged
off less current period recoveries and exclude uncollectible accrued interest
and fees and fraud losses. The Corporation regularly performs a migration
analysis of delinquent and current accounts in order to determine an
appropriate reserve for possible credit losses. A migration analysis is a
technique used to estimate the likelihood that a loan receivable will progress
through the various delinquency stages and ultimately charge off. In
completing the analysis of the adequacy of the reserve for possible credit
losses, the impact of economic conditions on the borrowers' ability to repay,
past collection experience, the risk characteristics and composition of the
portfolio, and other factors are considered. Significant changes in these
factors could impact the reserve and provision for possible credit losses. For
example, if actual loan losses exceeded projected loan losses by a material
amount, the Corporation would likely need to increase the reserve for possible
credit losses through a charge to the consolidated statements of income through
the provision for possible credit losses.
Congress is considering changes to the bankruptcy laws which, if enacted, may
result in increased bankruptcy filings prior to the effective date of the
changes. Such an increase in expected bankruptcy filings could result in
higher than anticipated future losses which could cause the Corporation to
increase the reserve for possible credit losses.
Intangible Assets:
The Corporation reviews the carrying value of its intangible assets for
impairment on a quarterly basis. The intangible assets, which consist
primarily of the value of acquired Customer accounts, are carried at the lower
of net book value or estimated fair value with the estimated fair value
determined by discounting the expected future cash flows from the use of the
asset at an appropriate discount rate. The Corporation performs this
impairment valuation quarterly 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. The
Corporation makes certain estimates and assumptions that affect the
determination of the estimated fair value of the intangible assets. These
estimates and assumptions include levels of account activation, active account
attrition, funding costs, credit loss experience, servicing costs, growth in
average account balances, interest and fees assessed on loans, and other
factors. Significant changes in these estimates and assumptions could result
in an impairment of the intangible assets. An impairment would result in a
write down of intangible assets on the consolidated statement of financial
condition and an increase in other operating expense on the consolidated
statement of income. Currently, the estimated fair value of acquired Customer
accounts exceeds the net book value of acquired Customer accounts. If actual
levels of active account attrition for all acquired portfolios would adversely
change 10%, the estimated fair value of acquired Customer accounts would still
exceed the net book value of acquired Customer accounts.
CHANGE IN ACCOUNTING ESTIMATE FOR INTEREST AND FEES
On July 22, 2002, the Federal Financial Institutions Examination Council
("FFIEC") released draft "Account Management and Loss Allowance Guidance"
("FFIEC guidance") for credit card lending to be effective August 16, 2002.
Subsequently, the FFIEC extended the comment period to September 23, 2002,
without indicating the expected effective date. The FFIEC guidance addresses
credit line management, over-limit practices, workout and forbearance
practices, income recognition and loss allowance practices and policy
exceptions. Management believes that the Corporation substantially complies
with the FFIEC guidance for credit line management, over-limit practices,
workout and forbearance practices and policy exceptions as presently proposed
and that adoption of these guidelines would not materially affect its business
operations or earnings.
In September 2002, the Corporation implemented the FFIEC guidance for
uncollectible accrued interest and fees for its managed loan portfolio. As a
result, the Corporation changed its estimate of the value of accrued interest
and fees in September 2002.
Prior to September 2002, the Corporation accrued interest and fees on loan
receivables until the loan receivables were paid or charged off. When loan
receivables were charged off, the Corporation deducted the accrued interest
and fees related to the loan receivables against current period income. Prior
to the change in the estimated value of accrued interest and fees, and
consistent with the treatment of the Corporation's loan receivables, interest
and fee income on securitized loans continued to be recognized until the
securitized loans were either paid or charged off. When the securitized loans
were charged off, the Corporation deducted the accrued interest and fees
against current period securitization income.
The Corporation recognizes interest income based on the amount of the loan
receivables outstanding and their contractual annual percentage rates. The
Corporation also recognizes fees on loan receivables in earnings as the fees
are assessed according to agreements with the Corporation's loan Customers.
Interest income accrued from the Customer's statement billing cycle date to the
end of the month is included in accrued income receivable on the consolidated
statement of financial condition. Interest income and fees are included in
loan receivables in the consolidated statement of financial condition when
billed. The Corporation adjusts the amount of interest income and fee income
recognized in the current period for its estimate of interest and fee income
that it does not expect to collect in subsequent periods through offsetting
adjustments to the respective income captions and loan receivables. The
estimate of uncollectible interest and fees is based on a migration analysis of
delinquent and current loan receivables that will progress through the various
delinquency stages and will ultimately not be collected. The Corporation also
adjusts the estimated value of accrued interest and fees on securitized loans
for the amount of uncollectible interest and fees that are not expected to be
collected with a corresponding adjustment to securitization income. This
estimate is also based on a migration analysis of delinquent and current
securitized loans that will progress through the various delinquency stages and
ultimately not be collected. The accrued interest and fees on securitized
loans is included in accounts receivable from securitization in the
consolidated statement of financial condition.
In accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," this change in the estimated value of accrued interest and fees has
been recorded as a change in accounting estimate in the third quarter of 2002.
The change in the estimated value of accrued interest and fees resulted in a
decrease to income before income taxes of $263.7 million ($167.2 million after
taxes) or $.13 per common share-assuming dilution for the three and nine months
ended September 30, 2002, through a reduction of $66.3 million of interest
income and $197.4 million of other operating income. This change in the
estimated value of accrued interest and fees also reduced ending total loan
receivables by $86.5 million, accrued income receivable by $5.2 million, and
accounts receivable from securitization by $172.0 million. The Corporation's
earnings per common share, excluding the change in the estimated value of
accrued interest and fees, would have been $.44 and $1.08 and earnings per
common share-assuming dilution would have been $.43 and $1.06 for the three and
nine months ended September 30, 2002, respectively. The Corporation does not
expect the change in the estimated value of accrued interest and fees to have a
material effect on earnings in subsequent periods.
The Corporation's change in the estimated value of accrued interest and fees
resulted in a decrease to managed and reported delinquency of 30 basis points
and 40 basis points, respectively. The change also reduced the managed net
interest margin by 101 basis points and 35 basis points for the three and nine
months ended September 30, 2002, respectively, and reduced the net interest
margin by 70 basis points and 25 basis points for the three and nine months
ended September 30, 2002, respectively. Managed and net charge-off ratios
were not significantly affected by the change.
The change in the estimated value of accrued interest and fees reduced the
Corporation's Tier 1 Capital ratio by 42 basis points, Total Capital ratio by
41 basis points, and Leverage ratio by 42 basis points at September 30, 2002.
The Corporation continues to be "well-capitalized" as defined under the
federal bank regulatory guidelines.
EARNINGS SUMMARY
Net income for the three months ended September 30, 2002, decreased 16.8% to
$398.0 million or $.30 per common share from the same period in 2001. Net
income for the nine months ended September 30, 2002, increased 4.8% to $1.2
billion or $.93 per common share from the same period in 2001. Excluding the
change in the estimated value of accrued interest and fees, net income for the
three months ended September 30, 2002, would have increased 18.2% to $565.2
million or $.43 per common share from $478.3 million or $.36 per common share
for the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, net income for the nine months ended September 30,
2002, would have increased 19.1% to $1.4 billion or $1.06 per common share as
compared to $1.2 billion or $.88 per common share for the same period in 2001.
All earnings per common share amounts are presented assuming dilution and have
been adjusted to reflect the three-for-two split of the Corporation's Common
Stock, effected in the form of a dividend, issued July 15, 2002, to
stockholders of record as of July 1, 2002.
The decrease in net income for the three months ended September 30, 2002, was
primarily attributable to the change in the estimated value of accrued interest
and fees which reduced net income by $167.2 million, partially offset by growth
in the Corporation's managed loans outstanding. The increase in net income for
the nine months ended September 30, 2002, was primarily attributable to the
growth in the Corporation's managed loans outstanding and an increase in
managed net interest margin, partially offset by the change in the estimated
value of accrued interest and fees and higher credit losses.
Managed loans consist of the Corporation's loans held for securitization, loan
portfolio, and securitized loans. The Corporation's average managed loans
increased 11.0% to $101.9 billion and 10.1% to $98.8 billion for the three and
nine months ended September 30, 2002, as compared to $91.9 billion and $89.7
billion for the same periods in 2001, respectively. Total managed loans at
September 30, 2002, were $102.8 billion, a $10.2 billion increase from
September 30, 2001. Excluding the change in the estimated value of accrued
interest and fees, total managed loans would have been $103.2 billion, a $10.6
billion increase from September 30, 2001.
The managed net interest margin was 7.66% and 8.40% for the three and nine
months ended September 30, 2002, respectively, as compared to 8.57% and 8.21%
for the same periods in 2001. Excluding the change in the estimated value of
accrued interest and fees, the managed net interest margin would have been
8.67% and 8.75% for the three and nine months ended September 30, 2002,
respectively. The decrease of 91 basis points for the three months ended
September 30, 2002, from the same period in 2001 reflects the change in the
estimated value of accrued interest and fees, partially offset by actions of
the Federal Open Market Committee ("FOMC") of the Federal Reserve throughout
2001, which impacted overall market interest rates and decreased the
Corporation's on-balance-sheet and securitization funding costs. The increase
of 19 basis points for the nine months ended September 30, 2002, from the same
period in 2001 reflects actions of the FOMC throughout 2001, which impacted
overall market interest rates and decreased the Corporation's on-balance-sheet
and securitization funding costs, partially offset by the change in the
estimated value of accrued interest and fees. The Corporation's managed credit
losses as a percentage of average managed loans for the three and nine months
ended September 30, 2002, were 4.84% and 4.97%, compared to 4.90% and 4.69% for
the same periods in 2001, respectively. Managed credit losses as a percentage
of average managed loans for the three and nine months ended September 30,
2002, were not significantly affected by the change in the estimated value of
accrued interest and fees.
The Corporation continues to be an active participant in the asset
securitization market. Asset securitization removes loan principal receivables
from the consolidated statement of financial condition by the sale of loan
principal receivables to investors, generally through a trust, that qualifies
as a sale under GAAP. The Corporation continues to own and service the
accounts that generate the loan principal receivables sold to the trust. Asset
securitization converts interest income, interchange income, credit card and
other consumer loan fees, insurance income, and recoveries on charged-off
securitized loans, gross credit losses, and other trust expenses into
securitization income. The Corporation had $76.5 billion of securitized loans
at September 30, 2002, as compared to $73.5 billion at September 30, 2001.
During the three and nine months ended September 30, 2002, the Corporation
securitized $3.8 billion and $10.9 billion of credit card loan receivables as
compared to $5.0 billion and $9.5 billion of credit card loan receivables
during the same periods in 2001, respectively. The Corporation's securitized
loans decreased and the Corporation's loan receivables increased $2.7 billion
and $7.5 billion during the three and nine months ended September 30, 2002,
respectively, when certain securitization transactions were in their scheduled
amortization period, and the trusts used principal payments on securitized loan
principal receivables to pay the investors rather than to purchase new loan
receivables from the Corporation. The Corporation's securitized loans
decreased and the Corporation's loan receivables increased $1.6 billion and
$4.9 billion during the three and nine months ended September 30, 2001,
respectively, when certain securitization transactions were in their scheduled
amortization period and the trusts used principal payments on securitized loan
receivables to pay the investors rather than to purchase new loan principal
receivables from the Corporation.
The Corporation's return on average total assets for the three and nine months
ended September 30, 2002, was 3.21% and 3.49%, as compared to 4.58% and 3.93%
for the same periods during 2001, respectively. Excluding the change in the
estimated value of accrued interest and fees, the Corporation's return on
average total assets for the three and nine months ended September 30, 2002,
would have been 4.56% and 3.97%, respectively. The Corporation's return on
average stockholders' equity was 18.55% and 20.26% for the three and nine
months ended September 30, 2002, as compared to 26.49% and 22.77% for the same
periods in 2001, respectively. Excluding the change in the estimated value of
accrued interest and fees, the Corporation's return on average stockholders'
equity would have been 26.35% and 23.02% for the three and nine months ended
September 30, 2002, respectively.
NET INTEREST INCOME
Net interest income represents interest income on total interest-earning
assets, on a fully taxable equivalent basis where appropriate, less interest
expense on total interest-bearing liabilities. A fully taxable equivalent
basis represents the income on total interest-earning assets that is either
tax-exempt or taxed at a reduced rate, adjusted to give effect to the
prevailing incremental federal income tax rate, and adjusted for nondeductible
carrying costs and state income taxes, where applicable. Yield calculations,
where appropriate, include these adjustments.
Net interest income, on a fully taxable equivalent basis, was $482.5 million
for the three months ended September 30, 2002, as compared to $416.1 million
from the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, net interest income, on a fully taxable equivalent
basis, would have been $548.8 million. Average interest-earning assets
increased $7.7 billion for the three months ended September 30, 2002, from the
same period in 2001, primarily as a result of an increase in average loan
receivables of $5.8 billion and an increase in average investment securities
and money market instruments of $1.2 billion. The yield on average interest-
earning assets was 9.35% for the three months ended September 30, 2002, as
compared to 11.47% for the same period in 2001. Excluding the change in the
estimated value of accrued interest and fees, the yield on average interest-
earning assets would have been 10.05% for the three months ended September 30,
2002, average interest-bearing liabilities increased $6.0 billion for the
three months ended September 30, 2002, from the same period in 2001, as
a result of an increase of $3.5 billion in average interest-bearing deposits
and an increase of $2.5 billion in average borrowed funds. The decrease in the
rate paid on average interest-bearing liabilities of 140 basis points to 4.28%
for the three months ended September 30, 2002, from 5.68% for the same period
in 2001 reflects actions by the FOMC throughout 2001 which impacted overall
market interest rates and lowered the Corporation's cost of funds.
Net interest income, on a fully taxable equivalent basis, was $1.5 billion for
the nine months ended September 30, 2002, as compared to $1.2 billion for the
same period in 2001. Excluding the change in the estimated value of accrued
interest and fees, net interest income, on a fully taxable basis, would have
been $1.6 billion for the nine months ended September 30, 2002. Average
interest-earning assets increased $7.4 billion for the nine months ended
September 30, 2002, as compared to the same period in 2001. The increase in
average interest-earning assets for the nine months ended September 30, 2002,
was primarily a result of an increase in average loan receivables of $5.1
billion and an increase in average investment securities and money market
instruments of $1.6 billion. The yield on average interest-earning assets was
9.90% for the nine months ended September 30, 2002, as compared to 11.78% for
the same period in 2001. Excluding the change in the estimated value of
accrued interest and fees, the yield on average interest-earning assets would
have been 10.14%. Average interest-bearing liabilities increased $5.5 billion
for the nine months ended September 30, 2002, as compared to the same period in
2001. The increase in average interest-bearing liabilities for the nine months
ended September 30, 2002, as compared to the same period in 2001 was a result
of an increase of $2.9 billion in average interest-bearing deposits and an
increase of $2.6 billion in average borrowed funds. The rate paid on average
interest-bearing liabilities decreased 163 basis points to 4.46% for the nine
months ended September 30, 2002, from the same period in 2001.
The Corporation's net interest margin, on a fully taxable equivalent basis, was
5.08% and 5.50%, respectively, for the three and nine months ended
September 30, 2002, as compared to 5.50% and 5.41% for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the net interest margin, on a fully taxable equivalent
basis, would have been 5.78% and 5.75% for the three and nine months ended
September 30, 2002. The net interest margin represents net interest income on
a fully taxable equivalent basis expressed as a percentage of average total
interest-earning assets. The 42 basis point decrease in the net interest
margin for the three months ended September 30, 2002, was primarily a result of
the change in the estimated value of accrued interest and fees, partially
offset by actions by the FOMC throughout 2001, which impacted overall market
interest rates and decreased the Corporation's funding costs. The 9 basis
point increase in the net interest margin for the nine months ended
September 30, 2002, was primarily a result of actions taken by the FOMC
throughout 2001, which impacted overall market interest rates and decreased the
Corporation's funding costs, partially offset by the change in the estimated
value of accrued interest and fees.
INVESTMENTS SECURITIES AND MONEY MARKET INSTRUMENTS
The Corporation seeks to maintain its investment securities and money market
instruments at a level appropriate for the Corporation's liquidity needs. The
Corporation's average investment securities and average money market
instruments are affected by the timing of receipt of funds from asset
securitizations, deposits, loan payments, long-term debt and bank notes, and
maturities of investment securities. Funds received from these sources are
generally 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. Average investment securities and money
market instruments as a percentage of average interest-earning assets were
20.0% and 21.3% for the three and nine months ended September 30, 2002, as
compared to 21.0% and 21.3% for the same periods in 2001, respectively. Money
market instruments increased at September 30, 2002, from December 31, 2001, to
provide liquidity to support portfolio acquisition activity and anticipated
loan growth.
Interest income on investment securities, on a fully taxable equivalent basis,
decreased to $33.4 million and $105.6 million for the three and nine months
ended September 30, 2002, as compared to $42.0 million and $130.7 million for
the same periods in 2001, respectively. The decrease in interest income on
investment securities for the three and nine months ended September 30, 2002,
was a result of a 158 basis point and 168 basis point decrease in the yield
earned on average investment securities, offset by an increase in average
investment securities of $549.4 million and $580.6 million for the three and
nine months ended September 30, 2002, from the same periods in 2001,
respectively.
Money market instruments include interest-earning time deposits in other banks
and federal funds sold. Interest income on money market instruments for the
three and nine months ended September 30, 2002, decreased $7.4 million and
$40.0 million to $20.7 million and $62.5 million, as compared to the same
periods in 2001, respectively. The decrease in interest income on money market
instruments was a result of a 152 basis point and 255 basis point decrease in
the yield earned on average money market instruments, offset by an increase in
average money market instruments of $685.1 million and $993.6 million for the
three and nine months ended September 30, 2002, as compared to the same periods
in 2001, respectively.
OTHER INTEREST-EARNING ASSETS
Interest income on other interest-earning assets decreased $13.9 million and
$12.6 million to $84.1 million and $267.8 million for the three and nine months
ended September 30, 2002, from the same periods in 2001, respectively. The
decrease in interest income on other interest-earning assets for the three and
nine months ended September 30, 2002, was attributable to a decrease of 328
basis points and 268 basis points on the yield earned on average other
interest-earning assets for the three and nine months ended September 30, 2002,
respectively, offset by an increase of $587.9 million and $715.9 million in
average other interest-earning assets, as compared to the same periods in 2001,
respectively. Other interest earning assets include the interest-only strip
receivable, cash reserve accounts, and accrued interest and fees on securitized
loans. For the three and nine months ended September 30, 2002, the yield on
average other interest-earning assets was not materially impacted by the change
in the estimated value of accrued interest and fees.
The Corporation accrues interest income related to its interests retained in a
securitization transaction accounted for as a sale in the Corporation's
consolidated financial statements. The Corporation includes these retained
interests in accounts receivable from securitization on the consolidated
statement of financial condition. These retained interests include the
interest-only strip receivable, cash reserve accounts, and accrued interest and
fees on securitized loans (see "Note H: Asset Securitization" for further
discussion). The decreases in the yield on average other interest-earning
assets for the three and nine months ended September 30, 2002, are primarily
attributable to the decrease in the discount rate assumptions related to the
Corporation's retained interests in the Corporation's securitization
transactions.
LOAN RECEIVABLES
Loan receivables consist of the Corporation's loans held for securitization and
loan portfolio.
Interest income generated by the Corporation's loan receivables was $749.4
million and $2.3 billion for the three and nine months ended September 30,
2002, as compared to $699.2 million and $2.0 billion for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the interest income generated by the Corporation's loan
receivables would have been $815.7 million and $2.3 billion for the three and
nine months ended September 30, 2002, respectively. The increase in interest
income on loan receivables for the three and nine months ended September 30,
2002, was primarily the result of an increase in average loan receivables of
$5.8 billion and $5.1 billion from the same periods in 2001, respectively. The
yield earned by the Corporation for the three and nine months ended
September 30, 2002, on average loan receivables was 11.30% and 12.18%, as
compared to 13.56% and 13.87% for the same periods in 2001, respectively
Excluding the change in the estimated value of accrued interest and fees, the
yield earned by the Corporation for the three and nine months ended
September 30, 2002, on average loan receivables would have been 12.30% and
12.53%.
Table 1 presents the Corporation's loan receivables at period end distributed
by loan type, excluding securitized loans. Loan receivables at September 30,
2002, were $26.3 billion, as compared to $24.6 billion at December 31, 2001.
Domestic credit card loan receivables were $13.7 billion at September 30, 2002,
as compared to $14.4 billion at December 31, 2001. During the nine months
ended September 30, 2002, domestic credit card loan receivables decreased as
domestic credit card loan originations through marketing programs and domestic
credit card loan portfolio acquisitions were offset by a net increase in
securitized domestic credit card loan receivables and higher Customer payments.
During the nine months ended September 30, 2002, the Corporation securitized
$9.0 billion of domestic credit card loan receivables, offset by an increase of
$7.2 billion in the Corporation's loan portfolio when certain securitization
transactions were in their scheduled amortization period and the trusts used
principal payments on securitized loans to pay the investors rather than to
purchase new loan principal receivables. The Corporation acquired $2.0 billion
of domestic credit card loan receivables during the nine months ended
September 30, 2002, including a $1.3 billion credit card loan portfolio from
Wachovia Corporation. The yield on average domestic credit card loan
receivables was 10.67% and 11.63% for the three and nine months ended
September 30, 2002, as compared to 13.38% and 13.80% for the same periods in
2001, respectively. Excluding the change in the estimated value of accrued
interest and fees, the yield on average domestic credit card loan receivables
would have been 11.71% and 11.99% for the three and nine months ended
September 30, 2002, respectively. The decrease in the yield on average
domestic credit card loan receivables reflects lower promotional and non-
promotional interest rates offered to attract and retain Customers and to grow
loan receivables, an increase in the percentage of loans in the portfolio with
promotional rates, and the change in the estimated value of accrued interest
and fees.
Domestic credit card loans held for securitization decreased to $7.2 billion at
September 30, 2002, from $7.9 billion at December 31, 2001. The $738.1 million
decrease reflects lower anticipated domestic credit card securitizations.
Domestic other consumer loan receivables were $6.5 billion at September 30,
2002, as compared to $6.1 billion at December 31, 2001. The yield on average
domestic other consumer loan receivables was 12.84% and 13.75% for the three
and nine months ended September 30, 2002, as compared to 14.94% and 15.04% for
the same periods in 2001, respectively. Excluding the change in the estimated
value of accrued interest and fees, the yield on average domestic other
consumer loan receivables would have been 14.40% and 14.29% for the three and
nine months ended September 30, 2002, respectively. The Corporation's domestic
other consumer loans typically have higher delinquency and charge-off rates
than the Corporation's domestic credit card loans. As a result, the
Corporation generally charges higher interest rates on its domestic other
consumer loans than on its domestic credit card loans. The decrease in the
yield on average domestic other consumer loan receivables reflects lower
promotional and non-promotional interest rates offered to attract and retain
Customers and to grow loan receivables, an increase in the percentage of loans
in the portfolio with promotional rates, and the change in the estimated value
of accrued interest and fees.
Domestic other consumer loans held for securitization decreased to $19.6
million at September 30, 2002, from $1.0 billion at December 31, 2001, as the
Corporation reduced the amount of other consumer loans it intends to securitize
or sell within one year.
The Corporation originates and sells home equity loans through MBNA Delaware.
Domestic other consumer loans held for securitization include the home equity
loans MBNA Delaware originates and intends to sell. The net gains realized by
the Corporation from the sale of its home equity loans were not material to the
Corporation's consolidated statement of income for the three and nine months
ended September 30, 2002, and 2001.
Foreign loan receivables were $6.2 billion at September 30, 2002, as compared
to $4.1 billion at December 31, 2001. The increase was primarily a result of
foreign loan originations through marketing programs and MBNA Europe's
acquisition of a $1.2 billion credit card loan portfolio from Alliance and
Leicester plc during the third quarter of 2002. During the nine months ended
September 30, 2002, the Corporation securitized $1.9 billion of foreign credit
card loan principal receivables, offset by an increase of $353.5 million in the
Corporation's foreign loan portfolio which resulted when certain
securitizations were in their scheduled amortization period and the trusts used
principal payments to pay the investors rather than to purchase new loan
principal receivables from the Corporation. The strengthening of foreign
currencies against the U.S. dollar also increased foreign loan receivables by
$330.1 million during the nine months ended September 30, 2002. The yield on
average foreign loan receivables was 11.15% and 11.69% for the three and nine
months ended September 30, 2002, as compared to 12.32% and 12.54% for the same
periods in 2001, respectively. Excluding the change in the estimated value of
accrued interest and fees, the yield on average foreign loan receivables would
have been 11.43% and 11.80% for the three and nine months ended September 30,
2002, respectively. The decrease in the yield on average foreign loan
receivables reflects lower promotional and non-promotional interest rates
offered to attract and retain Customers and to grow loan receivables, and the
change in the estimated value of accrued interest and fees.
TABLE 1: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
September 30, December 31,
2002 2001
------------- -------------
(unaudited)
Loans held for securitization(a):
Domestic:
Credit card.................................. $ 7,205,895 $ 7,943,965
Other consumer............................... 19,570 1,032,697
------------- -------------
Total domestic loans held for
securitization............................ 7,225,465 8,976,662
Foreign........................................ 1,513,862 953,286
------------- -------------
Total loans held for securitization........ 8,739,327 9,929,948
Loan portfolio(b):
Domestic:
Credit card.................................. 6,451,617 6,439,471
Other consumer............................... 6,493,174 5,094,198
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Total domestic loan portfolio.............. 12,944,791 11,533,669
Foreign........................................ 4,652,244 3,169,947
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Total loan portfolio....................... 17,597,035 14,703,616
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Total loan receivables..................... $ 26,336,362 $ 24,633,564
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(a) Loans held for securitization includes loans which were originated through
certain endorsing organizations or financial institutions who have the
contractual right to purchase the loans from the Corporation at fair value
and the lesser of loan principal receivables eligible for securitization
or sale, or loan principal receivables which management intends to
securitize or sell within one year.
(b) September 30, 2002 amounts include reductions from the change in the
estimated value of accrued interest and fees as follows: the domestic
credit card loan portfolio was reduced by $48.8 million, the domestic
other consumer loan portfolio was reduced by $32.3 million, and the
foreign loan portfolio was reduced by $5.4 million.(a)
OTHER ASSETS
Other assets increased $643.0 million or 53.4% to $1.8 billion at September 30,
2002, as compared to $1.2 billion at December 31, 2001. The increase is
primarily related to an increase in the Corporation's deferred tax assets and
an increase in the fair market value of the Corporation's interest rate swap
agreements and foreign exchange swap agreements accounted for as fair value
hedges under Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement No. 133"), as
amended by 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") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities-an Amendment of FASB Statement No. 133"
("Statement No. 138") (see "Note A: Significant Accounting Policies-Derivative
Financial Instruments and Hedging Activities" contained in the Annual Report on
Form 10-K for the year ended December 31, 2001). The increase in the fair
market value of the Corporation's interest rate swap agreements and foreign
exchange swap agreements that qualified for, and are accounted for, as fair
value hedges were offset by changes in the carrying value of the corresponding
hedged long-term debt and bank notes.
DEPOSITS
Total interest expense on deposits was $313.8 million and $942.4 million for
the three and nine months ended September 30, 2002, as compared to $359.8
million and $1.1 billion for the same periods in 2001, respectively. The
decrease in interest expense on deposits of $46.0 million and $160.2 million
for the three and nine months ended September 30, 2002, was primarily the
result of a decrease of 138 basis points and 147 basis points in the rate paid
on average interest-bearing deposits, offset by an increase of $3.5 billion and
$2.9 billion in average interest-bearing deposits for the three and nine months
ended September 30, 2002, respectively. The decrease in the rate paid on
average interest-bearing deposits reflects actions by the FOMC throughout 2001,
which impacted overall market interest rates and decreased the Corporation's
funding costs.
The Corporation's money market deposit accounts are variable-rate products. In
addition, the Corporation's foreign time deposits, although fixed in nature,
generally mature within one year. Therefore, the decrease in market interest
rates throughout 2001 decreased the rate paid on average money market deposit
accounts and average foreign time deposits during the three and nine months
ended September 30, 2002, as compared to the same periods in 2001. The
Corporation's domestic time deposits are primarily fixed-rate deposits with
maturities that range from three months to five years. Therefore, the lower
market interest rates throughout 2001 decreased the rate paid on average
domestic time deposits during the three and nine months ended September 30,
2002, as compared to the same periods in 2001, but not to the same extent as
average money market deposit accounts and average foreign time deposits.
BORROWED FUNDS
Borrowed funds include both short-term borrowings and long-term debt and bank
notes.
Interest expense on short-term borrowings increased to $11.4 million and $31.9
million for the three and nine months ended September 30, 2002, as compared to
$8.3 million and $12.6 million for the same periods in 2001, respectively. The
increase in interest expense on short-term borrowings for the three months
ended September 30, 2002, was primarily a result of an increase of $571.8
million in average short-term borrowings, offset by a decrease of 130 basis
points in the rate paid on average short-term borrowings from the same period
in 2001. The increase in interest expense on short-term borrowings for the
nine months ended September 30, 2002, was primarily a result of an increase of
$919.9 million in average short-term borrowings, offset by a decrease of 166
basis points in the rate paid on average short-term borrowings from the same
period in 2001. The increase in average short-term borrowings for the three
and nine months ended September 30, 2002, as compared to the same periods in
2001, was primarily a result of two on-balance sheet financings totaling $1.0
billion, which were entered into during the second half of 2001. These
financings are secured by $1.1 billion of domestic other consumer loan
receivables. The Corporation has the option to liquidate these financings on a
monthly basis.
Interest expense on long-term debt and bank notes decreased to $80.0 million
and $224.1 million for the three and nine months ended September 30, 2002, as
compared to $83.2 million and $268.8 million for the same periods in 2001,
respectively. The decrease in interest expense on long-term debt and bank
notes during the three and nine months ended September 30, 2002, from the same
period in 2001 was primarily a result of a decrease in the rate paid on average
long-term debt and bank notes of 134 basis points and 202 basis points, offset
by an increase in average long-term debt and bank notes of $1.9 billion and
$1.7 billion, respectively.
Interest expense on domestic long-term debt and bank notes decreased $12.8
million during the three months ended September 30, 2002, primarily as a result
of a decrease of 180 basis points in the rate paid on average domestic long-
term debt and bank notes, offset by a $1.2 billion increase in average domestic
long-term debt and bank notes as compared to the same period in 2001. Interest
expense