UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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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 19884-0131
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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
---------- ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No
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Common Stock, $.01 Par Value - 1,277,671,875 Shares
Outstanding as of March 31, 2003
MBNA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition - 1
March 31, 2003(unaudited), and December 31, 2002
Consolidated Statements of Income - 3
For the Three Months Ended March 31, 2003, and 2002 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity - 5
For the Three Months Ended March 31, 2003, and 2002
(unaudited)
Consolidated Statements of Cash Flows - 7
For the Three Months Ended March 31, 2003, and 2002
(unaudited)
Notes to the Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations (unaudited)
Item 3. Quantitative and Qualitative Disclosure About Market Risk 72
Item 4. Controls and Procedures 72
Part II - Other Information
Item 1. Legal Proceedings 73
Item 4. Submission of Matters to a Vote of Security Holders 74
Item 6. Exhibits and Reports on Form 8-K 75
Signature 77
Certifications
Item 1.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
ASSETS
Cash and due from banks........................... $ 839,820 $ 721,972
Interest-earning time deposits in other banks..... 4,996,487 3,703,052
Federal funds sold................................ 2,890,000 1,645,000
Investment securities:
Available-for-sale (amortized cost of $3,570,856
and $3,617,505 at March 31, 2003, and
December 31, 2002, respectively)............... 3,601,099 3,655,808
Held-to-maturity (market value of $410,032
and $428,472 at March 31, 2003, and
December 31, 2002, respectively)............... 402,243 419,760
Loans held for securitization..................... 9,523,377 11,029,627
Loan portfolio:
Credit card..................................... 9,663,795 9,484,115
Other consumer.................................. 8,238,099 8,212,766
------------ ------------
Total loan portfolio.......................... 17,901,894 17,696,881
Reserve for possible credit losses.............. (1,151,394) (1,111,299)
------------ ------------
Net loan portfolio............................ 16,750,500 16,585,582
Premises and equipment, net....................... 2,522,113 2,519,101
Accrued income receivable......................... 325,337 371,089
Accounts receivable from securitization........... 7,105,875 6,926,876
Intangible assets, net............................ 3,166,766 3,188,501
Prepaid expenses and deferred charges............. 514,110 412,609
Other assets...................................... 1,928,018 1,677,769
------------ ------------
Total assets.................................. $ 54,565,745 $ 52,856,746
============ ============
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
(dollars in thousands, except per share amounts)
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
LIABILITIES
Deposits:
Time deposits................................... $ 22,659,363 $ 22,079,031
Money market deposit accounts................... 7,672,260 7,520,119
Noninterest-bearing deposits.................... 1,125,496 915,687
Interest-bearing transaction accounts........... 54,217 45,414
Savings accounts................................ 67,712 55,965
------------ ------------
Total deposits................................ 31,579,048 30,616,216
Short-term borrowings............................. 1,198,424 1,250,103
Long-term debt and bank notes..................... 9,988,687 9,538,173
Accrued interest payable.......................... 284,283 286,158
Accrued expenses and other liabilities............ 2,175,005 2,064,777
------------ ------------
Total liabilities............................. 45,225,447 43,755,427
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000
shares authorized, 8,573,882 shares issued
and outstanding at March 31, 2003, and
December 31, 2002)............................... 86 86
Common stock ($.01 par value, 1,500,000,000
shares authorized, 1,277,671,875 shares
issued and outstanding at March 31, 2003,
and December 31, 2002)........................... 12,777 12,777
Additional paid-in capital........................ 2,230,301 2,296,568
Retained earnings................................. 7,033,921 6,707,162
Accumulated other comprehensive income............ 63,213 84,726
------------ ------------
Total stockholders' equity.................... 9,340,298 9,101,319
------------ ------------
Total liabilities and stockholders' equity.... $ 54,565,745 $ 52,856,746
============ ============
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
INTEREST INCOME
Loan portfolio.................................... $ 527,475 $ 451,002
Loans held for securitization..................... 284,580 308,576
Investment securities:
Taxable......................................... 30,382 34,487
Tax-exempt...................................... 361 457
Time deposits in other banks...................... 18,137 10,616
Federal funds sold................................ 7,954 10,951
Other interest income............................. 75,138 99,612
------------ ------------
Total interest income......................... 944,027 915,701
INTEREST EXPENSE
Deposits.......................................... 292,862 323,615
Short-term borrowings............................. 10,318 11,498
Long-term debt and bank notes..................... 85,251 67,312
------------ ------------
Total interest expense........................ 388,431 402,425
------------ ------------
NET INTEREST INCOME............................... 555,596 513,276
Provision for possible credit losses.............. 378,877 359,393
------------ ------------
Net interest income after provision for
possible credit losses........................... 176,719 153,883
OTHER OPERATING INCOME
Securitization income............................. 1,475,500 1,354,449
Interchange....................................... 89,666 74,919
Credit card fees.................................. 126,784 93,020
Other consumer loan fees.......................... 26,075 24,660
Insurance......................................... 53,487 45,809
Other............................................. 16,497 3,409
------------ ------------
Total other operating income.................. $ 1,788,009 $ 1,596,266
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
OTHER OPERATING EXPENSE
Salaries and employee benefits.................... $ 526,454 $ 478,958
Occupancy expense of premises..................... 43,248 40,658
Furniture and equipment expense................... 87,464 79,742
Other............................................. 630,709 567,337
------------ ------------
Total other operating expense.................. 1,287,875 1,166,695
------------ ------------
INCOME BEFORE INCOME TAXES........................ 676,853 583,454
Applicable income taxes........................... 244,344 213,544
------------ ------------
NET INCOME........................................ $ 432,509 $ 369,910
============ ============
EARNINGS PER COMMON SHARE......................... $ .34 $ .29
EARNINGS PER COMMON SHARE-ASSUMING DILUTION....... .33 .28
===============================================================================
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, 2002... 8,574 1,277,672 $ 86 $ 12,777
Comprehensive income:
Net income................. - - - -
Other comprehensive
income, net of tax........ - - - -
Comprehensive income.........
Cash dividends:
Common-$.08 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 6,142 - 61
Stock-based compensation
tax benefit................. - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (6,142) - (61)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2003...... 8,574 1,277,672 $ 86 $ 12,777
=========== ========== ========= ==========
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-$.07 per share...... - - - -
Preferred.................. - - - -
Exercise of stock options
and other awards............ - 19,654 - 196
Stock-based compensation
tax benefit................. - - - -
Amortization of deferred
compensation expense........ - - - -
Acquisition and retirement
of common stock............. - (19,641) - (196)
----------- ---------- --------- ----------
BALANCE, MARCH 31, 2002...... 8,574 1,277,685 $ 86 $ 12,777
=========== ========== ========= ==========
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
(dollars in thousands, except per share amounts)
(unaudited)
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Stockholders'
Capital Earnings Income Equity
---------- ---------- ------------- ------------
BALANCE, DECEMBER 31, 2002. $2,296,568 $6,707,162 $ 84,726 $ 9,101,319
Comprehensive income:
Net income............... - 432,509 - 432,509
Other comprehensive
income, net of tax...... - - (21,513) (21,513)
------------
Comprehensive income....... 410,996
------------
Cash dividends:
Common-$.08 per share.... - (102,234) - (102,234)
Preferred................ - (3,516) - (3,516)
Exercise of stock options
and other awards.......... 3,525 - - 3,586
Stock-based compensation
tax benefit............... 1,922 - - 1,922
Amortization of deferred
compensation expense...... 28,955 - - 28,955
Acquisition and retirement
of common stock........... (100,669) - - (100,730)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2003.... $2,230,301 $7,033,921 $ 63,213 $ 9,340,298
========== ========== ============= ============
BALANCE, DECEMBER 31, 2001. $2,529,563 $5,304,725 $ (48,433) $ 7,798,718
Comprehensive income:
Net income............... - 369,910 - 369,910
Other comprehensive
income, net of tax...... - - (36,445) (36,445)
------------
Comprehensive income....... 333,465
------------
Cash dividends:
Common-$.07 per share.... - (85,218) - (85,218)
Preferred................ - (3,516) - (3,516)
Exercise of stock options
and other awards.......... 109,799 - - 109,995
Stock-based compensation
tax benefit............... 108,941 - - 108,941
Amortization of deferred
compensation expense...... 13,006 - - 13,006
Acquisition and retirement
of common stock........... (488,984) - - (489,180)
---------- ---------- ------------- ------------
BALANCE, MARCH 31, 2002.... $2,272,325 $5,585,901 $ (84,878) $ 7,786,211
========== ========== ============= ============
The accompanying notes are an integral part of the consolidated financial
Statements.
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income........................................ $ 432,509 $ 369,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............ 378,877 359,393
Depreciation, amortization, and accretion....... 214,584 172,214
Benefit for deferred income taxes............... (14,832) (70,180)
Decrease in accrued income receivable........... 45,709 106,958
Increase in accounts receivable from
securitization................................. (193,275) (278,898)
(Decrease) increase in accrued interest payable. (291) 15,035
(Increase) decrease in other operating
activities..................................... (34,489) 292,975
------------ ------------
Net cash provided by operating activities......... 828,792 967,407
INVESTING ACTIVITIES
Net increase in money market instruments.......... (2,531,218) (2,401,906)
Proceeds from maturities of investment securities
available-for-sale............................... 318,805 293,478
Proceeds from sale of investment securities
available-for-sale............................... - 13,126
Purchases of investment securities
available-for-sale............................... (284,069) (585,512)
Proceeds from maturities of investment securities
held-to-maturity................................. 18,570 6,009
Purchases of investment securities
held-to-maturity................................. (1,019) (19,908)
Proceeds from securitization of loans............. 2,784,670 2,146,106
Loan portfolio acquisitions....................... (529,100) (63,027)
Increase in loans due to principal payments to
investors in the Corporation's securitization
transactions..................................... (2,592,955) (2,331,721)
Net loan repayments............................... 1,157,887 1,728,251
Net purchases of premises and equipment........... (77,872) (134,634)
------------ ------------
Net cash used in investing activities............. $ (1,736,301) $ (1,349,738)
MBNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(dollars in thousands)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
FINANCING ACTIVITIES
Net increase in money market deposit accounts,
noninterest-bearing deposits, interest-bearing
transaction accounts, and savings accounts....... $ 387,075 $ 792,061
Net increase (decrease) in time deposits.......... 585,138 (660,805)
Net decrease in short-term borrowings.. .......... (67,787) (503,541)
Proceeds from issuance of long-term debt
and bank notes................................... 612,699 1,276,141
Maturity of long-term debt and bank notes......... (301,665) (87,230)
Proceeds from exercise of stock options
and other awards................................. 3,586 109,995
Acquisition and retirement of common stock........ (100,730) (489,180)
Dividends paid.................................... (92,959) (80,181)
------------ ------------
Net cash provided by financing activities..... 1,025,357 357,260
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. 117,848 (25,071)
Cash and cash equivalents at beginning of period.. 721,972 962,118
------------ ------------
Cash and cash equivalents at end of period........ $ 839,820 $ 937,047
============ ============
SUPPLEMENTAL DISCLOSURES
Interest expense paid............................. $ 379,029 $ 380,301
============ ============
Income taxes paid................................. $ 27,212 $ 91,177
============ ============
==============================================================================
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
accounting principles generally accepted in the United States ("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, 2002, 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 months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
NOTE B: STOCK-BASED EMPLOYEE COMPENSATION
The Corporation has two stock-based employee compensation plans (which are more
fully described in "Note 21: Stock-Based Employee Compensation" contained in
the Annual Report on Form 10-K for the year ended December 31, 2002). The
Corporation measures compensation cost for employee stock options and similar
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), as interpreted by FASB Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation"
("Interpretation No. 44"). No options-based employee compensation cost is
reflected in net income, as all options are granted with an exercise price that
is not less than the fair market value of the Corporation's Common Stock on the
date the option is granted. For grants of restricted shares of common stock,
the market value of restricted shares at the date of grant is amortized into
expense over a period that approximates the restriction period, which is
10 years, or less if the restricted common shares had a specific vesting date
less than 10 years from the date of grant. The table below illustrates the
effect on net income and earnings per share as required by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"
("Statement No. 148") if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-based
Compensation," ("Statement No. 123") to options-based employee compensation.
Statement No. 123, as amended, defines a fair-value-based method of accounting
for an employee stock option or similar equity instrument. However, it allows
an entity to continue to measure compensation cost for those instruments using
the intrinsic-value-based method of accounting prescribed by APB Opinion
No. 25. As permitted by Statement No. 123, the Corporation elected to retain
the intrinsic-value-based method of accounting for employee stock option grants
in accordance with APB Opinion No. 25. Statement No. 123 required certain
additional disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. In accordance with
Statement No. 123, the Black-Scholes option pricing model is one technique
allowed to determine the fair value of employee stock options. The model uses
different assumptions that can significantly affect the fair value of the
employee stock options. The derived fair value estimates cannot be
substantiated by comparison to independent markets.
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
NET INCOME
As reported....................................... $ 432,509 $ 369,910
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects....................... 28,955 13,006
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related
tax effects............................... (52,631) (46,584)
------------ ------------
Pro forma......................................... $ 408,833 $ 336,332
============ ============
EARNINGS PER COMMON SHARE
As reported..................................... $ .34 $ .29
Pro forma....................................... .32 .26
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
As reported..................................... .33 .28
Pro forma....................................... .31 .25
NOTE C: CAPITALIZED SOFTWARE
Effective January 1, 2003, the Corporation reclassified capitalized computer
software from other assets to premises and equipment in the Corporation's
consolidated statements of financial condition. Amortization of capitalized
computer software is included in furniture and equipment expense in the
Corporation's consolidated statements of income. Capitalized computer software
was $354.9 million (net of accumulated amortization of $239.0 million) and
$330.5 million (net of accumulated amortization of $216.2 million) at
March 31, 2003, and December 31, 2002, respectively. Amortization of
capitalized computer software was $30.4 million and $24.4 million for the
three months ended March 31, 2003, and 2002, respectively (see "Note 3:
Significant Accounting Policies-Capitalized Software" contained in the Annual
Report on Form 10-K for the year ended December 31, 2002). For purposes of
comparability, prior period amounts have been reclassified.
NOTE D: 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 23, 2003 April 15, 2003 7.50% $ .46875 5.50% $ .34380
April 23, 2003 July 15, 2003 7.50 .46875 5.50 .34380
NOTE E: COMMON STOCK
The Corporation effected a three-for-two split of the Corporation's Common
Stock in the form of a dividend issued July 15, 2002. All common share and per
common share data have been adjusted to reflect this stock split.
During the three months ended March 31, 2003, 5.2 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
stock issued had an approximate aggregate market value of $105.0 million when
issued. The unamortized compensation expense related to all of the
Corporation's outstanding restricted stock awards was $234.0 million and
$158.2 million at March 31, 2003, and December 31, 2002, respectively.
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
three months ended March 31, 2003, the Corporation issued 6.1 million common
shares upon the exercise of stock options and issuance of restricted stock, and
purchased 6.1 million common shares for $100.7 million. The Corporation
received $3.6 million in proceeds from the exercise of stock options for the
three months ended March 31, 2003.
On April 23, 2003, the Corporation's Board of Directors declared a quarterly
cash dividend of $.08 per common share, payable July 1, 2003, to stockholders
of record as of June 13, 2003.
NOTE F: 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.
COMPUTATION OF EARNINGS PER COMMON SHARE
(dollars in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
EARNINGS PER COMMON SHARE
Net income........................................ $ 432,509 $ 369,910
Less: preferred stock dividend requirements....... 3,516 3,516
------------ ------------
Net income applicable to common stock............. $ 428,993 $ 366,394
============ ============
Weighted average common shares outstanding (000).. 1,278,980 1,277,995
============ ============
Earnings per common share......................... $ .34 $ .29
============ ============
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Net income........................................ $ 432,509 $ 369,910
Less: preferred stock dividend requirements....... 3,516 3,516
------------ ------------
Net income applicable to common stock............. $ 428,993 $ 366,394
============ ============
Weighted average common shares outstanding (000).. 1,278,980 1,277,995
Net effect of dilutive stock options (000)........ 13,667 33,079
------------ ------------
Weighted average common shares outstanding and
common stock equivalents (000)................... 1,292,647 1,311,074
============ ============
Earnings per common share-assuming dilution....... $ .33 $ .28
============ ============
There were 71.1 million stock options with an average option price of $21.26
per share outstanding at March 31, 2003, that were not included in the
computation of earnings per common share-assuming dilution for the three months
ended March 31, 2003, as a result of the stock options' exercise prices being
greater than the average market price of the common shares. These stock options
expire from 2008 through 2013. There were 90,000 stock options with an average
option price of $24.15 per share outstanding at March 31, 2002, that were not
included in the computation of earnings per common share-assuming dilution for
the three months ended March 31, 2002, 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 G: INVESTMENT SECURITIES
For the three months ended March 31, 2003, the Corporation did not sell any
investment securities available-for-sale. For the three months ended
March 31, 2002, the Corporation sold investment securities available-for-sale
resulting in a realized loss of $95,000 ($62,000 after taxes).
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.
ACCOUNTS RECEIVABLE FROM SECURITIZATION
(dollars in thousands)
March 31, December 31,
2003 2002
------------- ------------
(unaudited)
Sale of new loan principal receivables........... $ 1,983,948 $ 1,813,589
Accrued interest and fees on securitized loans... 1,968,656 2,027,281
Interest-only strip receivable................... 1,201,058 1,129,965
Accrued servicing fees........................... 717,686 667,246
Cash reserve accounts............................ 483,282 473,271
Other subordinated retained interests............ 598,384 613,659
Other............................................ 152,861 201,865
------------- ------------
Total accounts receivable from securitization.. $ 7,105,875 $ 6,926,876
============= ============
The gain from the sale of loan principal receivables for new 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") is included in
securitization income in the Corporation's consolidated statements of income.
The gain was $25.3 million (net of securitization transaction costs of
$8.7 million) for the three months ended March 31, 2003, (on the sale of
$2.8 billion of credit card loan principal receivables for the three months
ended March 31, 2003), as compared to $19.0 million (net of securitization
transaction costs of $12.8 million) for the three months ended March 31, 2002,
(on the sale of $2.2 billion of credit card loan principal receivables for the
three months ended March 31, 2002).
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 interest rate 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 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)
March 31, 2003 March 31, 2002
--------------------- ---------------------
(unaudited) (unaudited)
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,117,888 $ 83,170 $ 980,100 $ 101,025
Weighted average life (in years). .33 .85 .35 .90
Loan payment rate
(weighted average rate)......... 14.45% 5.18% 13.58% 4.84%
Impact on fair value of
20% adverse change............ $ 158,528 $ 12,644 $ 141,629 $ 15,292
Impact on fair value of
40% adverse change............ 274,875 21,756 240,728 26,370
Gross credit losses (b)
(weighted average rate)......... 5.43% 8.90% 5.01% 8.65%
Impact on fair value of
20% adverse change............ $ 245,609 $ 73,405 $ 198,755 $ 75,312
Impact on fair value of
40% adverse change............ 491,219 83,170 394,878 101,025
Excess spread (c)
(weighted average rate)......... 4.94% 2.02% 4.94% 2.32%
Impact on fair value of
20% adverse change............ $ 223,578 $ 16,634 $ 195,514 $ 19,965
Impact on fair value of
40% adverse change............ 447,155 33,268 391,713 40,448
Discount rate
(weighted average rate)......... 9.00% 9.00% 10.00% 10.00%
Impact on fair value of
20% adverse change............ $ 4,951 $ 853 $ 5,026 $ 1,217
Impact on fair value of
40% adverse change............ 9,865 1,693 10,008 2,411
(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 interest rate paid to investors.
SECURITIZATION KEY ASSUMPTIONS AND SENSITIVITIES (a):
(dollars in thousands)
December 31, 2002 December 31, 2001
--------------------- ---------------------
Credit Other Credit Other
Card Consumer Card Consumer
---------- --------- ---------- ---------
Interest-only strip receivable... $1,091,447 $ 38,518 $1,008,419 $ 115,644
Weighted average life (in years). .33 .87 .35 .93
Loan payment rate
(weighted average rate)......... 14.44% 5.05% 13.60% 4.67%
Impact on fair value of
20% adverse change............ $ 156,897 $ 5,835 $ 144,892 $ 17,304
Impact on fair value of
40% adverse change............ 268,019 10,081 246,857 29,870
Gross credit losses (b)
(weighted average rate)......... 5.43% 9.83% 5.25% 8.40%
Impact on fair value of
20% adverse change............ $ 244,432 $ 38,518 $ 205,460 $ 74,666
Impact on fair value of
40% adverse change............ 488,865 38,518 410,919 115,644
Excess spread (c)
(weighted average rate)......... 4.84% .91% 5.14% 2.60%
Impact on fair value of
20% adverse change............ $ 218,289 $ 7,704 $ 201,684 $ 23,129
Impact on fair value of
40% adverse change............ 436,579 15,407 403,368 46,258
Discount rate
(weighted average rate)......... 9.00% 9.00% 12.00% 12.00%
Impact on fair value of
20% adverse change............ $ 4,870 $ 404 $ 6,195 $ 1,709
Impact on fair value of
40% adverse change............ 9,703 801 12,326 3,378
(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 interest rate 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 three months ended March 31, 2003, 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 an
interest rate of 6.125%, payable semi-annually,
maturing in 2013...................................... $500,000
Fixed-Rate Medium-Term Deposit Notes, with interest
rates of 6.00%, payable semi-annually, maturing in
2008 (CAD$120.0 million).............................. 80,262
Floating-Rate Medium-Term Deposit Notes, priced at
105 basis points over the ninety-day Bankers
Acceptance Rate, payable quarterly, maturing in
2005 (CAD$10.0 million)............................... 6,538
Floating-Rate Euro Medium-Term Notes, priced at
155 basis points over the three-month Sterling London
Interbank Offered Rate, payable quarterly, maturing in
2008 (GBP20.0 million)................................ 31,517
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 interest rate
sensitivity of the Corporation's assets. The Corporation also uses foreign
exchange swap agreements to reduce its foreign currency exchange risk and to
change a portion of fixed-rate long-term debt and bank notes issued by MBNA
Europe Bank Limited ("MBNA Europe") to floating-rate long-term debt.
During the three months ended March 31, 2003, the Corporation entered into
interest rate swap agreements, with a total notional value of $500.0 million,
related to the issuance of the Fixed-Rate Senior Medium-Term Notes.
During the three months ended March 31, 2003, MBNA Canada Bank ("MBNA Canada")
entered into interest rate swap agreements, with a total notional value of
$80.3 million (CAD$120.0 million), related to the issuance of the Fixed-Rate
Medium-Term Deposit Notes.
All of the interest rate swap agreements entered into during the three months
ended March 31, 2003, 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.
During the three months ended March 31, 2003, $95.0 million of Senior Medium-
Term Notes, $13.4 million of Medium-Term Deposit Notes, and $193.3 million of
Euro Medium Term Notes matured.
NOTE J: COMPREHENSIVE INCOME
(dollars in thousands)
The components of comprehensive income, net of tax, are as follows:
For the Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
(unaudited)
Net income........................................ $ 432,509 $ 369,910
Other comprehensive income:
Foreign currency translation.................... (16,425) (14,850)
Net unrealized losses on investment
securities available-for-sale and other
financial instruments.......................... (5,088) (21,595)
------------ ------------
Other comprehensive income........................ (21,513) (36,445)
------------ ------------
Comprehensive income.............................. $ 410,996 $ 333,465
============ ============
The components of accumulated other comprehensive income, net of tax, are as
follows:
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
Foreign currency translation...................... $ 48,392 $ 64,817
Net unrealized gains on investment
securities available-for-sale and other
financial instruments........................... 19,097 24,185
Minimum benefit plan liability adjustment......... (4,276) (4,276)
------------ ------------
Accumulated other comprehensive income............ $ 63,213 $ 84,726
============ ============
The financial statements of the Corporation's foreign subsidiaries have been
translated into U.S. dollars in accordance with GAAP. Assets and liabilities
have been translated using the exchange rate at period end. Income and expense
amounts have been translated using the exchange rate for the period in which
the transaction took place. The translation gains and losses resulting from the
change in exchange rates have been reported as a component of other
comprehensive income included in stockholders' equity, net of tax.
NOTE K: NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("Statement No. 149").
Statement No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. Statement No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The implementation of
Statement No. 149 is not expected to have a material impact on the
Corporation's consolidated financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), was issued. Interpretation No. 46
clarified the rules for consolidation by an investor of an entity for which the
investor's ownership interest changes with changes in the entity's net asset
value. The Corporation's securitization trusts are qualified special purpose
entities as defined by Statement No. 140 that are specifically exempted from
the requirements of Interpretation No. 46. As a result, the implementation of
Interpretation No. 46 did not have an impact on the accounting for the
Corporation's asset securitizations. In addition, the implementation of
Interpretation No. 46 is not expected to have a material impact on the
accounting for the Corporation's community development investments in the form
of limited partnership interests that qualify under the Community Reinvestment
Act or the accounting for the Corporation's operating leases.
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 and other organizations. In addition to its credit card
lending, the Corporation also makes other consumer loans, which include
installment and revolving unsecured loan products, and offers insurance and
deposit products. The Corporation is also the parent of MBNA America
(Delaware), N.A. ("MBNA Delaware"), which offers business card products,
mortgage loans, and aircraft loans. Mortgage and aircraft loans are included in
other consumer loan receivables, and business card products are included in
credit card loan receivables in the Corporation's consolidated statements of
financial condition.
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 statements of financial condition through the sale of loan
principal receivables to a trust. The trust 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 excluded from the Corporation's
consolidated financial statements in accordance with accounting principles
generally accepted in the United States ("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, and interest earned on
investment securities and 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; business development
and operating expenses; and income taxes.
CRITICAL ACCOUNTING POLICIES
Management 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 that require management to make significant judgments, estimates, and
assumptions related to the accounting for asset securitization, the reserve for
possible credit losses, intangible assets, and revenue recognition. The
development and selection of the critical accounting policies, and the related
disclosure below have been reviewed with the Audit Committee of the Board of
Directors.
Asset Securitization:
The Corporation uses securitization of its loan principal receivables as one
source to meet its funding needs. The Corporation accounts for its
securitization transactions 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"), issued by the Financial
Accounting Standards Board ("FASB"). When the Corporation securitizes loan
principal receivables, the Corporation recognizes a gain on sale and retained
beneficial interests, including an interest-only strip receivable. The
interest-only strip receivable 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 ("excess
spread"). Since quoted market prices for the interest-only strip receivable are
not available, management uses certain assumptions and estimates in determining
the fair value of the interest-only strip receivable. These assumptions and
estimates include projections concerning interest income and late fees on
securitized loans, recoveries on charged-off securitized loans, gross credit
losses on securitized loans, contractual servicing fees, and the interest rate
paid to investors in a securitization transaction. These projections are used
to determine the excess spread to be earned by the Corporation over the
estimated life of the securitized loan principal receivables. The other
assumptions and estimates used by the Corporation in estimating the fair value
of the interest-only strip receivable 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 assumptions and estimates used to estimate the fair value of the interest-
only strip receivable at March 31, 2003, reflect management's judgment as to
the expected excess spread to be earned and payment rates to be experienced on
the securitized loans. 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 rates
subject to change based on changes in market interest rates. Changes in market
interest rates can also affect the projected interest income on securitized
loans, as the Corporation could reprice the managed loan portfolio. Credit loss
projections could change in the future based on changes in the credit quality
of the securitized loans, the Corporation's account management and collection
practices, 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 from the estimates used in the periods covered
by this report.
On a quarterly basis, the Corporation reviews and adjusts as appropriate, the
assumptions and estimates used in determining the fair value of the interest-
only strip receivable. If these assumptions change, or actual results differ
from projected results, the interest-only strip receivable and securitization
income would be affected. If management had made different assumptions for the
periods covered by this report that raised or lowered the excess spread or
payment rate, the Corporation's financial position and results of operations
could have differed materially. For example, a 20% change in the excess spread
assumption for all securitized loan principal receivables could have resulted
in a change of approximately $240 million in the value of the total interest-
only strip receivable at March 31, 2003, and a related change in securitization
income for the three months ended March 31, 2003.
Note H provides further detail regarding the Corporation's assumptions and
estimates used in determining the fair value of the interest-only strip
receivable and their sensitivities to adverse changes.
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 net credit losses. To project
probable net credit losses, the Corporation regularly performs a migration
analysis of delinquent and current accounts. 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. The
Corporation's projection of probable net credit losses considers 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. The Corporation establishes appropriate levels of the reserve
for possible credit losses for its products based on their risk
characteristics. The Corporation then reserves for the projected probable net
credit losses based on its projection of these amounts. A provision is charged
against earnings to maintain the reserve for possible credit losses at an
appropriate level. The Corporation's projections of probable net credit losses
are inherently uncertain, and as a result the Corporation cannot predict with
certainty the amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy laws or regulatory
policies, and other factors could impact the Corporation's actual and projected
net credit losses and the related reserve for possible credit losses. If
management had made different assumptions about probable net credit losses, the
Corporation's financial position and results of operations could have differed
materially. For example, a 10% change in management's projection of probable
net credit losses could have resulted in a change of approximately
$115 million in the reserve for possible credit losses and the provision for
possible credit losses.
Intangible Assets:
The Corporation's intangible assets include purchased credit card relationships
("PCCRs") which are carried at net book value. The Corporation records these
intangible assets as part of the acquisition of credit card loans and the
corresponding Customer relationships. The Corporation's intangible assets are
amortized over the period the assets are expected to contribute to the cash
flows of the Corporation which reflect the expected pattern of benefit. PCCRs
are amortized using an accelerated method based upon the projected cash flows
the Corporation will receive from the Customer relationships during the
estimated useful lives of the PCCRs.
The Corporation's PCCRs are subject to impairment tests in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement No. 144"). The
Corporation reviews the carrying value of its PCCRs for impairment on a
quarterly basis, or sooner whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable, by comparing their carrying
value to the sum of the undiscounted expected future cash flows from the credit
card relationships. In accordance with Statement No. 144, an impairment exists
if the sum of the undiscounted expected future cash flows is less than the
carrying amount of the asset. An impairment would result in a write-down of the
PCCRs to estimated fair value based on the discounted future cash flows
expected from the PCCRs. The Corporation performs the impairment test on a
specific portfolio basis, since it represents the lowest level for which
identifiable cash flows are independent of the cash flows of other assets and
liabilities.
The Corporation makes certain estimates and assumptions that affect the
determination of the expected future cash flows from the credit card
relationships. 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 PCCRs. The estimated
undiscounted cash flows of acquired Customer credit card relationships exceeds
the $3.1 billion net book value of the Corporation's PCCRs at March 31, 2003.
If actual levels of active account attrition for all acquired portfolios would
adversely change 10%, the estimated undiscounted cash flows of acquired
Customer accounts in the aggregate would still exceed the net book value of
acquired Customer accounts at March 31, 2003.
Prior to 2003, the Corporation amortized the value of foreign PCCRs over a
period of 10 years. Effective January 1, 2003 the Corporation extended the
amortization period for foreign PCCRs to 15 years to more appropriately match
the amortization period with the PCCRs' estimated useful lives. The change in
estimate did not have a material impact on the Corporation's financial
condition or results of operations.
Revenue Recognition:
Interest income is recognized based upon the amount of loans outstanding and
their contractual annual percentage rates. Interest income is included in loan
receivables when billed to the Customer. The Corporation accrues unbilled
interest income on a monthly basis from the Customer's statement billing cycle
date to the end of the month. The Corporation uses certain estimates and
assumptions (for example, estimated yield) in the determination of the accrued
unbilled portion of interest income that is included in accrued income
receivable in the Corporation's consolidated statements of financial condition.
The Corporation also uses certain assumptions and estimates in the valuation of
the accrued interest and fees on securitized loans which is included in
accounts receivable from securitization in the Corporation's consolidated
statements of financial condition. If management had made different assumptions
about the determination of the accrued unbilled portion of interest income and
the valuation of accrued interest and fees on securitized loans, the
Corporation's financial position and results of operations could have differed
materially. For example, a 5% change in management's projection of the
estimated yield could have resulted in a change totaling approximately
$32 million in interest income and other operating income.
The Corporation also recognizes fees on loan receivables in earnings (except
annual fees) as the fees are assessed according to agreements with the
Corporation's Customers. Credit card and other consumer loan fees include
annual, late, overlimit, returned check, cash advance, express payment, and
other miscellaneous fees. These fees are included in the Corporation's loan
receivables when billed. Annual fees and incremental direct loan origination
costs are deferred and amortized on a straight-line basis over the one-year
period to which they pertain.
The Corporation adjusts the amount of interest 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 adjustments to the respective
income statement captions, loan receivables, and accrued income receivable. 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 charge off. 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
through an adjustment to accounts receivable from securitization and
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 charge off.
If management had made different assumptions about uncollectible interest and
fees, the Corporation's financial position and results of operations could have
differed materially. For example, a 10% change in management's estimate of
uncollectible interest and fees could have resulted in a change totaling
approximately $41 million in interest and other operating income.
EARNINGS SUMMARY
Net income for the three months ended March 31, 2003, increased 16.9% to
$432.5 million or $.33 per common share from $369.9 million or $.28 per common
share for the same period in 2002. 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 overall growth in earnings for the three months ended March 31, 2003, was
primarily the result of growth in the Corporation's managed loans outstanding
and an increase in interest income and fee income, partially offset by higher
managed credit losses and an increase in other operating expenses which
reflects the Corporation's continued investment in attracting, servicing, and
retaining credit card and other consumer loan Customers.
Ending loan receivables at March 31, 2003, were $27.4 billion, an increase of
$4.6 billion or 20.3% over the same period in 2002. Total managed loans at
March 31, 2003, were $106.1 billion, an increase of $10.8 billion or 11.3% over
the same period in 2002. Average loan receivables for the three months ended
March 31, 2003, were $27.4 billion, an increase of $3.4 billion or 14.3% over
the same period in 2002. Total average managed loans for the three months ended
March 31, 2003, were $106.0 billion, an increase of $9.7 billion or 10.1% over
the first quarter of 2002.
The Corporation allocates resources on a managed basis, and financial data
provided to management reflects the Corporation's results on a managed basis.
Managed data assumes the Corporation's securitized loan principal receivables
have not been sold and presents the earnings on securitized loan principal
receivables in the same fashion as the Corporation's owned loans. Management,
equity and debt analysts, rating agencies and others evaluate the Corporation's
operations on a managed basis because the loans that are securitized are
subject to underwriting standards comparable to the Corporation's owned loans,
and the Corporation services the securitized and owned loans, and the related
accounts, together and in the same manner without regard to ownership of the
loans. In a securitization, the account relationships are not sold to the
trust. The Corporation continues to own and service the accounts that generate
the securitized loan principal receivables. The credit performance of the
entire managed loan portfolio is important to understand the quality of
originations and the related credit risks inherent in the owned portfolio and
retained interests in securitization transactions. Whenever managed data is
included in this report, a reconciliation of the managed data to the most
directly comparable financial measure is calculated and presented in accordance
with GAAP.
Table 1 reconciles the Corporation's loan receivables to its managed loans and
average loan receivables to its average managed loans.
TABLE 1: RECONCILIATION OF LOAN RECEIVABLES TO MANAGED LOANS
(dollars in thousands)
For the Three Months Ended
March 31,
----------------------------
2003 2002
------------- -------------
At Period End: (unaudited)
Loans held for securitization.................. $ 9,523,377 $ 8,202,513
Loan portfolio................................. 17,901,894 14,591,952
------------- -------------
Loan receivables............................. 27,425,271 22,794,465
Securitized loans.............................. 78,698,578 72,566,991
------------- -------------
Total managed loans.......................... $ 106,123,849 $ 95,361,456
============= =============
Average for the Period:
Loans held for securitization.................. $ 9,807,427 $ 9,160,373
Loan portfolio................................. 17,555,619 14,773,432
------------- -------------
Loan receivables............................. 27,363,046 23,933,805
Securitized loans.............................. 78,669,738 72,361,802
------------- -------------
Total managed loans.......................... $ 106,032,784 $ 96,295,607
============= =============
The Corporation acquired 80 new endorsements from organizations and added
2.3 million new accounts during the three months ended March 31, 2003.
The net credit losses ratio on loan receivables and managed loans for the first
quarter of 2003 were 5.12% and 5.47%, respectively. As previously reported in
the Corporation's current reports on Form 8-K dated January 31, 2003,
February 28, 2003, March 31, 2003, and April 30, 2003, after a typical seasonal
increase in loss rates in January, net credit loss rates have declined from
January levels. Although there may be minor monthly fluctuations, management
expects the declining trend in managed net credit loss rates to continue
throughout the year. The Corporation's projections of future net credit losses
are by their nature uncertain and changes in economic conditions, bankruptcy
laws, regulatory policies, and other factors may impact actual losses.
Delinquency on the loan receivables and managed loans was 3.88% and 4.74%,
respectively, at March 31, 2003. Refer to "LOAN QUALITY - NET CREDIT LOSSES"
and "LOAN QUALITY - DELINQUENCIES" for a reconciliation of the loan receivables
net credit losses ratio to the managed net credit losses ratio for the three
months ended March 31, 2003, and the loan receivables delinquency ratio to the
managed delinquency ratio at March 31, 2003.
The Corporation's return on average total assets for the three months ended
March 31, 2003, was 3.28%, as compared to 3.30% for the same period in 2002.
The decrease in the return on average total assets was primarily the result of
net income growing at a slower rate than average total assets.
The Corporation's return on average stockholders' equity was 18.95% for the
three months ended March 31, 2003, as compared to 19.42% for the same period
in 2002. The decline in the return on average stockholders' equity is
primarily the result of net income growing at a slower rate than average
stockholders' equity.
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 $555.8 million
for the three months ended March 31, 2003, as compared to $513.5 million for
the same period in 2002. Average interest-earning assets increased $5.6 billion
for the three months ended March 31, 2003, from the same period in 2002,
primarily as a result of an increase in average loan receivables of
$3.4 billion and an increase in average investment securities and money market
instruments of $2.2 billion. The yield on average interest-earning assets
decreased 112 basis points to 9.24% for the three months ended March 31, 2003,
as compared to 10.36% for the same period in 2002. The decrease in the yield on
average interest-earning assets was primarily the result of the decrease in the
yield earned on average loan receivables. Average interest-bearing liabilities
also increased $6.0 billion for the three months ended March 31, 2003, from the
same period in 2002, as a result of an increase of $3.8 billion in average
interest-bearing deposits and an increase of $2.2 billion in average borrowed
funds. The decrease in the rate paid on average interest-bearing liabilities
of 83 basis points to 3.85% for the three months ended March 31, 2003, from
4.68% for the same period in 2002 reflect actions by the Federal Open Market
Committee ("FOMC") throughout 2001 and in the fourth quarter of 2002 that
impacted overall market interest rates and lowered the Corporation's cost of
funds.
The Corporation's net interest margin, on a fully taxable equivalent basis, was
5.44% for the three months ended March 31, 2003, as compared to 5.81% for the
same period in 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 37 basis point decrease in the net interest
margin for the three months ended March 31, 2003, was primarily the result of
the yield earned on average interest-earning assets decreasing more than the
rate paid on average interest-bearing liabilities combined with the increase in
average interest-earning assets.
See "IMPACT OF SECURITIZATION TRANSACTIONS ON THE CORPORATION'S RESULTS" for a
discussion of the managed net interest margin.
INVESTMENT 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
securitization transactions, deposits, loan payments, and long-term debt and
bank note issuances. 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 was 24.8% for the three months ended
March 31, 2003, as compared to 22.4% for the same period in 2002. Money market
instruments increased during the three months ended March 31, 2003, to provide
liquidity to support portfolio acquisition activity and anticipated loan
growth. Also, during the three months ended March 31, 2003, the Corporation
increased its liquidity position in anticipation of possible market disruptions
due to uncertainty created by world events and capital market conditions.
Interest income on investment securities, on a fully taxable equivalent basis,
decreased $4.2 million to $31.0 million for the three months ended
March 31, 2003, as compared to the same period in 2002. The decrease in
interest income on investment securities for the three months ended
March 31, 2003, was primarily the result of a 71 basis point decrease in the
yield earned on average investment securities, partially offset by an increase
in average investment securities of $289.7 million for the three months ended
March 31, 2003, from the same period in 2002.
Interest income on money market instruments increased $4.5 million to
$26.1 million for the three months ended March 31, 2003, as compared to the
same period in 2002. The increase in interest income on money market
instruments was primarily the result of an increase in average money market
instruments of $2.0 billion for the three months ended March 31, 2003,
partially offset by a 34 basis point decrease in the yield earned on average
money market instruments, as compared to the same period in 2002. Money market
instruments include interest-earning time deposits in other banks and federal
funds sold.
OTHER INTEREST-EARNING ASSETS
Other interest-earning assets include the Corporation's retained interests in
securitization transactions, which are the interest-only strip receivable, cash
reserve accounts, and accrued interest and fees on securitized loans. Also
included in other interest-earning assets is Federal Reserve Bank stock. 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 in the consolidated
statements of financial condition (see "Note H: Asset Securitization" for
further discussion).
Interest income on other interest-earning assets decreased $24.5 million to
$75.1 million for the three months ended March 31, 2003, from the same period
in 2002. The decrease in interest income on other interest-earning assets for
the three months ended March 31, 2003, was primarily the result of a decrease
in the yield earned on other interest-earning assets of 235 basis points
combined with a decrease of $96.8 million in average other interest-earning
assets, as compared to the same period in 2002. The decrease in the yield
earned on average other interest-earning assets was primarily the result of the
decrease in the discount rate assumptions used in the valuation of the
Corporation's retained beneficial interest in its 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 increased
$52.5 million to $812.1 million for the three months ended March 31, 2003, from
the same period in 2002. The increase in interest income on loan receivables
for the three months ended March 31, 2003, was primarily the result of an
increase in average loan receivables of $3.4 billion from the same period in
2002. The yield earned by the Corporation for the three months ended
March 31, 2003, on average loan receivables decreased 83 basis points to
12.04%, as compared to 12.87% for the same period in 2002.
Table 2 presents the Corporation's loan receivables at period end distributed
by loan type, excluding securitized loans. Loan receivables were $27.4 billion
at March 31, 2003, as compared to $28.7 billion at December 31, 2002.
Domestic credit card loan receivables decreased to $14.6 billion at
March 31, 2003, from $15.6 billion at December 31, 2002. The decrease in
domestic credit card loan receivables at March 31, 2003, was primarily the
result of Customers paying down balances that existed at December 31, 2002.
Customers typically pay down balances that were built up over the holiday
shopping season in the first quarter of the subsequent year. These decreases
were partially offset by domestic credit card loans originated through
marketing programs and domestic credit card loan acquisitions.
During the three months ended March 31, 2003, the Corporation securitized
$2.0 billion of domestic credit card loan receivables, offset by an increase of
$2.2 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
$453.7 million of domestic credit card loan receivables during the three months
ended March 31, 2003.
The yield on average domestic credit card loan receivables was 11.64% for the
three months ended March 31, 2003, as compared to 12.39% for the same period in
The decrease of 75 basis points in the yield on average domestic credit
card loan receivables reflects lower average promotional and non-
promotional interest rates offered to attract and retain Customers and
to grow loan receivables.
Domestic credit card loans held for securitization decreased to $8.0 billion at
March 31, 2003, from $9.2 billion at December 31, 2002. The $1.2 billion
decrease reflects lower anticipated domestic credit card securitizations.
Domestic other consumer loan receivables were $6.3 billion at
March 31, 2003, and December 31, 2002. The yield on average domestic other
consumer loan receivables was 13.96% for the three months ended March 31, 2003,
as compared to 14.37% for the same period in 2002. 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 a change in
the mix of unsecured lending products relative to sales finance products.
Sales finance products are offered by the Corporation through associations with
retailers where the Corporation provides financing to Customers to purchase the
retailer's goods and services. The Corporation generally charges a higher
interest rate for its sales finance products than its other unsecured lending
products.
Foreign loan receivables were $6.5 billion at March 31, 2003, as compared to
$6.8 billion at December 31, 2002. The decrease was primarily a result of a
net increase in securitized foreign loan principal receivables. During the
three months ended March 31, 2003, the Corporation securitized $790.0 million
of foreign credit card loan principal receivables, partially offset by an
increase of $394.0 million in the Corporation's foreign loan portfolio which
resulted when certain securitizations entered 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 the U.S. dollar against foreign currencies also decreased
foreign loan receivables by $54.6 million at March 31, 2003, as compared to
December 31, 2002. The yield on average foreign loan receivables was 11.06%
for the three months ended March 31, 2003, as compared to 12.20% for the same
period in 2002. The decrease in the yield on average foreign loan receivables
reflects lower average promotional and non-promotional interest rates offered
to attract and retain Customers and to grow loan receivables.
TABLE 2: LOAN RECEIVABLES DISTRIBUTION
(dollars in thousands)
March 31, December 31,
2003 2002
------------- ------------
(unaudited)
Loans held for securitization(a):
Domestic:
Credit card.................................. $ 7,970,737 $ 9,157,751
Other consumer............................... 63,508 40,962
------------- ------------
Total domestic loans held for
securitization............................ 8,034,245 9,198,713
Foreign........................................ 1,489,132 1,830,914
------------- ------------
Total loans held for securitization........ 9,523,377 11,029,627
Loan portfolio:
Domestic:
Credit card.................................. 6,657,905 6,413,116
Other consumer............................... 6,278,782 6,285,751
------------- ------------
Total domestic loan portfolio.............. 12,936,687 12,698,867
Foreign........................................ 4,965,207 4,998,014
------------- ------------
Total loan portfolio....................... 17,901,894 17,696,881
------------- ------------
Total loan receivables..................... $ 27,425,271 $ 28,726,508
============= ============
(a) Loans held for securitization includes loans 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.
PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses and deferred charges increased $101.5 million or 24.6% to
$514.1 million at March 31, 2003, as compared to $412.6 million at
December 31, 2002. The increase was primarily the result of an increase in
prepaid postage expense and prepaid employee benefit plan costs of
$54.7 million and $33.5 million, respectively.
OTHER ASSETS
Other assets increased $250.2 million or 14.9% to $1.9 billion at
March 31, 2003, as compared to $1.7 billion at December 31, 2002. The increase
is primarily the result of 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 (see "Note 3: Significant
Accounting Policies-Derivative Financial Instruments and Hedging Activities"
contained in the Annual Report on Form 10-K for the year ended
December 31, 2002). 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 partially
offset by changes in the carrying value of the corresponding hedged long-term
debt and bank notes.
DEPOSITS
Total interest expense on deposits was $292.9 million for the three months
ended March 31, 2003, as compared to $323.6 million for the same period in
The decrease in interest expense on deposits for the three months ended
March 31, 2003, was primarily the result of a decrease of 104 basis
points in the rate paid on average interest-bearing deposits, partially
offset by an increase of $3.8 billion in average interest-bearing deposits for
the three months ended March 31, 2003. The decrease in the rate paid on
average interest-bearing deposits reflects actions by the FOMC throughout 2001
and in the fourth quarter of 2002, that 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-rate,
generally mature within one year. Therefore, the decrease in market interest
rates in the fourth quarter of 2002 permitted the Corporation to decrease the
rate paid on average money market deposit accounts and average foreign time
deposits during the three months ended March 31, 2003, as compared to the same
period in 2002. The Corporation's domestic time deposits are primarily fixed-
rate deposits with maturities that range from three months to five years.
Therefore, the Corporation realized the benefits of lower market rates on
domestic time deposits more slowly than the benefits of lower market rates on
money market deposits.
BORROWED FUNDS
Borrowed funds include both short-term borrowings and long-term debt and bank
notes.
Interest expense on short-term borrowings decreased to $10.3 million for the
three months ended March 31, 2003, as compared to $11.5 million for the same
period in 2002. The decrease in interest expense on short-term borrowings was
primarily the result of a decrease of $182.5 million in average short-term
borrowings, partially offset by an increase of 12 basis points in the rate paid
on average short-term borrowings from the same period in 2002.
Interest expense on domestic short-term borrowings decreased to $8.9 million
for the three months ended March 31, 2003, as compared to $10.2 million for the
same period in 2002. The decrease in interest expense on domestic short-term
borrowings was primarily the result of a $145.8 million decrease in average
domestic short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002. Domestic short-term borrowings for the
three months ended March 31, 2003, were solely related to two on-balance-sheet
structured financings.
Interest expense on foreign short-term borrowings increased to $1.5 million for
the three months ended March 31, 2003, as compared to the same period in 2002.
The increase in interest expense on foreign short-term borrowings was primarily
the result of an 86 basis point increase in the rate paid on foreign short-term
borrowings for the three months ended March 31, 2003, as compared to the same
period in 2002, partially offset by a decrease of $36.7 million in average
foreign short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002. Foreign short-term borrowings for the
three months ended March 31, 2003, consisted of short-term deposit notes issued
by MBNA Canada. The 86 basis point increase in the rate paid on average
foreign short-term borrowings for the three months ended March 31, 2003, as
compared to the same period in 2002, primarily relates to an increase in the
underlying benchmark interest rate.
Interest expense on long-term debt and bank notes increased to $85.3 million
for the three months ended March 31, 2003, as compared to $67.3 million for the
same period in 2002. The increase in interest expense on long-term debt and
bank notes during the three months ended March 31, 2003, from the same period
in 2002 was primarily the result of an increase in average long-term debt and
bank notes of $2.4 billion, as compared to the same period in 2002, partially
offset by a decrease in the rate paid on average long-term debt and bank notes
of 18 basis points.
Interest expense on domestic long-term debt and bank notes increased
$6.4 million during the three months ended March 31, 2003, as compared to the
same period in 2002, primarily as a result of a $2.0 billion increase in
average domestic long-term debt and bank notes, partially offset by a decrease
of 54 basis points in the rate paid on average domestic long-term debt and bank
notes. The Corporation issued additional long-term debt and bank notes over
the past 12 months to fund loan and other asset growth and to diversify funding
sources. The decrease in the rate paid on average domestic long-term debt and
bank notes reflects actions by the FOMC in the fourth quarter of 2002 that
impacted overall market interest rates. Interest expense on foreign long-term
debt and bank notes increased $11.5 million during the three months ended
March 31, 2003, as compared to the same period in 2002. The increase in
interest expense on foreign long-term debt and bank notes was primarily the
result of an increase in average foreign long-term debt and bank notes of
$361.8 million to $2.5 billion for three months ended March 31, 2003, as
compared to the same period in 2002, combined with an increase of 112 basis
points in the rate paid on average foreign long-term debt and bank notes. The
increase in the rate paid on foreign long-term debt and bank notes is primarily
a result of an increase in the underlying benchmark interest rate on medium-
term deposit notes issued by MBNA Canada.
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 in order to more closely match the
interest rate sensitivity of the Corporation's assets. The Corporation also
uses foreign exchange swap agreements to minimize its foreign currency exchange
risk on a portion of long-term debt and bank notes issued by MBNA Europe.
Table 3 provides further detail regarding the Corporation's average balances,
yields and rates, and income or expense for the three months ended
March 31, 2003, and 2002, respectively.
TABLE 3: STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,135 .71% $ 2
Foreign................................ 3,717,536 1.98 18,135
------------ ----------
Total interest-earning time deposits
in other banks...................... 3,718,671 1.98 18,137
Federal funds sold....................... 2,568,556 1.26 7,954
------------ ----------
Total money market instruments....... 6,287,227 1.68 26,091
Investment securities(a):
Domestic:
Taxable................................ 3,649,308 3.11 27,994
Tax-exempt(b).......................... 107,805 2.17 578
------------ ----------
Total domestic investment securities. 3,757,113 3.08 28,572
Foreign.................................. 217,955 4.44 2,388
------------ ----------
Total investment securities.......... 3,975,068 3.16 30,960
Other interest-earning assets(a)........... 3,800,002 8.02 75,138
Loan receivables:
Loans held for securitization:
Domestic:
Credit card............................ 7,807,967 11.86 228,430
Other consumer......................... 38,723 5.39 515
------------ ----------
Total domestic loans held for
securitization...................... 7,846,690 11.83 228,945
Foreign.................................. 1,960,737 11.51 55,635
------------ ----------
Total loans held for securitization.. 9,807,427 11.77 284,580
STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS - CONTINUED
Loan portfolio:
Domestic:
Credit card............................ $ 6,496,637 11.37% $ 182,129
Other consumer......................... 6,296,235 14.02 217,615
------------ ----------
Total domestic loan portfolio........ 12,792,872 12.67 399,744
Foreign.................................. 4,762,747 10.88 127,731
------------ ----------
Total loan portfolio................. 17,555,619 12.19 527,475
------------ ----------
Total loan receivables............... 27,363,046 12.04 812,055
------------ ----------
Total interest-earning assets........ 41,425,343 9.24 944,244
Cash and due from banks...................... 805,316
Premises and equipment, net.................. 2,524,429
Other assets................................. 9,787,992
Reserve for possible credit losses........... (1,111,019)
------------
Total assets......................... $ 53,432,061
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 21,795,904 4.60% $ 247,088
Money market deposit accounts.......... 7,604,653 2.13 39,873
Interest-bearing transaction accounts.. 52,695 1.32 171
Savings accounts....................... 68,030 1.38 232
------------ ----------
Total domestic interest-bearing
deposits............................ 29,521,282 3.95 287,364
Foreign:
Time deposits.......................... 645,618 3.45 5,498
------------ ----------
Total interest-bearing deposits...... 30,166,900 3.94 292,862
STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2003
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY - CONTINUED
Borrowed funds:
Short-term borrowings:
Domestic................................. $ 1,000,000 3.60% $ 8,865
Foreign.................................. 187,665 3.14 1,453
------------ ----------
Total short-term borrowings.......... 1,187,665 3.52 10,318
Long-term debt and bank notes(c):
Domestic................................. 7,088,338 2.65 46,384
Foreign.................................. 2,478,556 6.36 38,867
------------ ----------
Total long-term debt and bank notes.. 9,566,894 3.61 85,251
------------ ----------
Total borrowed funds................. 10,754,559 3.60 95,569
------------ ----------
Total interest-bearing liabilities... 40,921,459 3.85 388,431
Noninterest-bearing deposits................. 960,409
Other liabilities............................ 2,293,821
------------
Total liabilities.................... 44,175,689
Stockholders' equity......................... 9,256,372
------------
Total liabilities and stockholders'
equity.............................. $ 53,432,061
============ ----------
Net interest income.................. $ 555,813
==========
Net interest margin.................. 5.44
Interest rate spread................. 5.39
(a) Average balances for investment securities available-for-sale and
other interest-earning assets are based on market values or estimated
market values; if these assets were carried at amortized cost, there would
not be a material impact on the net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
March 31, 2003, was $217.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
ASSETS (unaudited)
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in other
banks:
Domestic............................... $ 1,025 1.19% $ 3
Foreign................................ 1,798,407 2.39 10,613
------------ ----------
Total interest-earning time
deposits in other banks............. 1,799,432 2.39 10,616
Federal funds sold....................... 2,535,779 1.75 10,951
------------ ----------
Total money market instruments....... 4,335,211 2.02 21,567
Investment securities(a):
Domestic:
Taxable................................ 3,379,880 3.86 32,140
Tax-exempt(b).......................... 110,414 2.62 714
------------ ----------
Total domestic investment securities. 3,490,294 3.82 32,854
Foreign.................................. 195,071 4.88 2,347
------------ ----------
Total investment securities.......... 3,685,365 3.87 35,201
Other interest-earning assets(a)........... 3,896,774 10.37 99,612
Loan receivables:
Loans held for securitization:
Domestic:
Credit card............................ 6,938,775 13.49 230,795
Other consumer......................... 1,029,068 15.61 39,608
------------ ----------
Total domestic loans held for
securitization...................... 7,967,843 13.76 270,403
Foreign.................................. 1,192,530 12.98 38,173
------------ ----------
Total loans held for securitization.. 9,160,373 13.66 308,576
STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
ASSETS - CONTINUED
Loan portfolio:
Domestic:
Credit card............................ $ 6,180,650 11.15% $ 169,968
Other consumer......................... 5,235,819 14.12 182,334
------------ ----------
Total domestic loan portfolio........ 11,416,469 12.52 352,302
Foreign.................................. 3,356,963 11.92 98,700
------------ ----------
Total loan portfolio................. 14,773,432 12.38 451,002
------------ ----------
Total loan receivables............... 23,933,805 12.87 759,578
------------ ----------
Total interest-earning assets........ 35,851,155 10.36 915,958
Cash and due from banks...................... 780,537
Premises and equipment, net.................. 2,373,729
Other assets................................. 7,271,317
Reserve for possible credit losses........... (878,806)
------------
Total assets......................... $ 45,397,932
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits.......................... $ 18,794,380 5.75% $ 266,343
Money market deposit accounts.......... 6,634,452 2.99 48,905
Interest-bearing transaction accounts.. 51,137 1.82 230
Savings accounts....................... 45,126 1.83 204
------------ ----------
Total domestic interest-bearing
deposits............................ 25,525,095 5.02 315,682
Foreign:
Time deposits.......................... 814,035 3.95 7,933
------------ ----------
Total interest-bearing deposits...... 26,339,130 4.98 323,615
STATEMENTS OF AVERAGE BALANCES, YIELDS AND RATES, INCOME OR EXPENSE
(dollars in thousands, yields and rates on a fully taxable equivalent basis)
For the Three Months Ended
March 31, 2002
--------------------------------
Average Yield/ Income
Amount Rate or Expense
------------ ------ ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY - CONTINUED
Borrowed funds:
Short-term borrowings:
Domestic................................. $ 1,145,779 3.62% $ 10,239
Foreign.................................. 224,345 2.28 1,259
------------ ----------
Total short-term borrowings.......... 1,370,124 3.40 11,498
Long-term debt and bank notes(c):
Domestic................................. 5,081,401 3.19 39,977
Foreign.................................. 2,116,763 5.24 27,335
------------ ----------
Total long-term debt and bank notes.. 7,198,164 3.79 67,312
------------ ----------
Total borrowed funds................. 8,568,288 3.73 78,810
------------ ----------
Total interest-bearing liabilities... 34,907,418 4.68 402,425
Noninterest-bearing deposits................. 899,208
Other liabilities............................ 1,867,931
------------
Total liabilities.................... 37,674,557
Stockholders' equity......................... 7,723,375
------------
Total liabilities and stockholders'
equity.............................. $ 45,397,932
============ ----------
Net interest income.................. $ 513,533
==========
Net interest margin.................. 5.81
Interest rate spread................. 5.68
(a) Average balances for investment securities available-for-sale and
other interest-earning assets are based on market values or estimated
market values; if these assets were carried at amortized cost, there would
not be a material impact on the net interest margin.
(b) The fully taxable equivalent adjustment for the three months ended
March 31, 2002, was $257.
(c) Includes the impact of interest rate swap agreements and foreign exchange
swap agreements used to change a portion of fixed-rate funding sources to
floating-rate funding sources.
OTHER OPERATING INCOME
Total other operating income was